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, 18378-18421 [2021-07255]
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Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91476; S7–04–21]
Notice of Substituted Compliance
Application Submitted by the United
Kingdom Financial Conduct Authority
in Connection With Certain
Requirements Applicable to SecurityBased Swap Dealers and Major
Security-Based Swap Participants
Subject to Regulation in the United
Kingdom; Proposed Order
Securities and Exchange
Commission.
ACTION: Notice of application for
substituted compliance determination;
proposed order.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is soliciting public comment on an
application by the United Kingdom
Financial Conduct Authority (‘‘FCA’’)
requesting that, pursuant to rule 3a71–
6 under the Securities Exchange Act of
1934 (‘‘Exchange Act’’), the Commission
determine that registered security-based
swap dealers and registered major
security-based swap participants
(together, ‘‘SBS Entities’’) that are not
U.S. persons and that are subject to
certain regulation in the United
Kingdom (‘‘UK’’) may comply with
certain requirements under the
Exchange Act via compliance with
corresponding requirements of the UK.
The Commission also is soliciting
comment on a proposed Order
providing for conditional substituted
compliance in connection with the
application.
SUMMARY:
Submit comments on or before
May 3, 2021.
ADDRESSES: Comments may be
submitted by any of the following
methods:
DATES:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
04–21 on the subject line.
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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 S7–04–21. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
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only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/proposed.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. Persons submitting
comments are cautioned that the
Commission does not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make publicly available.
FOR FURTHER INFORMATION CONTACT:
Carol M. McGee, Assistant Director,
Laura Compton, Senior Special Counsel,
or Pamela Carmody, Special Counsel, at
202–551–5870, Office of Derivatives
Policy, Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–7010.
SUPPLEMENTARY INFORMATION: The
Commission is soliciting public
comment on an application by the FCA
requesting that the Commission
determine that SBS Entities that are not
U.S. persons and that are subject to
certain regulation in the UK may satisfy
certain requirements under the
Exchange Act by complying with
comparable requirements in the UK.
The Commission also is soliciting
comment on a proposed Order, set forth
in Attachment A, providing for
conditional substituted compliance in
connection with the FCA application.
I. Background
On August 6, 2021, market
participants will begin to count
security-based swap positions toward
the thresholds for registration with the
Commission as an SBS Entity.1
Exchange Act rule 3a71–6 2
conditionally provides that non-U.S.
SBS Entities may satisfy certain
requirements under Exchange Act
section 15F 3 by complying with
comparable regulatory requirements of a
foreign jurisdiction.4 Substituted
1 See Exchange Act Release No. 86175 (Jun. 21,
2019), 84 FR 43872, 53954 (Aug. 22, 2019) (‘‘Capital
and Margin Adopting Release’’); see also Exchange
Act Release No. 87780 (Dec. 18, 2019), 85 FR 6270,
6345–49 (Feb. 4, 2020).
2 17 CFR 240.3a71–6.
3 15 U.S.C. 78o–10.
4 The Commission also has discussed the
parameters of substituted compliance in connection
with substituted compliance requests regarding the
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compliance potentially is available in
connection with requirements regarding
business conduct and supervision, chief
compliance officers, trade
acknowledgment and verification, nonprudentially regulated capital and
margin, recordkeeping and reporting,
portfolio reconciliation and dispute
reporting, portfolio compression and
trading relationship documentation.5
Substituted compliance in part is
predicated on the Commission
determining the analogous foreign
requirements are ‘‘comparable’’ to the
applicable requirements under the
Exchange Act, after accounting for
factors such as the ‘‘scope and
objectives’’ of the relevant foreign
regulatory requirements and the
effectiveness of the relevant foreign
authority’s or authorities’ supervisory
and enforcement frameworks.6
Substituted compliance further requires
that the Commission and the relevant
foreign financial regulatory authorities
have entered into an effective
supervisory and enforcement
memorandum of understanding and/or
other arrangement addressing
cooperation and other matters related to
substituted compliance.7 A foreign
Federal Republic of Germany and the French
Republic. See Exchange Act Release No. 90378
(Nov. 9, 2020), 85 FR 72726 (Nov. 13, 2020)
(‘‘German Notice and Proposed Order’’); Exchange
Act Release No. 90765 (Dec. 22, 2020), 85 FR 85686
(Dec. 29, 2020) (‘‘German Substituted Compliance
Order’’); Exchange Act Release No. 90766 (Dec. 22,
2020), 85 FR 85720 (Dec. 29, 2020) (‘‘French Notice
and Proposed Order’’).
5 See Exchange Act rule 3a71–6(d). Substituted
compliance is not available for antifraud
prohibitions and information-related requirements
under section 15F. See Exchange Act rule 3a71–
6(d)(1) (specifying that substituted compliance is
not available in connection with the antifraud
provisions of Exchange Act section 15F(h)(4)(A)
and Exchange Act rule 15Fh–4(a), 17 CFR
240.15Fh–4(a), and the information-related
provisions of Exchange Act sections 15F(j)(3) and
15F(j)(4)(B)). Substituted compliance under rule
3a71–6 also does not extend to certain other
provisions of the federal securities laws that apply
to security-based swaps, such as: (1) Additional
antifraud prohibitions (see Exchange Act section
10(b), 15 U.S.C. 78j(b), Exchange Act rule 10b–5, 17
CFR 240.10b–5, and Securities Act of 1933 section
17(a), 15 U.S.C. 77q(a)); (2) requirements related to
transactions with counterparties that are not eligible
contract participants (‘‘ECPs’’) (see Exchange Act
section 6(l), 15 U.S.C. 78f(l); Securities Act of 1933
section 5(e), 15 U.S.C. 77e(e)); (3) segregation of
customer assets (see Exchange Act section 3E, 15
U.S.C. 78c–5; Exchange Act rule 18a–4, 17 CFR
240.18a–4); (4) required clearing upon counterparty
election (see Exchange Act section 3C(g)(5), 15
U.S.C. 78c–3(g)(5)); (5) regulatory reporting and
public dissemination (see generally Regulation
SBSR, 17 CFR 242.900 et seq.); (6) SBS Entity
registration (see Exchange Act section 15F(a) and
(b)); and (7) registration of offerings (see Securities
Act of 1933 section 5, 15 U.S.C. 77e).
6 See Exchange Act rule 3a71–6(a)(2)(i).
7 See Exchange Act rule 3a71–6(a)(2)(ii). The
Commission and the FCA are in the process of
negotiating a memorandum of understanding to
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financial regulatory authority may
submit a substituted compliance
application only if the authority
provides ‘‘adequate assurances’’ that no
law or policy would impede the ability
of any entity that is directly supervised
by the authority and that may register
with the Commission ‘‘to provide
prompt access to the Commission to
such entity’s books and records or to
submit to onsite inspection or
examination by the Commission.’’ 8
Commission rule 0–13 9 addresses
procedures for filing substituted
compliance applications. The rule
provides that the Commission will
publish a notice when a completed
application has been submitted and that
any person may submit to the
Commission ‘‘any information that
relates to the Commission action
requested in the application.’’ 10
II. The FCA’s Substituted Compliance
Request
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The FCA has submitted a complete
substituted compliance application to
the Commission (‘‘FCA Application’’).11
Pursuant to rule 0–13, the Commission
is publishing notice of the FCA
Application together with a proposed
Order to conditionally grant substituted
compliance to an entity that (1) is a
security-based swap dealer or major
security-based swap participant
address cooperation matters related to substituted
compliance. Because the FCA asks the Commission
to permit certain entities regulated and supervised
by both the FCA and the UK Prudential Regulation
Authority (‘‘PRA’’) to use substituted compliance,
the Commission and the PRA are also in the process
of developing a memorandum of understanding or
other arrangement to address cooperation matters
related to substituted compliance. These
memoranda of understanding or other arrangements
will need to be in place before the Commission may
allow Covered Entities (as defined herein) to use
substituted compliance to satisfy obligations under
the Exchange Act. The Commission expects to
publish any such memorandum of understanding or
arrangement on its website at www.sec.gov under
the ‘‘Substituted Compliance’’ tab, which is located
on the ‘‘Security-Based Swap Markets’’ page in the
Division of Trading and Markets section of the site.
8 See Exchange Act rule 3a71–6(a)(3). The FCA
has satisfied this prerequisite in the Commission’s
preliminary view, taking into account information
and representations that the FCA provided
regarding certain UK requirements that are relevant
to the Commission’s ability to inspect, and access
the books and records of, Covered Entities (as
defined herein).
9 17 CFR 240.0–13.
10 See Commission rule 0–13(h). The Commission
may take final action on a substituted compliance
application no earlier than 25 days following
publication of the notice in the Federal Register.
See id.
11 See Letter from Nausicaa Delfas, Executive
Director of International, FCA, dated March 19,
2021. The FCA Application is available on the
Commission’s website at: https://www.sec.gov/files/
uk-financial-conduct-authority-completeapplication-substituted-compliance-031921.pdf.
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registered with the Commission; (2) is
not a ‘‘U.S. person,’’ as that term is
defined in rule 3a71–3(a)(4) under the
Exchange Act; 12 (3) is a ‘‘MiFID
investment firm’’ or ‘‘third country
investment firm,’’ as such terms are
defined in the FCA Handbook Glossary,
that has permission from the FCA or
PRA under Part 4A of FSMA to carry on
regulated activities relating to
investment services and activities in the
UK; and (4) is supervised by the FCA
under the fixed supervision model and,
if the firm is a PRA-authorized person,
also supervised by the PRA as a
Category 1 firm (each, a ‘‘Covered
Entity’’).13 In making its substituted
compliance determination, the
Commission will consider public
comments on the FCA Application and
the proposed Order.
The FCA seeks substituted
compliance for Covered Entities in
connection with a number of
requirements under Exchange Act
section 15F.
A. Relevant Market Participants and
General Conditions
The Commission will consider
whether to allow substituted
compliance to be used by any Covered
Entity.
B. Relevant Section 15F Requirements
The FCA requests that the
Commission issue an order determining
that—for substituted compliance
purposes—applicable requirements in
the UK are comparable with the
following requirements under Exchange
Act section 15F:
• Risk control requirements—
Requirements related to internal risk
management systems, trade
acknowledgment and verification,
portfolio reconciliation and dispute
resolution, portfolio compression and
trading relationship documentation.14
• Capital and margin requirements—
Requirements related to capital
applicable to non-prudentially regulated
security-based swap dealers and
requirements related to margin
applicable to non-prudentially regulated
SBS Entities.15
12 17
CFR 240.3a71–3(a)(4).
terms ‘‘MiFID investment firm’’ and ‘‘third
country investment firm’’ include credit institutions
when they provide investment services or perform
investment activities in the UK. See FCA Handbook
Glossary.
14 See part IV, infra.
15 See part V, infra. The FCA requests substituted
compliance in connection with capital and margin
requirements applicable to non-prudentially
regulated SBS Entities pursuant to Exchange Act
section 15F(e) and Exchange Act rules 18a–1
through 18a–1d, and 18a–3. 17 CFR 240.18a–1
13 The
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18379
• Internal supervision, chief
compliance officer and additional
Exchange Act section 15F(j)
requirements—Requirements related to
diligent supervision, conflicts of
interest, information gathering under
Exchange Act section 15F(j) and chief
compliance officers.16
• Counterparty protection
requirements—Requirements related to
disclosure of material risks and
characteristics and material incentives
or conflicts of interest, ‘‘know your
counterparty,’’ suitability of
recommendations, fair and balanced
communications, disclosure of daily
marks and disclosure of clearing
rights.17
• Recordkeeping, reporting,
notification and securities count
requirements—Requirements related to
making and keeping current certain
prescribed records, the preservation of
records, reporting, notification and
securities counts.18
C. Comparability Considerations and
Proposed Order
Though the UK ceased to be a member
of the European Union (the ‘‘EU’’) on
January 31, 2020, market participants in
the UK remain subject to UK
requirements implemented pursuant to
EU directives, and to EU regulations
that have been added to UK law.19
Those requirements include those
related to: Organization, compliance
through 18a–1d, and 17 CFR 240.18a–3. The FCA
does not request substituted compliance in
connection with capital requirements applicable to
non-prudentially regulated major security-based
swap participants pursuant to Exchange Act rule
18a–2, 17 CFR 240.18a–2. The proposed Order
defines the term ‘‘prudentially regulated’’ to mean
an SBS Entity that has a ‘‘prudential regulator’’ as
that term is defined in Exchange Act section
3(a)(74), 15 U.S.C. 78c(a)(74). See para. (g)(41) to the
proposed Order.
16 See part VI, infra.
17 See part VII, infra. The FCA is not requesting
substituted compliance in connection with: ECP
verification requirements (Exchange Act section
15F(h)(3)(A) and Exchange Act rule 15Fh–3(a)(1),
17 CFR 240.15Fh–3(a)(1)); ‘‘special entity’’
provisions (Exchange Act sections 15F(h)(4) and (5)
and Exchange Act rules 15Fh–3(a)(2) and (3), 15Fh–
4(b) and 15Fh–5, 17 CFR 240.15Fh–3(a)(2) and (3),
240.15Fh–4(b) and 240.15Fh–5); and political
contribution provisions (Exchange Act rule 15Fh–
6, 17 CFR 240.15Fh–6).
18 See part VIII, infra.
19 In adding EU regulations to UK law, the UK in
some cases has adopted UK versions of these
regulations that differ from the original EU versions
‘‘as necessary to account for the effects of Brexit.’’
See FCA Application Appendix A at 7. The
Commission has reviewed the FCA Application in
light of the UK versions of these regulations.
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and conduct; 20 risk-mitigation; 21
prudential matters; 22 and certain other
matters relevant to the application.23 In
the view of the FCA, UK requirements
taken as a whole produce regulatory
outcomes that are comparable to those
of the relevant requirements under the
Exchange Act.24
20 The Financial Services and Markets Act 2000
(‘‘FSMA’’) gives the FCA and PRA powers to make
rules and guidance for firms within the scope of
FSMA’s financial services regulatory regime,
including MiFID investment firms and third
country investment firms. Relevant elements of the
EU’s Markets in Financial Instruments Directive,
Directive 2014/65/EU (‘‘MiFID’’), have been
implemented in the UK via provisions in the FCA
Handbook and PRA Rulebook. These provisions in
the FCA Handbook and the PRA Rulebook address
organizational, compliance and conduct
requirements applicable to MiFID investment firms
and third country investment firms. The UK version
of Commission Delegated Regulation (EU) 2017/565
(‘‘UK MiFID Org Reg’’) in part supplements the FCA
Handbook and the PRA Rulebook with respect to
organizational requirements for these firms. The UK
version of the Markets in Financial Instruments
Regulation, Regulation (EU) 648/2012 (‘‘UK
MiFIR’’), addresses certain recordkeeping
requirements. Commission Delegated Directive (EU)
2017/593 (‘‘MiFID Delegated Directive’’) in part
supplements MiFID with regard to safeguarding
client property, and in the UK has been
implemented in relevant part in the FCA Handbook
and PRA Rulebook.
21 The UK version of the European Market
Infrastructure Regulation (‘‘EMIR’’), Regulation (EU)
648/2012 (‘‘UK EMIR’’), in part imposes certain risk
mitigation requirements on counterparties in
connection with non-centrally cleared OTC
derivatives transactions. The UK version of
Delegated Regulation (EU) 149/2013 (‘‘UK EMIR
RTS’’) supplements EMIR with requirements related
to confirmations, portfolio reconciliation, portfolio
compression and dispute resolution. The UK
version of Delegated Regulation (EU) 2016/2251
(‘‘UK EMIR Margin RTS’’) further supplements
EMIR with requirements related to documentation
and collateral.
22 The EU’s Capital Requirements Directive IV,
Directive 2013/36/EU (‘‘CRD’’), has been adopted in
the UK via provisions in the FCA Handbook and
PRA Rulebook. The FCA Handbook sets forth
prudential and related requirements applicable in
relevant part to IFPRU investment firms. The PRA
Rulebook sets forth prudential and related
requirements applicable in relevant part to UK
banks and UK designated investment firms. The UK
version of the Capital Requirements Regulation
(‘‘CRR’’), Regulation (EU) 575/2013 (‘‘UK CRR’’),
further addresses prudential and related
requirements for those firms. The UK version of
Commission Implementing Regulation (EU) 680/
2014 (‘‘UK CRR Reporting ITS’’) sets forth
implementing technical standards regarding
supervisory reporting.
23 The UK version of the Market Abuse
Regulation, Regulation (EU) 596/2014 (‘‘UK MAR’’),
sets forth requirements to enhance market integrity
and investor protection. The UK version of the
MAR Investment Recommendations Regulation,
Commission Delegated Regulation (EU) 2016/958
(‘‘UK MAR Investment Recommendations
Regulation’’), supplements UK MAR with respect to
regulatory technical standards regarding investment
recommendations. The UK’s Money Laundering,
Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017 (‘‘MLR
2017’’) sets forth ‘‘know your counterparty’’
requirements.
24 The FCA Application includes a series of
analyses that compare UK requirements with the
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In the Commission’s preliminary
view, requirements under the Exchange
Act and UK requirements maintain
similar approaches with respect to
achieving regulatory goals in several
respects, but follow differing
approaches or incorporate disparate
elements in certain other respects. The
Commission has considered those
similarities and differences when
analyzing comparability and developing
preliminary views, while recognizing
that differences in approach do not
necessarily preclude substituted
compliance in light of the Commission’s
holistic, outcomes-oriented framework
for assessing comparability.25
Based on the Commission’s analysis
of the application and review of relevant
UK requirements, the proposed Order,
located at Attachment A, would grant
substituted compliance subject to
specific conditions and limitations.
When Covered Entities seek to rely on
substituted compliance to satisfy
particular requirements under the
Exchange Act, non-compliance with the
applicable UK requirements would lead
to a violation of those requirements
under the Exchange Act and potential
enforcement action by the Commission
(as opposed to automatic revocation of
the substituted compliance order).
III. Applicable Entities and General
Conditions
A. Covered Entities for Which the
Commission Is Proposing a Positive
Conditional Substituted Compliance
Determination
Under the proposed Order,
substituted compliance could be
applied by ‘‘Covered Entities’’—a term
that would limit the scope of the
substituted compliance determination to
SBS Entities that are subject to
applicable UK requirements and
applicable requirements under the Exchange Act in
the following areas: Risk control (see FCA
Application Appendix B category 1), books and
records (see FCA Application Appendix B category
2), internal supervision and compliance (see FCA
Application Appendix B category 3) and
counterparty protection (see FCA Application
Appendix B category 4). These analyses are
available on the Commission’s website along with
the remainder of the FCA Application. See note 11,
supra.
25 In this context, the Commission recognizes that
other regulatory regimes will have exclusions,
exceptions and exemptions that may not align
perfectly with the corresponding requirements
under the Exchange Act. Where the Commission
preliminarily has found that the UK regime
produces comparable outcomes notwithstanding
those particular differences, the Commission
proposes to make a positive determination on
substituted compliance. Where the Commission
preliminarily has found that those exclusions,
exemptions and exceptions lead to outcomes that
are not comparable, however, the proposal would
not provide for substituted compliance.
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oversight. Consistent with the
parameters of substituted compliance
under Exchange Act rule 3a71–6, the
proposed ‘‘Covered Entity’’ definition
provides that the relevant entity must be
a security-based swap dealer or major
security-based swap participant
registered with the Commission, and
that the entity cannot be a U.S. person.26
The proposed ‘‘Covered Entity’’
definition further would provide that
the entity must be either a MiFID
investment firm or a third country
investment firm that has permission
from the FCA or PRA under Part 4A of
FSMA to carry on regulated activities
relating to investment services and
activities in the UK.27 Each entity also
must be supervised by the FCA under
the fixed supervision model and, if the
firm is a PRA-authorized person, also
supervised by the PRA as a Category 1
firm.28 These prongs of the definition
are intended to help ensure that
Covered Entities are subject to relevant
UK requirements and oversight.
B. General Conditions and Prerequisites
Substituted compliance under the
proposed Order would be subject to a
number of conditions and other
prerequisites, to help ensure that the
relevant UK requirements that form the
basis for substituted compliance in
practice will apply to the Covered
Entity’s security-based swap business
and activities, and to promote the
Commission’s oversight over entities
that avail themselves of substituted
compliance.
1. ‘‘Subject to and Complies With’’
Applicability Provisions
Each relevant section of the proposed
Order would be subject to the condition
that the Covered Entity ‘‘is subject to
and complies with’’ the applicable UK
requirements that are needed to
establish comparability. Accordingly,
the proposed Order would not provide
substituted compliance when a Covered
Entity is excused from compliance with
relevant foreign provisions, such as, for
example, if relevant UK requirements do
not apply to the security-based swap
activities of a non-UK branch of a MiFID
investment firm or to a third country
investment firm. In that event, the
Covered Entity would not be ‘‘subject
to’’ those requirements, and the Covered
Entity could not rely on substituted
compliance in connection with those
activities.29
26 See paras. (g)(1)(i) and (ii) to the proposed
Order.
27 See para. (g)(1)(iii) to the proposed Order.
28 See para. (g)(1)(iv) to the proposed Order.
29 An SBS Entity’s ‘‘voluntary’’ compliance with
the relevant UK requirements would not suffice for
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2. Additional General Conditions
Substituted compliance under the
proposed Order further would be
subject to general conditions intended
to help ensure the applicability of
relevant UK requirements, and to
facilitate the Commission’s oversight of
firms that avail themselves of
substituted compliance. In particular:
• ‘‘Regulated activities’’—For each
condition in the proposed Order that
requires the application of, and
compliance with, provisions of the
Senior Management Arrangements,
Systems and Controls Sourcebook of the
FCA Handbook (‘‘FCA SYSC’’) 4, 5, 6,
7, 9 and/or 10, certain parts of the PRA
Rulebook and/or MLR 2017, the
Covered Entity’s relevant security-based
swap activities must constitute
‘‘regulated activities’’ as defined for
purposes of the relevant UK provisions,
must be carried on by the Covered
Entity from an establishment in the UK
and must fall within the scope of the
Covered Entity’s authorization from the
FCA and/or PRA to conduct regulated
activities in the UK.30
• UK MiFID ‘‘investment services or
activities’’—For each condition in the
proposed Order that requires the
application of, and compliance with,
provisions of the Product Intervention
and Product Governance Sourcebook of
the FCA Handbook (‘‘FCA PROD’’) 3
and/or UK MiFID Org Reg, the Covered
Entity’s relevant security-based swap
activities must constitute ‘‘investment
services or activities,’’ as defined in the
FCA Handbook Glossary, must be
carried on by the Covered Entity from
an establishment in the UK and must
fall within the scope of the Covered
Entity’s authorization from the FCA
and/or PRA to conduct regulated
activities in the UK.31
these purposes. Substituted compliance reflects an
alternative means by which an SBS Entity may
comply with applicable requirements under the
Exchange Act, and thus mandates that the SBS
Entity be subject to the requirements needed to
establish comparability and face consequences
arising from any failure to comply with those
requirements. Moreover, the comparability
assessment takes into account the effectiveness of
the supervisory compliance program administered
and the enforcement authority exercised by the FCA
and/or PRA, which would not be expected to
promote comparable outcomes when compliance
merely is ‘‘voluntary.’’
30 See para. (a)(1) to the proposed Order.
31 See para. (a)(2) to the proposed Order. Under
this condition, a Covered Entity’s security-based
swap activities must constitute ‘‘investment
services or activities’’ only to the extent that the
relevant part of the proposed Order requires the
entity to be subject to and comply with the UK
provisions listed in paragraph (a)(2) to the proposed
Order. The security-based swap activities need not
be ‘‘investment services or activities’’ when the
relevant part of the proposed Order does not require
compliance with one of those provisions (e.g.,
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• UK ‘‘MiFID or equivalent third
country business’’—For each condition
in the proposed Order that requires the
application of, and compliance with,
provisions of the Conduct of Business
Sourcebook of the FCA Handbook
(‘‘FCA COBS’’) 2, 4, 6, 8A, 9A, 14 and/
or 14A, the Covered Entity’s relevant
security-based swap activities must
constitute ‘‘MiFID or equivalent third
country business,’’ as defined in the
FCA Handbook Glossary, must be
carried on by the Covered Entity from
an establishment in the UK and must
fall within the scope of the Covered
Entity’s authorization from the FCA
and/or PRA to conduct regulated
activities in the UK.32
• UK ‘‘designated investment
business’’—For each condition in the
proposed Order that requires the
application of, and compliance with,
provisions of FCA COBS 11, the
Covered Entity’s relevant security-based
swap activities must constitute ‘‘MiFID
business’’ that is also ‘‘designated
investment business,’’ each as defined
in the FCA Handbook Glossary, must be
carried on by the Covered Entity from
an establishment in the UK and must
fall within the scope of the Covered
Entity’s authorization from the FCA
and/or PRA to conduct regulated
activities in the UK.33
• UK ‘‘MiFID business’’—For each
condition in the proposed Order that
requires the application of, and
compliance with, provisions of the
Client Asset Sourcebook of the FCA
Handbook (‘‘FCA CASS’’) 6 and/or 7,
the Covered Entity must not be an
‘‘ICVC’’ as defined in the FCA
paragraph (e)(6) to the proposed Order addressing
substituted compliance for daily mark disclosure
requirements).
32 See para. (a)(3) to the proposed Order. Under
this condition, a Covered Entity’s security-based
swap activities must constitute ‘‘MiFID or
equivalent third country business’’ only to the
extent that the relevant part of the proposed Order
requires the entity to be subject to and comply with
the UK provisions listed in paragraph (a)(3) to the
proposed Order. The security-based swap activities
need not be ‘‘MiFID or equivalent third country
business’’ when the relevant part of the proposed
Order does not require compliance with one of
those provisions (e.g., paragraph (e)(6) to the
proposed Order addressing substituted compliance
for daily mark disclosure requirements).
33 See para. (a)(4) to the proposed Order. Under
this condition, a Covered Entity’s security-based
swap activities must constitute ‘‘MiFID business’’
that is also ‘‘designated investment business’’ only
to the extent that the relevant part of the proposed
Order requires the entity to be subject to and
comply with FCA COBS 11. The security-based
swap activities need not be ‘‘MiFID business’’ that
is also ‘‘designated investment business’’ when the
relevant part of the proposed Order does not require
compliance with FCA COBS 11 (e.g., paragraph
(e)(6) addressing substituted compliance for daily
mark disclosure requirements).
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Handbook Glossary,34 the Covered
Entity’s relevant security-based swap
activities must constitute ‘‘regulated
activities’’ as defined for purposes of the
relevant UK provisions and ‘‘MiFID
business’’ as defined in the FCA
Handbook Glossary, must be carried on
by the Covered Entity from an
establishment in the UK and must fall
within the scope of the Covered Entity’s
authorization from the FCA and/or PRA
to conduct regulated activities in the
UK.35
• Activities covered by FCA SYSC
10A—For each condition in the
proposed Order that requires the
application of, and compliance with,
provisions of FCA SYSC 10A, the
Covered Entity’s relevant security-based
swap activities must constitute activities
described in FCA SYSC 10A.1.1(2)(a),
(b) and/or (c), must be carried on by the
Covered Entity from an establishment in
the UK and must fall within the scope
of the Covered Entity’s authorization
from the FCA and/or PRA to conduct
regulated activities in the UK.36
• UK MiFID ‘‘clients’’—For each
condition in the proposed Order that
requires the application of, and
compliance with, provisions of FCA
CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A,
9A, 11, 14 and/or 14A, FCA PROD 3,
FCA SYSC 10.1.8, FCA SYSC 10A and/
or UK MiFID Org, the Covered Entity’s
relevant counterparties (or potential
counterparties) must be ‘‘clients’’ (or
potential ‘‘clients’’) as defined in FCA
COBS 3.2.1R.37
• UK MiFID ‘‘financial
instruments’’—For each condition in the
proposed Order that requires the
34 ‘‘ICVC’’ means investment company with
variable capital as defined in the FCA Handbook
Glossary.
35 See para. (a)(5) to the proposed Order. Under
this condition, a Covered Entity’s security-based
swap activities must constitute ‘‘regulated
activities’’ that is also ‘‘MiFID business’’ only to the
extent that the relevant part of the proposed Order
requires the entity to be subject to and comply with
the UK provisions listed in paragraph (a)(5) to the
proposed Order. The security-based swap activities
need not be ‘‘MiFID business’’ that is also
‘‘designated investment business’’ when the
relevant part of the proposed Order does not require
compliance with one of those provisions (e.g.,
paragraph (e)(6) addressing substituted compliance
for daily mark disclosure requirements).
36 See para. (a)(6) to the proposed Order. Under
this condition, a Covered Entity’s security-based
swap activities must constitute activities described
in FCA SYSC 10A.1.1(2)(a), (b) and/or (c) only to
the extent that the relevant part of the proposed
Order requires the entity to be subject to and
comply with FCA SYSC 10A. The security-based
swap activities need not be activities described in
those provisions when the relevant part of the
proposed Order does not require compliance with
FCA SYSC 10A (e.g., paragraph (e)(6) addressing
substituted compliance for daily mark disclosure
requirements).
37 See para. (a)(7) to the proposed Order.
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application of, and compliance with,
provisions of FCA CASS 6 and/or 7,
FCA COBS 2, 4, 6, 8A, 9A, 11, 14 and/
or 14A, FCA PROD 3, FCA SYSC 10A,
UK MAR, UK MAR Investment
Recommendations Regulation and/or
UK MiFID Org Reg, the relevant
security-based swap must be a
‘‘financial instrument’’ as defined in
Part 1 of Schedule 2 of the UK
Regulated Activities Order.38
• UK CRD/CRR ‘‘institution’’—For
each condition in the proposed Order
that requires the application of, and
compliance with, provisions of UK CRR,
the Covered Entity must be an
‘‘institution’’ as defined in UK CRR
article 4(1)(3).39
• ‘‘Common platform firm’’ or ‘‘third
country firm’’—For each condition in
the proposed Order that requires the
application of, and compliance with,
provisions of FCA SYSC 4, 5, 6, 7, 9
and/or 10, the Covered Entity must be
either a ‘‘common platform firm’’ (other
than a ‘‘UCITS investment firm’’) or a
‘‘third country firm,’’ each as defined in
the FCA Handbook Glossary.40
• ‘‘IFPRU investment firm’’—For each
condition in the proposed Order that
requires the application of, and
compliance with, provisions of FCA
SYSC 19A, the Prudential Sourcebook
for Investment Firms of the FCA
Handbook (‘‘FCA IFPRU’’) and/or the
Prudential Sourcebook for Banks,
Building Societies and Investment
Firms of the FCA Handbook (‘‘FCA
BIPRU’’), the Covered Entity must be an
‘‘IFPRU investment firm’’ as defined in
the FCA Handbook Glossary.41
• ‘‘UK bank’’ or ‘‘UK designated
investment firm’’—For each condition
in the proposed Order that requires the
application of, and compliance with,
provisions of FCA SYSC 19D and/or
certain parts of the PRA Rulebook, the
Covered Entity must be a ‘‘UK bank’’ or
‘‘UK designated investment firm,’’ each
as defined in the FCA Handbook
Glossary (in the case of chapter 19D of
FCA SYSC) or in the PRA Rulebook
Glossary (in the case of a part of the
PRA Rulebook).42
• Covered Entity’s counterparties as
UK EMIR ‘‘counterparties’’—For each
condition in the proposed Order that
requires the application of, and
compliance with, provisions of UK
EMIR, UK EMIR RTS and/or UK EMIR
Margin RTS, if the counterparty to the
Covered Entity is not a ‘‘financial
counterparty’’ or ‘‘non-financial
counterparty’’ as defined in UK EMIR
articles 2(8) or 2(9), respectively, the
Covered Entity must comply with the
applicable condition as if the
counterparty were a financial
counterparty or non-financial
counterparty.43 If the Covered Entity
reasonably determines that the
counterparty conducts a financial
business that would cause it to be a
financial counterparty if it were UKestablished and UK-authorized, then the
proposed Order would require the
Covered Entity to treat the counterparty
as a financial counterparty; otherwise,
the proposed Order would require the
Covered Entity to treat the counterparty
as a non-financial counterparty.44 In
addition, the proposed Order would
provide that a Covered Entity complying
with UK EMIR could not apply
substituted compliance by complying
with third country requirements that UK
authorities may determine to be
equivalent to UK EMIR.45
• Security-based swap status under
UK EMIR—For each condition in the
proposed Order that requires the
application of, and compliance with,
provisions of UK EMIR, UK EMIR RTS
and/or UK EMIR Margin RTS, either: (1)
The relevant security-based swap must
be an ‘‘OTC derivative’’ or ‘‘OTC
derivative contract,’’ as defined in UK
EMIR article 2(7), that has not been
cleared by a CCP and otherwise is
subject to the provisions of UK EMIR
article 11, UK EMIR RTS articles 11
through 15, and UK EMIR Margin RTS
article 2; or (2) the relevant securitybased swap must have been cleared by
a central counterparty that has been
authorized or recognized to clear
derivatives contracts in the UK.46
• Memorandum of understanding—
The Commission has an applicable
memorandum of understanding or other
arrangement with the FCA and PRA
addressing cooperation with respect to
the proposed Order at the time the
Covered Entity makes use of substituted
compliance.47
• Notice of reliance on substituted
compliance—A Covered Entity must
provide notice of its intent to rely on the
proposed Order by notifying the
Commission in the manner specified on
the Commission’s website.48 In the
notice, the Covered Entity would need
to identify each specific substituted
compliance determination in the
proposed Order for which the Covered
43 See
38 See
para. (a)(8) to the proposed Order.
39 See para. (a)(9) to the proposed Order.
40 See para. (a)(10) to the proposed Order.
41 See para. (a)(11) to the proposed Order.
42 See para. (a)(12) to the proposed Order.
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para. (a)(13) to the proposed Order.
para. (a)(13)(i) to the proposed Order.
45 See para. (a)(13)(ii) to the proposed Order.
46 See para. (a)(14) to the proposed Order.
47 See para. (a)(15) to the proposed Order.
48 See para. (a)(16) to the proposed Order.
44 See
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Entity intends to apply substituted
compliance.49 If a Covered Entity elects
not to apply substituted compliance
with respect to a specific substituted
compliance determination in the
proposed Order, it must comply with
the Exchange Act requirements subject
to that determination. Further, except in
the case of the counterparty protection
requirements and linked recordkeeping
requirements discussed below, the
Commission has determined that the
Exchange Act requirements subject to
substituted compliance determinations
in the proposed Order are entity-level
requirements. Therefore, if a Covered
Entity elects to apply substituted
compliance to these entity-level
requirements, it must do so at the entity
level. Finally, a Covered Entity must
promptly update the notice if it intends
to modify its reliance on the positive
substituted compliance determinations
in the proposed Order.50
49 If the Covered Entity intends to rely on all the
substituted compliance determinations in a given
paragraph of the Order, it can cite that paragraph
in the notice. For example, if the Covered Entity
intends to rely on the capital and margin
determinations in paragraph (c) of the proposed
Order, it would indicate in the notice that it is
relying on the determinations in paragraph (c).
However, if the Covered Entity intends to rely on
the margin determination but not the capital
determination, it would need to indicate in the
notice that it is relying on paragraph (c)(2) of the
proposed Order (the margin determination). In this
case, paragraph (c)(1) of the proposed Order (the
capital determination) would be excluded from the
notice and the Covered Entity would need to
comply with the Exchange Act capital
requirements. Further, as discussed below in
section VIII.B. of this notice, the recordkeeping and
reporting determinations in the proposed Order
have been structured to provide Covered Entities
with a high level of flexibility in selecting specific
requirements within those rules for which they
want to rely on substituted compliance. For
example, paragraph (f)(1)(i) of the proposed Order
sets forth the Commission’s preliminary substituted
compliance determinations with respect to the
requirements of Exchange Act rule 18a–5, 17 CFR
240.18a–5. These proposed determinations are set
forth in paragraphs (f)(1)(i)(A) through (O). If a
Covered Entity intends to rely on some but not all
of the determinations, it would need to identify in
the notice the specific determinations in this
paragraph it intends to rely on (e.g., paragraphs
(f)(1)(i)(A), (B), (C), (D), (G), (H), (I), and (O)). For
any determinations excluded from the notice, the
Covered Entity would need to comply with the
Exchange Act rule 18a–5 requirement. Finally, as
discussed below in sections VII.B.2. and VIII.B.2. of
this notice, a Covered Entity would be able to apply
substituted compliance at the transaction level
(rather than the entity level) for certain
counterparty protection requirements and the
recordkeeping requirements that are linked to them.
In this case, the notice would need to indicate the
class of transactions (e.g., transactions with UK
counterparties) for which the Covered Entity is
applying substituted compliance with respect to the
counterparty protection requirements and linked
recordkeeping requirements.
50 A Covered Entity would modify its reliance on
the positive substituted compliance determinations
in the proposed Order, and thereby trigger the
requirement to update its notice, if it adds or
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IV. Substituted Compliance for Risk
Control Requirements
A. FCA Request and Associated
Analytic Considerations
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The FCA Application in part requests
substituted compliance in connection
with risk control requirements under
the Exchange Act relating to:
• Risk management systems—
Internal risk management system
requirements pursuant to Exchange Act
section 15F(j)(2) and relevant aspects of
Exchange Act rule 15Fh–3(h)(2)(iii)(I).51
Those provisions address the obligation
of SBS Entities to follow policies and
procedures reasonably designed to help
manage the risks associated with their
business activities.52
• Trade acknowledgment and
verification—Trade acknowledgment
and verification requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–2.53 Those
provisions help avoid legal and
operational risks by requiring definitive
written records of transactions and for
procedures to avoid disagreements
regarding the meaning of transaction
terms.54
• Portfolio reconciliation and dispute
reporting—Portfolio reconciliation and
dispute reporting requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–3.55 Those
provisions require that counterparties
engage in portfolio reconciliation and
resolve discrepancies in connection
subtracts determinations for which it is applying
substituted compliance or completely discontinues
its reliance on the proposed Order.
51 17 CFR 240.15Fh–3(h)(2)(iii)(I). The FCA also
is requesting substituted compliance in connection
with Exchange Act rule 18a–1(f), 17 CFR 240.18a–
1(f), which sets forth additional internal risk
management system requirements for nonprudentially regulated security-based swap dealers.
The Commission preliminarily has considered that
request holistically as part of its analysis of the
FCA’s request for substituted compliance for capital
requirements for those entities. See part V, infra.
The FCA is not requesting substituted compliance
in connection with Exchange Act rule 18a–2(c),
which sets forth additional internal risk
management system requirements for nonprudentially regulated major security-based swap
participants.
52 See Exchange Act Release No. 68071 (Oct. 18,
2012), 77 FR 70214, 70250 (Nov. 23, 2012)
(proposing capital and margin requirements for
security-based swap dealers and major securitybased swap participants). The FCA Application
discusses UK requirements that address Covered
Entities’ obligations related to risk management. See
FCA Application Appendix B category 1 at 19–71.
53 17 CFR 240.15Fi–2.
54 See Exchange Act Release No. 78011 (Jun. 8,
2016), 81 FR 39808, 39809 & 39820 (Jun. 17, 2016)
(‘‘Trade Acknowledgment and Verification
Adopting Release’’). The FCA Application discusses
UK requirements that address Covered Entities’
obligations related to confirmations. See FCA
Application Appendix B category 1 at 72–84.
55 17 CFR 240.15Fi–3.
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with uncleared security-based swaps
and promptly notify the Commission
and applicable prudential regulators
regarding certain valuation disputes.56
• Portfolio compression—Portfolio
compression requirements pursuant to
Exchange Act section 15F(i) and
Exchange Act rule 15Fi–4.57 Those
provisions require that SBS Entities
have procedures addressing bilateral
offset, bilateral compression and
multilateral compression in connection
with uncleared security-based swaps.58
• Trading relationship
documentation—Trading relationship
documentation requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–5.59 Those
provisions require that SBS Entities
have procedures to execute written
security-based swap trading relationship
documentation with their counterparties
prior to, or contemporaneously with,
executing certain security-based
swaps.60
Taken as a whole, these risk control
requirements help to promote market
stability by mandating that SBS Entities
follow practices that are appropriate to
manage the market, credit, counterparty,
operational and legal risks associated
with their security-based swap
businesses. The Commission’s
comparability assessment accordingly
focuses on whether the analogous
foreign requirements—taken as a
whole—produce comparable outcomes
with regard to providing that Covered
Entities follow risk mitigation and
documentation practices that are
appropriate to the risks associated with
their security-based swap businesses.
B. Preliminary Views and Proposed
Order
1. General Considerations
In the Commission’s preliminary view
based on the FCA Application and the
Commission’s review of applicable
provisions, relevant UK requirements
would produce regulatory outcomes that
are comparable to those associated with
56 See Exchange Act Release No. 87782 (Dec. 18,
2019), 85 FR 6359, 6360–61 (Feb. 4, 2020) (‘‘Risk
Mitigation Adopting Release’’). The FCA
Application discusses UK requirements that
address portfolio reconciliation and dispute
resolution and reporting. See FCA Application
Appendix B category 1 at 85–93.
57 17 CFR 240.15Fi–4.
58 See Risk Mitigation Adopting Release, 85 FR at
6361. The FCA Application discusses UK portfolio
compression requirements. See FCA Application
Appendix B category 1 at 94–96.
59 17 CFR 240.15Fi–5.
60 See Risk Mitigation Adopting Release, 85 FR at
6361. The FCA Application discusses UK
requirements regarding records of agreements with
counterparties. See FCA Application Appendix B
category 1 at 96–100.
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the above risk control requirements, by
subjecting Covered Entities to risk
mitigation and documentation practices
that are appropriate to the risks
associated with their security-based
swap businesses. Substituted
compliance accordingly would be
conditioned on Covered Entities being
subject to the UK provisions that in the
aggregate establish a framework that
produces outcomes comparable to those
associated with these risk control
requirements under the Exchange Act.61
In connection with trade
acknowledgement and verification
requirements, the Commission
preliminarily believes that UK
requirements are comparable to
Exchange Act requirements despite not
requiring a Covered Entity to establish,
maintain and enforce written policies
and procedures that are reasonably
designed to obtain prompt verification
of a trade acknowledgment. The
Commission reached this preliminary
conclusion because the UK
requirements instead generally require
both counterparties to provide a trade
confirmation. Though this confirmation
requirement generally does not apply to
a counterparty not established in the
UK, such as a U.S. person counterparty
(unless the relevant contract has a direct
and substantial effect in the UK), the
Commission has considered the UK
confirmation requirements together with
guidance from the European Securities
and Markets Authority (‘‘ESMA’’).62 In
interpreting EU confirmation
61 In connection with risk management system
requirements, a Covered Entity must be subject to
and comply with provisions of UK law that
implement MiFID article 16(4) and (5) and CRD
articles 74, 76 and 79 through 87; UK CRR articles
286 through 288 and 293; UK EMIR Margin RTS
article 2; and UK MiFID Org Reg articles 21 through
24. See para. (b)(1) to the proposed Order. In
connection with trade acknowledgment and
verification requirements, a Covered Entity must be
subject to and comply with the UK EMIR article
11(1)(a) and the UK EMIR RTS article 12. See para.
(b)(2) to the proposed Order. In connection with
portfolio reconciliation and dispute reporting
requirements, a Covered Entity must be subject to
and comply with UK EMIR article 11(1)(b) and UK
EMIR RTS articles 13 and 15. See para. (b)(3) to the
proposed Order. In connection with portfolio
compression requirements, a Covered Entity must
be subject to and comply with UK EMIR RTS article
14. See para. (b)(4) to the proposed Order. In
connection with trading relationship
documentation requirements, a Covered Entity must
be subject to and comply with UK EMIR article
11(1)(a), UK EMIR article 12 and UK EMIR Margin
RTS article 2. See para. (b)(5) to the proposed
Order.
62 See European Securities and Markets
Authority, Questions and Answers: Implementation
of the Regulation (EU) No 648/2012 on OTC
Derivatives, Central Counterparties and Trade
Repositories (EMIR), available at: https://
www.esma.europa.eu/sites/default/files/library/
esma70-1861941480-52_qa_on_emir_
implementation.pdf (‘‘ESMA EMIR Q&A’’).
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requirements that are identical to the
UK requirements referenced in the
proposed Order, that guidance provides
that ‘‘when an EU counterparty is
transacting with a third country entity,
the EU counterparty would be required
to ensure that the requirements for . . .
timely confirmation . . . are met for the
relevant . . . transactions even though
the third country entity would not itself
be subject to EMIR.’’ 63 That guidance
also provides that compliance with the
EMIR confirmation requirements means
‘‘reach[ing] a legally binding agreement
to all the terms of an OTC derivative
contract.’’ 64 The FCA has published
guidance indicating that ESMA’s
guidance ‘‘will remain relevant [after
the UK’s exit from the EU] to the FCA
and market participants in their
compliance with regulatory
requirements.’’ 65 In the Commission’s
preliminary view, the UK requirements,
as interpreted by this guidance, thus are
comparable to Exchange Act trade
acknowledgment and verification
requirements.
In connection with trading
relationship documentation
requirements, the Commission also
preliminarily believes that UK
requirements are comparable to
Exchange Act requirements when
considered together with this guidance.
The proposed Order would require a
Covered Entity to be subject to and
comply with UK EMIR article 11(1)(a),
UK EMIR RTS article 12 and UK EMIR
Margin RTS article 2. By its terms, UK
EMIR Margin RTS article 2 relates to
documentation of ‘‘risk management
procedures for the exchange of
collateral’’ for non-centrally cleared
transactions.66 Exchange Act trading
relationship documentation
requirements, however, apply not only
to agreements related to collateral
exchange procedures but also to any
other terms governing the trading
relationship between the
counterparties.67 In the Commission’s
ESMA EMIR Q&A, OTC Answer 12(b).
ESMA EMIR Q&A, OTC Answer 5(a).
65 See Financial Conduct Authority, ‘‘Brexit: Our
approach to EU non-legislative materials,’’ para. 9,
available at: https://www.fca.org.uk/publication/
corporate/brexit-our-approach-to-eu-nonlegislative-materials.pdf (‘‘FCA Brexit Guidance’’);
see also FCA Brexit Guidance at para. 12 (‘‘We will
continue to have regard to other EU non-legislative
material where and if they are relevant, taking
account of Brexit and ongoing domestic legislation.
Firms, market participants and stakeholders should
also continue to do so.’’).
66 UK EMIR Margin RTS article 2(1).
67 See Exchange Act rule 15Fi–5(b)(1) (‘‘The
security-based swap trading relationship
documentation shall be in writing and shall include
all terms governing the trading relationship
between the security-based swap dealer or major
preliminary view, UK EMIR article
11(1)(a) and UK EMIR RTS article 12,
when viewed together with the ESMA
EMIR Q&A as described above, bridge
this gap by requiring counterparties to
reach a legally binding agreement to all
the terms of a transaction.
While the Commission recognizes
these and certain other differences
between UK requirements and the
applicable risk control requirements
under the Exchange Act, in the
Commission’s preliminary view those
differences on balance would not
preclude substituted compliance for
these requirements, particularly as
requirement-by-requirement similarity
is not needed for substituted
compliance.
2. Scope of Substituted Compliance
The proposed Order would permit a
Covered Entity to apply substituted
compliance for one or more risk control
requirements. For example, a Covered
Entity could apply substituted
compliance for internal risk
management requirements but comply
directly with Exchange Act trade
acknowledgment and verification,
portfolio reconciliation and dispute
reporting, portfolio compression or
trading relationship documentation
requirements. For any set of risk control
requirements for which a Covered Entity
applies substituted compliance,
however, the proposed Order would
require the Covered Entity to apply
substituted compliance at an entity
level, i.e., to all of its activities subject
to that set of risk control requirements.
For example, the proposed Order would
require a Covered Entity applying
substituted compliance for internal risk
management requirements to comply
with the comparable UK requirements
with respect to all of its risk
management systems. The Covered
Entity could not choose to comply with
the Exchange Act for one part of its risk
management systems and with UK
requirements for another part of its risk
management systems.68 The
63 See
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security-based swap participant and its
counterparty. . . .’’).
68 See para. (b)(1) to the proposed Order.
Similarly, a Covered Entity applying substituted
compliance for trade acknowledgment and
verification requirements would have to comply
with the comparable UK requirements with respect
to all security-based swaps subject to Exchange Act
trade acknowledgment and verification
requirements. See para. (b)(2) to the proposed
Order. A Covered Entity applying substituted
compliance for portfolio reconciliation and dispute
reporting requirements would have to comply with
the comparable UK requirements with respect to all
security-based swaps subject to Exchange Act
portfolio reconciliation and dispute reporting
requirements. See para. (b)(3) to the proposed
Order. A Covered Entity applying substituted
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Commission preliminarily believes that
this scope of substituted compliance
strikes the right balance between
providing Covered Entities flexibility to
tailor the application of substituted
compliance to their business needs and
ensuring that substituted compliance is
consistent with the Commission’s
classification of the relevant Exchange
Act risk control requirements as entitylevel requirements.69
3. Types of Covered Entities ‘‘Subject
to’’ Comparable UK Requirements
In connection with risk management
system requirements, each of the
comparable UK provisions listed in the
proposed Order applies to a uniquely
defined set of UK-authorized firms.70 To
assist UK firms in determining whether
they are subject to these provisions, the
Commission preliminarily has
determined that any Covered Entity that
is an ‘‘IFPRU investment firm,’’ as
defined in the FCA Handbook Glossary,
or a ‘‘UK bank’’ or ‘‘UK designated
investment firm,’’ as defined in both the
FCA Handbook Glossary and the PRA
Rulebook Glossary, would be subject to
all of the required UK provisions.
Accordingly, those types of firms
preliminarily would be eligible to apply
substituted compliance for risk
management system requirements. A
Covered Entity that is preliminarily not
eligible to apply substituted compliance
compliance for portfolio compression requirements
would have to comply with the comparable UK
requirements with respect to all security-based
swaps subject to Exchange Act portfolio
compression requirements. See para. (b)(4) to the
proposed Order. A Covered Entity applying
substituted compliance for trading relationship
documentation requirements would have to comply
with the comparable UK requirements with respect
to all security-based swaps subject to Exchange Act
trading relationship documentation requirements.
See para. (b)(5) to the proposed Order.
69 See Exchange Act Release No. 77617 (Apr. 14,
2016), 81 FR 29960, 30064 (May 13, 2016)
(‘‘Business Conduct Adopting Release’’) (internal
risk management requirements are entity-level
requirements); Trade Acknowledgment and
Verification Adopting Release, 81 FR at 39826
(trade acknowledgment and verification
requirements are entity-level requirements); Risk
Mitigation Adopting Release, 85 FR at 6378
(portfolio reconciliation and dispute reporting,
portfolio compression and trading relationship
documentation requirements are entity-level
requirements).
70 The Commission preliminarily understands
that FCA IFPRU and FCA BIPRU apply to IFPRU
investment firms; FCA SYSC 4 and 7 apply to
common platform firms and third country firms;
FCA SYSC 19A applies to IFPRU investment firms
and their overseas firm analogues; FCA SYSC 19D
applies to UK banks, UK designated investment
firms and their overseas firm analogues; the PRA
rules cited in paragraph (b)(1) to the proposed
Order apply to CRR firms as defined in the PRA
Rulebook Glossary; UK CRR applies to CRR firms
as defined in that legislation; UK EMIR Margin RTS
applies to financial counterparties; and UK MiFID
Org Reg applies to MIFID investment firms.
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for risk management system
requirements, such as a third country
investment firm, nevertheless would be
preliminarily eligible to apply
substituted compliance for other
requirements addressed in the proposed
Order if it complies with the relevant
parts of the proposed Order.
In connection with trade
acknowledgment and verification,
portfolio reconciliation and dispute
reporting, portfolio compression and
trading relationship documentation
requirements, each of the comparable
UK provisions listed in the proposed
Order applies to ‘‘financial
counterparties.’’ The Commission
preliminarily understands that this term
includes Covered Entities that are
MiFID investment firms but not Covered
Entities that are third country
investment firms. A Covered Entity that
is preliminarily not eligible to apply
substituted compliance for these
Exchange Act requirements nevertheless
would be preliminarily eligible to apply
substituted compliance for other
requirements addressed in the proposed
Order if it complies with the relevant
parts of the proposed Order.
4. Additional Conditions and Scope
Issues
Substituted compliance in connection
with these requirements would be
subject to certain additional conditions
to help ensure the comparability of
outcomes:
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a. Trading Relationship
Documentation—Disclosure Regarding
Legal and Bankruptcy Status
Under the proposed Order,
substituted compliance in connection
with trading relationship
documentation would not extend to
disclosures regarding legal and
bankruptcy status that are required by
paragraph (b)(5) to Exchange Act rule
15Fi–5 when the counterparty is a U.S.
person.71 Documentation requirements
under applicable UK law do not address
the disclosure of information related to
insolvency procedures under U.S. law.
However, the absence of such disclosure
would not appear to preclude a
71 Those disclosures address information
regarding the status of the SBS Entity or its
counterparty as an insured depository institution or
financial counterparty, and regarding the possibility
that in certain circumstances the SBS Entity or its
counterparty may be subject to the insolvency
regime set forth under Title II of the Dodd-Frank
Act or the Federal Deposit Insurance Act, which
may affect rights to terminate, liquidate or net
security-based swaps. See Risk Mitigation Adopting
Release, 85 FR at 6374 (discussing potential
application of alternatives to the liquidation
schemes established under the Securities Investor
Protection Act of 1970 or the U.S. Bankruptcy
Code).
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comparable regulatory outcome when
the counterparty is not a U.S. person,
because the insolvency-related
consequences that are the subject of the
disclosure would not be applicable to
non-U.S. counterparties in most cases.72
b. Dispute Reporting—Provision of
Dispute Reports Consistent With UK
Law
Under the proposed Order,
substituted compliance further would
be conditioned on Covered Entities
having to provide the Commission with
reports regarding disputes between
counterparties, on the same basis as the
Covered Entities provide those reports
to the FCA pursuant to UK law.73 This
condition promotes comparability with
the Exchange Act rule requiring
reporting to the Commission regarding
significant valuation disputes,74 while
leveraging UK reporting provisions to
avoid the need for Covered Entities to
create additional reporting
frameworks.75
V. Substituted Compliance for Capital
and Margin Requirements
A. The FCA’s Request and Associated
Analytic Considerations
The FCA Application in part requests
substituted compliance in connection
with requirements under the Exchange
Act relating to:
• Capital—Capital requirements
pursuant to Exchange Act section 15F(e)
and Exchange Act rule 18a–1 and its
appendices (collectively ‘‘Exchange Act
72 See also UK EMIR Margin RTS (in part
addressing procedures providing for or specifying
the terms of agreements entered into by
counterparties, including applicable governing law
for non-centrally cleared derivatives, and further
providing that counterparties which enter into a
netting or collateral exchange agreement must
perform an independent legal review regarding
enforceability).
73 See para. (b)(3)(ii) to the proposed Order.
74 In proposing the notice provision, the
Commission recognized that valuation inaccuracies
may lead to uncollateralized credit exposure and
the potential for loss in the event of default. See
Exchange Act Release No. 84861 (Dec. 19, 2018), 84
FR 4614, 4621 (Feb. 15, 2019). It thus is important
that the Commission be informed regarding
valuation disputes affecting SBS Entities.
75 The principal difference between the two sets
of requirements concerns the timing of notices.
Under Exchange Act rule 15Fi–3, SBS Entities must
promptly report to the Commission valuation
disputes in excess of $20 million that have been
outstanding for three or five business days
(depending on counterparty types). Under UK EMIR
RTS article 15(2), firms must report to the FCA at
least monthly any disputes between counterparties
in excess of Ö15 million and outstanding for at least
15 business days. The Commission is mindful that
the UK provision does not provide for notice as
quickly as rule 15Fi–3(c), but in the Commission’s
preliminary view, on balance this difference would
not be inconsistent with the conclusion that the two
sets of risk control requirements—taken as a
whole—produce comparable regulatory outcomes.
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rule 18a–1’’) applicable to certain SBS
Entities.76 Exchange Act rule 18a–1
helps to ensure the SBS Entity
maintains at all times sufficient liquid
assets to promptly satisfy its liabilities,
and to provide a cushion of liquid assets
in excess of liabilities to cover potential
market, credit, and other risks.77 The
rule’s net liquid assets test standard
protects customers and counterparties
and mitigates the consequences of an
SBS Entity’s failure by promoting the
ability of the firm to absorb financial
shocks and, if necessary, to selfliquidate in an orderly manner.78 As
part of the capital requirements, nonprudentially regulated security-based
swap dealers also must comply with the
internal risk management control
requirements of Exchange Act Rule
15c3–4 with respect to certain
activities.79
• Margin—Margin requirements
pursuant to Exchange Act section 15F(e)
and Exchange Act rule 18a–3 for nonprudentially regulated SBS Entities. The
margin requirements are designed to
protect SBS Entities from the
consequences of a counterparty’s
default.80
Taken as a whole, these capital and
margin requirements help to promote
76 Exchange Act rule 18a–1 applies to nonprudentially regulated security-based swap dealers
that are not also registered as broker-dealers, other
than OTC derivatives dealers.
77 See Capital and Margin Adopting Release, 84
FR at 43947. The FCA Application discusses UK
requirements that address firms’ capital
requirements. See FCA Application Appendix B,
Annex V (Side Letter Addressing Capital
Requirements). See also FCA Application Appendix
B category 1.d. (Internal Risk Management
Requirements) (generally discussing internal risk
management requirements).
78 See Capital and Margin Adopting Release, 84
FR at 43879–83. The capital standard of Exchange
Act rule 18a–1 is based on the net liquid assets test
of Exchange Act rule 15c3–1 applicable to brokerdealers. Id. The net liquid assets test seeks to
promote liquidity by requiring that a firm maintain
sufficient liquid assets to meet all liabilities,
including obligations to customers, counterparties,
and other creditors, and, in the event a firm fails
financially, to have adequate additional resources to
wind-down its business in an orderly manner
without the need for a formal proceeding. See id.
at 43879. See FCA Application Appendix B, Annex
V (Side Letter Addressing Capital Requirements).
79 See Exchange Act rule 18a–1(f).
80 See Capital and Margin Adopting Release, 84
FR at 43947; see also id. at 43949 (‘‘Obtaining
collateral is one of the ways OTC derivatives
dealers manage their credit risk exposure to OTC
derivatives counterparties. Prior to the financial
crisis, in certain circumstances, counterparties were
able to enter into OTC derivatives transactions
without having to deliver collateral. When ‘‘trigger
events’’ occurred during the financial crisis, those
counterparties faced significant liquidity strains
when they were required to deliver collateral’’). The
FCA Application discusses UK requirements that
address firms’ margin requirements. See FCA
Application Appendix B category 1.c. (Margin
Requirements for Nonbank Firms) and Annex I
(Margin Haircuts (Category 1)).
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market stability by mandating that SBS
Entities follow practices to manage the
market, credit, liquidity, solvency,
counterparty, and operational risks
associated with their security-based
swap businesses. The Commission’s
comparability assessment accordingly
focuses on whether the analogous
foreign requirements—taken as a
whole—produce comparable outcomes
with regard to providing that Covered
Entities follow capital and margin
requirements that address the risks
associated with their security-based
swap businesses.
B. Preliminary Views and Proposed
Order
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1. General Considerations
In the Commission’s preliminary
view, based on the FCA Application and
the Commission’s review of applicable
provisions, relevant UK capital
requirements would produce regulatory
outcomes that address the risks that the
above capital requirements are designed
to address. As discussed below,
however, the Commission preliminarily
believes that additional conditions on
applying substituted compliance with
respect to the Exchange Act capital
requirements may be an appropriate
supplement to the UK capital
requirements in order to produce
comparable regulatory outcomes.
Substituted compliance with respect to
the capital requirements accordingly
would be conditioned on Covered
Entities being subject to the UK capital
requirements and additional conditions
that, in the aggregate, establish a
framework that produces outcomes
comparable to those associated with the
capital requirements under Exchange
Act rule 18a–1.81
81 In connection with capital requirements,
Covered Entities must comply with: The capital
requirements of UK CRR, including recitals 40, 43
and 87, and articles 26, 28, 50 through 52, 61, 63,
92, 111, 113(1), 114 through 122, 143, 153(8),
177(2), 283, 290, 300 through 311, 312(2), 362
through 377, 382 through 383, 412(1), 413(1),
416(1), 427(1), 413, 429, 430, and 499; UK MiFID
Org Reg article 23; UK EMIR Margin RTS recital 31
and articles 2, 3(b), 7, and 19(1)(d) and (e), (3) and
(8); FCA SYSC 4.1.1R, 7.1.4R, and 7.1.18R; FCA
IFPRU 2,7, 10, and 11; FCA BIPRU 12; FCA PRIN;
Client asset protection requirements under FCA
CASS; PRA General Organisational Requirements
Rule 2.1; PRA Risk Control Rules 2.3 and 3.1(1),
Capital Buffers Part, Internal Capital Adequacy
Assessment Part, Internal Liquidity Adequacy
Assessment Part, Liquidity Coverage Requirement—
UK Designated Investment Firms Part, and
Notifications Part, of the PRA Rulebook; Banking
Act 2009; Capital Requirements Regulations 2013;
Capital Requirements (Capital Buffers and Macroprudential Measures) Regulations 2014; Part 8 and
Part 9 of the Bank Recovery and Resolution (No 2)
Order 2014; Bank of England Act 1998 (Macroprudential Measures) (No 2) Order 2015; and Parts
4A and 12A of FSMA. See para. (c)(1)(i) to the
proposed Order.
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In the Commission’s preliminary
view, based on the FCA Application and
the Commission’s review of applicable
provisions, relevant UK margin
requirements would produce regulatory
outcomes that are comparable to those
associated with the above margin
requirements. For example, in adopting
its final margin requirements for noncleared security-based swaps, the
Commission stated that it modified the
proposal to more closely align the final
rule with the margin rules of the
Commodity Futures Trading
Commission and the U.S. prudential
regulators and, in doing so, with the
recommendations made by the Basel
Committee on Banking Supervision
(‘‘BCBS’’) and the Board of the
International Organization of Securities
Commissions (‘‘IOSCO’’) with respect to
margin requirements for non-centrally
cleared derivatives.82 Substituted
compliance with respect to the margin
requirements accordingly would be
conditioned on Covered Entities being
subject to those UK provisions that, the
Commission has determined, in the
aggregate, establish a framework that
produces outcomes comparable to those
associated with the requirements under
the Exchange Act rule 18a–3.83
While the Commission recognizes that
there are certain differences between
those UK requirements and the
applicable capital and margin
requirements under the Exchange Act,
in the Commission’s preliminary view,
those differences on balance would not
preclude substituted compliance for
these requirements, particularly as
requirement-by-requirement similarity
is not needed for substituted
compliance.
As noted above, substituted
compliance in connection with capital
requirements would be subject to
certain additional conditions to help
ensure the comparability of outcomes.84
As discussed in more detail below in
section V.B.3. of this notice, these
proposed conditions to substituted
compliance for capital are designed to
82 See Capital and Margin Adopting Release, 84
FR at 43908–09; see also BCBS/IOSCO, Margin
Requirements for Non-centrally Cleared Derivatives
(April 2020), available at: https://www.bis.org/bcbs/
publ/d499.pdf (‘‘BCBS/IOSCO Paper’’). The UK
margin requirements also are based on the
recommendation in the BCBS/IOSCO Paper.
83 In connection with margin requirements,
Covered Entities must comply with: UK EMIR
article 11; UK EMIR Margin RTS; UK CRR articles
103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7),
290, 295, 296(2)(b), 297(1), 297(3), and 298(1); UK
MiFID Org Reg article 23(1); FCA SYSC 4.1.1R; FCA
IFPRU 2.2.18R; PRA General Organisational
Requirements Rule 2.1; and PRA Internal Capital
Adequacy Assessment Rule 4.2. See para. (c)(2) to
the proposed Order.
84 See para. (c)(1)(ii) to the proposed Order.
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promote comparability in light of the
differences between the net liquid assets
test standard of Exchange Act rule 18a–
1 and the bank capital standard
applicable to Covered Entities.85 More
specifically, in proposing the capital
conditions, the Commission has
preliminarily sought to balance the
Commission’s objective to promote the
ability of Covered Entities to absorb
financial shocks and, if necessary, to
self-liquidate in an orderly manner
while also providing them flexibility to
apply substituted compliance with
respect to Exchange Act rule 18a–1.86
2. Scope of Substituted Compliance
The proposed Order would permit a
Covered Entity to apply substituted
compliance for the capital and/or
margin requirements. Thus, a Covered
Entity could apply substituted
compliance for Exchange Act margin
requirements by complying with UK
margin requirements but comply with
Exchange Act capital requirements
(rather than applying substituted
compliance to those requirements) and
vice versa. However, as to the various
requirements within the capital and
margin rules, the Commission found the
rules to be entity-level when adopting
amendments to Exchange Act rule
3a71–6 to make substituted compliance
available with respect to them.87
Consequently, under the proposed
Order, a Covered Entity must apply
substituted compliance with respect to
capital and margin requirements at an
entity level. For example, a Covered
Entity applying substituted compliance
for capital would need to comply with
the comparable UK capital requirements
at the entity level with respect to all
capital requirements and calculations.
Similarly, a Covered Entity applying
substituted compliance for margin
would need to comply with the
85 See Capital and Margin Adopting Release, 84
FR at 43881 (‘‘Consequently, in the Commission’s
judgment, the broker-dealer capital standard is the
appropriate standard for nonbank SBSDs because it
is designed to promote a firm’s liquidity and selfsufficiency (in other words, to account for the lack
of inexpensive funding sources that are available to
banks, such as deposits and central bank
support).’’).
86 See, e.g., Capital and Margin Adopting Release,
84 FR at 43881 (‘‘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.’’).
87 See Capital and Margin Adopting Release, 84
FR at 43946–50.
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comparable UK requirements at the
entity level with respect to all margin
requirements and counterparties—the
firm could not apply UK margin
requirements for one set of
counterparties and Exchange Act margin
requirements for another set of
counterparties.88
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3. Additional Conditions
Substituted compliance in connection
with capital requirements would be
subject to certain additional conditions
to help ensure the comparability of
outcomes. As discussed above, 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).89 For example, Exchange Act
88 See Capital and Margin Adopting Release, 84
FR at 43947 (‘‘Margin is designed to protect the
nonbank SBSD or MSBSP from the consequences of
a counterparty’s default. Permitting different margin
requirements based on the location of the
counterparty is not consistent with this objective.’’)
(footnotes omitted).
89 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, 1988), 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
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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 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 (‘‘GAAP’’). 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.90 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 the
UK are subject to capital requirements
applicable to prudentially regulated
entities based on the international
capital standard for banks (the ‘‘Basel
capital standard’’).91 The Basel capital
to protect against potential market and credit
risks.’’) (footnote omitted).
90 See 17 CFR 240.15c3–1(c)(2).
91 See supra note 81 (citing UK capital
requirements under UK CRR). See also BCBS, The
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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.
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
the UK margin requirements, Covered
Entities will be required to post initial
margin to counterparties unless an
exception applies.92 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.93 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.’’ 94 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, substituted compliance with
respect to Exchange Act rule 18a–1
Basel Framework, available at: https://www.bis.org/
basel_framework/.
92 Exchange Act rule 18a–3 does not require SBS
Entities to post initial margin (though it does not
prohibit the practice).
93 See Capital and Margin Adopting Release, 84
FR at 43887–88.
94 See id. at 43887.
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would 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 initial written notice
to the Commission of its intent to rely
on substituted compliance under
condition (a)(16) to the proposed
Order.95
The first proposed 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,96 that
equals or exceeds the Covered Entity’s
current liabilities coming due in the
next 365 days.97 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 longterm liabilities that mature in more than
a year. The proposed 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
95 See
para. (c)(1)(ii) to the proposed Order.
standard supervisory haircuts under the
Basel capital standards. BCBS, The Basel
Framework, available at: https://www.bis.org/basel_
framework/.
97 See para. (c)(1)(ii)(A) to the proposed Order.
96 See
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ability to remain a going concern.98 The
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 proposed condition
would require that a Covered Entity
make a quarterly record listing: (1) The
assets maintained pursuant to the first
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.99 The
requirement to create this record would
enable the Commission or Commission
staff to monitor compliance with the
proposed condition and facilitate
examination of the Covered Entity with
regard to substituted compliance. The
proposed 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.
In proposing these two conditions, the
Commission acknowledges that the
Basel capital standard includes the
liquidity coverage ratio (‘‘LCR’’).
However, 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 calendarday period. As discussed above, the first
proposed 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. This is
consistent with the goal of ensuring
comparability of outcomes.
The third proposed 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.100 This
condition is based on the $100 million
tentative net capital requirement of
98 See Capital and Margin Adopting Release, 84
FR at 43881 (‘‘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.’’)
99 See para. (c)(1)(ii)(B) to the proposed Order.
100 See para. (c)(1)(ii)(C) to the proposed Order.
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Exchange Act rule 18a–1 for SBS
Entities authorized to use models. The
condition is 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 fourth 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.101 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 is mindful that
compliance with these 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.102 On
balance, however, these proposed
conditions to substituted compliance for
capital are designed to ensure the
comparability of outcomes in light of
the differences between the net liquid
101 See
para. (c)(1)(ii)(D) to the proposed Order.
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 proposed capital conditions.
102 Additional
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assets test and the Basel capital
standard. If these conditions are
included in the final order, the
Commission intends to monitor their
impact on firms and to make
adjustments to them as appropriate.
VI. Substituted Compliance for Internal
Supervision, Chief Compliance Officers
and Additional Exchange Act Section
15F(j) Requirements
A. FCA Request and Associated
Analytic Considerations
The FCA also requests substituted
compliance in connection with
requirements under the Exchange Act
relating to:
• Internal supervision—Diligent
supervision is required pursuant to
Exchange Act rule 15Fh–3(h),103 and
Exchange Act section 15F(j)(5) requires
conflict of interest systems and
procedures. These provisions generally
require that SBS Entities establish,
maintain and enforce supervisory
policies and procedures that reasonably
are designed to prevent violations of
applicable law, and implement certain
systems and procedures related to
conflicts of interest.104
• Chief compliance officers—Chief
compliance officer requirements are set
out in Exchange Act section 15F(k) and
Exchange Act rule 15Fk–1.105 These
provisions in general require that SBS
Entities designate individuals with the
responsibility and authority to establish,
administer and review compliance
policies and procedures, to resolve
conflicts of interest, and to prepare and
certify an annual compliance report to
the Commission.106
• Additional Exchange Act section
15F(j) requirements—Additional
requirements related to informationgathering pursuant to Exchange Act
section 15F(j)(4)(A), and certain
antitrust prohibitions specified by
Exchange Act section 15F(j)(6).107
103 17
CFR 240.15Fh–3(h).
FCA Application addresses UK provisions
that address firms’ supervisory frameworks, persons
with supervisory authority, supervisory policies
and procedures, general compliance and internal
recordkeeping, investigation of personnel, conflicts
of interest, personal trading and remuneration. See
FCA Application Appendix B category 3 at 190–
214, 217–48.
105 17 CFR 240.15Fk–1.
106 The FCA Application discusses UK
requirements that address compliance officers and
their responsibilities, compliance officer
appointment, removal and compensation, related
conflict of interest provisions and compliancerelated reports. See FCA Application Appendix B
category 3 at 249–74.
107 Section 15F(j)(4)(A) particularly requires firms
to have systems and procedures to obtain necessary
information to perform functions required under
section 15F. The FCA Application in turn discusses
UK provisions generally addressing information
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Taken as a whole, these internal
supervision, chief compliance officer
and additional Exchange Act section
15F(j) requirements help to promote
SBS Entities’ use of structures,
processes and responsible personnel
reasonably designed to promote
compliance with applicable law, to
identify and cure instances of noncompliance and to manage conflicts of
interest. The comparability assessment
accordingly may focus on whether the
analogous foreign requirements—taken
as a whole—produce comparable
outcomes with regard to providing that
Covered Entities have structures and
processes reasonably designed to
promote compliance with applicable
law, identify and cure instances of noncompliance and to manage conflicts of
interest, in part through the designation
of an individual with responsibility and
authority over compliance matters.
B. Preliminary Views and Proposed
Order
1. General Considerations
Based on the FCA Application and
the Commission’s review of applicable
provisions, in the Commission’s
preliminary view the relevant UK
requirements would produce regulatory
outcomes that are comparable to those
associated with the above-described
internal supervision, chief compliance
officer, conflict of interest and
information-related requirements by
providing that Covered Entities have
structures and processes that reasonably
are designed to promote compliance
with applicable law and to identify and
cure instances of non-compliance and
manage conflicts of interest.108 As
gathering and disclosure. See FCA Application
Appendix B category 3 at 214–15. Section 15F(j)(6)
prohibits firms from adopting any process or taking
any action that results in any unreasonable restraint
of trade, or to impose any material anticompetitive
burden on trading or clearing. The FCA Application
addresses EU antitrust requirements. See FCA
Application Appendix B category 3 at 216–17.
108 This portion of the proposed Order
accordingly would extend generally to the internal
supervision provisions of Exchange Act rule 15Fh–
3(h), the requirement in Exchange Act section
15F(j)(4)(A) to have systems and procedures to
obtain necessary information to perform functions
required under Exchange Act section 15F and the
conflict of interest provisions of Exchange Act
section 15F(j)(5). See para. (d)(1) to the proposed
Order. This portion of the proposed Order does not
extend to the portions of rule 15Fh–3(h) that
mandate supervisory policies and procedures in
connection with: The risk management system
provisions of Exchange Act section 15F(j)(2) (which
are addressed by paragraph (b)(1) to the proposed
Order in connection with internal risk
management); the information-related provisions of
Exchange Act sections 15F(j)(3) and (j)(4)(B) (for
which substituted compliance is not available); or
the antitrust provisions of Exchange Act section
15F(j)(6) (for which the Commission is not
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elsewhere, this part of the proposed
Order conditions substituted
compliance on Covered Entities being
subject to and complying with specified
UK requirements that are necessary to
establish comparability.109
The Commission recognizes that
certain differences are present between
those UK requirements and the
applicable requirements under the
Exchange Act. In the Commission’s
preliminary view, on balance, however,
those differences would not preclude
substituted compliance within the
relevant outcomes-oriented context.
2. Scope of Substituted Compliance
The proposed Order would permit a
Covered Entity to apply substituted
compliance for internal supervision
and/or chief compliance officer
requirements. For example, a Covered
Entity could apply substituted
compliance for internal supervision
requirements but comply directly with
Exchange Act chief compliance officer
requirements. For either set of
requirements for which a Covered Entity
applies substituted compliance,
however, the proposed Order would
require the Covered Entity to apply
substituted compliance at an entity
level, i.e., to all of its activities subject
to that set of requirements. For example,
the proposed Order would require a
Covered Entity applying substituted
compliance for internal supervision
requirements to comply with the
comparable UK requirements with
respect to all of its internal supervision
systems and procedures. The Covered
Entity could not choose to comply with
the Exchange Act for one part of its
internal supervision systems and
procedures and with UK requirements
for another part of its internal
supervision systems and procedures.110
The Commission preliminarily believes
that this scope of substituted
compliance strikes the right balance
between providing Covered Entities
proposing to provide substituted compliance). See
para. (d)(1)(iii) to the proposed Order.
109 In connection with these internal supervision,
chief compliance officer and conflict of interest and
information gathering provisions, a Covered Entity
must be subject to and comply with provisions of
UK law that implement MiFID articles 16 and 23
and CRD articles 74, 76, 79 through 87, 88(1), 91(1)
and (2) and 92; UK CRR article 286 through 288 and
293; UK EMIR Margin RTS article 2; and UK MiFID
Org Reg articles 21 through 37 and 72 through 76
and Annex IV. See para. (d)(3) to the proposed
Order.
110 See para. (d)(1) to the proposed Order.
Similarly, a Covered Entity applying substituted
compliance for chief compliance officer
requirements would have to comply with the
comparable UK requirements with respect to all
security-based swaps subject to Exchange Act trade
acknowledgment and verification requirements. See
para. (d)(2) to the proposed Order.
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flexibility to tailor the application of
substituted compliance to their business
needs and ensuring that substituted
compliance is consistent with the
Commission’s classification of the
relevant Exchange Act requirements as
entity-level requirements.111
3. Types of Covered Entities ‘‘Subject
to’’ Comparable UK Requirements
Each of the comparable UK provisions
listed in the proposed Order applies to
a uniquely defined set of UK-authorized
firms.112 To assist UK firms in
determining whether they are subject to
these provisions, the Commission
preliminarily has determined that any
Covered Entity that is an ‘‘IFPRU
investment firm,’’ as defined in the FCA
Handbook Glossary, or a ‘‘UK bank’’ or
‘‘UK designated investment firm,’’ as
defined in both the FCA Handbook
Glossary and the PRA Rulebook
Glossary, and is not an ‘‘investment
company with variable capital,’’ as
defined in the FCA Handbook Glossary,
would be subject to all of the required
UK provisions. Accordingly, those types
of firms preliminarily would be eligible
to apply substituted compliance for
internal supervision, chief compliance
officer, conflict of interest and
information-related requirements. A
Covered Entity that is preliminarily not
eligible to apply substituted compliance
for those requirements, such as a third
country investment firm, nevertheless
would be preliminarily eligible to apply
substituted compliance for other
requirements addressed in the proposed
Order if it complies with the relevant
parts of the proposed Order.
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4. Additional Conditions and Scope
Issues
Substituted compliance in connection
with these requirements would be
111 See Business Conduct Adopting Release, 81
FR at 30064 (diligent supervision and chief
compliance officer requirements are entity-level
requirements).
112 The Commission preliminarily understands
that FCA CASS 6 and 7 apply to all FCA-authorized
firms that are not investment companies with
variable capital; FCA COBS 11 applies to all FCAauthorized firms; FCA IFPRU and FCA BIPRU
apply to IFPRU investment firms; FCA SYSC 4, 7,
9 and 10 (except SYSC 10.1.8) apply to common
platform firms and third country firms; FCA SYSC
10.1.8 applies to firms that provide services to a
client in the course of carrying on regulated
activities or ancillary activities or providing
ancillary services that constituted MiFID business;
FCA SYSC 10A applies to MiFID investment firms
and third country investment firms; FCA SYSC 19A
applies to IFPRU investment firms and their
overseas firm analogues; FCA SYSC 19D applies to
UK banks, UK designated investment firms and
their overseas firm analogues; the PRA rules cited
in paragraph (d)(3) to the proposed Order apply to
CRR firms as defined in the PRA Rulebook
Glossary; and UK MiFID Org Reg applies to
investment firms and credit institutions.
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subject to certain additional conditions
to help ensure the comparability of
outcomes:
a. Application of UK Supervisory and
Compliance Requirements to Residual
U.S. Requirements and Order
Conditions
Under the proposed Order,
substituted compliance for the relevant
internal supervision requirements
would be conditioned on Covered
Entities complying with applicable UK
supervisory and compliance provisions
as if those provisions also require the
Covered Entity to comply with
applicable requirements under the
Exchange Act and the other applicable
conditions to the Order.113
Even with substituted compliance,
Covered Entities still would be subject
directly to a number of requirements
under the Exchange Act and to the
conditions to the Order. In some cases,
particular requirements under the
Exchange Act are outside the ambit of
substituted compliance.114 In other
cases, certain requirements under the
Exchange Act may not have comparable
UK requirements or may be outside the
scope of the FCA Application,115 or the
Covered Entity may decide not to use
substituted compliance for certain
requirements under the Exchange Act.
While the UK regulatory framework in
general reasonably appears to promote
Covered Entities’ compliance with
applicable UK laws, those requirements
do not appear to promote Covered
Entities’ compliance with requirements
under the Exchange Act that are not
subject to substituted compliance, or
promote Covered Entities’ compliance
with the applicable conditions to
substituted compliance. This condition
would address this issue, while still
allowing Covered Entities to use their
existing internal supervision and
compliance frameworks to comply with
the relevant Exchange Act requirements
and Order conditions, rather than
having to establish separate specialpurpose supervision and compliance
frameworks.
b. Compliance Reports
Under the proposed Order,
substituted compliance in connection
113 See
para. (d)(4) to the proposed Order.
noted, substituted compliance does not
extend to antifraud prohibitions or to certain other
requirements under the Exchange Act (e.g.,
requirements related to transactions with
counterparties that are not ECPs and segregation
requirements). See note 5, supra.
115 For example, the FCA is not requesting
substituted compliance in connection with ECP
verification requirements, ‘‘special entity’’
provisions and political contribution provisions.
See note 17, supra.
114 As
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with the compliance report
requirements under Exchange Act
section 15F(k)(3) and Exchange Act rule
15Fk–1(c) also would be subject to the
condition that the compliance reports
required pursuant to UK MiFID Org Reg
article 22(2)(c) must: (1) Be provided to
the Commission annually and in the
English language; (2) include a
certification under penalty of law that
the report is accurate and complete; and
(3) address the Covered Entity’s
compliance with other applicable
conditions to the proposed Order.116
Although certain UK requirements
address a Covered Entity’s use of
internal compliance reports, those
provisions do not require it to submit
compliance reports to the Commission.
Under this condition, a Covered Entity
could leverage the compliance reports
that it otherwise must produce, by
extending those reports to address
compliance with the conditions to the
proposed Order.117
c. Antitrust Considerations
Under the proposed Order,
substituted compliance would not
extend to Exchange Act section 15F(j)(6)
(and related internal supervision
requirements of Exchange Act rule
15Fh–3(h)(2)(iii)(I)). Allowing an
alternative means of compliance would
not lead to outcomes comparable to that
statutory prohibition.118
VII. Substituted Compliance for
Counterparty Protection Requirements
A. FCA Request and Associated
Analytic Considerations
The FCA further requests substituted
compliance in connection with
provisions under the Exchange Act
relating to:
116 See para. (d)(2)(ii) to the proposed Order. UK
MiFID Org Reg article 22(2)(c) particularly requires
that a Covered Entity’s compliance function ‘‘report
to the management body, on at least an annual
basis, on the implementation and effectiveness of
the overall control environment for investment
services and activities, on the risks that have been
identified and on the complaints-handling reporting
as well as remedies undertaken or to be
undertaken[.]’’ Under the proposed condition, those
reports, as submitted to the Commission and the
Covered Entity’s management body, also would
address the Covered Entity’s compliance with the
other conditions to the proposed Order (in addition
to addressing the Covered Entity’s compliance with
applicable UK provisions).
117 In practice, a Covered Entity may satisfy this
condition by identifying relevant Order conditions
and reporting on the implementation and
effectiveness of its controls with regard to
compliance with those Order conditions.
118 See also German Substituted Compliance
Order, 85 FR at 85691–92. The Commission is not
taking any position regarding the applicability of
the section 15F(j)(6) antitrust prohibitions in the
cross-border context. Non-U.S. SBS Entities should
assess the applicability of those prohibitions to
their security-based swap businesses.
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• Disclosure of material risks and
characteristics and material incentives
or conflicts of interest—Exchange Act
rule 15Fh–3(b) 119 requires that SBS
Entities disclose to certain
counterparties to a security-based swap
certain information about the material
risks and characteristics of the securitybased swap, as well as material
incentives or conflicts of interest that
the SBS Entity may have in connection
with the security-based swap. These
provisions address the need for securitybased swap market participants to have
information that is sufficient to make
informed decisions regarding potential
transactions involving particular
counterparties and particular financial
instruments.120
• ‘‘Know your counterparty’’—
Exchange Act rule 15Fh–3(e) 121
requires that SBS Entities establish,
maintain and enforce written policies
and procedures to obtain and retain
certain information regarding a
counterparty that is necessary for
conducting business with that
counterparty. This provision accounts
for the need that SBS Entities obtain
essential counterparty information
necessary to promote effective
compliance and risk management.122
• Suitability—Exchange Act rule
15Fh–3(f) 123 requires a security-based
swap dealer that recommends to certain
counterparties a security-based swap or
trading strategy involving a securitybased swap, to undertake reasonable
diligence to understand the potential
risks and rewards associated with the
recommendation and to have a
reasonable basis to believe that the
recommendation is suitable for the
counterparty.124 This provision
119 17
CFR 240.15Fh–3(b).
Business Conduct Adopting Release, 81
FR at 29983–86. The FCA Application discusses UK
requirements that address disclosure of product
information and firm information. See FCA
Application Appendix B category 4 at 292–303.
121 17 CFR 240.15Fh–3(e).
122 See Business Conduct Adopting Release, 81
FR at 29993–94. The FCA Application discusses UK
suitability requirements regarding information that
firms must obtain regarding counterparties. See
FCA Application Appendix B category 4 at 313–20.
123 17 CFR 240.15Fh–3(f).
124 See Business Conduct Adopting Release, 81
FR at 29994–30000. A security-based swap dealer
may satisfy its counterparty-specific suitability
obligation with respect to an ‘‘institutional
counterparty,’’ as defined in Exchange Act rule
15Fh–3(f)(4), if the security-based swap dealer
reasonably determines that the counterparty or its
agent is capable of independently evaluating
relevant investment risks, the counterparty or its
agent represents in writing that it is exercising
independent judgment in evaluating the
recommendation, and the security-based swap
dealer discloses that it is acting as counterparty and
is not undertaking to assess the suitability of the
recommendation for the counterparty. See
Exchange Act rule 15Fh–3(f)(2) and (3).
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accounts for the need to guard against
security-based swap dealers making
unsuitable recommendations.125
• Fair and balanced
communications—Exchange Act rule
15Fh–3(g) 126 requires that SBS Entities
communicate with counterparties in a
fair and balanced manner based on
principles of fair dealing and good faith.
These provisions promote complete and
honest communications as part of SBS
Entities’ security-based swap
businesses.127
• Daily mark disclosure—Exchange
Act rule 15Fh–3(c) 128 requires that SBS
Entities provide daily mark information
to certain counterparties. These
provisions address the need for market
participants to have effective access to
daily mark information necessary to
manage their security-based swap
positions.129
• Clearing rights disclosure—
Exchange Act rule 15Fh–3(d) 130
requires that SBS Entities provide
certain counterparties with information
regarding clearing rights under the
Exchange Act.131
Taken as a whole, the counterparty
protection requirements under section
15F of the Exchange Act help to ‘‘bring
professional standards of conduct to,
and increase transparency in, the
security-based swap market and to
require [SBS Entities] to treat parties to
these transactions fairly.’’ 132 The
125 See Business Conduct Adopting Release, 81
FR at 29997. The FCA Application discusses UK
suitability requirements that are more targeted for
transactions with ‘‘professional clients.’’ See FCA
Application Appendix B category 4 at 321–32.
126 17 CFR 240.15Fh–3(g).
127 See Business Conduct Adopting Release, 81
FR at 30000–02. The FCA Application discusses UK
requirements that address communications
standards. See FCA Application Appendix B
category 4 at 275–91.
128 17 CFR 240.15Fh–3(c).
129 See Business Conduct Adopting Release, 81
FR at 29986–91. The FCA Application discusses UK
requirements that address valuation, portfolio
reconciliation and trade reporting. See FCA
Application Appendix B category 4 at 304–12.
130 17 CFR 240.15Fh–3(d).
131 Exchange Act section 3C(g)(5), provides
certain rights for counterparties to select the
clearing agency at which a security-based swap is
cleared. For all security-based swaps that an SBS
Entity enters into with certain counterparties, the
counterparty has the sole right to select the clearing
agency at which the security-based swap is cleared.
For security-based swaps that are not subject to
mandatory clearing (pursuant to Exchange Act
sections 3C(a) and (b), 15 U.S.C. 78c–3(a) and (b))
and that an SBS Entity enters into with certain
counterparties, the counterparty also may elect to
require clearing of the security-based swap.
Substituted compliance is not available in
connection with this provision. The FCA
Application discusses UK provisions that address
clearing rights. See FCA Application Appendix B
category 4 at 333–40.
132 See Business Conduct Adopting Release, 81
FR at 30065. These transaction-level requirements
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comparability assessment accordingly
may focus on whether the analogous
foreign requirements—taken as a
whole—produce similar outcomes with
regard to promoting professional
standards of conduct, increasing
transparency and requiring Covered
Entities to treat parties fairly.
B. Preliminary Views and Proposed
Order
1. General Considerations
Based on the FCA Application and
the Commission’s review of applicable
provisions, in the Commission’s
preliminary view, the relevant UK
requirements produce regulatory
outcomes that are comparable to
counterparty protection requirements
under Exchange Act section 15F(h)
related to disclosure of material risks
and characteristics, disclosure of
material incentives or conflicts of
interest, ‘‘know your counterparty,’’
suitability, fair and balanced
communications and daily mark
disclosure, by subjecting Covered
Entities to obligations that promote
standards of professional conduct,
transparency and the fair treatment of
parties. The proposed Order accordingly
would provide conditional substituted
compliance in connection with those
requirements.133 The proposed Order
preliminarily does not provide
substituted compliance in connection
with requirements related to clearing
rights disclosure, however, for reasons
addressed below.
In taking this proposed approach, the
Commission recognizes that there are
certain differences between relevant UK
requirements, on the one hand, and the
relevant disclosure, ‘‘know your
counterparty,’’ suitability and
communications requirements under
the Exchange Act, on the other hand. On
balance, however, in the Commission’s
preliminary view, those differences,
when coupled with the conditions in
the proposed Order, are not so material
as to be inconsistent with substituted
generally apply only to a non-U.S. SBS Entity’s
activities involving U.S. counterparties (unless the
transaction is arranged, negotiated or executed in
the United States). In particular, for non-U.S. SBS
Entities, the counterparty protection requirements
under Exchange Act section 15F(h) apply only to
the SBS Entity’s transactions with U.S.
counterparties (apart from certain transactions
conducted through a foreign branch of the U.S.
counterparty), or to transactions arranged,
negotiated or executed in the United States. See
Exchange Act rule 3a71–3(c), 17 CFR 240.3a71–3(c)
(exception from business conduct requirements for
a security-based swap dealer’s ‘‘foreign business’’);
see also Exchange Act rule 3a71–3(a)(3), (8) and (9),
17 CFR 240.3a71–3(a)(3), (8) and (9) (definitions of
‘‘transaction conducted through a foreign branch,’’
‘‘U.S. business’’ and ‘‘foreign business’’).
133 See generally para. (e) to the proposed Order.
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compliance within the requisite
outcomes-oriented framework. As
elsewhere, the counterparty protection
provisions of the proposed Order in part
condition substituted compliance on
Covered Entities being subject to, and
complying with, specified UK
requirements that are necessary to
establish comparability.134 Substituted
compliance in connection with these
counterparty protection requirements
also would be subject to specific
conditions and limitations necessary to
promote consistency in regulatory
outcomes.
134 In connection with requirements related to
disclosure of information regarding material risks
and characteristics, a Covered Entity must be
subject to and comply with provisions of UK law
that implement MiFID article 24(4) and either UK
MiFID Org Reg articles 48 through 50 or provisions
of UK law that reflect UK MiFID Org Reg articles
48 through 50, in each case in relation to the
security-based swap for which substituted
compliance is applied. See para. (e)(1) to the
proposed Order. In connection with requirements
related to disclosure of information regarding
material incentives or conflicts of interest, a
Covered Entity must be subject to and comply with
either: (1) Provisions of UK law that implement
MiFID article 23(2) and (3) and UK MiFID Org Reg
articles 33 through 35; (2) provisions of UK law that
implement MiFID article 24(9) and MiFID Delegated
Directive article 11(5); or (3) UK MAR article 20(1)
and UK MAR Investment Recommendations
Regulation articles 5 and 6, in each case in relation
to the security-based swap for which substituted
compliance is applied. See para. (e)(2) to the
proposed Order. In connection with ‘‘know your
counterparty’’ requirements, a Covered Entity must
be subject to and comply with provisions of UK law
that implement MiFID article 16(2); UK MiFID Org
Reg articles 21, 22, 25, 26 and applicable parts of
Annex I; provisions of UK law that implement CRD
articles 74(1) and 85(1), MLD articles 11 and 13 and
MLD articles 8(3) and 8(4)(a) as applied to policies,
controls and procedures regarding customer due
diligence, in each case in relation to the securitybased swap counterparty for which substituted
compliance is applied. See para. (e)(3) to the
proposed Order. In connection with suitability
requirements, a Covered Entity must be subject to
and comply with provisions of UK law that
implement MiFID articles 24(2) and (3) and 25(1)
and (2) and UK MiFID Org Reg articles 21(1)(b) and
(d), 54 and 55, in each case in relation to the
recommendation of a security-based swap or
trading strategy involving a security-based swap for
which substituted compliance is applied. See para.
(e)(4)(i) to the proposed Order. In connection with
fair and balanced communications requirements, a
Covered Entity must be subject to and comply with
provisions of UK law that implement either MiFID
article 24(1) and (3) or MiFID article 30(1);
provisions of UK law that implement MiFID article
24(4) and (5); either UK MiFID Org Reg articles 46
through 48 or provisions of UK law that reflect UK
MiFID Org Reg articles 46 through 48; UK MAR
Investment Recommendations Regulation articles 3
and 4; and UK MAR articles 12(1)(c), 15 and 20(1),
in each case in relation to the communication for
which substituted compliance is applied. See para.
(e)(5) to the Proposed Order. In connection with
daily mark disclosure requirements, Covered
Entities must be required to reconcile, and in fact
reconcile, the portfolio containing the securitybased swap for which substituted compliance is
applied, on each business day pursuant to UK EMIR
articles 11(1)(b) and 11(2) and UK EMIR RTS article
13. See para. (e)(6) to the Proposed Order.
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2. Scope of Substituted Compliance
The proposed Order would permit a
Covered Entity to apply substituted
compliance for one or more
counterparty protection requirements.
For example, a Covered Entity could
apply substituted compliance for fair
and balanced communications
requirements but comply directly with
Exchange Act requirements related to
disclosure of information regarding
material risks and characteristics,
disclosure of information regarding
material incentives or conflicts of
interest, ‘‘know your counterparty,’’
suitability and daily mark disclosure. A
Covered Entity also may decide to apply
substituted compliance for a particular
set of counterparty protection
requirements, such as fair and balance
communications, for some activities and
comply directly with Exchange Act
requirements for other activities. For
example, the proposed Order would
allow a Covered Entity applying
substituted compliance for fair and
balanced communications requirements
to comply with the comparable UK
requirements with respect to
communications with UK
counterparties that are subject to the
Exchange Act and to comply directly
with Exchange Act requirements with
respect to U.S. person counterparties.135
The Commission preliminarily believes
that this scope of substituted
135 See para. (e)(5) to the proposed Order.
Similarly, a Covered Entity applying substituted
compliance for requirements to disclose
information regarding material risks and
characteristics could comply with the comparable
UK requirements with respect to some securitybased swaps and comply directly with Exchange
Act requirements with respect to other securitybased swaps. See para. (e)(1) to the proposed Order.
A Covered Entity applying substituted compliance
for requirements to disclose information regarding
material incentives or conflicts of interest could
comply with the comparable UK requirements with
respect to some security-based swaps and comply
directly with Exchange Act requirements with
respect to other security-based swaps. See para.
(e)(2) to the proposed Order. A Covered Entity
applying substituted compliance for ‘‘know your
counterparty’’ requirements could comply with the
comparable UK requirements with respect to some
security-based swap counterparties and comply
directly with Exchange Act requirements with
respect to other counterparties. See para. (e)(3) to
the proposed Order. A Covered Entity applying
substituted compliance for suitability requirements
could comply with the comparable UK
requirements with respect to some
recommendations of a security-based swap or
trading strategy involving a security-based swap
and comply directly with Exchange Act
requirements with respect to other
recommendations. See para. (e)(4) to the proposed
Order. A Covered Entity applying substituted
compliance for daily mark disclosure requirements
could comply with the comparable UK
requirements with respect to some security-based
swaps and comply directly with Exchange Act
requirements with respect to other security-based
swaps. See para. (e)(6) to the proposed Order.
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compliance would provide Covered
Entities flexibility to tailor the
application of substituted compliance to
their business needs in a manner
consistent with the Commission’s
classification of the relevant Exchange
Act counterparty protection
requirements as transaction-level
requirements.136
3. Types of Covered Entities ‘‘Subject
to’’ Comparable UK Requirements
Each of the comparable UK provisions
listed in the proposed Order applies to
a uniquely defined set of UK-authorized
firms.137 To assist UK firms in
determining whether they are subject to
these provisions, the Commission
preliminarily has determined that any
Covered Entity would be subject to the
required UK requirements related to
disclosure of material risks and
characteristics, disclosure of material
incentives or conflicts of interest,
suitability and fair and balanced
communications. Accordingly, any
136 See Business Conduct Adopting Release, 81
FR at 30065 (counterparty protection requirements
are transaction-level requirements).
137 In connection with requirements related to
disclosure of information regarding material risks
and characteristics, the Commission preliminarily
understands that FCA COBS 2, 6, 9A and 14 apply
to MiFID investment firms and third country
investment firms and the UK MiFID Org Reg applies
to investment firms and credit institutions. In
connection with requirements related to disclosure
of information regarding material incentives or
conflicts of interest, the Commission preliminarily
understands that FCA COBS 2 applies to MiFID
investment firms and third country investment
firms; FCA SYSC 10.1.8 applies to firms that
provide services to a client in the course of carrying
on regulated activities or ancillary activities or
providing ancillary services that constitute MiFID
business; UK MAR article 20 applies to all natural
and legal persons; and UK MiFID Org Reg applies
to investment firms and credit institutions. In
connection with ‘‘know your counterparty’’
requirements, the Commission preliminarily
understands that FCA IFPRU applies to IFPRU
investment firms; FCA SYSC 4 and 6 apply to
common platform firms and third country firms;
MLR 2017 applies to, among others, investment
firms and credit institutions; the PRA rules cited in
paragraph (e)(3) to the proposed Order apply to CRR
firms as defined in the PRA Rulebook Glossary; and
UK MiFID Org Reg applies to investment firms and
credit institutions. In connection with suitability
requirements, the Commission preliminarily
understands that FCA COBS 4 and 9A and PROD
3 apply to MiFID investment firms and third
country investment firms; FCA SYSC 5 applies to
common platform firms and third country firms;
and UK MiFID Org Reg applies to investment firms
and credit institutions. In connection with fair and
balanced communications requirements, the
Commission preliminarily understands that FCA
COBS 2, 4, 6, 8A, 9A, 14 and 14A apply to MiFID
investment firms and third country investment
firms; UK MAR articles 12(1)(c) and 15 and UK
MAR Investment Recommendations Regulation
article 5 apply to all natural and legal persons; and
UK MiFID Org Reg applies to investment firms and
credit institutions. In connection with daily mark
disclosure requirements, the Commission
preliminarily understands that UK EMIR and UK
EMIR RTS apply to financial counterparties.
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Covered Entity preliminarily would be
eligible to apply substituted compliance
for disclosure of material risks and
characteristics, disclosure of material
incentives or conflicts of interest,
suitability and fair and balanced
communications requirements. In
connection with ‘‘know your
counterparty’’ requirements, the
Commission also preliminarily has
determined that any Covered Entity that
is an ‘‘IFPRU investment firm,’’ as
defined in the FCA Handbook Glossary,
or a ‘‘UK bank’’ or ‘‘UK designated
investment firm,’’ as defined in both the
FCA Handbook Glossary and the PRA
Rulebook Glossary, would be subject to
all of the required UK provisions and
thus eligible to apply substituted
compliance for Exchange Act ‘‘know
your counterparty’’ requirements. In
connection with daily mark disclosure
requirements, the Commission
preliminarily has determined that any
Covered Entity that is a ‘‘financial
counterparty’’—that is, a Covered Entity
that is a MiFID investment firm rather
than a third country investment firm—
would be subject to all of the required
UK provisions and thus eligible to apply
substituted compliance for Exchange
Act daily mark disclosure requirements.
A Covered Entity that is preliminarily
not eligible to apply substituted
compliance for ‘‘know your
counterparty’’ and/or daily mark
disclosure requirements, such as a third
country investment firm, nevertheless
would be preliminarily eligible to apply
substituted compliance for other
requirements addressed in the proposed
Order if it complies with the relevant
parts of the proposed Order.
4. Additional Conditions and Scope
Issues
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a. Daily Mark Disclosure
The proposed Order would provide
substituted compliance in connection
with daily mark disclosure requirements
pursuant to Exchange Act rule 15Fh–
3(c) to the extent that the Covered Entity
participates in daily portfolio
reconciliation exercises that include the
relevant security-based swap pursuant
to UK requirements.138 The FCA
138 The Commission received a comment on the
German Notice and Proposed Order suggesting that
a similar condition should apply only to securitybased swaps with U.S. counterparties; for all other
transactions subject to Exchange Act daily mark
requirements, the commenter proposed that the
Commission grant substituted compliance if the
Covered Entity complies with EU mark-to-market
(or mark-to-model) and reporting requirements. See
Letter from Kyle Brandon, Managing Director, Head
of Derivative Policy, SIFMA (Dec. 8, 2020) (‘‘SIFMA
Letter’’) at 6. The Commission did not adopt that
bifurcated approach. See German Substituted
Compliance Order, 85 FR at 85694–95. Similarly,
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Application takes the view that UK
requirements directing certain types of
derivatives counterparties to mark-tomarket (or mark-to-model) uncleared
transactions each day are comparable to
Exchange Act requirements. In the
Commission’s preliminary view,
however, these UK mark-to-market (or
mark-to-model) requirements are not
comparable to Exchange Act
requirements because the UK
requirements do not require disclosure
to counterparties. In the alternative, the
FCA Application notes that certain
derivatives counterparties must report
to a UK trade repository updated daily
valuations for each OTC derivative
contract and that all counterparties have
the right to access these valuations at
the relevant UK trade repository. In the
Commission’s preliminary view, in
practice, U.S. counterparties may
encounter challenges when attempting
to access daily marks for different
security-based swaps reported to
multiple UK trade repositories with
which they may not otherwise have
business relationships. In addition, the
information may be less current, given
the time necessary for reporting and for
the trade repository to make the
information available.139 For these
reasons, in the Commission’s
preliminary view, these UK reporting
requirements also are not comparable to
Exchange Act requirements. Finally, the
FCA Application describes the EU’s
portfolio reconciliation requirements for
uncleared OTC derivative contracts,
which include a requirement to
exchange valuations of those contracts
directly between counterparties. The
required frequency of portfolio
reconciliations varies depending on the
types of counterparties and the size of
the portfolio of OTC derivatives
between them, with daily reconciliation
required only for the largest portfolios.
For security-based swaps to which the
UK’s daily portfolio reconciliation
requirements apply (i.e., security-based
swaps of a financial counterparty or
non-financial counterparty subject to
the clearing obligation in UK EMIR, if
the counterparties have 500 or more
OTC derivatives contracts outstanding
with each other 140), the Commission
preliminarily views these requirements
as comparable to Exchange Act
requirements. For all other securitybased swaps in portfolios that are not
required to be reconciled on each
business day, the Commission
preliminarily views the UK’s portfolio
reconciliation requirements as not
comparable to Exchange Act
requirements and is proposing not to
make a positive substituted compliance
determination.
the Commission is proposing one approach to
substituted compliance for daily mark requirements
in response to the FCA Application. This approach
would provide substituted compliance for daily
mark requirements based on comparability of
outcomes with respect to transactions with U.S.
counterparties to the same extent as it would
provide substituted compliance with respect to all
other transactions.
139 The Commission received a comment on the
German Notice and Proposed Order that EU
reporting requirements similar to the UK
requirements cited by the FCA are comparable to
Exchange Act daily mark requirements. See SIFMA
Letter at 5. The commenter stated that the access
and timing challenges should not be as relevant for
EU and other non-U.S. counterparties if they are
already subject to EU reporting obligations and that
in its experience data is available promptly from
trade repositories. See id. The commenter’s
position, however, highlights that U.S.
counterparties, as well as non-U.S. counterparties
without existing business relationships with
multiple UK trade repositories, still may encounter
challenges in receiving timely marks from these
trade reports. See also German Substituted
Compliance Order, 85 FR at 85694–95.
c. Suitability
Under the proposed Order,
substituted compliance in connection
with the suitability provisions of
Exchange Act rule 15Fh–3(f) in part
would be conditioned on the
requirement that the counterparty be a
per se ‘‘professional client’’ as defined
in FCA COBS and not be a ‘‘special
entity’’ as defined in Exchange Act
section 15F(h)(2)(C) and Exchange Act
rule 15Fh–2(d).142 Accordingly, the
proposed Order would not provide
substituted compliance for Exchange
Act suitability requirements for a
recommendation made to a counterparty
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b. No Substituted Compliance in
Connection With Clearing Rights
Disclosure
The proposed Order would not
provide substituted compliance in
connection with clearing rights
disclosure requirements pursuant to
Exchange Act rule 15Fh–3(d). For those
requirements, the FCA Application cites
certain provisions related to clearing
rights in the UK that are unrelated to the
clearing rights provided by Exchange
Act section 3C(g)(5).141 The section
3C(g)(5) clearing rights are not eligible
for substituted compliance, and the UK
provisions do not require disclosure of
these section 3C(g)(5) clearing rights. In
the Commission’s preliminary view,
substituted compliance based on UK
clearing provisions would not lead to
comparable disclosure of a
counterparty’s clearing rights under the
Exchange Act.
140 See UK EMIR RTS article 13(3)(a)(i); UK EMIR
article 10.
141 See note 131, supra.
142 17 CFR 240.15Fh–2(d). See para. (e)(4)(ii) to
the proposed Order.
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that is a ‘‘retail client’’ or an elective
‘‘professional client,’’ as such terms are
defined in FCA COBS,143 or for a
‘‘special entity’’ as defined in the
Exchange Act. In the Commission’s
preliminary view, absent such a
condition the UK suitability
requirements would not be expected to
produce a counterparty protection
outcome that is comparable with the
outcome produced by the suitability
requirements under the Exchange
Act.144
VIII. Substituted Compliance for
Recordkeeping, Reporting, Notification,
and Securities Count Requirements
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A. FCA Request and Associated
Analytic Considerations
The FCA Application in part requests
substituted compliance for requirements
applicable to SBS Entities under the
Exchange Act relating to:
• Recordmaking—Exchange Act rule
18a–5 requires prescribed records to be
made and kept current.145
• Record Preservation—Exchange Act
section 15F(g) and Exchange Act rule
18a–6 require preservation of records.146
143 FCA COBS 3.5 describes which clients are
‘‘professional clients.’’ FCA COBS 3.5.2R describes
the types of clients considered to be professional
clients unless the client elects non-professional
treatment; these clients are per se professional
clients. FCA COBS 3.5.3R describes the types of
clients who may be treated as professional clients
on request; these clients are elective professional
clients. See FCA COBS 3.5.
144 The Commission recognizes that Exchange Act
rules permit security-based swap dealers, when
making a recommendation to an ‘‘institutional
counterparty,’’ to satisfy some elements of the
suitability requirement if the security-based swap
dealer reasonably determines that the counterparty
or its agent is capable of independently evaluating
relevant investment risks, the counterparty or its
agent represents in writing that it is exercising
independent judgment in evaluating
recommendations, and the security-based swap
dealer discloses to the counterparty that it is acting
as counterparty and is not undertaking to assess the
suitability of the recommendation for the
counterparty. See Exchange Act rule 15Fh–3(f)(2).
However, the institutional counterparties to whom
this alternative applies are only a subset of the
‘‘professional clients’’ to whom more narrowly
tailored suitability requirements apply under UK
law. The Commission notes that the institutional
counterparty alternative under the Exchange Act
would remain available, in accordance with its
terms, for recommendations that are not eligible for,
or for which a Covered Entity does not rely on,
substituted compliance.
145 See 17 CFR 240.18a–5. The FCA Application
discusses UK requirements that address firms’
record creation obligations related to matters such
as financial condition, operations, transactions,
counterparties and their property, personnel and
business conduct. See FCA Application Appendix
B category 2 at 101–28, 136–39.
146 See 15 U.S.C. 780–10(g); 17 CFR 240.18a–6.
The FCA Application discusses UK requirements
that address firms’ record preservation obligations
related to records that firms are required to create,
as well as additional records such as records of
communications. See FCA Application Appendix B
category 2 at 140–71.
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• Reporting—Exchange Act rule 18a–
7 requires certain reports.147
• Notification—Exchange Act rule
18a–8 requires notification to the
Commission when certain financial or
operational problems occur.148
• Securities Count—Exchange Act
rule 18a–9 requires non-prudentially
regulated security-based swap dealers to
perform a quarterly securities count.149
Taken as a whole, the recordkeeping,
reporting, notification, and securities
count requirements that apply to SBS
Entities are designed to promote the
prudent operation of the firm’s securitybased swap activities, assist the
Commission in conducting compliance
examinations of those activities, and
alert the Commission to potential
financial or operational problems that
could impact the firm and its customers.
The comparability assessment
accordingly may focus on whether the
analogous foreign requirements—taken
as a whole—produce comparable
outcomes with regard to recordkeeping,
reporting, notification, securities counts,
and related practices that support the
Commission’s oversight of these
registrants. A foreign jurisdiction need
not have analogues to every requirement
under Commission rules to receive a
positive substituted compliance
determination.150
B. Preliminary Views and Proposed
Order
1. General Considerations
Based on the FCA Application and
the Commission’s review of applicable
provisions, in the Commission’s
preliminary view, the relevant UK
requirements, subject to the conditions
147 See 17 CFR 240.18a–7. The FCA Application
discusses UK requirements that address firms’
obligations to make certain reports. See FCA
Application Appendix B category 2 at 172–80, 185–
89.
148 See 17 CFR 240.18a–8. The FCA Application
discusses UK requirements that address firms’
obligations to make certain notifications. See FCA
Application Appendix B category 2 at 181–85.
149 See 17 CFR 240.18a–9. The FCA Application
discusses UK requirements that address firms’
obligations to perform securities counts. See FCA
Application Appendix B category 2 at 129–36.
150 Rule 3a71–6 sets forth additional analytic
considerations in connection with substituted
compliance for the Commission’s recordkeeping,
reporting, notification, and securities count
requirements. In particular, Exchange Act rule
3a71–6(d)(6) provides that the Commission intends
to consider (in addition to any conditions imposed)
‘‘whether the foreign financial regulatory system’s
required records and reports, the timeframes for
recording or reporting information, the accounting
standards governing the records and reports, and
the required format of the records and reports’’ are
comparable to applicable provisions under the
Exchange Act, and whether the foreign provisions
‘‘would permit the Commission to examine and
inspect regulated firms’ compliance with the
applicable securities laws.’’
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and limitations of the proposed Order,
would produce regulatory outcomes that
are comparable to the outcomes
associated with the vast majority of the
recordkeeping, reporting, notification,
and securities count requirements under
the Exchange Act applicable to SBS
Entities pursuant to Exchange Act
section 15F(g) and Exchange Act rules
18a–5, 18a–6, 18a–7, 18a–8, and 18a–9.
In reaching this preliminary
conclusion, the Commission recognizes
that there are certain differences
between those UK requirements and the
applicable recordkeeping, reporting,
notification, and securities count
requirements under the Exchange Act.
In the Commission’s preliminary view,
on balance, those differences generally
would not be inconsistent with
substituted compliance for these
requirements. As noted, requirement-byrequirement similarity is not needed for
substituted compliance.
However, the Commission is
structuring its preliminary 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 and reporting
rules for which they want to apply
substituted compliance. This flexibility
is intended to permit Covered Entities to
leverage existing recordkeeping and
reporting systems that are designed to
comply with the broker-dealer
recordkeeping and reporting
requirements on which the
recordkeeping and reporting
requirements applicable to SBS Entities
are based. For example, it may be more
efficient for a Covered Entity to comply
with certain Exchange Act requirements
within a given recordkeeping or
reporting rule (rather than apply
substituted compliance) because it can
utilize systems that its affiliated brokerdealer has implemented to comply with
them.
As applied to Exchange Act rules
18a–5 and 18a–6, this approach of
providing greater flexibility results in
preliminary substituted compliance
determinations with respect to the
different categories of records these
rules require SBS Entities to make, keep
current, and/or preserve. The objectives
of these rules—taken as a whole—is to
assist the Commission in monitoring
and examining for compliance with
Exchange Act requirements applicable
to SBS Entities as well as to promote the
prudent operation of these firms.151 The
151 See, e.g., Exchange Act Release No. 71958
(Apr. 17, 2014), 79 FR 25194, 25199–200 (May 2,
2014).
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Commission preliminarily believes the
comparable UK recordkeeping rules
achieve these outcomes with respect to
compliance with UK requirements for
which positive substituted compliance
determinations are being made in this
proposed Order (e.g., capital and margin
requirements). At the same time, the
recordkeeping rules address different
categories of records through distinct
requirements within the rules. 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) can be
viewed in isolation as a distinct
recordkeeping rule. Therefore, it may be
appropriate to make substituted
compliance determinations at this level
of Exchange Act rules 18a–5 and 18a–
6.
As discussed in more detail below,
the Commission’s preliminary view is
that substituted compliance is
appropriate for most of the requirements
within these rules. However, certain of
the requirements are fully or partially
linked to substantive Exchange Act
requirements for which a positive
substituted compliance determination is
not being made under the proposed
Order. In these cases, a positive
substituted compliance determination is
not being made 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 requirement for which
there is not a positive determination. In
particular, a positive substituted
compliance determination is not being
made for recordkeeping, reporting, or
notification requirements linked to the
following Exchange Act rules for which
a positive substituted compliance
determination is not being made: (1)
Exchange Act rule 10b–10 (‘‘Rule 10b–
10 Exclusion’’); (2) Exchange Act rule
15Fh–4 (‘‘Rule 15Fh–4 Exclusion’’); (3)
Exchange Act rule 15Fh–5 (‘‘Rule 15Fh–
5 Exclusion’’); (4) Exchange Act rule
15Fh–6 (‘‘Rule 15Fh–6 Exclusion’’); (5)
Exchange Act rule 18a–2 (‘‘Rule 18a–2
Exclusion’’); (6) Exchange Act rule 18a–
4 (‘‘Rule 18a–4 Exclusion’’); and (7)
Regulation SBSR (‘‘Regulation SBSR
Exclusion’’).
In addition, certain of the
requirements in the 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, substituted compliance
with the linked requirement in the
recordkeeping, reporting, or notification
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rule is conditioned on the Covered
Entity applying substituted compliance
to the linked substantive Exchange Act
requirement. This is the case regardless
of whether the requirement is fully or
partially linked to the substantive
Exchange Act requirement. The
recordkeeping, reporting, and
notification requirements that are linked
to a substantive Exchange Act
requirement are designed and tailored to
assist the Commission in monitoring
and examining an SBS Entity’s
compliance with the substantive
Exchange Act requirement. UK
recordkeeping, reporting, and
notification requirements are designed
to perform a similar role with respect to
the UK requirements to which they are
linked. Consequently, this condition is
designed to ensure that the records,
reports, and notifications of a Covered
Entity align with the substantive
Exchange Act or UK requirement to
which they are linked. For these
reasons, substituted compliance for
recordkeeping, reporting, and
notification requirements linked to the
following Exchange Act rules is
conditioned on the SBS Entity applying
substituted compliance to the linked
substantive Exchange Act rule: (1)
Exchange Act rule 15Fh–3 (‘‘Rule 15Fh–
3 Condition’’); (2) Exchange Act rule
15Fi–2 (‘‘Rule 15Fi–2 Condition’’); (3)
Exchange Act rule 15Fi–3 (‘‘Rule 15Fi–
3 Condition’’); (4) Exchange Act rule
15Fi–4 (‘‘Rule 15Fi–4 Condition’’); (5)
Exchange Act rule 15Fi–5 (‘‘Rule 15Fi–
5 Condition’’); (6) Exchange Act rule
15Fk–1 (‘‘Rule 15Fk–1 Condition’’); (7)
Exchange Act rule 18a–1 (‘‘Rule 18a–1
Condition’’); (8) Exchange Act rule 18a–
3 (‘‘Rule 18a–3 Condition’’); (8)
Exchange Act rule 18a–5 (‘‘Rule 18a–5
Condition’’) and (9) Exchange Act rule
18a–7 (‘‘Rule 18a–7 Condition’’).
Moreover, 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.
Therefore, substituted compliance with
respect to these recordkeeping and
reporting requirements is subject to the
condition that the Covered Entity
applies substituted compliance with
respect to Exchange Act rule 18a–1 and
its appendices (i.e., the Rule 18a–1
Condition). This approach is designed
to ensure that, if the Covered Entity
does not apply substituted compliance
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18395
with respect to Exchange Act rule 18a–
1, it makes and preserves records and
files reports that the Commission uses to
monitor and examine for compliance
with the Exchange Act rule 18a–1 and
its appendices, and that the firm makes
and preserves records to assist it in
complying with these rules.
2. Scope of Substituted Compliance
The structure of the preliminary
substituted compliance determinations
with respect to Exchange Act rules 18a–
5, 18a–6, 18a–7, 18a–8, and 18a–9 as
well as Exchange Act Section 15F(g)
would permit a covered entity to apply
substituted compliance with respect to
certain of these rules (e.g., Exchange Act
rules 18a–5 and 18a–6) and comply
with the Exchange Act requirements of
the remaining rules and statute (i.e.,
Exchange Act rules 18a–7, 18a–8, and
18a–9, as well as Exchange Act Section
15F(g)). Moreover, as discussed above,
the Commission is structuring its
preliminary substituted compliance
determinations in the Order with
respect to the recordkeeping and
reporting rules to provide Covered
Entities with greater flexibility to select
distinct requirements within the broader
recordkeeping and reporting rules for
which they want to apply substituted
compliance. As applied to Exchange Act
rules 18a–5 and 18a–6, this approach of
providing greater flexibility results in
preliminary substituted compliance
determinations with respect to the
different categories of records these
rules require SBS Entities to make, keep
current, and/or preserve. For example, a
Covered Entity could apply substituted
compliance with respect Exchange Act
rule 18a–5 requirements to make and
keep current records of trade blotters 152
but comply directly with Exchange Act
rule 18a–5 requirements to make and
keep current employment records.153
In this regard, the Commission found
the recordkeeping, reporting,
notification, and securities count rules
to be entity-level when adopting
amendments to Exchange Act rule
3a71–6 to make substituted compliance
available with respect to them.154
Consequently, aside from a limited
exception for recordkeeping
requirements linked to customer
152 See para. (f)(1)(i)(A) to the proposed Order
(relating to substituted compliance for Exchange
Act rule 18a–5(a)(1) and (b)(1)).
153 See para. (f)(1)(i)(K) to the proposed Order
(relating to substituted compliance for Exchange
Act rule 18a–5(a)(10) and (b)(8)).
154 See 84 FR 68550, 68596–97 (Dec. 16, 2019),
Exchange Act Release No. 87005 (Sept. 19, 2019)
(‘‘Recordkeeping Adopting Release’’).
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protection rules,155 a Covered Entity
must apply substituted compliance at
the entity level if it chooses to apply
substituted compliance with respect to
Exchange Act rule 18a–9 and Exchange
Act Section 15F(g). Further, with
respect to a distinct substituted
compliance determination for a
requirement within rule 18a–5, 18a–6,
18a–7, or 18a–8, a Covered Entity must
apply substituted compliance with
respect to the determination at the
entity level. For example, a Covered
Entity applying substituted compliance
for Exchange Act rule 18a–5
requirements to make and keep current
records of trade blotters pursuant to
paragraph (f)(1)(i)(A) of the proposed
Order would have to comply with the
comparable UK requirements at the
entity level. The Covered Entity could
not choose to comply with the Exchange
Act for one part of its trade blotters and
with UK requirements for another part
of its trade blotters. The Commission
preliminarily believes that this scope of
substituted compliance strikes the right
balance between providing Covered
Entities flexibility to tailor the
application of substituted compliance to
their business needs and ensuring that
substituted compliance is consistent
with the Commission’s classification of
the Exchange Act recordkeeping,
reporting, notification and securities
count requirements as entity-level
requirements.156
With respect to requirements in
Exchange Act rules 18a–5 and 18a–6
linked to counterparty protection rules
(i.e., Exchange Act rules 15Fh–3(b), (c),
(e), (f) and (g)), the proposed Order
would permit a Covered Entity to apply
substituted compliance to some
security-based swap activities and
comply directly with Exchange Act
requirements for other activities.157 As
discussed in section VII.B.2. of this
notice, a Covered Entity may decide to
apply substituted compliance for a
particular set of counterparty protection
requirements, such as fair and balanced
communications, for some activities and
comply directly with Exchange Act
155 See paras. (f)(1)(i)(M) and (f)(2)(i)(K) to the
proposed Order (permitting substituted compliance
on a transaction level). As discussed below, these
recordkeeping requirements are linked to
transaction level counterparty protection
requirements.
156 Id.
157 See paras. (f)(1)(ii)(B) and (f)(2)(ii)(A) of the
proposed Order; see also para. (f)(1)(i)(M) of the
proposed Order (the preliminary substituted
compliance determination with respect to Exchange
Act rules 18a–5(a)(17) and (b)(13)) and para.
(f)(2)(i)(K) of the proposed Order (the preliminary
substituted compliance determination with respect
to Exchange Act rules 18a–6(b)(1)(xii) and
(b)(2)(vii)).
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requirements for other activities.158 For
example, the proposed Order would
allow a Covered Entity applying
substituted compliance for fair and
balanced communications requirements
to comply with the comparable UK
requirements with respect to
communications with UK
counterparties that are subject to the
Exchange Act and to comply directly
with Exchange Act requirements with
respect to U.S. person counterparties.
To accommodate the transaction-level
approach to the counterparty protection
rules, the proposed Order would allow
a Covered Entity to apply substituted
compliance to requirements of Exchange
Act rules 18a–5 and 18a–6 linked to the
counterparty protection rules
consistently with how the firm is
applying substituted compliance with
respect to the counterparty protection
rules. For example, if the Covered Entity
is applying substituted compliance with
respect to Exchange Act rule 15Fh–3(g)
for UK counterparties and complying
with Exchange Act rule 15Fh–3(g) for
U.S. person counterparties, the Covered
Entity could apply substituted
compliance with respect to the linked
requirements of Exchange Act rule 18a–
5 for UK counterparties and comply
with the linked requirements of
Exchange Act rule 18a–5 for U.S. person
counterparties.
The Commission preliminarily
believes that this scope of substituted
compliance would provide Covered
Entities flexibility to tailor the
application of substituted compliance to
their business needs in a manner
consistent with the Commission’s
classification of the relevant Exchange
Act counterparty protection
requirements as transaction-level
requirements. In proposing this
significant flexibility for the application
of substituted compliance, the
Commission nevertheless would expect
Covered Entities to ensure that the
manner in which they choose to apply
substituted compliance allows them to
comply with the requirements to keep
books and records open to inspection by
any representative of the Commission
and promptly furnish to a representative
of the Commission legible, true,
complete and current copies of the
Covered Entity’s records.159
3. Exchange Act Rule 18a–5
Exchange Act rule 18a–5 requires SBS
Entities to make and keep current
various types of records. The
158 See Business Conduct Adopting Release, 81
FR at 30065 (counterparty protection requirements
are transaction-level requirements).
159 See also para. (f)(7) to the proposed Order.
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requirements for SBS Entities that do
not have a prudential regulator are set
forth in paragraph (a) of the rule.160 The
requirements for SBS Entities that do
have a prudential regulator are set forth
in paragraph (b) of the rule.161 The
Commission preliminarily is making a
positive substituted compliance
determination for many of the
requirements set forth in these
paragraphs.
However, certain of these
requirements are linked to substantive
Exchange Act requirements for which a
positive substituted compliance is not
being made under the proposed Order.
In these cases, a positive substituted
compliance determination is not being
made for the linked requirement in
Exchange Act rule 18a–5 or the portion
of the requirement in Exchange Act rule
18a–5 that is linked to the substantive
Exchange Act requirement.162
In addition, certain of the
requirements in Exchange Act rule 18a–
5 are fully or partially linked to
substantive Exchange Act requirements
where a positive substituted compliance
determination is being made under the
proposed Order. In these cases,
substituted compliance with the
requirement in Exchange Act rule 18a–
5 is conditioned on the SBS Entity
applying substituted compliance to the
linked substantive Exchange Act
requirement.163
160 See paras. (a)(1) through (18) of Exchange Act
rule 18a–5.
161 See paras. (b)(1) through (14) of Exchange Act
rule 18a–6.
162 A positive substituted compliance
determination is not being made for the following
requirements of Exchange Act rule 18a–5 because
they are linked to a substantive Exchange Act
requirement for which a positive substituted
compliance determination is not being made: (1)
The portion of Exchange Act rules 18a–5(a)(6) and
(b)(6) that relates to confirmations with respect to
securities (other than security based swaps) is
subject to the Rule 10b–10 Exclusion; (2) the
portion of Exchange Act rule 18a–5(a)(9) that relates
to Exchange Act rule 18a–2 is subject to the Rule
18a–2 Exclusion; (3) Exchange Act rules 18a–
5(a)(13) and (14) and (b)(9) and (10) are fully linked
to Exchange Act rule 18a–4 and, therefore, are
subject to the Rule 18a–4 Exclusion; (4) the portions
of Exchange Act rules 18a–5(a)(16) and (b)(12) that
relate to Exchange Act rule 15Fh–6 are subject to
the Rule 15Fh–6 Exclusion; (5) the portions of
Exchange Act rules 18a–5(a)(17) and (b)(13) that
relate to Exchange Act rules 15Fh–4 are subject to
the Rule 15Fh–4 Exclusion; and (6) the portions of
Exchange Act rules 18a–5(a)(17) and (b)(13) that
relate to Exchange Act rule 15Fh–5 are subject to
the 15Fh–5 Exclusion.
163 Substituted compliance with the following
requirements of Exchange Act rule 18a–5 is
conditioned on the SBS Entity applying substituted
compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a–5(a)(6),
(a)(15), (b)(6) and (b)(11) are linked to Exchange Act
rule 15Fi–2 and, therefore, are subject to the Rule
15Fi–2 Condition; (2) Exchange Act rule 18a–5(a)(9)
is linked to Exchange Act rule 18a–1 and, therefore,
is subject to the Rule 18a–1 Condition; (3) Exchange
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Moreover, there are certain
requirements in Exchange Act rule 18a–
5 that are not expressly linked to
Exchange Act rule 18a–1, but that
would be important records in terms of
the Commission’s ability to examine for
compliance with that rule, and the
Covered Entity’s ability to monitor its
net capital position. Therefore,
substituted compliance with respect to
these requirements of Exchange Act rule
18a–5 is subject to the condition that the
Covered Entity applies substituted
compliance with respect to Exchange
Act rule 18a–1 and its appendices (i.e.,
the Rule 18a–1 Condition).164
Under the proposed Order,
substituted compliance in connection
with the recordmaking requirements of
Exchange Act rule 18a–5 is subject to
the condition that the SBS Entity: (1)
Preserves all of the data elements
necessary to create the records required
by Exchange Act rules 18a–5(a)(1), (2),
(3), (4), and (7) (if not prudentially
regulated) or Exchange Act rules 18a–
5(b)(1), (2), (3), and (7) (if prudentially
regulated); and (2) upon request
furnishes promptly to representatives of
the Commission the records required by
those rules (‘‘SEC Format
Condition’’).165 This condition is
modeled on the alternative compliance
mechanism in paragraph (c) of Exchange
Act rule 18a–5. In effect, a Covered
Entity applying substituted compliance
with respect to these requirements of
Exchange Act rule 18a–5 would need to
comply with the comparable UK
requirements. However, under the SEC
Format Condition, the Covered Entity
would need to produce a record that is
formatted in accordance with the
requirements of rule 18a–5 at the
request of Commission staff. The
objective is to require—on a very
limited basis—the production of a
record that consolidates the information
required by Exchange Act rules 18a–
5(a)(1), (2), (3), (4), and (7) (if not
prudentially regulated) or Exchange Act
rules 18a–5(b)(1), (2), (3), and (7) (if
prudentially regulated) in a single
record and, as applicable, in a blotter or
ledger format. This will assist the
Commission staff in reviewing the
information on the record.
The following table summarizes the
Commission’s proposed positive
substituted compliance determinations
with respect to requirements of
Exchange Act rule 18a–5 by listing in
each row: (1) The paragraph of the
proposed Order that sets forth the
determination; (2) the paragraph(s) of
Exchange Act rule 18a–5 to which the
determination applies; (3) a brief
description of the records required by
those paragraphs; and (4) any additional
conditions, including any partial
exclusions from positive substituted
compliance.166
EXCHANGE ACT RULE 18a–5
[Record making]
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Order paragraph
Rule paragraph
Rule description
Additional conditions and partial
exclusions
(f)(1)(i)(A) .............
(a)(1) ........................
(b)(1) ........................
Trade blotters ...........................
(f)(1)(i)(B) .............
(a)(2) ........................
..................................
General ledger ..........................
(f)(1)(i)(C) .............
(a)(3) ........................
(b)(2) ........................
Account ledgers ........................
(f)(1)(i)(D) .............
(a)(4) ........................
(b)(3) ........................
Stock record .............................
(f)(1)(i)(E) .............
..................................
(b)(4) ........................
(f)(1)(i)(F) ..............
(a)(5) ........................
(b)(5) ........................
(f)(1)(i)(G) .............
(a)(6), (a)(15) ...........
(b)(6), (b)(11) ...........
Memoranda of brokerage orders.
Memoranda of proprietary orders.
Confirmations, trade verification
(f)(1)(i)(H) .............
(a)(7) ........................
(b)(7) ........................
Accountholder information ........
(f)(1)(i)(I) ...............
(f)(1)(i)(J) ..............
(a)(8) ........................
(a)(9) ........................
..................................
..................................
(f)(1)(i)(K) .............
(a)(10) ......................
(b)(8) ........................
(f)(1)(i)(L) ..............
(a)(12) ......................
..................................
(f)(1)(i)(M) .............
(a)(17) ......................
(b)(13) ......................
Options positions ......................
Trial balances, computation of
net capital and tangible net
worth.
Associated person’s employment application.
Non-cleared margin rule calculations.
Compliance with business conduct requirements.
(f)(1)(i)(N) .............
(a)(18)(i), (a)(18)(ii) ..
(b)(14)(i), (b)(14)(ii) ..
Act rule 18a–5(a)(12) is linked to Exchange Act rule
18a–3 and, therefore, is subject to the Rule 18a–3
Condition; (4) Exchange Act rules 18a–5(a)(17) and
(b)(13) are linked to Exchange Act rule 15Fh–3 and,
therefore, are subject to the Rule 15Fh–3 Condition;
(5) Exchange Act rules 18a–5(a)(17) and (b)(13) are
linked to Exchange Act rule 15Fk–1, and therefore,
are subject to the Rule 15Fk–1 Condition; (6)
Exchange Act rules 18a–5(a)(18)(i) and (ii) or
(b)(14)(i) and (ii) are linked to Exchange Act rule
15Fi–3 and, therefore, are subject to the Rule 15Fi–
3 Condition; and (7) Exchange Act rules 18a–
5(a)(18)(iii) and (b)(14)(iii) are linked to Exchange
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Portfolio reconciliation ..............
Act rule 15Fi–4 and, therefore, are subject to the
Rule 15Fi–4 Condition.
164 Substituted compliance with the requirements
of Exchange Act rules 18a–5(a)(1), (2), (3), (4), (5),
(7), (8), and (9) is conditioned on the SBS Entity
applying substituted compliance to Exchange Act
rule 18a–1 and its appendices.
165 See para. (f)(1)(ii) to the proposed Order.
166 The chart below does not include the
additional conditions for applying substituted
compliance to Exchange Act rule 18a–5; namely
that the SBS Entity: (1) Must be subject to and
comply with specified requirements of foreign law;
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(1) SEC Format Condition;
Condition for ¶ (a)(1).
(1) SEC Format Condition;
Condition for ¶ (a)(2).
(1) SEC Format Condition;
Condition for ¶ (a)(3).
(1) SEC Format Condition;
Condition for ¶ (a)(4).
N/A.
(2) Rule 18a–1
(2) Rule 18a–1
(2) Rule 18a–1
(2) Rule 18a–1
Rule 18a–1 Condition for ¶ (a)(5).
(1) Rule 15Fi–2 Condition; (2) Rule 10b–
10 Exclusion.
(1) SEC Format Condition; (2) Rule 18a–1
Condition for ¶ (a)(7).
Rule 18a–1 Condition.
(1) Rule 18a–1 Condition; (2) Rule 18a–2
Exclusion.
N/A.
Rule 18a–3 Condition.
(1) Rule 15Fh–3 Condition; (2) Rule
15Fk–1 Condition; (3) Rule 15Fh–4 Exclusion; (4) Rule 15Fh–5 Exclusion.
Rule 15Fi–3 Condition.
(2) remains subject to the requirement of Exchange
Act section 15F(f) to keep books and records open
to inspection by any representative of the
Commission and the requirement of Exchange Act
rule 18a–6(g) to furnish promptly to a
representative of the Commission legible, true,
complete, and current copies of certain records (see
discussion below); and (3) must promptly furnish
to a representative of the Commission upon request
an English translation of certain records (see
discussion below). See paras. (f)(7) and (8) to the
proposed Order (with respect to the second and
third conditions).
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EXCHANGE ACT RULE 18a–5—Continued
[Record making]
Order paragraph
(f)(1)(i)(O) .............
(a)(18)(iii) .................
(b)(14)(iii) .................
The following table summarizes the
Commission’s preliminary
determinations with respect to
requirements of Exchange Act rule 18a–
5 for which a positive substituted
compliance determination is not being
made because they are fully linked to
Portfolio compression ...............
substantive Exchange Act requirements
for which a positive substituted
compliance determination is not being
made by listing in each row: (1) The
paragraph of the proposed Order that
sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a–
Rule 15Fi–4 Condition.
5 to which the determination applies;
(3) a brief description of the records
required by those paragraphs; and (4)
the exclusion from substituted
compliance.
EXCHANGE ACT RULE 18a–5
[Record making]
Order paragraph
(f)(1)(ii)(B) .............
(f)(1)(ii)(B) .............
(f)(1)(ii)(B) .............
Rule paragraph
(a)(13) ......................
(a)(14) ......................
(a)(16) ......................
(b)(9) ........................
(b)(10) ......................
(b)(12) ......................
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4. Exchange Act Rule 18a–6
Exchange Act rule 18a–6 requires an
SBS Entity to preserve certain types of
records if it makes or receives them (in
addition to the records the SBS Entity
is required to make and keep current
pursuant to Exchange Act rule 18a–5).
Exchange Act rule 18a–6 also prescribes
the time period that these additional
records and the records required to be
made and kept current pursuant to
Exchange Act rule 18a–5 must be
preserved and the manner in which they
must be preserved.167 Paragraphs (a)
through (d) of Exchange Act rule 18a–
6 identify the records that an SBS Entity
must retain if it makes or receives them
and prescribes the retention periods for
these records as well as for the records
that must be made and kept current
pursuant to Exchange Act rule 18a–5.
Certain of these paragraphs prescribe
requirements separately for SBS Entities
that do not have a prudential regulator
and SBS Entities that do have a
prudential regulator.168
Paragraph (e) of Exchange Act rule
18a–6 sets forth the requirements for
preserving records electronically.
Paragraph (f) sets forth requirements for
when records are prepared or
maintained by a third party. Paragraph
167 See
17 CFR 240.18a–5.
(a)(1), (b)(1), (d)(2)(i), and (d)(3)(i)
of Exchange Act rule 18a–6 apply to SBS Entities
that do not have a prudential regulator. Paragraphs
(a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of Exchange Act
rule 18a–6 apply to SBS Entities that have a
prudential regulator. Paragraphs (c), (d)(1), (d)(4),
(d)(5), (e), (f), (g), and (h) of Exchange Act rule 18a–
6 apply to SBS Entities irrespective of whether they
have a prudential regulator.
168 Paragraphs
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Rule description
Possession or control records ..
Reserve computations ..............
Political contribution records ....
(g) requires that an SBS Entity must
furnish promptly to a representative of
the Commission legible, true, complete,
and current copies of those records of
the SBS Entity that are required to be
preserved under Exchange Act rule 18a–
6, or any other records of the SBS Entity
that are subject to examination or
required to be made or maintained
pursuant to section 15F of the Exchange
Act that are requested by a
representative of the Commission.
The Commission is making a
preliminary positive substituted
compliance determination for many of
the requirements set forth in paragraphs
(a) through (f) of Exchange Act rule 18a–
6.169 However, certain of these
requirements are fully or partially
linked to substantive Exchange Act
requirements for which a positive
substituted compliance determination is
not being made under the proposed
Order. In these cases, a positive
substituted compliance determination is
not being made for the linked
requirement in Exchange Act rule 18a–
6.170
169 The Commission does not believe it would be
appropriate to grant substituted compliance with
respect to the requirements in paragraph (g) of
Exchange Act rule 18a–6 because there is no
comparable requirement in the UK to produce these
records to a representative of the Commission.
170 A positive substituted compliance
determination is not being made for the following
requirements of Exchange Act rule 18a–6 because
they are linked to a substantive Exchange Act
requirement for which a positive substituted
compliance determination is not being made: (1)
The portion of Exchange Act rule 18a–6(b)(1)(v)
relating to Exchange Act rule 18a–2 is subject to the
Rule 18a–2 Exclusion; (2) Exchange Act rule 18a–
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Fmt 4701
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Rule 18a–4 Exclusion.
Rule 18a–4 Exclusion.
Rule 15Fh–6 Exclusion.
In addition, certain of the
requirements in Exchange Act rule 18a–
6 are fully or partially linked to
substantive Exchange Act requirements
where a positive substituted compliance
determination is being made under the
proposed Order. In these cases,
substituted compliance with the
requirement in Exchange Act rule 18a–
6 is conditioned on the SBS Entity
applying substituted compliance to the
linked substantive Exchange Act
requirement.171
6(b)(1)(viii)(L) is fully linked to Exchange Act Rule
18a–4 and, therefore, is subject to the Rule 18a–4
Exclusion; (3) the portion of Exchange Act rule 18a–
6(b)(1)(viii)(M) relating to Exchange Act rule 18a–
2 is subject to the Rule 18a–2 Exclusion; (4)
Exchange Act rules 18a–6(b)(1)(xi) and (b)(2)(vi) are
fully linked to Regulation SBSR and, therefore, are
subject to the Regulation SBSR Exclusion; (5)
Exchange Act rules 18a–6(b)(1)(xiii) and 18a–
6(b)(2)(viii) are fully linked to Exchange Act rules
15Fh–4 and, therefore, are subject to the Rule 15Fh–
4 Exclusion; and (6) Exchange Act rules 18a–
6(b)(1)(xiii) and 18a–6(b)(2)(viii) are fully linked to
Exchange Act rules 15Fh–5 and, therefore, are
subject to the Rule 15Fh–5 Exclusion.
171 Substituted compliance with the following
requirements of Exchange Act rule 18a–6 is
conditioned on the SBS Entity applying substituted
compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a–6(b)(1)(v) is
linked to Exchange Act rule 18a–1 and, therefore,
is subject to the Rule 18a–1 Condition; (2) Exchange
Act rules 18a–6(b)(1)(viii) and (b)(2)(v) are linked to
Exchange Act rule 18a–7 and, therefore are subject
to the Rule 18a–7 Condition; (3) Exchange Act rule
18a–6(b)(1)(viii) is linked to Exchange Act rule 18a–
1 and, therefore, is subject to the Rule 18a–1
Condition; (4) Exchange Act rule 18a–6(b)(1)(ix) is
linked to Exchange Act rule 18a–1 and, therefore,
is subject to the Rule 18a–1 Condition; (5) Exchange
Act rule 18a–6(b)(1)(x) is linked to Exchange Act
rule 18a–1 and, therefore, is subject to the Rule
18a–1 Condition; (6) Exchange Act rules 18a–
6(b)(1)(xii) and (b)(2)(vii) are linked to Exchange
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Moreover, there are certain
requirements in Exchange Act rule 18a–
6 that are not expressly linked to
Exchange Act rule 18a–1, but that
would be important records in terms of
the Commission’s ability to examine for
compliance with that rule, and the
Covered Entity’s ability to monitor its
net capital position. Therefore,
substituted compliance with respect to
these requirements of Exchange Act rule
18a–6 is subject to the Rule 18a–1
Condition.172
The following table summarizes the
Commission’s proposed positive
substituted compliance determinations
with respect to requirements of
Exchange Act rule 18a–6 by listing in
each row: (1) The paragraph of the
proposed Order that sets forth the
determination; (2) the paragraph(s) of
Exchange Act rule 18a–6 to which the
18399
determination applies; (3) a brief
description of the records required by
those paragraphs; and (4) a brief
description of any additional conditions
to applying substituted compliance to
the requirements, including any partial
exclusions because portions of the
requirements are linked to substantive
Exchange Act requirements for which a
positive substituted compliance is not
being made under this Order.173
EXCHANGE ACT RULE 18a–6
[Record preservation]
Order paragraph
(f)(2)(i)(A)
(f)(2)(i)(B)
(f)(2)(i)(C)
(f)(2)(i)(D)
(f)(2)(i)(E)
Rule description
Conditions and partial exclusions
N/A.
N/A.
Rule 18a–1 Condition.
N/A.
(1) Rule 18a–1 Condition; (2) Rule 18a–2
Exclusion.
Rule 18a–1 Condition for ¶ (b)(1)(vi).
Rule 18a–1 Condition for ¶ (b)(1)(vii).
(1) Rule 18a–7 Condition; (2) Rule 18a–2
Exclusion for ¶ (b)(1)(viii)(M).
Rule 18a–1 Condition.
.............
.............
.............
.............
.............
(a)(1) ........................
(b)(1)(i) .....................
(b)(1)(ii), (b)(1)(iii) ....
(b)(1)(iv) ...................
(b)(1)(v) ....................
(a)(2) ........................
(b)(2)(i) .....................
..................................
(b)(2)(ii) ....................
..................................
6 year record preservation .......
3 year record preservation .......
Bank records, bills ....................
Communications .......................
Trial balances ...........................
(f)(2)(i)(F) ..............
(f)(2)(i)(G) .............
(f)(2)(i)(H) .............
(b)(1)(vi) ...................
(b)(1)(vii) ..................
(b)(1)(viii) .................
(b)(2)(iii) ...................
(b)(2)(iv) ...................
(b)(2)(v) ....................
(f)(2)(i)(I) ...............
(b)(1)(ix) ...................
..................................
(f)(2)(i)(J) ..............
(f)(2)(i)(K) .............
(b)(1)(x) ....................
(b)(1)(xii) ..................
..................................
(b)(2)(vii) ..................
Account documents ..................
Written agreements ..................
Information supporting financial
reports.
Rule 15c3–4 risk management
records.
Credit risk determinations .........
Business conduct standard
records.
(f)(2)(i)(L) ..............
(c)
(f)(2)(i)(M) .............
(d)(1)
(f)(2)(i)(N) .............
(f)(2)(i)(O) .............
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Rule paragraph
(d)(2)(i) .....................
(d)(3)(i) .....................
(d)(2)(ii) ....................
(d)(3)(ii) ....................
Rule 18a–1 Condition.
(1) Rule 15Fh–3 Condition; (2) Rule
15Fk–1 Condition.
Corporate documents ...............
N/A.
Associated person’s
ment application.
N/A.
employ-
Regulatory authority reports .....
Compliance, supervisory, and
procedures manuals.
Rule 18a–1 Condition for ¶ (d)(2)(i).
Rule 18a–1 Condition for ¶ (d)(3)(i).
(f)(2)(i)(P) .............
(d)(4), (d)(5)
Portfolio reconciliation ..............
(1) Rule 15Fi–3 Condition; (2) Rule 15Fi–
4 Condition; (3) Rule 15Fi–5 Condition.
(f)(2)(i)(Q) .............
(e)
Electronic storage system ........
N/A.
(f)(2)(i)(R) .............
(f)
Third-party recordkeeper ..........
N/A.
The following table summarizes the
Commission’s preliminary
determinations with respect to
requirements of Exchange Act rule 18a–
6 for which for which a positive
substituted compliance determination is
not being made because they are fully
linked to substantive Exchange Act
requirements for which a positive
substituted compliance determination is
not being made by listing in each row:
(1) The paragraph of the proposed Order
that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a–
6 to which the determination applies;
(3) a brief description of the records
required by those paragraphs; and (4)
the exclusion from substituted
compliance.
Act rule 15Fh–3 and, therefore, is subject to the
Rule 15Fh–3 Condition; (7) Exchange Act rules
18a–6(b)(1)(xii) and (b)(2)(vii) are linked to
Exchange Act rule 15Fk–1 and, therefore, is subject
to the Rule 15Fk–1 Condition; (8) Exchange Act
rules 18a–6(d)(4) and (d)(5) are linked to Exchange
act rule 15Fi–3 and, therefore, are subject to the
Rule 15Fi–3 Condition; (9) Exchange Act rules 18a–
6(d)(4) and (d)(5) are linked to Exchange act rule
15Fi–4 and, therefore, are subject to the Rule 15Fi–
4 Condition; and (10) Exchange Act rules 18a–
6(d)(4) and (d)(5) are linked to Exchange act rule
15Fi–3 and, therefore, are subject to the Rule 15Fi–
5 Condition.
172 Substituted compliance with the requirements
of Exchange Act rules 18a–6(b)(1)(ii), (b)(1)(iii),
(b)(1)(vi), (b)(1)(vii), (d)(2)(i), and (d)(3)(i) is
conditioned on the SBS Entity applying substituted
compliance to Exchange Act rule 18a–1 and its
appendices.
173 The chart below does not include the
additional conditions for applying substituted
compliance to Exchange Act rule 18a–6; namely
that the SBS Entity: (1) Is subject to and complies
with the requirements of foreign law; (2) remains
subject to the requirement of Exchange Act section
15F(f) to keep books and records open to inspection
by any representative of the Commission and the
requirement of Exchange Act rule 18a–6(g) to
furnish promptly to a representative of the
Commission legible, true, complete, and current
copies of certain records; and (3) must promptly
furnish to a representative of the Commission upon
request an English translation of certain records.
See para. (f)(7) and (8) to the proposed Order (with
respect to the second and third conditions).
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EXCHANGE ACT RULE 18a–6
[Preservation]
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Order paragraph
Rule paragraph
Rule description
(f)(2)(ii) .................
(f)(2)(i)(H)(4) .........
(b)(1)(xi) ...................
(b)(1)(viii)(L) .............
(b)(2)(vi) ...................
..................................
(f)(2)(ii) .................
(b)(1)(xiii) .................
(b)(2)(viii) .................
5. Exchange Act Rule 18a–7
Paragraph (a)(1) of Exchange Act rule
18a–7 requires SBS Entities that are not
prudentially regulated to file monthly
unaudited reports about its financial
and operational condition using the
FOCUS Report Part II. Paragraph (a)(2)
of Exchange Act rule 18a–7 requires
SBS Entities that are prudentially
regulated to file quarterly periodic
unaudited reports about their financial
and operational condition using the
FOCUS Report Part IIC. The FOCUS
Report Part IIC elicits less information
than the FOCUS Report Part II because
the Commission does not have
responsibility for overseeing the capital
and margin requirements applicable to
these entities. Paragraph (a)(3) of
Exchange Act rule 18a–7 requires SBS
Entities that are not prudentially
regulated and have been authorized by
the Commission to compute net capital
under Exchange Act rule 18a–1 using
models to file certain monthly or
quarterly information related to their
use of models. Paragraph (b) of
Exchange Act rule 18a–7 requires SBS
Entities that are not prudentially
regulated to make certain financial
information available on their websites.
Paragraphs (c), (d), (e), (f), (g), and (h) of
Exchange Act rule 18a–7 set forth
requirements for SBS Entities that are
not prudentially regulated to annually
file financial statements and certain
reports, as well as reports covering those
statements and reports prepared by an
independent public accountant.
Paragraph (i) of Exchange Act rule 18a–
7 requires SBS Entities that do not have
a prudential regulator to notify the
Commission when they change their
fiscal year. Finally, Paragraph (j) of
Exchange Act rule 18a–7 sets forth
requirements with respect to the reports
that must be filed with the Commission
under the rule.174
The Commission preliminarily is
making a positive substituted
compliance determination for all of
these paragraphs of Exchange Act rule
18a–7. As discussed below, substituted
compliance with respect to these
174 See
17 CFR 240.18a–7.
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Regulation SBSR information ...
Possession or control information.
Special entity documents .........
paragraphs of Exchange Act rule 18a–7
is subject to certain conditions.
First, certain of the requirements in
Exchange Act rule 18a–7 are fully or
partially linked to substantive Exchange
Act requirements for which a positive
substituted compliance determination is
being made under the proposed Order.
In these cases, substituted compliance
with the requirement in Exchange Act
rule 18a–7 is conditioned on the
Covered Entity applying substituted
compliance to the linked substantive
Exchange Act requirement.175
Second, under the proposed Order,
substituted compliance with respect to
the requirement in Exchange Act rule
18a–7 to file periodic unaudited
financial and operational information
on the FOCUS Report Part II or Part IIC
is subject to the condition that the
Covered Entity file with the
Commission periodic unaudited
financial and operational information in
the manner and format specified by the
Commission by order or rule (‘‘Manner
and Format Condition’’) and present the
financial information in accordance
with GAAP that the firm uses to prepare
general purpose publicly available or
available to be issued financial
statements in the UK (‘‘UK GAAP
Condition’’).176
As noted above, Exchange Act rule
18a–7 requires SBS Entities, on a
175 Substituted compliance with the following
requirements of Exchange Act rule 18a–7 is
conditioned on the SBS Entity applying substituted
compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a–7(a)(1) is
linked to Exchange Act rule 18a–1 and, therefore,
is subject to the Rule 18a–1 Condition; (2) Exchange
Act rule 18a–7(a)(3) is linked to Exchange Act rule
18a–1 and, therefore, is subject to the Rule 18a–1
Condition; and (3) Exchange Act rules 18a–7(c), (d),
(e), (f), (g) and (h) taken as a whole are linked to
Exchange Act rule 18a–1 and, therefore, are subject
to the Rule 18a–1 Condition.
176 See para. (f)(3)(i) to the proposed Order. Under
this approach, Covered Entities would be permitted
to present the information reported in the FOCUS
Report in accordance with GAAP that the firm uses
to prepare publicly available or available to be
issued general purpose financial statements in its
home jurisdiction instead of U.S. GAAP if other
GAAP, such as International Financial Reporting
Standards (IFRS) as issued by the International
Accounting Standards Board (IASB), is used by the
SBS Entity in preparing publicly available or
available to be issued general purpose financial
statements in the UK.
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Regulation SBSR Exclusion.
Rule 18a–4 Exclusion.
(1) Rule 15Fh–4 Exclusion; (2) Rule
15Fh–5 Exclusion.
monthly basis (if not prudentially
regulated) or on a quarterly basis (if
prudentially regulated), to file an
unaudited financial and operational
report on the FOCUS Report Part II (if
not prudentially regulated) or Part IIC (if
prudentially regulated). The
Commission will use the FOCUS
Reports filed by the SBS Entities to both
monitor the financial and operational
condition of individual SBS Entities and
to perform comparisons across SBS
Entities. The FOCUS Report Parts II and
IIC are standardized forms that elicit
specific information through numbered
line items. This facilitates cross-firm
analysis and comprehensive monitoring
of all SBS Entities registered with the
Commission. Further, the Commission
has designated the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’) to
receive the FOCUS Reports from SBS
Entities.177 Broker-dealers registered
with the Commission currently file their
FOCUS Reports with FINRA through the
eFOCUS system it administers. Using
FINRA’s eFOCUS system will enable
broker-dealers, security-based swap
dealers, and major security-based swap
participants to file FOCUS Reports on
the same platform using the same
preexisting templates, software, and
procedures.
The Commission preliminarily
believes that it would be appropriate to
condition substituted compliance with
respect to Exchange Act rule 18a–7 on
the Covered Entity filing unaudited
financial and operational information in
a manner and format that facilitates
cross-firm analysis and comprehensive
monitoring of all SBS Entities registered
with the Commission. For example, the
Commission could by order or rule
require SBS Entities to file the financial
and operational information with
FINRA using the FOCUS Report Part II
(if not prudentially regulated) or Part IIC
(if prudentially regulated) but permit
the information input into the form to
177 See Order Designating Financial Industry
Regulatory Authority, Inc., to Receive Form X–17A–
5 (FOCUS Report) from Certain Security-Based
Swap Dealers and Major Security-Based Swap
Participants, Exchange Release No. 88866 (May 14,
2020).
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be the same information the SBS Entity
reports to the FCA or PRA.178
Third, under the proposed Order,
substituted compliance in connection
with the requirement that Covered
Entities without a prudential regulator
file audited annual reports under
Exchange Act rule 18a–7 is subject to
five conditions.179 The first condition is
that the SBS Entity simultaneously
sends a copy of the financial statements
the Covered Entity is required to file
with the UK PRA or FCA, including a
report of an independent public
accountant covering the financial
statements, to the Commission in the
manner specified on the Commission’s
website (‘‘SEC Filing Condition’’).
Because UK laws would not otherwise
require the financial statements and
report of the independent public
accountant covering the financial
statements to be filed with the
Commission, the purpose of this
condition is to ensure the Commission
receives the financial statements and
report to more effectively supervise and
monitor SBS Entities.
The second condition is that the SBS
Entity includes with the transmission of
the annual financial statements and
report the contact information of an
individual who can provide further
information about the financial
statements and reports (‘‘Contact
Information Condition’’). This would
assist the Commission staff in promptly
contacting an individual at the SBS
Entity who can respond to questions
that information on the financial
statements or report may raise about the
Covered Entity’s financial or operational
condition.
The third condition is that the SBS
Entity includes with the transmission
the report of an independent public
accountant required by Exchange Act
rule 18a–7(c)(1)(i)(C) covering the
annual financial statements if UK laws
do not require the Covered Entity to
engage an independent public
accountant to prepare a report covering
the annual financial statements
178 The Commission anticipates that it would be
appropriate to tailor the line items required to be
reported pursuant to this condition and is
requesting comment on which, if any, line items in
FOCUS Report Part II (if not prudentially regulated)
and Part IIC (if prudentially regulated) the SBS
Entity does not otherwise report or record pursuant
to applicable laws or regulations. Further, the
Commission is requesting comment on whether it
would be appropriate as a condition to substitute
compliance for SBS Entities to file a FOCUS Report
Part II (if not prudentially regulated) or Part IIC (if
prudentially regulated) with a limited number of
the required line items filled out for two years.
During this time, the Commission could further
evaluate the scope of information SBS Entities
should file.
179 See para. (f)(3)(iv) to the proposed Order.
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(‘‘Accountant’s Report Condition’’). The
third condition further provides that the
report of the independent public
accountant may be prepared in
accordance with generally accepted
auditing standards (‘‘GAAS’’) in the UK
that are used to perform audit and
attestation services and the accountant
complies with UK independence
requirements. According to the FCA
Application, UK laws only require
certain investment firms (depending on
their size) to have their financial
statements audited, so this condition
ensures that all SBS Entities subject to
the requirement in rule 18a–7 to file
audited annual reports are required to
have their financial statements audited.
The fourth condition is that an SBS
Entity that is a security-based swap
dealer must file the reports required by
Exchange Act rule 18a–7(c)(1)(i)(B) and
(C) addressing the statements identified
in Exchange Act rule 18a–7(c)(3) or
(c)(4), as applicable, that relate to
Exchange Act rule 18a–4 (‘‘Rule 18a–4
Limited Exclusion’’).180 These reports
are designed to provide the Commission
with information about an SBS Entity’s
compliance with Rule 18a–4. As
discussed above, a positive substituted
compliance determination is not being
made for Exchange Act rule 18a–4 and,
therefore, this condition is designed to
provide the Commission with similar
compliance information. Under this
condition, Covered Entities will need to
file a limited compliance report that
includes the statements relating to Rule
18a–4 181 or exemption report if the
Covered Entity claims an exemption
from Rule 18a–4. The Covered Entity
also will need to file the report of an
independent public accountant covering
the limited compliance report or
exemption report. The fourth condition
further provides that the report of the
independent public accountant may be
prepared in accordance with GAAS in
the UK that are used to perform audit
and attestation services and the
180 The Commission views this as a limited
exclusion from the availability of substituted
compliance for these requirements because the
proposed Order permits these reports relating
Exchange Act rule 18a–4 to be included with the
UK regulatory reports the Covered Entities will file
with the Commission and because the reports can
be prepared in accordance with UK GAAS (as
discussed below).
181 The limited compliance report would not need
to address Exchange Act rule 18a–9 if the Covered
Entity is applying substituted compliance to this
requirement. Further, as discussed above,
substituted compliance with paragraphs (c) through
(h) of Exchange Act rule 18a–7 is conditioned on
the Covered Entity applying substituted compliance
to Exchange Act rule 18a–1. Therefore, the Covered
Entity would not need to address that rule in the
compliance report. Finally, the Covered Entity
would not need to address an account statement
rule of a self-regulatory organization.
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18401
accountant complies with UK
independence requirements.
The fifth condition is that a Covered
Entity that is a security-based swap
dealer files the supporting schedules
required by Exchange Act rule 18a–
7(c)(1)(i)(A) and (C) addressing the
statements identified in Exchange Act
rules 18a–7(c)(2)(ii) and (iii) that relate
to Exchange Act rule 18a–4 if the SBS
Entity is not exempt from Exchange Act
rule 18a–4 (i.e., a Rule 18a–4 Limited
Exclusion). These supporting schedules
are the Computation for Determination
of Security-Based Swap Customer
Reserve Requirements and the
Information Relating to the Possession
or Control Requirements for SecurityBased Swap Customers, which are
designed to provide the Commission
with information about an SBS Entity’s
compliance with Rule 18a–4.
Fourth, under the proposed Order,
substituted compliance in connection
with the requirement that Covered
Entities file notice of a change in fiscal
year under Exchange Act rule 18a–7(i)
is conditioned on the SBS Entity
simultaneously sending a copy of the
notice of change in fiscal year that the
Covered Entity is required to file with
the UK PRA or FCA to the Commission
in the manner specified on the
Commission’s website (‘‘SEC Filing
Condition’’). Because UK laws would
not otherwise require the notice of a
change in fiscal year to be filed with the
Commission, the purpose of this
condition is to ensure the Commission
receives the notice to more effectively
supervise and monitor SBS Entities.
The following table summarizes the
Commission’s proposed positive
substituted compliance determinations
with respect to requirements of
Exchange Act rule 18a–7 by listing in
each row: (1) The paragraph of the
proposed Order that sets forth the
determination; (2) the paragraph(s) of
Exchange Act rule 18a–7 to which the
determination applies; (3) a brief
description of the records required by
those paragraphs; and (4) a brief
description of any additional conditions
to applying substituted compliance to
the requirements, including any partial
exclusions because portions of the
requirements are linked to substantive
Exchange Act requirements for which a
positive substituted compliance
determination is not being made under
the proposed Order.182
182 The chart below does not include the
additional conditions for applying substituted
compliance to Exchange Act rule 18a–7; namely
that the SBS Entity: (1) Is subject to and complies
with the requirements of foreign law; (2) remains
subject to the requirement of Exchange Act section
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Order paragraph
Rule paragraph
Rule description
Conditions and partial exclusions
(1) Manner and Format Condition; (2) UK
GAAP Condition; (3) Rule 18a–1 Condition for ¶ (a)(1).
(1) Rule 18a–1 Condition.
(f)(3)(i) ..................
(a)(1) ........................
(a)(2) ........................
File FOCUS Reports ................
(f)(3)(ii) .................
(a)(3) ........................
..................................
(f)(3)(iii) .................
(b) ............................
..................................
(f)(3)(iv) ................
(c), (d), (e), (f), (g),
(h).
..................................
Information related to capital
models.
Publish certain financial information.
File annual audited reports .......
(f)(3)(v) .................
(i) .............................
..................................
Notice of fiscal year change .....
N/A.
(1) SEC Filing Condition; (2) Contact Information Condition; (3) Accountant’s
Report Condition; (4) Rule 18a–4 Limited Exclusion; (5) Rule 18a–1 Condition.
SEC Filing Condition.
6. Exchange Act Rule 18a–8
Exchange Act rule 18a–8 requires SBS
Entities to send notifications to the
Commission if certain adverse events
occur.183 Paragraphs (a)(1)(i), (a)(1)(ii),
(b)(1), (b)(2), and (b)(4) of Exchange Act
rule 18a–8 require an SBS Entity that is
a security-based swap dealer and that
does not have a prudential regulator to
provide notifications related to the
capital requirements of Exchange Act
rule 18a–1. Paragraphs (a)(2) and (b)(3)
Exchange Act rule 18a–8 require an SBS
Entity that is a major security-based
swap participant and that does not have
a prudential regulator to provide
notifications related to the capital
requirements of Exchange Act rule 18a–
8. Paragraph (c) Exchange Act rule 18a–
8 requires an SBS Entity that is a
security-based swap dealer and that files
a notice of adjustment to its reported
capital category with a U.S. prudential
regulator to transmit a copy of the notice
to the Commission. Paragraph (d) of
Exchange Act rule 18a–8, in pertinent
part, requires an SBS Entity to provide
notification to the Commission if it fails
to make and keep current books and
records under Exchange Act rule 18a–5
and to transmit a subsequent report on
what is being done to correct the
situation. Paragraph (e) of Exchange Act
rule 18a–8, in pertinent part, requires an
SBS Entity that is a security-based swap
dealer and that does not have a
prudential regulator to provide
notification if it has a material weakness
under Exchange Act rule 18a–7 and to
transmit a subsequent report on what is
being done to correct the situation.
Paragraph (g) of Exchange Act rule 18a–
8, in pertinent part, requires an SBS
Entity that is a security-based swap
dealer to provide notification if it fails
to make a required deposit into its
special reserve account for the exclusive
benefit of security-based swap
customers under Exchange Act rule
18a–4. Finally, paragraph (h) sets forth
requirements for transmitting the
notifications described above.
The Commission preliminarily makes
a positive substituted compliance
determination for a number of the
notification requirements set forth in
these paragraphs. However, certain of
these requirements are linked to
substantive Exchange Act requirements
for which a positive substituted
compliance determination is not being
made under the proposed Order. In
these cases, a positive substituted
compliance determination is not being
made for the linked requirement in
Exchange Act rule 18a–8 or the portion
of the requirement in Exchange Act rule
18a–8 that is linked to the substantive
Exchange Act requirement.184
In addition, certain of the
requirements in Exchange Act rule 18a–
8 are fully or partially linked to
substantive Exchange Act requirements
where a positive substituted compliance
determination is being made under the
proposed Order. In these cases,
substituted compliance with the
requirement in Exchange Act rule 18a–
8 is conditioned on the SBS Entity
applying substituted compliance to the
linked substantive Exchange Act
requirement.185
Under the proposed Order,
substituted compliance in connection
with the notification requirements of
Exchange Act rule 18a–8 is subject to
the condition that the SBS Entity: (1)
Simultaneously sends a copy of any
notice required to be sent by UK
notification laws to the Commission in
the manner specified on the
Commission’s website; and (2) includes
with the transmission the contact
information of an individual who can
provide further information about the
matter that is the subject of the notice
(i.e., the ‘‘Contact Information
Condition’’). The purpose of this
condition is to alert the Commission to
financial or operational problems that
could adversely affect the firm—the
objective of Exchange Act rule 18a–8.
The following table summarizes the
Commission’s proposed positive
15F(f) to keep books and records open to inspection
by any representative of the Commission and the
requirement of Exchange Act rule 18a–6(g) to
furnish promptly to a representative of the
Commission legible, true, complete, and current
copies of certain records; and (3) must promptly
furnish to a representative of the Commission upon
request an English translation of certain records.
See paras. (f)(7) and (8) to the proposed Order (with
respect to the second and third conditions).
183 See 17 CFR 240.18a–8.
184 A positive substituted compliance
determination is not being made for the following
requirements of Exchange Act rule 18a–8 because
they are linked to a substantive Exchange Act
requirement for which a positive substituted
compliance determination is not being made: (1)
Exchange Act rules 18a–8(a)(3) and (b)(3) are fully
linked to Exchange Act rule 18a–2 and, therefore,
are subject to the Rule 18a–2 Exclusion; (2) the
portion of Exchange Act rule 18a–8(e) that relates
to Exchange Act rule 18a–2 is subject to the Rule
18a–2 Exclusion; (3) the portion of Exchange Act
rule 18a–8(e) that relates to Exchange Act rule 18a–
4 is subject to the Rule 18a–4 Exclusion; and (4)
Exchange Act rule 18a–8(g) is fully linked to
Exchange act rule 18a–4 and, therefore, is subject
to the Rule 18a–4 Exclusion.
185 Substituted compliance with the following
requirements of Exchange Act rule 18a–8 is
conditioned on the SBS Entity applying substituted
compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a–8(a)(1)(i)
and (ii), (b)(1), (b)(2), and (b)(4) are linked to
Exchange Act rule 18a–1 and, therefore, are subject
to the Rule 18a–1 Condition; and (2) Exchange Act
rules 18a–8(d) is linked to Exchange Act rule 18a–
5 and, therefore, is subject to the Rule 18a–5
Condition with respect to any category of records
required to be made and kept current by that rule.
Consequently, if the Covered Entity does not apply
substituted compliance with respect to a category
of record required to be made and kept current by
Exchange Act rule 18a–5, the Covered Entity would
need to provide the notification required by
Exchange Act rule 18a–8(d) if it fails to make and
keep current that category of record.
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Exchange Act rule 18a–8 to which the
determination applies; (3) a brief
description of the records required by
those paragraphs; and (4) a brief
description of any additional conditions
to applying substituted compliance to
substituted compliance determinations
with respect to requirements of
Exchange Act rule 18a–8 by listing in
each row: (1) The paragraph of the
proposed Order that sets forth the
determination; (2) the paragraph(s) of
the requirements, including any partial
exclusions because portions of the
requirements are linked to substantive
Exchange Act requirements for which a
positive substituted compliance
determination is not being made.186
EXCHANGE ACT RULE 18a–8
[Notification]
Order paragraph
Rule paragraph
Rule description
Conditions and partial exclusions
(f)(4)(i)(A) .............
(a)(1)(i), (a)(1)(ii),
..................................
(b)(1), (b)(2), (b)(4).
Capital notices ..........................
(f)(4)(i)(B) .............
(c) ............................
..................................
(f)(4)(i)(C) .............
(d) ............................
..................................
Prudential regulator capital category adjustment notices.
Books and records notices .......
(f)(4)(i)(D) .............
(e) ............................
..................................
Material weakness notices .......
(1) Rule 18a–1 Condition; (2) SEC Filing
Condition; (3) Contact Information Condition.
(1) SEC Filing Condition; (2) Contact Information Condition.
(1) Rule 18a–5 Condition; (2) SEC Filing
Condition; (3) Contact Information Condition.
(1) Rule 18a–1 Condition; (2) Rule 18a–2
Exclusion; (3) Rule 18a–4 Limited Exclusion; (4) SEC Filing Condition; (5)
Contact Information Condition.
The following table summarizes the
Commission’s preliminary
determinations with respect to
requirements of Exchange Act rule 18a–
8 for which a positive substituted
compliance determination is not being
made because they are fully linked to
substantive Exchange Act requirements
for which a positive substituted
compliance determination is not being
made by listing in each row: (1) The
paragraph of the proposed Order that
sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a–
8 to which the determination applies;
(3) a brief description of the records
required by those paragraphs; and (4)
the exclusion from substituted
compliance.
EXCHANGE ACT RULE 18a–8
[Notification]
Order paragraph
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(f)(4)(ii)(B) .............
(f)(4)(ii)(C) ............
Rule paragraph
(a)(2) ........................
(g) ............................
Rule description
(b)(3) ........................
MSBSP capital notices .............
8. Exchange Act Section 15F(g)
Exchange Act rule 18a–9 requires SBS
Entities that are security-based swap
dealers and that do not have a
prudential regulator to examine and
count the securities they physically
hold, account for the securities that are
subject to their control or direction but
are not in their physical possession,
verify the locations of securities under
certain circumstances, and compare the
results of the count and verification
with their records.187 The Commission
preliminarily is making a positive
substituted compliance determination’
for this rule.188
Exchange Act Section 15F(g) requires
SBS Entities to maintain daily trading
records.189 The Commission
preliminarily believes UK law produces
a comparable result in terms of its daily
trading recordkeeping requirements.190
Accordingly, the Commission
preliminarily is making a positive
substituted compliance determination
for the self-executing requirements in
this paragraph.191
186 The chart below does not include the
additional conditions for applying substituted
compliance to Exchange Act rule 18a–8; namely
that the SBS Entity: (1) Is subject to and complies
with the requirements of foreign law; (2) remains
subject to the requirement of Exchange Act section
15F(f) to keep books and records open to inspection
by any representative of the Commission and the
requirement of Exchange Act rule 18a–6(g) to
furnish promptly to a representative of the
Commission legible, true, complete, and current
copies of certain records; and (3) must promptly
furnish to a representative of the Commission upon
request an English translation of certain records.
See paras. (f)(7) and (8) to the proposed Order (with
respect to the second and third conditions).
187 See 17 CFR 240.18a–9.
188 See para. (f)(5) to the proposed Order.
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Rule 18a–2 Exclusion.
I .................................. Reserve account notices .......... Rule 18a–4 Exclusion.
7. Exchange Act Rule 18a–9
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Exclusion
9. Examination and Production of
Records
Every Covered Entity registered with
the Commission, whether complying
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directly with Exchange Act
requirements or relying on substituted
compliance as a means of complying
with the Exchange Act, is required to
satisfy the inspection and production
requirements imposed on such entities
under the Exchange Act.192 Covered
Entities may make, keep, and preserve
records, subject to the conditions
described above, in a manner prescribed
by applicable UK requirements. The
Commission notes that as an element of
its substituted compliance application,
the FCA has provided the Commission
with adequate assurances that no law or
policy would impede the ability of any
entity that is directly supervised by the
189 See
15 U.S.C. 78o–10(g).
FCA COND at paragraphs 2C, 2D, 3B, 3C,
5D and 5F; PRA Fundamental Rules 2 and 6; FCA
PRIN 2.1.1.R(2) and (3); PRA Recordkeeping Rule
2.1; FCA SYSC 9.1.1AR.
191 See para. (f)(6) to the proposed Order.
192 See Exchange Act section 15F(f); Exchange Act
rule 18a–6(g).
190 See
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authority and that may register with the
Commission ‘‘to provide prompt access
to the Commission to such entity’s
books and records or to submit to onsite
inspection or examination by the
Commission.’’ Consistent with those
assurances and the requirements that
apply to all Covered Entities under the
Exchange Act, Covered Entities will
need to keep books and records open to
inspection by any representative of the
Commission and to furnish promptly to
a representative of the Commission
legible, true, complete, and current
copies of those records of the firm that
these entities are required to preserve
under Exchange Act rule 18a–6 (which
would include records for which a
positive substituted compliance
determination is being made with
respect to Exchange Act rule 18a–6
under the Order), or any other records
of the firm that are subject to
examination or required to be made or
maintained pursuant to Exchange Act
section 15F that are requested by a
representative of the Commission.193
10. English Translations
The proposed Order states that to the
extent documents are not prepared in
the English language, SBS Entities must
furnish to a representative of the
Commission upon request an English
translation of any record, report, or
notification of the SBS Entity that is
required to be made, preserved, filed, or
subject to examination pursuant to
Exchange Act section 15F or the UK
Order.194 This requirement addresses
difficulties that Commission
examinations staff would have
examining SBS Entities that furnish
documents in a foreign language. While
acknowledging that English is widely
spoken in the UK, this requirement is
included to address foreign branches of
UK SBS Entities that may prepare
documents in foreign languages. Such
English translations would be required
to be provided promptly.
IX. Additional Considerations
Regarding Supervisory and
Enforcement Effectiveness in the UK
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A. General Considerations
As noted above, 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 the supervisory program
administered, and the enforcement
authority exercised’’ by the foreign
financial regulatory authority. This
193 See
194 See
para. (f)(6) to the proposed Order.
para. (f)(7) to the proposed Order.
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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. This prerequisite, however,
also recognizes that differences among
the supervisory and enforcement
regimes should not be assumed to
reflect flaws in one regime or
another.195
In connection with these
considerations, the FCA Application
includes information regarding the UK
supervisory and enforcement framework
applicable to derivatives markets and
market participants. This includes
information regarding the supervisory
and enforcement authority afforded to
the FCA and the PRA to promote
compliance with applicable
requirements, applicable supervisory
and enforcement tools and capabilities,
consequences of non-compliance, and
the application of the FCA’s and PRA’s
supervisory and enforcement practices
in the cross-border context. After review
of this information, the Commission
preliminarily believes that the
framework is reasonably designed to
promote compliance with the laws
where substituted compliance has been
requested.
In preliminarily concluding that the
relevant supervisory and enforcement
considerations are consistent with
substituted compliance, the
Commission particularly has considered
the following factors:
B. Supervisory Framework in the UK
Supervision of banks and investment
firms (together, ‘‘firms’’) that conduct
security-based swap business in the UK
is conducted by the FCA and the PRA.
At the time of this application, all firms
that will be using substituted
compliance are dually-regulated by the
FCA and PRA. Although both
supervisors take a broad view of their
supervisory powers, the FCA is
primarily responsible for conduct, antimoney laundering, trade
acknowledgment and verification,
portfolio reconciliation and dispute
reporting, portfolio compression,
trading relationship documentation and
securities count requirements, while the
PRA is primarily responsible for capital,
margin, internal supervision, chief
compliance officer and risk management
195 See generally Business Conduct Adopting
Release, 81 FR at 30079.
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requirements. Both the FCA and the
PRA are responsible for recordkeeping,
reporting and notification requirements,
and both have the ability to request
records needed for supervision from
firms through the supervisory process.
In addition, the FCA and the PRA set
priorities in their annual business plans
which also sets forth the thematic
reviews that will be conducted each
year. These thematic reviews focus on
particular areas of risk or products
across several firms and key findings are
made public to promote consistency
across the market.
1. FCA
For large firms, such as those that will
be applying to be security-based swap
dealers in the United States, the FCA
uses a firm-specific supervision program
(‘‘fixed supervision’’) and assigns at
least one supervisor dedicated to
supervising the firm. The supervisor has
regular interaction with the firm,
including meetings, emails, phone calls
and video calls. The supervisor reviews
the monthly and quarterly reports that
are submitted by firms. If a supervisor
sees a red flag on a report, the
supervisor may take a number of actions
such as contacting the firm’s senior
management or requiring a skilled
person review. This supervisor also
works with specialists, who monitor
specific activities at the firm, such as
financial crimes, and provide support to
the primary supervisor.
The FCA meets with each firm subject
to fixed supervision to conduct a
strategy meeting, which allows the firm
to inform the FCA of their business
strategy for the next two years.196 This
strategy meeting feeds into the firm
evaluation, which is the FCA’s
assessment of the firm using the FAM
methodology.197 Before a firm
evaluation is finalized, the supervisor
presents the FAM analysis, a
description of the key risks at the firm,
and a workplan to address those risks to
senior management for approval. Once
the workplan is approved, the firm is
sent a letter that summarizes the
supervisory team’s assessment of the
firm and gives the firm an overview of
what to expect from a supervisory
perspective over the next year.
When the FCA identifies a risk or
issue at a firm that requires remediation,
196 Depending on the regulatory cycle of the firm,
these meetings typically occur at least every two
years.
197 More information on FCA’s supervisory
approach, including a description of the FAM
methodology, is available at: https://
www.fca.org.uk/publication/corporate/ourapproach-supervision-final-report-feedbackstatement.pdf.
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the FCA can take a number of corrective
actions and strives to choose the one
that is appropriate and proportionate to
the circumstances. If the FCA
determines that the issue is minor then
the supervisor may discuss with the
firm how the matter is best resolved and
follow up with the firm to ensure
adequate steps have been taken. For
more significant issues, the supervisor
can deploy a range of regulatory tools to
achieve a specific outcome. The
common tools used by the FCA include
starting a deep dive; 198 requiring the
firm to commit to certain action (for
example, varying a firm’s ability to
conduct business until a prescribed
action is taken); or requiring review by
a third party, such as a skilled person
review.199 If these actions fail, or if the
issue is considered harmful enough, the
matter will be referred to the FCA
Enforcement division for investigation.
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2. PRA
The PRA divides all firms into the
five categories for supervisory purposes,
with category 1 (‘‘CAT1’’) being the
most significant firms whose size,
interconnectedness, complexity and
business type give them the capacity to
cause significant disruption to the UK
financial system by failing, or by
carrying on their business in an unsafe
manner.200 All firms that will be
registering as security-based swap
dealers in the United States are CAT1
firms and are assigned several
supervisors to monitor the firm. These
supervisors have frequent interactions
(typically daily) with the firms,
including regular meetings with the
firm’s executive management.
Supervisors review information
submitted by a firm and this
information is periodically validated,
either through onsite inspection by the
PRA supervisory and specialist risk
staff, or by third-parties. Supervisors
examine for risks in the firm’s business
model and analyze where and how a
firm makes money, the risks involved in
doing so, and how the firm is funded.
PRA staff regularly engages with firms
198 A deep dive is a focused, forward-looking
assessment of a firm to investigate a specific area
of potential risk. Deep dives are designed to be
focused assessments, looking at specific risks,
rather than wide ranging assessments that, for
example, look at controls within a firm generally.
199 More information on skilled person reviews is
available at: https://www.fca.org.uk/about/
supervision/skilled-persons-reviews.
200 Information on the PRA’s supervisory
approach, including the factors it uses to divide
firms into the different categories, is available at:
https://www.bankofengland.co.uk/-/media/boe/
files/prudential-regulation/approach/bankingapproach-2018.pdf?la=en&
hash=3445FD6B39A2576ACCE8
B4F9692B05EE04D0CFE3.
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on business performance, governance
and management, external context
impact, capital, liquidity, risk controls,
and resolvability. The supervisors work
with risk specialists and other staff who
offer expertise in certain areas (e.g.,
credit risk, operational risk, governance)
to monitor the firm.
The PRA conducts an annual internal
meeting regarding each firm called a
‘‘periodic summary meeting’’ (‘‘PSM’’)
to discuss the major risks at the firm, the
supervisory strategy, and proposed
remedial actions, including guidance
about the adequacy of a firm’s capital
and liquidity. After the PSM, the PRA
sends an annual letter to each firm
outlining the key risks that are of
greatest concern, which require action
by the firm. The PRA verifies that action
is taken on the key risks identified in
the PSM, and actively engages with the
firm’s audit committee and nonexecutive directors on the progress
made to address the most significant
risks. Less significant issues identified
in the PSM are conveyed to the firm to
be addressed autonomously and the
PRA expects confirmation by the most
appropriate senior individual within the
firm (e.g., the chief executive officer,
finance director, or chair of the audit
committee) that these issues have been
closed.
When the PRA detects supervisory
issues at a firm, it has the power to
require firms to take corrective actions,
such as conducting an internal audit or
appointing a monitor to review certain
aspects of the firm’s regulatory reports.
The PRA may also determine that
further information is needed and can,
for example, require an external audit,
conduct its own inspection or appoint
an independent skilled person that will
produce a report on the topic to the
PRA. The PRA may conduct its own
onsite inspection, which involves risk
specialists and other technical staff,
when it wants to review a certain area,
such as a particular business line or a
model review. The inspections are indepth, focused reviews that involve
discussions with staff, reviews of
internal documents at the firm, and
testing to ensure the information
provided by the firm to the PRA is
accurate. If a firm does not take
appropriate corrective action as
required, the PRA may open an
enforcement proceeding.
C. Enforcement Authority in the UK
Similar to the supervision regime,
enforcement of banks and investment
firms located in the UK is conducted by
the FCA and the PRA. As with
supervisory powers, the FCA is
primarily responsible for conduct, anti-
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18405
money laundering, trade
acknowledgment and verification,
portfolio reconciliation and dispute
reporting, portfolio compression,
trading relationship documentation and
securities count requirements, while the
PRA is primarily responsible for capital,
margin, internal supervision, chief
compliance officer and risk management
requirements. Both the FCA and PRA
are responsible for recordkeeping,
reporting and notification requirements.
1. FCA
Within the FCA, enforcement
investigations are carried out by the
relevant department of the
organization’s Enforcement and Market
Oversight Division (‘‘EMO’’). EMO has
three investigation departments: (1)
Unauthorized business; (2) retail; and
(3) wholesale. Most investigations into
firms subject to substituted compliance
would fall into the wholesale category.
The FCA gathers information through
voluntary submissions and interviews,
and may compel information,
documents or testimony as necessary,
and subject to limitations on use. In
addition to the authority to investigate
and impose sanctions for regulatory
misconduct, the FCA can
simultaneously prosecute criminal
offenses such as insider trading and
unauthorized business and promotion
activities. The FCA has many sanctions
and remedies for wrongdoing available
for use. Among its sanctioning powers
are: Public censure, financial penalties,
disciplinary prohibitions, and
suspension or restriction orders. In
deciding which sanction to apply, the
FCA considers relevant circumstances
including steps taken to mitigate or
remedy the harm and the level of
cooperation. The FCA resolves many
matters by settlement. Additionally, as
required by law, it publishes Final
Notices regarding enforcement, subject
to certain public interest limitations on
publication.
2. PRA
The decision to open an investigation
at the PRA is typically made jointly by
a senior supervisor and a senior
representative of the PRA’s enforcement
team. Once these individuals decide to
investigate, investigators are appointed
and the PRA sends a notice to the
subject. Like the FCA, the PRA is
empowered to require certain
information or documents from
authorized firms. Under certain
circumstances, investigators also can
require a person that is neither the
subject of the investigation nor
connected with the subject to attend an
interview and answer questions and/or
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provide information necessary to the
investigation. At the end of an
investigation, the investigators will
report to the PRA and make a
recommendation. The possible
recommendations include, among
others, (1) taking no further action; (2)
imposing an enforcement sanction
against the subject, which may start
settlement discussions or steps towards
a contested process; (3) imposing
requirements or other supervisory
measures against a firm; or (4) opening
additional investigations.201 The PRA is
empowered to impose sanctions such as
publishing a public statement regarding
misconduct, called ‘‘public censure,’’
directing persons to refrain from
conduct, prohibiting a person from
holding an office or position, or
imposing a financial penalty.202 In
determining the appropriate amount of
penalty, the PRA considers: (1) Any
disgorgement to be ordered; (2) the
seriousness of the misconduct; (3) any
adjustment for aggravating or mitigating
factors; (4) any adjustment for
deterrence; and (5) reductions for
settlement discount and/or serious
financial hardship. In resolving actions,
the PRA seeks first to determine
whether an appropriate settlement can
be reached. If one cannot be reached,
the investigation team recommends
action to the Enforcement Decision
Making Committee, which is the PRA’s
decision-making body for contested
enforcement cases.203 As with the FCA,
the PRA is required by law to publish
Final Notices regarding enforcement,
subject to certain public interest
limitations on publication.
X. Request for Comment
Commenters are invited to address all
aspects of the application, the
Commission’s preliminary views and
the proposed Order.
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A. General Aspects of the Comparability
Assessments and Proposed Order
The Commission requests comment
regarding the preliminary views and
201 See PRA Regulatory Investigations Guide,
available at: https://www.bankofengland.co.uk/-/
media/boe/files/prudential-regulation/prastatutory-powers/regulatory-investigations-guide.
pdf?la=en&hash=7170036F5249
F21F15236504A8CC94E6F65D5EE2, April 2019 at
8.
202 See Enforcement Decision Making Committee
Policy Statement PS/EDMC2018, available at:
https://www.bankofengland.co.uk/-/media/boe/
files/paper/2018/enforcement-decision-makingcommittee-policy-statement.pdf?la=en&hash=2
F1E211F8BDB9B23A054DD770CBE342EB381020E
(‘‘Enforcement Decision Making Committee Policy
Statement PS/EDMC2018’’), at 1 (citing Section
832ZR of the Banking Act of 2009).
203 Enforcement Decision Making Committee
Policy Statement PS/EDMC2018.
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The Commission further requests
comment regarding the proposed grant
of substituted compliance in connection
with requirements under the Exchange
Act related to internal risk management
systems, trade acknowledgement and
verification, portfolio reconciliation and
dispute reporting, and trading
relationship documentation.
Commenters particularly are invited to
address the basis for substituted
compliance in connection with those
risk control requirements, and the
proposed conditions and limitations
connected to substituted compliance for
those requirements.
In addition to these general matters,
the Commission invites commenters to
address the Commission’s preliminary
analysis that UK EMIR trade
acknowledgment and verification and
trading relationship documentation
requirements are comparable to
Exchange Act requirements when
viewed in light of the ESMA EMIR Q&A
and the addition of the new general
condition concerning a Covered Entity’s
application of UK EMIR requirements,
and without the need to rely on UK
requirements that implement MiFID
documentation requirements. Should
the Commission instead require Covered
Entities to comply both with UK EMIR
requirements related to trade
acknowledgment and verification and
trading relationship documentation and
with UK requirements that implement
MiFID documentation requirements?
With respect to portfolio
reconciliation and dispute reporting
requirements, the Commission also
invites commenters to address the
condition requiring a Covered Entity to
provide the Commission with reports
regarding disputes between
counterparties on the same basis as the
Covered Entity provides those reports to
the FCA pursuant to UK law. Would
differences in the timing of dispute
reports made pursuant to Exchange Act
requirements as compared to reports
made pursuant to UK law make UK
portfolio reconciliation and dispute
reporting requirements not comparable
to Exchange Act requirements?
With respect to all risk control
requirements, commenters also are
invited to address any differences
between UK regulatory requirements
and frameworks and either the German
requirements and frameworks that
formed the basis for the Commission’s
conditional grant of substituted
compliance for Germany or the French
requirements and frameworks that
formed the basis for the Commission’s
proposed conditional grant of
substituted compliance for France.205
Would the responses to any of the
questions about risk control
requirements that the Commission
asked in connection with the German
Notice and Proposed Order and/or the
French Notice and Proposed Order
differ if those questions applied to UK
regulatory requirements and
frameworks?
204 See German Substituted Compliance Order, 85
FR at 85868; French Notice and Proposed Order, 85
FR at 85720; see also German Notice and Proposed
Order, 85 FR at 72729–30.
205 See German Substituted Compliance Order, 85
FR at 85689–91; French Notice and Proposed Order,
85 FR 85724–25; see also German Notice and
Proposed Order, 85 FR at 72730–32.
proposed Order in connection with each
of the general ‘‘regulatory outcome’’
categories addressed above.
Commenters particularly are invited to
address, among other issues, whether
the relevant UK provisions generally are
sufficient to produce regulatory
outcomes that are comparable to the
outcomes associated with requirements
under the Exchange Act, and whether
the conditions and limitations of the
proposed Order would adequately
address potential gaps in the relevant
regulatory outcomes or would otherwise
result in any implementation or other
practical issues.
Further, the Commission requests
comment regarding whether the
proposed conditions and limitations
guard against comparability gaps arising
from the cross-border application of UK
requirements (including when SBS
Entities conduct security-based swap
business through branches located in
the United States or in third countries).
With respect to the proposed
conditions and limitations, commenters
also are invited to address any
differences between UK regulatory
requirements and frameworks and either
the German requirements and
frameworks that formed the basis for the
Commission’s conditional grant of
substituted compliance for Germany or
the French requirements and
frameworks that formed the basis for the
Commission’s proposed conditional
grant of substituted compliance for
France.204 Would the responses to any
of the questions that the Commission
asked in connection with the German
Notice and Proposed Order and/or the
French Notice and Proposed Order
differ if those questions applied to UK
regulatory requirements and
frameworks?
B. Risk Control Requirements
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C. Capital and Margin Requirements
1. Capital
The Commission further requests
comment regarding the comparability
analysis of UK capital requirements
with Exchange Act capital requirements
for non-prudentially regulated securitybased swap dealers. Commenters
particularly are invited to address the
basis for substituted compliance in
connection with those requirements,
and the proposed conditions and
limitations connected to substituted
compliance for those requirements.
Does UK law taken as a whole produce
regulatory outcomes that are comparable
to those of Exchange Act rule 18a–1?
Are there any additional conditions that
should be applied to substituted
compliance for these capital
requirements to promote comparable
regulatory outcomes?
The Commission also requests
comment and supporting data on the
proposed capital conditions. The
purpose of the potential conditions
would be to address the concern that,
while the Basel capital standard
contains requirements designed to
address liquidity such as the LCR, net
stable funding ratio (‘‘NSFR’’), and an
internal liquidity adequacy assessment
process (‘‘liquidity assessment
process’’), 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.
The Commission also requests
comment on whether Covered Entities
that are not banks have access to shortterm liquidity through Central Bank
facilities in the UK that are available to
banks (e.g., Sterling Monetary
Framework through the Bank of
England). 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 proposed capital
conditions compare to any existing
capital requirements under the Basel
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capital standards. For example, are there
differences in the frequency or nature of
calculations under the Basel capital
standards?
The Commission also requests
comment on and seeks information
about the assets, liabilities, and capital
of the Covered Entities that would apply
substituted compliance with respect to
Exchange Act rule 18a–1. The
Commission further requests comment
on what specific types of nonprudentially regulated security-based
swap dealers in the UK would be
relying on a substituted compliance
determination with respect to capital
requirements under 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 proposed capital
conditions. For example, do the Covered
Entities that would apply substituted
compliance with respect to Exchange
Act 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 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 Commission requests comment
on the capital conditions that would
require a Covered Entity to: (1) Maintain
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; and (2) makes a quarterly record
listing: (a) The assets maintained
pursuant to the first proposed 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. Is the
term ‘‘current liabilities’’ understood by
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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 Commission requests
comment on how these conditions
would compare to the LCR.
The Commission also requests
comment and supporting data on the
proposed condition that a Covered
Entity maintain at least $100 million of
equity capital composed of ‘‘highly
liquid assets’’ as defined in the Basel
capital standard. 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 Commission also requests
comment and supporting data on the
proposed condition that a Covered
Entity includes its most recent audited
or unaudited statement of financial
condition filed with its local supervisor
with its initial written notice to the
Commission of its intent to rely on
substituted compliance. Are there other
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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 the UK 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. The Commission
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
proposed 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.
Please identify and describe any
potential impacts on the way Covered
Entities currently conduct their business
with respect to implementing the
proposed capital conditions.
The Commission further requests
comment on whether the Commission
should consider other potential
conditions with respect to applying
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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
capital condition include 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
there be a percent threshold of nonallowable 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 also requests
comment on whether the Commission
should consider imposing other 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. If so, explain why? Please
explain which threshold may be
appropriate or suggest an alternative.
The Commission further requests
comment on whether there will be any
non-prudentially regulated securitybased swap dealers in the UK other than
PRA-designated investment firms that
would be seeking substituted
compliance. In addition, HM Treasury,
the PRA and the FCA published a joint
statement announcing that they had
decided to target an implementation
date of January 1, 2022 for the new
prudential rules for investment firms.
The Commission further requests
comment on whether any investment
firms that may be relying on the
Commission’s proposed substituted
compliance determination with respect
to Exchange Act rule 18a–1 would
potentially be covered under this new
capital regime for investment firms in
the UK. If so, should these capital
requirements be included in any
Commission final order regarding the
determination of substituted compliance
with respect to the capital requirements
of the Commission and the UK? If so,
explain how they are comparable to the
capital requirements for nonprudentially regulated security-based
swap dealers under the Exchange Act.
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With respect to capital requirements,
commenters also are invited to address
any differences between UK regulatory
requirements and frameworks and the
French requirements and frameworks
that formed the basis for the
Commission’s proposed conditional
grant of substituted compliance for
France.206 Would the responses to any
of the questions about capital
requirements that the Commission
asked in connection with the French
Notice and Proposed Order differ if
those questions applied to UK
regulatory requirements and
frameworks? 207
The Commission further requests
comment on whether there would be
any non-prudentially regulated major
security-based swap participants in the
UK that would be seeking substituted
compliance with respect to Exchange
Act rule 18a–2.
2. Margin
The Commission further requests
comment regarding the Commission’s
preliminary view that the UK margin
requirements are comparable to the
Exchange Act margin requirements for
non-prudentially regulated securitybased swap dealers and major securitybased swap participants. Commenters
particularly are invited to address the
basis for substituted compliance in
connection with those requirements.
Does UK law taken as a whole produce
regulatory outcomes that are comparable
to those of Exchange Act rule 18a–3?
Are there any additional conditions that
should be applied to substituted
compliance for these margin
requirements to promote comparable
regulatory outcomes?
The Commission further requests
comment on whether the haircuts
required under the UK EMIR Margin
RTS are comparable to the collateral
haircuts required under paragraph (c)(3)
of Exchange Act rule 18a–3. The
Commission also requests comment
whether the standardized grid for
computing initial margin under the UK
EMIR Margin RTS is comparable to the
standardized approach for computing
initial margin under paragraph (d)(1) of
Exchange Act rule 18a–3.
With respect to margin requirements,
commenters also are invited to address
any differences between UK regulatory
requirements and frameworks and the
French requirements and frameworks
that formed the basis for the
Commission’s proposed conditional
206 See French Notice and Proposed Order, 85 FR
85726.
207 See French Notice and Proposed Order, 85 FR
85736–37.
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grant of substituted compliance for
France.208 Would the responses to any
of the questions about margin
requirements that the Commission
asked in connection with the French
Notice and Proposed Order differ if
those questions applied to UK
regulatory requirements and
frameworks? 209
D. Internal Supervision, Chief
Compliance Officer and Additional
Exchange Act Section 15F(j)
Requirements
The Commission requests comment
regarding the proposed grant of
substituted compliance in connection
with requirements under the Exchange
Act related to internal supervision and
chief compliance officers, as well as
additional Exchange Act section 15F(j)
requirements. Commenters particularly
are invited to address the basis for
substituted compliance in connection
with those risk control requirements,
and the proposed conditions and
limitations connected to substituted
compliance for those requirements.
With respect to internal supervision
and chief compliance officers
requirements, as well as additional
Exchange Act section 15F(j)
requirements, commenters also are
invited to address any differences
between UK regulatory requirements
and frameworks and either the German
requirements and frameworks that
formed the basis for the Commission’s
conditional grant of substituted
compliance for Germany or the French
requirements and frameworks that
formed the basis for the Commission’s
proposed conditional grant of
substituted compliance for France.210 In
particular, the proposed Order would
require a Covered Entity to be subject to,
and comply with, in part provisions of
UK law that implement CRD article 92,
whereas the German Substituted
Compliance Order requires, and the
French Notice and Proposed Order
would require, compliance with
provisions that implement CRD articles
92 through 95. Should the Commission
apply to these three orders (and to any
other substituted compliance orders in
jurisdictions with requirements based
on CRD) the approach to these
provisions in the proposed Order or the
approach in the German Substituted
Compliance Order and French Notice
208 See French Notice and Proposed Order, 85 FR
85726.
209 See French Notice and Proposed Order, 85 FR
85736.
210 See generally German Substituted Compliance
Order, 85 FR at 85691–92; French Notice and
Proposed Order, 85 FR 85726–28; see also German
Notice and Proposed Order, 85 FR at 72732–34.
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and Proposed Order? Similarly, the
proposed Order would require a
Covered Entity to be subject to, and
comply with, in part UK CRR articles
286 through 288 and 293, whereas the
German Substituted Compliance Order
does not require, and the French Notice
and Proposed Order would not require,
compliance with comparable provisions
of EU law. Should the Commission
apply to these three order (and to any
other substituted compliance orders in
jurisdictions with requirements based
on CRR) the approach to these
provisions in the proposed Order or the
approach in the German Substituted
Compliance Order and French Notice
and Proposed Order? In addition, would
the responses to any of the questions
about internal supervision or chief
compliance officer requirements, or the
additional Exchange Act section 15F(j)
requirements, that the Commission
asked in connection with the German
Notice and Proposed Order and/or the
French Notice and Proposed Order
differ if those questions applied to UK
regulatory requirements and
frameworks?
E. Counterparty Protection
Requirements
The Commission requests comment
regarding the proposed grant of
substituted compliance in connection
with counterparty protection
requirements under the Exchange Act.
Commenters particularly are invited to
address the basis for substituted
compliance in connection with the
counterparty protection requirements,
and the proposed conditions and
limitations connected to substituted
compliance for those requirements.
The Commission also requests
comment on the scope of UK ‘‘know
your counterparty’’ and daily mark
requirements to which a Covered Entity
must be subject if it relies on substituted
compliance. Third country investment
firms (a term that includes third country
credit institutions when providing
investment services or performing
investment activities in the UK) are not
subject to these UK requirements and
therefore would not be eligible to apply
substituted compliance for Exchange
Act ‘‘know your counterparty’’ or daily
mark requirements. Do any such third
country investment firms currently plan
to apply, or believe they might in the
future apply, substituted compliance for
Exchange Act ‘‘know your
counterparty’’ or daily mark
requirements? Are any other UK
requirements applicable to third country
investment firms comparable to
Exchange Act ‘‘know your
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counterparty’’ or daily mark
requirements?
With respect to all counterparty
protection requirements, commenters
also are invited to address any
differences between UK regulatory
requirements and frameworks and either
the German requirements and
frameworks that formed the basis for the
Commission’s conditional grant of
substituted compliance for Germany or
the French requirements and
frameworks that formed the basis for the
Commission’s proposed conditional
grant of substituted compliance for
France.211 Would the responses to any
of the questions about counterparty
protection requirements that the
Commission asked in connection with
the German Notice and Proposed Order
and/or the French Notice and Proposed
Order differ if those questions applied
to UK regulatory requirements and
frameworks?
F. Recordkeeping, Reporting,
Notification, and Securities Count
The Commission requests comment
regarding the proposed grant of
substituted compliance in connection
with requirements under the Exchange
Act related to recordkeeping, reporting,
notification, and securities counts, as
well as the requirement of Exchange Act
section 15F(g). Commenters particularly
are invited to address the basis for
substituted compliance in connection
with those requirements, and the
proposed conditions and limitations
connected to substituted compliance for
those requirements. Does UK law taken
as a whole produce regulatory outcomes
that are comparable to those of
Exchange Act section 15F(g) and
Exchange Act rules 18a–5, 18a–6, 18a–
7, 18a–8, and 18a–9? In this regard,
commenters are invited to address the
UK laws cited for each substituted
compliance determination with respect
to the distinct requirements within
Exchange Act rules 18a–5, 18a–6, 18a–
7, and 18a–8 (i.e., the rules for which a
more granular approach to substituted
compliance is being taken). With respect
to each substituted compliance
determination, the Commission seeks
comment on the following matters: (1)
Will the UK laws cited for the
determination result in a comparable
regulatory outcome; (2) are there
additional or alternative UK laws that
should be cited to achieve a comparable
regulatory outcome; and (3) are any of
the UK laws cited for the determination
211 See generally German Substituted Compliance
Order, 85 FR at 85692–95; French Notice and
Proposed Order, 85 FR 85728–30; see also German
Notice and Proposed Order, 85 FR at 72734–36.
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unnecessary to achieve a comparable
regulatory outcome?
Commenters particularly are invited
to address the proposed condition with
respect to Exchange Act rule 18a–5 that
the Covered Entity: (1) Preserve all of
the data elements necessary to create the
records required by Exchange Act rules
18a–5(a)(1), (2), (3), (4), and (7) (if not
prudentially regulated) or Exchange Act
rules 18a–5(b)(1), (2), (3), and (7) (if
prudentially regulated); and (2) upon
request furnish promptly to
representatives of the Commission the
records required by those rules. Do the
relevant UK laws require SBS Entities to
retain the data elements necessary to
create the records required by these
rules? If not, please identify which data
elements are not preserved pursuant to
the relevant UK laws. Further, how
burdensome would it be for an SBS
Entity to format the data elements into
the records required by these rules (e.g.,
a blotter, ledger, or securities record, as
applicable) if the firm was requested to
do so? In what formats do SBS Entities
in the UK produce this information to
the PRA, FCA, or other UK authorities?
How do those formats differ from the
formats required by Exchange Act rules
18a–5(a)(1), (2), (3), (4), and (7) (if not
prudentially regulated) or Exchange Act
rules 18a–5(b)(1), (2), (3), and (7) (if
prudentially regulated)?
Is it 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? Explain why or
why not. For example, would it be more
efficient for a Covered Entity to comply
with certain Exchange Act requirements
within a given recordkeeping or
reporting rule (rather than apply
substituted compliance) because it can
utilize systems that its affiliated brokerdealer has implemented to comply with
them? If so, explain why. If not, explain
why not. Is it appropriate to permit
Covered Entities to take a more granular
approach to the requirements within
these recordkeeping rules? 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.
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Certain of the Commission’s
recordkeeping, reporting, and
notification requirements are fully or
partially linked to substantive Exchange
Act requirements for which a positive
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 a substantive Exchange Act
requirement? 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? 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? 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
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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.
Commenters also are invited to
address the proposal that a positive
substituted compliance determination
with respect to Exchange Act rule 18a–
7 would be conditioned on the Covered
Entity filing financial and operational
information with the Commission in the
manner and format specified by the
Commission by order or rule. With
respect to FOCUS Report Part II, not all
of the line items on the report may be
as pertinent to a non-prudentially
regulated SBS Entity if a positive
substituted compliance determination is
made with respect to capital or margin.
With respect to FOCUS Report Part IIC,
because the Commission does not have
responsibility to administer capital and
margin requirements for prudentially
regulated SBS Entities, the FOCUS
Report Part IIC elicits much less
information than the FOCUS Report Part
II or the financial reports SBS Entities
file with UK authorities. Should the
Commission require Covered Entities to
file the financial and operational
information using the FOCUS Report
Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated)? Are
there line items on the FOCUS Report
Part II or Part IIC that elicit information
that is not included in the reports SBS
Entities file with the FCA or PRA? If so,
do SBS Entities record that information
in their required books and records?
Please identify any information that is
elicited in the FOCUS Report Part II (if
not prudentially regulated) or Part IIC (if
prudentially regulated) that is not: (1)
Included in the financial reports filed by
SBS Entities with the FCA or PRA; or
(2) recorded in the books and records
required of SBS Entities. With respect to
FOCUS Report Part IIC, would the
answer to these questions change if
references to FFIEC Form 031 were not
included in the FOCUS Report Part IIC?
If so, how? As a preliminary matter, as
a condition of substituted compliance
should SBS Entities file a limited
amount of financial and operational
information on the FOCUS Report Part
II (if not prudentially regulated) or Part
IIC (if prudentially regulated) for a
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period of two years to further evaluate
the burden of requiring all applicable
line items to be filled out? If so, which
line items should be required? To the
extent that SBS Entities otherwise report
or record information that is responsive
to the FOCUS Report Part II or Part IIC,
how could the information on these
reports be integrated into a database of
filings the Commission or its designee
will maintain for filers of the FOCUS
Report Parts II and IIC (e.g., the eFOCUS
system) to achieve the objective of being
able to perform cross-form analysis of
information entered into the uniquely
numbered line items on the forms?
Commenters also are invited to
address the proposal that a positive
substituted compliance determination
with respect to the requirement to file
annual audited reports pursuant to
Exchange Act rule 18a–7 would be
subject to five conditions. For example,
comment is sought on the first and third
conditions that would permit the SBS
Entity to simultaneously transmit to the
Commission a copy of the financial
statements the SBS Entity is required to
file annually with a UK regulator, and,
if not already required, require the SBS
Entity to engage an independent public
accountant to prepare a report covering
the annual financial statements. Are
there any concerns with the
Commission accepting financial
statements that are prepared in
accordance with UK GAAP and audited
by an independent public accountant in
accordance with UK GAAS? In addition,
are there any concerns with the public
accountant being independent in
accordance with local UK requirements?
Further, the third condition would
require SBS Entities that are not
required under UK law to file a report
of an independent public accountant
covering their financial statements to
file such an accountant’s report. This
condition is based on the fact that UK
law only requires certain investment
firms (depending on their size) to have
their financial statements audited. Do
the firms in the UK that are not subject
to the requirement to file audited
financial reports engage in securitybased swap activities? If so, are they
likely to register with the Commission
as a non-prudentially regulated securitybased swap dealer or major securitybased swap participant?
With respect to recordkeeping,
reporting, notification, and securities
count requirements, commenters also
are invited to address any differences
between UK regulatory requirements
and frameworks and either the German
requirements and frameworks that
formed the basis for the Commission’s
conditional grant of substituted
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compliance for Germany or the French
requirements and frameworks that
formed the basis for the Commission’s
proposed conditional grant of
substituted compliance for France.212
Would the responses to any of the
questions about recordkeeping,
reporting, notification, and securities
count requirements that the
Commission asked in connection with
the German Notice and Proposed Order
and the French Notice and Proposed
Order differ if those questions applied
to UK regulatory requirements and
frameworks?
G. Supervisory and Enforcement Issues
The Commission further requests
comment regarding how to weigh
considerations regarding supervisory
and enforcement effectiveness in the UK
as part of the comparability
assessments. Commenters particularly
are invited to address relevant issues
regarding the effectiveness of UK
supervision and enforcement over firms
that may register with the Commission
as SBS Entities, including but not
limited to issues regarding:
• UK supervisory and enforcement
authority, supervisory inspection
practices and the use of alternative
supervisory tools, and enforcement tools
and practices;
• UK supervisory and enforcement
effectiveness with respect to derivatives
such as security-based swaps; and
• UK supervision and enforcement in
the cross-border context (e.g., any
differences between the oversight of
firms’ businesses within the UK and the
oversight of activities and branches
outside of the UK, including within the
United States).
By the Commission.
Dated: April 5, 2021.
Vanessa A. Countryman,
Secretary.
Attachment A
It is hereby determined and ordered,
pursuant to rule 3a71–6 under the
Exchange Act, that a Covered Entity (as
defined in paragraph (g)(1) of this
Order) may satisfy the requirements
under the Exchange Act that are
addressed in paragraphs (b) through (f)
of this Order so long as the Covered
Entity is subject to and complies with
relevant requirements of the United
Kingdom and with the conditions to this
Order, as amended or superseded from
time to time.
212 See generally German Substituted Compliance
Order, 85 FR at 85695–97; French Notice and
Proposed Order, 85 FR 85730–34.
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(a) General Conditions
This Order is subject to the following
general conditions, in addition to the
conditions specified in paragraphs (b)
through (f):
(1) Activities as UK ‘‘regulated
activities.’’ For each condition in
paragraphs (b) through (f) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of FCA SYSC 4, 5, 6, 7, 9
and/or 10, PRA General Organisational
Requirements, PRA Recordkeeping
Rules, PRA Remuneration Rules, PRA
Risk Control Rules and/or MLR 2017,
the Covered Entity’s relevant securitybased swap activities constitute
‘‘regulated activities’’ as defined for
purposes of the relevant UK provisions,
are carried on by the Covered Entity
from an establishment in the United
Kingdom and fall within the scope of
the Covered Entity’s authorization from
the FCA and/or the PRA to conduct
regulated activities in the United
Kingdom.
(2) Activities as UK MiFID
‘‘investment services or activities.’’ For
each condition in paragraphs (b)
through (f) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
FCA PROD 3 and/or UK MiFID Org Reg,
the Covered Entity’s relevant securitybased swap activities constitute
‘‘investment services or activities,’’ as
defined in the FCA Handbook Glossary,
are carried on by the Covered Entity
from an establishment in the United
Kingdom and fall within the scope of
the Covered Entity’s authorization from
the FCA and/or PRA to conduct
regulated activities in the United
Kingdom.
(3) Activities as UK ‘‘MiFID or
equivalent third country business.’’ For
each condition in paragraphs (b)
through (f) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
FCA COBS 2, 4, 6, 8A, 9A, 14 and/or
14A, the Covered Entity’s relevant
security-based swap activities constitute
‘‘MiFID or equivalent third country
business,’’ as defined in the FCA
Handbook Glossary, are carried on by
the Covered Entity from an
establishment in the United Kingdom
and fall within the scope of the Covered
Entity’s authorization from the FCA
and/or PRA to conduct regulated
activities in the United Kingdom.
(4) Activities as UK ‘‘designated
investment business.’’ For each
condition in paragraphs (b) through (f)
of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of FCA
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COBS 11, the Covered Entity’s relevant
security-based swap activities constitute
‘‘MiFID business’’ that is also
‘‘designated investment business,’’ each
as defined in the FCA Handbook
Glossary; are carried on by the Covered
Entity from an establishment in the
United Kingdom; and fall within the
scope of the Covered Entity’s
authorization from the FCA and/or PRA
to conduct regulated activities in the
United Kingdom.
(5) Activities as UK ‘‘MiFID business.’’
For each condition in paragraphs (b)
through (f) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
FCA CASS 6 and/or 7, the Covered
Entity is not an ICVC as defined in the
FCA Handbook Glossary and the
Covered Entity’s relevant security-based
swap activities constitute ‘‘regulated
activities’’ as defined for purposes of the
relevant UK provisions and ‘‘MiFID
business’’ as defined in the FCA
Handbook Glossary; are carried on by
the Covered Entity from an
establishment in the United Kingdom
and fall within the scope of the Covered
Entity’s authorization from the FCA
and/or the PRA to conduct regulated
activities in the United Kingdom.
(6) Activities covered by FCA SYSC
10A. For each condition in paragraphs
(b) through (f) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
FCA SYSC 10A, the Covered Entity’s
relevant security-based swap activities
constitute activities described in FCA
SYSC 10A.1.1(2)(a), (b) and/or (c); are
carried on by the Covered Entity from
an establishment in the United Kingdom
and fall within the scope of the Covered
Entity’s authorization from the FCA
and/or the PRA to conduct regulated
activities in the United Kingdom.
(7) Counterparties as UK MiFID
‘‘clients.’’ For each condition in
paragraphs (b) through (f) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of FCA CASS 6 and/or 7,
FCA COBS 2, 4, 6, 8A, 9A, 11, 14 and/
or 14A, FCA PROD 3, FCA SYSC 10.1.8,
FCA SYSC 10A and/or UK MiFID Org
Reg, the relevant counterparty (or
potential counterparty) to the Covered
Entity is a ‘‘client’’ (or potential
‘‘client’’), as defined in COBS 3.2.1R.
(8) Security-based swaps as UK MiFID
‘‘financial instruments.’’ For each
condition in paragraphs (b) through (f)
of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of FCA
CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A,
9A, 11, 14 and/or 14A, FCA PROD 3,
FCA SYSC 10A, UK MAR, UK MAR
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Investment Recommendations
Regulation and/or UK MiFID Org Reg,
the relevant security-based swap is a
‘‘financial instrument,’’ as defined in
Part 1 of Schedule 2 of the UK
Regulated Activities Order.
(9) Covered Entity as UK CRD/CRR
‘‘institution.’’ For each condition in
paragraph (b) through (f) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of UK CRR, the Covered
Entity is an ‘‘institution,’’ as defined in
UK CRR article 4(1)(3).
(10) Covered Entity as UK ‘‘common
platform firm’’ or ‘‘third country firm.’’
For each condition in paragraph (b)
through (f) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
FCA SYSC 4, 5, 6, 7, 9 and/or 10, the
Covered Entity is either a ‘‘common
platform firm’’ (other than a ‘‘UCITS
investment firm’’) or a ‘‘third country
firm,’’ each as defined in the FCA
Handbook Glossary.
(11) Covered Entity as UK ‘‘IFPRU
investment firm.’’ For each condition in
paragraph (b) through (f) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of FCA SYSC 19A, FCA
IFPRU and/or FCA BIPRU, the Covered
Entity is an ‘‘IFPRU investment firm,’’
as defined in the FCA Handbook
Glossary.
(12) Covered Entity as ‘‘UK bank’’ or
‘‘UK designated investment firm.’’ For
each condition in paragraph (b) through
(f) of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of FCA
SYSC 19D, PRA Internal Capital
Adequacy Assessment Rules, PRA
Internal Liquidity Adequacy
Assessment Rules, PRA General
Organisational Requirements, PRA
Remuneration Rules and/or PRA Risk
Control Rules, the Covered Entity is a
‘‘UK bank’’ or ‘‘UK designated
investment firm,’’ each as defined in the
FCA Handbook Glossary (in the case of
a provision of FCA SYSC 19D) or as
defined in the PRA Rulebook Glossary
(in the case of a provision of a PRA
rule).
(13) Covered Entity’s counterparties
as UK EMIR ‘‘counterparties.’’ For each
condition in paragraphs (b) through (e)
of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of UK
EMIR, UK EMIR RTS and/or UK EMIR
Margin RTS, if the counterparty to the
Covered Entity is not a ‘‘financial
counterparty’’ or ‘‘non-financial
counterparty’’ as defined in UK EMIR
articles 2(8) or 2(9), respectively, the
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Covered Entity complies with the
applicable condition of this Order:
(i) As if the counterparty were a
financial counterparty, if the Covered
Entity reasonably determines that the
counterparty would be a financial
counterparty if it were established in the
UK and authorized by an appropriate
UK authority, or, otherwise, as if the
counterparty were a non-financial
counterparty; and
(ii) Without regard to the application
of UK EMIR article 13.
(14) Security-based swap status under
UK EMIR. For each condition in
paragraphs (b) through (e) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of UK EMIR and/or other UK
requirements adopted pursuant to those
provisions, either:
(i) The relevant security-based swap is
an ‘‘OTC derivative’’ or ‘‘OTC derivative
contract,’’ as defined in UK EMIR article
2(7), that has not been cleared by a CCP
and otherwise is subject to the
provisions of UK EMIR article 11, UK
EMIR RTS articles 11 through 15, and
UK EMIR Margin RTS article 2; or
(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 UK.
(15) Memorandum of Understanding
with the FCA and the PRA. The
Commission has a supervisory and
enforcement memorandum of
understanding and/or other arrangement
with the FCA and the PRA addressing
cooperation with respect to this Order at
the time the Covered Entity complies
with the relevant requirements under
the Exchange Act via compliance with
one or more provisions of this Order.
(16) Notice to Commission. A Covered
Entity relying on this Order must
provide notice of its intent to rely on
this Order by notifying the Commission
in writing. Such notice must be sent to
the Commission in the manner specified
on the Commission’s website. The
notice must include the contact
information of an individual who can
provide further information about the
matter that is the subject of the notice.
The notice must identify each specific
substituted compliance determination
within paragraphs (b) through (f) of the
Order for which the Covered Entity
intends to apply substituted
compliance. A Covered Entity must
promptly provide an amended notice if
it modifies its reliance on the
substituted compliance determinations
in this Order.
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(b) Substituted Compliance in
Connection With Risk Control
Requirements
same basis as it provides those reports
to the FCA pursuant to UK EMIR RTS
article 15(2).
(4) Portfolio compression. The
requirements of Exchange Act rule
15Fi–4, provided that the Covered
Entity is subject to and complies with
the requirements of UK EMIR RTS
article 14.
(5) Trading relationship
documentation. The requirements of
Exchange Act rule 15Fi–5, other than
paragraph (b)(5) to that rule when the
counterparty is a U.S. person, provided
that the Covered Entity is subject to and
complies with the requirements of UK
EMIR article 11(1)(a), UK EMIR RTS
article 12 and UK EMIR Margin RTS
article 2.
This Order extends to the following
provisions related to risk control:
(1) Internal risk management. The
requirements of Exchange Act section
15F(j)(2) and related aspects of
Exchange Act rule 15Fh–3(h)(2)(iii)(I),
provided that the Covered Entity is
subject to and complies with the
requirements of:
(i) Either {FCA IFPRU 2.2.7R(2),
2.2.17R through 2.2.28R, 2.2.30R and
2.2.32R through 2.2.35R; and FCA
BIPRU 12.3.4R, 12.3.5R, 12.3.7R,
12.3.8R, 12.3.22AR, 12.3.22BR,
12.3.27R, 12.4.–2R, 12.4.–1R, 12.4.5AR,
12.4.10R and 12.4.11R} or {PRA Internal
Capital Adequacy Assessment Rules 4.1 (c) Substituted Compliance in
Connection With Capital and Margin
through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1
through 8.5, 9.1, 10.1, 10.2 and 11.1
(1) Capital. The requirements of
through 11.3; and PRA Internal
Exchange Act section 15F(e) and
Liquidity Adequacy Assessment Rules
Exchange Act rules 18a–1, and 18a–1a
3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2, through d, provided that:
11.4, 12.1, 12.3, and 12.4};
(i) The Covered Entity is subject to
(ii) FCA PRIN 2.1.1R(3);
and complies with the capital
(iii) FCA SYSC 4.1.1R(1), 4.1.2R,
requirements of: The UK CRR, including
7.1.4R, 7.1.17R, 7.1.18R, 7.1.18BR,
recitals 40, 43 and 87, and articles 26,
7.1.19R, 7.1.20R, 7.1.21R and 7.1.22R
28, 50 through 52, 61, 63, 92, 111,
and, if the Covered Entity is a UK bank
113(1), 114 through 122, 143, 153(8),
or UK designated investment firm, also
177(2), 283, 290, 300 through 311,
PRA General Organisational
312(2), 362 through 377, 382 through
Requirements Rule 2.1 and 2.2 and PRA 383, 412(1), 413(1), 416(1), 427(1), 413,
Risk Control Rules 2.3, 2.7 and 3.1
429, 430, and 499; UK MiFID Org Reg
through 3.5;
article 23; UK EMIR Margin RTS, recital
(iv) Either {FCA SYSC 19A.2.1R} or
31, articles 2, 3(b), 7, and 19(1)(d) and
{FCA SYSC 19D.2.1R and PRA
(e), (3) and (8); FCA SYSC 4.1.1R, 7.1.4R
Remuneration Rule 6.2};
and 7.1.18R; Chapters 2,7, 10, 11 of FCA
(v) Either {FSMA schedule 6 part 2D
IFPRU; Chapter 12 of FCA BIPRU; FCA
and FCA COND 2.4.1A} or {FSMA
PRIN; Client asset protection
schedule 6 parts 3C and 5D, FCA COND requirements under the FCA CASS; PRA
2.4.1C and PRA Fundamental Rules 3
General Organisational Requirements
through 6};
Rule 2.1; PRA Risk Control Rules 2.3
(vi) UK CRR articles 286 through 288
and 3.1(1); PRA Capital Buffers Rules;
and 293;
PRA Internal Capital Adequacy
(vii) UK EMIR Margin RTS article 2;
Assessment Rules; PRA Internal
and
Liquidity Adequacy Assessment Rules;
(viii) UK MiFID Org Reg articles 21
PRA Liquidity Coverage Requirement—
through 24.
UK Designated Investment Firms Rules;
(2) Trade acknowledgement and
PRA Notifications Rules; Banking Act
verification. The requirements of
2009; Capital Requirements Regulations
Exchange Act rule 15Fi–2, provided that 2013; Capital Requirements (Capital
the Covered Entity is subject to and
Buffers and Macro-prudential Measures)
complies with the requirements of UK
Regulations 2014; Part 8 and Part 9 of
EMIR article 11(1)(a) and UK EMIR RTS the Bank Recovery and Resolution (No
article 12.
2) Order 2014; Bank of England Act
(3) Portfolio reconciliation and
1998 (Macro-prudential Measures) (No
dispute reporting. The requirements of
2) Order 2015; and Parts 4A and 12A of
Exchange Act rule 15Fi–3, provided
FSMA; and
that:
(ii) The Covered Entity:
(A) Maintains an amount of assets that
(i) The Covered Entity is subject to
are allowable under Exchange Act rule
and complies with the requirements of
18a–1, after applying applicable
UK EMIR article 11(1)(b) and UK EMIR
haircuts under the Basel capital
RTS articles 13 and 15;
standard, that equals or exceeds the
(ii) The Covered Entity provides the
Covered Entity’s current liabilities
Commission with reports regarding
coming due in the next 365 days;
disputes between counterparties on the
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18413
(B) Makes a quarterly record listing:
(1) The assets maintained pursuant to
paragraph (c)(1)(ii)(A), their value, and
the amount of their applicable haircuts;
(2) The aggregate amount of the
liabilities coming due in the next 365
days; and
(C) Maintains at least $100 million of
equity capital composed of ‘‘highly
liquid assets’’ as defined in the Basel
capital standard; and
(D) Includes its most recent statement
of financial condition filed with its local
supervisor whether audited or
unaudited with its initial written notice
to the Commission of its intent to rely
on substituted compliance under
condition (a)(16) above.
(2) Margin. The requirements of
Exchange Act section 15F(e) and
Exchange Act rule 18a–3, provided that
the Covered Entity is subject to and
complies with the requirements of: UK
EMIR article 11; UK EMIR Margin RTS;
UK CRR articles 103, 105(3); 105(10);
111(2), 224, 285, 286, 286(7), 290, 295,
296(2)(b), 297(1), 297(3), and 298(1); UK
MiFID Org Reg article 23(1); FCA SYSC
4.1.1R; FCA IFPRU 2.2.18R; PRA
General Organisational Requirements
Rule 2.1; and PRA Internal Capital
Adequacy Assessment Rule 4.2.
(d) Substituted Compliance in
Connection With Internal Supervision
and Compliance Requirements and
Certain Exchange Act Section 15F(j)
Requirements
This Order extends to the following
provisions related to internal
supervision and compliance and
Exchange Act section 15F(j)
requirements:
(1) Internal supervision. The
requirements of Exchange Act rule
15Fh–3(h) and Exchange Act sections
15F(j)(4)(A) and (j)(5), provided that:
(i) The Covered Entity is subject to
and complies with the requirements
identified in paragraph (d)(3) to this
Order;
(ii) The Covered Entity complies with
paragraph (d)(4) to this Order; and
(iii) This paragraph (d) does not
extend to the requirements of paragraph
(h)(2)(iii)(I) to rule 15Fh–3 to the extent
those requirements pertain to
compliance with Exchange Act sections
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to
the general and supporting provisions of
paragraph (h) to rule 15Fh–3 in
connection with those Exchange Act
sections.
(2) Chief compliance officers. The
requirements of Exchange Act section
15F(k) and Exchange Act rule 15Fk–1,
provided that:
(i) The Covered Entity is subject to
and complies with the requirements
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identified in paragraph (d)(3) to this
Order;
(ii) All reports required pursuant to
UK MiFID Org Reg article 22(2)(c) must
also:
(A) Be provided to the Commission at
least annually and in the English
language;
(B) Include a certification that, under
penalty of law, the report is accurate
and complete; and
(C) Address the firm’s compliance
with other applicable conditions to this
Order in connection with requirements
for which the Covered Entity is relying
on this Order.
(3) Applicable supervisory and
compliance requirements. Paragraphs
(d)(1) and (d)(2) are conditioned on the
Covered Entity being subject to and
complying with the following
requirements:
(i) FCA CASS 6.2.1R, 7.11.1R and
7.12.1R;
(ii) FCA COBS 11.7A.3R;
(iii) Either {FCA IFPRU 2.2.7R(2),
2.2.17R through 2.2.28R, 2.2.30R and
2.2.32R through 2.2.35R; and FCA
BIPRU 12.3.4R, 12.3.5R, 12.3.7R,
12.3.8R, 12.3.22AR, 12.3.22BR,
12.3.27R, 12.4.–2R, 12.4.–1R, 12.4.5AR,
12.4.10R and 12.4.11R} or {PRA Internal
Capital Adequacy Assessment Rules 4.1
through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1
through 8.5, 9.1, 10.1, 10.2 and 11.1
through 11.3; and PRA Internal
Liquidity Adequacy Assessment Rules
3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2,
11.4, 12.1, 12.3 and 12.4};
(iv) FCA PRIN 2.1.1R(3);
(v) FCA SYSC 4.1.1R(1), 4.1.2R,
4.3A.1R, 4.3A.3R, 4.3A.4R, 7.1.4R,
7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R,
7.1.20R, 7.1.21R, 7.1.22R, 9.1.1AR,
10.1.3R, 10.1.7R, 10.1.8R, 10A.1.6R,
10A.1.8R, 10A.1.11R and 24.2.6R(8)
and, if the Covered Entity is a UK bank
or UK designated investment firm, also
PRA Allocation of Responsibilities Rule
4.1(16); PRA General Organisational
Requirements Rules 2.1, 2.2 and 5.1
through 5.3; PRA Record Keeping Rule
2.1; PRA Risk Control Rules 2.3, 2.7 and
3.1 through 3.5; and PRA Senior
Management Functions Rule 8.2;
(vi) Either {FCA SYSC 19A.2.1R,
19A.3.1R(1), 19A.3.3R, 19A.3.7R
through 19A.3.11R, 19A.3.14R,
19A.3.16R and 19A.3.35AR} or {FCA
SYSC 19D.2.1R, 19D.3.1R, 19D.3.3R,
19D.3.7R through 19D.3.11R, 19D.3.15R,
19D.3.17R and 19D.3.37R and PRA
Remuneration Rules 3.1, 4.2, 5.1, 6.2,
6.3, 6.4, 7.2, 7.3, 8.1, 8.2 and 15.2};
(vii) Either {FSMA schedule 6 part 2D
and FCA COND 2.4.1A} or {FSMA
schedule 6 parts 3C and 5D, FCA COND
2.4.1C and PRA Fundamental Rules 3
through 6};
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(viii) UK CRR articles 286 through 288
and 293;
(ix) UK EMIR Margin RTS article 2;
and
(x) UK MiFID Org Reg articles 21
through 37 and 72 through 76 and
Annex IV.
(4) Additional condition to paragraph
(d)(1). Paragraph (d)(1) further is
conditioned on the requirement that the
Covered Entity complies with the
provisions specified in paragraph (d)(3)
as if those provisions also require
compliance with:
(i) Applicable requirements under the
Exchange Act; and
(ii) The other applicable conditions to
this Order in connection with
requirements for which the Covered
Entity is relying on this Order.
(e) Substituted Compliance in
Connection With Counterparty
Protection Requirements
This Order extends to the following
provisions related to counterparty
protection:
(1) Disclosure of information
regarding material risks and
characteristics. The requirements of
Exchange Act rule 15Fh–3(b) relating to
disclosure of material risks and
characteristics of one or more securitybased swaps subject thereto, provided
that the Covered Entity, in relation to
that security-based swap, is subject to
and complies with the requirements of:
(i) FCA COBS 2.2A.2R, 6.1ZA.11R,
6.1ZA.12R, 6.2B.33R, 9A.3.6R and
14.3A.3R; and
(ii) Either {UK MiFID Org Reg articles
48 through 50} or {FCA COBS
6.1ZA.9UK, 6.1ZA.14UK, and
14.3A.5UK}.
(2) Disclosure of information
regarding material incentives or
conflicts of interest. The requirements of
Exchange Act rule 15Fh–3(b) relating to
disclosure of material incentives or
conflicts of interest that a Covered
Entity may have in connection with one
or more security-based swaps subject
thereto, provided that the Covered
Entity, in relation to that security-based
swap, is subject to and complies with
the requirements of either:
(i) FCA SYSC 10.1.8R and UK MiFID
Org Reg articles 33 to 35;
(ii) FCA COBS 2.3A.5R, 2.3A.6R,
2.3A.7E and 2.3A.10R through
2.3A.14R; or
(iii) UK MAR article 20(1) and UK
MAR Investment Recommendations
Regulation articles 5 and 6.
(3) ‘‘Know your counterparty.’’ The
requirements of Exchange Act rule
15Fh–3(e), as applied to one or more
security-based swap counterparties
subject thereto, provided that the
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Covered Entity, in relation to the
relevant security-based swap
counterparty, is subject to and complies
with the requirements of:
(i) FCA SYSC 6.1.1R;
(ii) UK MiFID Org Reg articles 21, 22,
25, 26 and applicable parts of Annex I;
(iii) FCA SYSC 4.1.1R(1);
(iv) Either {FCA IFPRU 2.2.7R(2) and
2.2.32R} or {PRA General
Organisational Requirement 2.1 and
PRA Internal Capital Adequacy
Assessment Rule 10.1};
(v) MLR 2017 Regulations 27 and 28;
and
(v) MLR 2017 Regulations 19(1)
through (3), as applied to policies,
controls and procedures regarding
customer due diligence.
(4) Suitability. The requirements of
Exchange Act rule 15Fh–3(f), as applied
to one or more recommendations of a
security-based swap or trading strategy
involving a security-based swap subject
thereto, provided that:
(i) The Covered Entity, in relation to
the relevant recommendation, is subject
to and complies with the requirements
of:
(A) FCA COBS 4.2.1R, 9A.2.1R and
9A.1.16R;
(B) FCA PROD 3.2.1R and 3.3.1R;
(C) FCA SYSC 5.1.5AAR and
5.1.5ABR; and
(D) UK MiFID Org Reg articles
21(1)(b) and (d), 54 and 55; and
(ii) The counterparty to which the
Covered Entity makes the
recommendation is a ‘‘professional
client’’ mentioned in FCA COBS 3.5.2R
and is not a ‘‘special entity’’ as defined
in Exchange Act section 15F(h)(2)(C)
and Exchange Act rule 15Fh–2(d).
(5) Fair and balanced
communications. The requirements of
Exchange Act rule 15Fh–3(g), as applied
to one or more communications subject
thereto, provided that the Covered
Entity, in relation to the relevant
communication, is subject to and
complies with the requirements of:
(i) Either {FCA COBS 2.1.1R and FCA
COBS 4.2.1R} or {FCA COBS 2.1.1AR
and FCA COBS 4.2.1R};
(ii) FCA COBS 2.2A.2R, 2.2A.3R,
6.1ZA.11R, 6.1ZA.12R, 6.1ZA.13R,
6.2B.33R, 6.2B.34R, 9A.3.6R and
14.3A.3R;
(iii) Either {UK MiFID Org Reg articles
46 through 48} or {FCA COBS
4.5A.9UK, 4.7.–1AUK, 6.1ZA.5UK,
6.1ZA.8UK, 6.1ZA.17UK, 6.1ZA.19UK,
6.1ZA.20UK, 8A.1.5UK to 8A.1.7UK,
14.3A.5UK, 14.3A.7UK and
14.3A.9UK};
(iv) UK MAR Investment
Recommendations Regulation articles 3
and 4; and
(v) UK MAR articles 12(1)(c), 15 and
20(1).
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(6) Daily mark disclosure. The
requirements of Exchange Act rule
15Fh–3(c), as applied to one or more
security-based swaps subject thereto,
provided that the Covered Entity is
required to reconcile, and does
reconcile, the portfolio containing the
relevant security-based swap on each
business day pursuant to UK EMIR
articles 11(1)(b) and 11(2) and UK EMIR
RTS article 13.
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(f) Substituted Compliance in
Connection With Recordkeeping,
Reporting, Notification, and Securities
Count Requirements
This Order extends to the following
provisions that apply to a Covered
Entity related to recordkeeping,
reporting, notification and securities
counts:
(1)(i) Make and keep current certain
records. The requirements of the
following provisions of Exchange Act
rule 18a–5, provided that the Covered
Entity complies with the relevant
conditions in this paragraph (f)(1)(i) and
with the applicable conditions in
paragraph (f)(1)(ii):
(A) The requirements of Exchange Act
rule 18a–5(a)(1) or (b)(1), as applicable,
provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK MiFID Org Reg articles 74, 75, 76
and Annex IV; UK MiFIR article 25(1);
and FCA SYSC 10A.1.6R, 10A.1.8R; and
(2) With respect to the requirements
of Exchange Act rule 18a–5(a)(1), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order.
(B) The requirements of Exchange Act
rule 18a–5(a)(2), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA IFPRU 2.2.7R(1); PRA Internal
Capital Adequacy Assessment Rule 3.1;
FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A–1R, 6.3.6AR, 6.6.2R, 6.6.3R,
6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK MiFID
Org Reg articles 72(1), 74 and 75; and
UK EMIR article 39(4); and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(C) The requirements of Exchange Act
rule 18a–5(a)(3) or (b)(2), as applicable,
provided that:
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(1) The Covered Entity is subject to
and complies with the requirements of
FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A–1R, 6.3.6AR, 6.6.4R, 6.6.5G,
6.6.2R, 6.6.3R, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK MiFID
Org Reg articles 72(1), 74 and 75; and
UK EMIR article 39(4); and
(2) With respect to the requirements
of Exchange Act rule 18a–5(a)(3), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(D) The requirements of Exchange Act
rule 18a–5(a)(4) or (b)(3), as applicable,
provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK CRR articles 103 and 103(b)(ii); FCA
COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; PRA Fundamental Rules 2 and
6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; UK MiFID Org
Reg articles 59, 74, 75 and 76 and
Annex IV; UK MiFIR article 25(1); FCA
SYSC 9.1.1AR, 10A.1.6R and 10A.1.8R;
FCA COBS 8A.1.9R, 9A.2.1R, 9.1.1AR,
16A.2.1 R and 16A.3.1UK; UK EMIR
articles 9(2) and 11(1)(a); MLR 2017
Regulations 28(10) and (18) and 28
through 30; and FCA FCG 3.1.7; and
(2) With respect to the requirements
of Exchange Act rule 18a–5(a)(4), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(E) The requirements of Exchange Act
rule 18a–5(b)(4) provided that the
Covered Entity is subject to and
complies with the requirements of FCA
COBS 8A.1.9R, 16A.2.1 R, 16A.3.1UK;
UK MiFID Org Reg article 59; FCA SYSC
9.1.1AR; and UK EMIR articles 9(2) and
11(1)(a);
(F) The requirements of Exchange Act
rule 18a–5(a)(5) or (b)(5), as applicable,
provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK MiFID Org Reg articles 74, 75, 76
and Annex IV; UK MiFIR article 25(1);
FCA SYSC 10A.1.6R, 10A.1.8R; and UK
MiFID Org Reg article 76; and
(2) With respect to the requirements
of Exchange Act rule 18a–5(a)(5), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
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(G) The requirements of Exchange Act
rules 18a–5(a)(6) and (a)(15) or (b)(6)
and (b)(11), as applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
PRA Recordkeeping Rule 2.1; UK MiFID
Org Reg articles 59, 74, 75 76 and Annex
IV; UK MiFIR article 25(1); FCA SYSC
9.1.1AR, 10A.1.6R and 10A.1.8R; FCA
COBS 8A.1.9R, 9.1.1AR, 9A.2.1R,
16A.2.1R and 16A.3.1UK; UK EMIR
articles 9(2) and 11(1)(a); MLR 2017
Regulations 28(10) and (18) and 28–30;
and FCA FCG 3.1.7;
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act rule
15Fi–2 pursuant to this Order; and
(3) This Order does not extend to the
requirements of Exchange Act rule 18a–
5(a)(6) and (b)(6) to make and keep
current books and records of
confirmations of purchases and sales of
securities other than security-based
swaps;
(H) The requirements of Exchange Act
rule 18a–5(a)(7) or (b)(7), as applicable,
provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK MiFIR article 25(1); MLR 2017
Regulations 28 through 30; FCA FCG
3.1.7; FCA COBS 8A.1.9R, 9.1.1AR,
9A.2.1R, 16A.2.1 R and 16A.3.1UK; FCA
SYSC 9.1.1AR, 10A.1.6R and 10A.1.8R;
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
PRA Recordkeeping Rule 2.1; UK MiFID
Org Reg articles 59, 74, 75 and 76 and
Annex IV; and UK EMIR articles 9(2)
and 11(1)(a); and
(2) With respect to the requirements
of Exchange Act rule 18a–5(a)(7), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(I) The requirements of Exchange Act
rule 18a–5(a)(8), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
PRA Recordkeeping Rule 2.1; UK MiFID
Org Reg articles 59, 72(1), 74, 75 76 and
Annex IV; UK MiFIR article 25(1); FCA
SYSC 9.1.1AR, 10A.1.6R and 10A.1.8R;
FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R,
16A.2.1 R and 16A.3.1UK; UK EMIR
articles 9(2) and 11(1)(a); MLR 2017
Regulations 28(10) and (18) and 28
through 30; and FCA FCG 3.1.7; and
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(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order.;
(J) The requirements of Exchange Act
rule 18a–5(a)(9), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA IFPRU 2.2.7R(1); PRA Internal
Capital Adequacy Assessment Rule 3.1;
FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A–1R, 6.3.6AR, 6.6.2R, 6.6.3R,
6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK EMIR
article 39(4); and UK MiFID Org Reg
articles 72(1), 74, and 75;
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
and
(3) This Order does not extend to the
requirements of Exchange Act rule 18a–
5(a)(9) relating to Exchange Act rule
18a–2;
(K) The requirements of Exchange Act
rule 18a–5(a)(10) and (b)(8), provided
that the Covered Entity is subject to and
complies with the requirements of
FSMA sections 63F(2), 63F(5), 63(2A),
60A(2) and (5); PRA Fitness and
Propriety Rules 2.6 and 2.9; SMR
Applications and Notifications Rules
2.1, 2.2 and 2.6; PRA Certification
Rules; PRA Fundamental Rules 2 and 6;
PRA Recordkeeping Rule 2.1; PRA
Internal Capital Adequacy Assessment
Rule 3.1; PRA General Organisational
Requirements Rules 5.1 and 5.2; FCA
SUP 3.10.4R through 3.10.7R,
10C.10.8D, 10C.10.8AD, 10C.15,
10C.10.14G, 10C.10.16R, 10C.10.21G
and 10C Annex 3D; FCA SYSC 4.3A.1R.,
4.3A.3R, 4.3A.3R, 10.1.7R, 27 and
27.2.5G; FCA FIT 2.1, 2.2 and 2.3; UK
MiFID Org Reg articles 21(1)(a), 35;
(L) The requirements of Exchange Act
rule 18a–5(a)(12), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK CRR articles 103, 105(3) and
105(10); FCA IFPRU 2.2.7R(1); PRA
Internal Capital Adequacy Assessment
Rule 3.1; FCA CASS 6.2.1R, 6.2.2R,
6.3.2AR, 6.3.4A–1R, 6.3.6AR, 6.6.2R,
6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R,
6.6.8R, 7.12.1R, 7.12.2R, 7.13.12R,
7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R,
7.15.8R, 7.15.9R, 7.15.20R, 7.15.21G,
10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK
EMIR article 39(4); and MiFID Org Reg.
articles 72(1), 74 and 75;
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(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rule 18a–3
pursuant to this Order;
(M) The requirements of Exchange
Act rule 18a–5(a)(17) and (b)(13), as
applicable, regarding one or more
provisions of Exchange Act rules 15Fh–
3 or 15Fk–1 for which substituted
compliance is available under this
Order, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
PRA Recordkeeping Rule 2.1; FCA
SYSC 9.1.1AR and 10A.1.6R; UK MiFID
Org Reg articles 72, 73, 76(8)(b) and
Annex I; and UK EMIR article 39(5), in
each case with respect to the relevant
security-based swap or activity;
(2) With respect to the portion of
Exchange Act rule 18a–5(a)(17) and
(b)(13) that relates to Exchange Act rule
15Fh–3, the Covered Entity applies
substituted compliance for such
business conduct standard(s) of
Exchange Act rule 15Fh–3 pursuant to
this Order, as applicable, with respect to
the relevant security-based swap or
activity; and
(3) With respect to the portion of
Exchange Act rule 18a–5(a)(17) and
(b)(13) that relates to Exchange Act rule
15Fk–1, the Covered Entity applies
substituted compliance for Exchange
Act section 15F(k) and Exchange Act
rule 15Fk–1 pursuant to this Order;
(N) The requirements of Exchange Act
rule 18a–5(a)(18)(i) and (ii) or (b)(14)(i)
and (ii), as applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK EMIR article 11(1)(b); and UK EMIR
RTS article 15(1); and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rule 15Fi–3 pursuant to this Order;
and
(O) The requirements of Exchange Act
rule 18a–5(a)(18)(iii) or (b)(14)(iii), as
applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK EMIR article 11(1)(b); and UK EMIR
RTS article 15(1), in each case with
respect to such security-based swap
portfolio(s); and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rule 15Fi–4 pursuant to this Order.
(ii) Paragraph (f)(1)(i) is subject to the
following further conditions:
(A) Paragraphs (f)(1)(i)(A) through (D)
and (H) are subject to the condition that
the Covered Entity preserves all of the
data elements necessary to create the
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records required by the applicable
Exchange Act rules cited in such
paragraphs and upon request furnishes
promptly to representatives of the
Commission the records required by
those rules;
(B) A Covered Entity may apply the
substituted compliance determination
in paragraph (f)(1)(i)(M) to records of
compliance with Exchange Act rule
15Fh–3(b), (c), (e), (f) and (g) in respect
of one or more security-based swaps or
activities related to security-based
swaps; and
(C) This Order does not extend to the
requirements of Exchange Act rule 18a–
5(a)(13), (a)(14), (a)(16), (b)(9), (b)(10) or
(b)(12).
(2)(i) Preserve certain records. The
requirements of the following
provisions of Exchange Act rule 18a–6,
provided that the Covered Entity
complies with the relevant conditions in
this paragraph (f)(2)(i) and with the
applicable conditions in paragraph
(f)(2)(ii):
(A) The requirements of Exchange Act
rule 18a–6(a)(1) or (a)(2), as applicable,
provided that the Covered Entity is
subject to and complies with the
requirements of UK MiFID Org Reg
articles 59, 72(1), 74, 75, 76 and Annex
IV; FCA SYSC 9.1.1AR, 9.1.2R,
10A.1.6R and 10A.1.8R; FCA IFPRU
2.2.7R(1); PRA Internal Capital
Adequacy Assessment Rule 3.1; PRA
Fundamental Rules 2 and 6; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
COBS 8A.1.9R, 9.1.1AR, 9A.2.1R,
16A.2.1 R and 16A.3.1UK; FCA PRIN
2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA
CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A–
1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R,
6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK CRR
articles 103 and 103(b)(ii); FCA COND
at paragraphs 2C, 2D, 3B, 3C, 5D and 5F;
MLR 2017 Regulations 28 through 30;
UK MiFID Org Reg article 72(1), 74 and
75; UK MiFIR article 25(1); and UK
EMIR article 9(2), 39(4) and 11(1)(a);
(B) The requirements of Exchange Act
rule 18a–6(b)(1)(i) or (b)(2)(i), as
applicable, provided that the Covered
Entity is subject to and complies with
the requirements of UK MiFID Org Reg
articles 59, 72(1), 74, 75, 76 and Annex
IV; FCA SYSC 9.1.1AR, 9.1.2R,
10A.1.6R and 10A.1.8R; FCA IFPRU
2.2.7R(1); PRA Internal Capital
Adequacy Assessment Rule 3.1; PRA
Fundamental Rules 2 and 6; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
COBS 8A.1.9R, 9.1.1AR, 9A.2.1R,
16A.2.1 R and 16A.3.1UK; FCA PRIN
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2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA
CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A–
1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R,
6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK CRR
articles 103 and 103(b)(ii); FCA COND
at paragraphs 2C, 2D, 3B, 3C, 5D and 5F;
MLR 2017 Regulations 28(10) and (18)
and 28 through 30; UK MiFID Org Reg
articles 72(1), 74 and 75; UK MiFIR
article 25(1); and UK EMIR articles 9(2),
39(4) and 11(1)(a);
(C) The requirements of Exchange Act
rule 18a–6(b)(1)(ii) and (iii), provided
that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA IFPRU 2.2.7R(1); PRA Internal
Capital Adequacy Assessment Rule 3.1;
FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A–1R, 6.3.6AR, 6.6.2R, 6.6.3R,
6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK MiFID
Org Reg articles 72(1), 74 and 75; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
SYSC 9.1.1AR and 9.1.2R; UK EMIR
articles 9(2), 25(1) and 39(4); FCA
COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; and PRA Fundamental Rules 2
and 6; and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(D) The requirements of Exchange Act
rule 18a–6(b)(1)(iv) or (b)(2)(ii), as
applicable, provided that the Covered
Entity is subject to and complies with
the requirements of FCA SYSC 9.1.1AR,
10A.1.6R and 10A.1.8R; FCA COND at
paragraphs 2C, 2D, 3B, 3C, 5D and 5F;
MLR 2017 Regulations 28(18), 28(10)
and 28 through 30; PRA Internal Capital
Adequacy Assessment Rule 3.1; PRA
Fundamental Rules 2 and 6; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A–
1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R,
6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G,
10.1.3R, 10.1.7 and 10.1.9E; UK CRR
articles 103 and 103(b)(ii); FCA PRIN
2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA
IFPRU 2.2.7R(1); FCA COBS 8A.1.9R,
9.1.1AR, 9A.2.1R, 16A.2.1 R and
16A.3.1UK; FCA SYSC 9.1.1AR, 9.1.2R,
10A.1.6R and 10A.1.8R; UK MiFID Org
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Reg articles 59, 72, 72(1), 73, 74, 75, 76,
76(8)(b), Annex I and Annex IV; UK
MiFIR article 25(1); and UK EMIR
articles 9(2), 11(1)(a), 39(4) and 39(5);
(E) The requirements of Exchange Act
rule 18a–6(b)(1)(v), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK CRR articles 99, 104(1)(j), 294, 394,
415, 430 and Part Six: Title II & Title III;
UK CRR Reporting ITS annexes I, II, III,
IV, V, VIII, IX, X, XI, XII, XIII and article
14; PRA Recordkeeping Rules 2.1 and
2.2; FCA SYSC 9.1.1AR and 9.1.2R; UK
MiFID Org Reg article 72(1); UK MiFIR
article 25(1); and UK EMIR article 9(2);
(2) With respect to the requirements
of Exchange Act rule 18a–6(b)(1)(v), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant this Order; and
(3) This Order does not extend to the
requirements of Exchange Act rule 18a–
6(b)(1)(v) relating to Exchange Act rule
18a–2;
(F) The requirements of Exchange Act
rule 18a–6(b)(1)(vi) or (b)(2)(iii), as
applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COBS 8A.1.9R; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg articles 72(1) and 73; FCA
COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; PRA Fundamental Rules 2 and
6; and FCA PRIN 2.1.1.R(2) and (3); UK
MiFIR article 25(1); and UK EMIR
article 9(2); and
(2) With respect to the requirements
of Exchange Act rule 18a–6(b)(1)(vi), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(G) The requirements of Exchange Act
rule 18a–6(b)(1)(vii) or (b)(2)(iv), as
applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COBS 8A.1.9R, 16A.2.1 R, and
16A.3.1; PRA Recordkeeping Rules 2.1
and 2.2; FCA SYSC 9.1.1AR and 9.1.2R;
UK MiFID Org Reg articles 59, 72(1) and
73; UK MiFIR article 25(1); UK EMIR
articles 9(2) and 11(1)(a); FCA COND at
paragraphs 2C, 2D, 3B, 3C, 5D and 5F;
PRA Fundamental Rules 2 and 6; and
FCA PRIN 2.1.1.R(2) and (3); and
(2) With respect to the requirements
of Exchange Act rule 18a–6(b)(1)(vii),
the Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
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(H) The requirements of Exchange Act
rule 18a–6(b)(1)(viii) or (b)(2)(v), as
applicable, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
UK CRR articles 99, 104(1)(j), 294, 394,
415, 430 and Part Six: Title II & Title III;
UK CRR Reporting ITS article 14 and
annexes I, II, III, IV, V, VIII, IX, X, XI,
XII, XIII; PRA Recordkeeping Rules 2.1
and 2.2; FCA SYSC 9.1.1AR and 9.1.2R;
UK MiFID Org Reg article 72(1); UK
MiFIR article 25(1); and UK EMIR
article 9(2);
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act rule 18a–
7 pursuant to this Order;
(3) With respect to the requirements
of Exchange Act rule 18a–6(b)(1)(viii),
the Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(4) This Order does not extend to the
requirements of Exchange Act rule 18a–
6(b)(1)(viii)(L); and
(5) This Order does not extend to the
requirements of Exchange Act rule 18a–
6(b)(1)(viii)(M) relating to Exchange Act
rule 18a–2.
(I) The requirements of Exchange Act
rule 18a–6(b)(1)(ix), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA SYSC 4.1.1(1)R, 4.1.1R(1), 6.1.1R,
7.1.4R, 9.1.1AR, 9.1.2R and 10.1.7R;
FCA COBS 2.3A.32R; UK MiFID Org
Reg articles 22(3)(c), 23, 23(1)(b), 24,
25(2), 26, 29(2)(c), 35 and 72(1); PRA
Risk Control Rule 2.3; PRA Internal
Capital Adequacy Assessment Rules 3
through 11; FCA IFPRU 2.2.7R, 2.2.17R
through 2.2.35R and 2.2.44R; UK CRR
articles 286 and 293(1)(d); UK EMIR
RTS; PRA Recordkeeping Rule 2.1 and
2.2; UK MiFIR article 25(1); UK EMIR
articles 9(2) and 11; UK EMIR RTS; FCA
COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; PRA Fundamental Rules 2 and
6; and FCA PRIN 2.1.1.R(2) and (3); and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(J) The requirements of Exchange Act
rule 18a–6(b)(1)(x), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA IFPRU 2.2.7R; PRA Internal Capital
Adequacy Assessment Rule 3.1; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg article 72(1); UK MiFIR article
25(1); UK EMIR article 9(2); FCA COND
at paragraphs 2C, 2D, 3B, 3C, 5D and 5F;
PRA Fundamental Rules 2 and 6; FCA
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PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; and FCA SYSC
9.1.1AR; and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(K) The requirements of Exchange Act
rule 18a–6(b)(1)(xii) or (b)(2)(vii), as
applicable, regarding one or more
provisions of Exchange Act rules 15Fh–
3 or 15Fk–1 for which substituted
compliance is available under this
Order, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
MLD4 articles 11 and 14; MLR 2017
Regulations 27 through 30; PRA
Recordkeeping Rule 2.1 and 2.2; FCA
SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg article 72(1); UK MiFIR article
25(1); and UK EMIR article 9(2), in each
case with respect to the relevant
security-based swap or activity;
(2) With respect to the portion of
Exchange Act rule 18a–6(b)(1)(xii) or
(b)(2)(vii) that relates to Exchange Act
rule 15Fh–3, the Covered Entity applies
substituted compliance for such
business conduct standard(s) of
Exchange Act rule 15Fh–3 pursuant to
this Order, as applicable, with respect to
the relevant security-based swap or
activity; and
(3) With respect to the portion of
Exchange Act rule 18a–6(b)(1)(xii) or
(b)(2)(vii), as applicable, that relates to
Exchange Act rule 15Fk–1, the Covered
Entity applies substituted compliance
for Exchange Act section 15F(k) and
Exchange Act rule 15Fk–1 pursuant to
this Order;
(L) The requirements of Exchange Act
rule 18a–6(c), provided that the Covered
Entity is subject to and complies with
the requirements of PRA Recordkeeping
Rules 2.1 and 2.2; FCA SYSC 9.1.1AR
and 9.1.2R; UK MiFID Org Reg article
72(1); UK MiFIR article 25(1); and UK
EMIR article 9(2);
(M) The requirements of Exchange
Act rule 18a–6(d)(1), provided that the
Covered Entity is subject to and
complies with the requirements of PRA
General Organisational Requirements
Rule 5.2; FSMA sections 60A(2), 63(2A),
63F(2) and (5); PRA Fitness and
Propriety Rules 2.6 and 2.9; FCA SUP
10C.10.8D, 10C.10.8AD 10C.15, 10C
Annex 3D, 10C.10.14G, 10C.10.16R, and
10C.10.21G; SMR Applications and
Notifications Rules 2.1, 2.2 and 2.6; PRA
Certification Rule 2.1; FCA SYSC
4.3A.1R, 4.3A.3R, 9.1.1AR, 9.1.2R,
10.1.7R, 27 and 27.2.5G; FCA FIT 2.1,
2.2 and 2.3; PRA General Organisational
Requirements Rules 5.1 and 5.2; UK
MiFID Org Reg articles 21(1)(a), 35 and
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72(1); and PRA Recordkeeping Rules 2.1
and 2.2;
(N) The requirements of Exchange Act
rule 18a–6(d)(2), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
PRA Recordkeeping Rules 2.1 and 2.2;
FCA SYSC 9.1.1AR and 9.1.2R; UK
MiFID Org Reg articles 72(1) and 72(3);
UK MiFIR article 25(1); and UK EMIR
article 9(2); and
(2) With respect to the requirements
of Exchange Act rule 18a–6(d)(2)(i), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(O) The requirements of Exchange Act
rule 18a–6(d)(3), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
FCA SYSC 6.1.1R, 9.1.1AR, 9.1.2R and
10A.1.6R; PRA Recordkeeping Rules 2.1
and 2.2; UK MiFID Org Reg articles 72,
72(1), 73, 76(8)(b) and Annex I; UK
MiFIR article 25(1); and UK EMIR
article 9(2) and 39(5); and
(2) With respect to the requirements
of Exchange Act rule 18a–6(d)(3)(i), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(P) The requirements of Exchange Act
rule 18a–6(d)(4) and (d)(5), provided
that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA COBS 8A.1.9R; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
SYSC 4.1.1R(1), 9.1.1AR and 9.1.2R; UK
MiFID Org Reg articles 24, 25(2), 72(1)
and 73; UK MiFIR article 25(1); and UK
EMIR article 9(2); and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rules 15Fi–3, 15Fi–4, and 15Fi–5
pursuant to this Order;
(Q) The requirements of Exchange Act
rule 18a–6(e), provided that the Covered
Entity is subject to and complies with
the requirements of FCA COBS 8A.1.9R;
PRA Recordkeeping Rules 2.1 and 2.2;
FCA SYSC 4.1.1R, 9.1.1AR and 9.1.2R;
UK MiFID Org Reg articles 21(2), 58,
72(1) and 72(3); UK MiFIR article 25(1);
and UK EMIR article 9(2); and
(R) The requirements of Exchange Act
rule 18a–6(f), provided that the Covered
Entity is subject to and complies with
the requirements of PRA Outsourcing
Rule 2.1; EBA Guidelines on
Outsourcing section 13.3; PRA
Recordkeeping Rules 2.1 and 2.2; FCA
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SYSC 8.1.1R, 9.1.1AR and 9.1.2R; UK
MiFID Org Reg articles 31(1) and 72(1);
UK MiFIR article 25(1); and UK EMIR
article 9(2).
(ii) Paragraph (f)(2)(i) is subject to the
following further conditions:
(A) A Covered Entity may apply the
substituted compliance determination
in paragraph (f)(2)(i)(K) to records
related to Exchange Act rule 15Fh–3(b),
(c), (e), (f) and (g) in respect of one or
more security-based swaps or activities
related to security-based swaps; and
(B) This Order does not extend to the
requirements of Exchange Act rule
(b)(1)(xi), (b)(1)(xiii), (b)(2)(vi), or
(b)(2)(viii).
(3) File Reports. The requirements of
the following provisions of Exchange
Act rule 18a–7, provided that the
Covered Entity complies with the
relevant conditions in this paragraph
(f)(3):
(i) The requirements of Exchange Act
rule 18a–7(a)(1) or (a)(2), as applicable,
and the requirements of Exchange Act
rule 18a–7(j) as applied to such
requirements, provided that:
(A) The Covered Entity is subject to
and complies with the requirements of
FSMA sections 137A, 137G and 137T;
CRD article 104(1)(j); PRA Definition of
Capital Rule 4.5; UK CRR articles 99,
394, 430 and Part Six: Title II & Title III;
and UK CRR Reporting ITS annexes I, II,
III, IV, V, VIII, IX, X, XI, XII and XIII;
(B) The Covered Entity files periodic
unaudited financial and operational
information with the Commission or its
designee in the manner and format
required by Commission rule or order
and presents the financial information
in the filing in accordance with
generally accepted accounting
principles that the Covered Entity uses
to prepare general purpose publicly
available or available to be issued
financial statements in the UK; and
(C) With respect to the requirements
of Exchange Act rule 18a–7(a)(1), the
Covered Entity applies substituted
compliance for the requirements of
Exchange Act section 15F(e) and
Exchange Act rules 18a–1 through 18a–
1d pursuant to this Order;
(ii) The requirements of Exchange Act
rule 18a–7(a)(3) and the requirements of
Exchange Act rule 18a–7(j) as applied to
such requirements, provided that:
(A) The Covered Entity is subject to
and complies with the requirements of
UK CRR articles 99, 394, 431 to 455,
432, 433, 434, 437 to 440, 442, 443, 445
to 449, 451 to 455, 452 and 455; UK CRR
Reporting ITS annexes I, II, VIII and IX;
FSMA sections 137A, 137G and 137T;
PRA Definition of Capital Rule 4.5; and
Companies Act sections 394, 415, 442
and 475; and
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(B) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(iii) The requirements of Exchange
Act rule 18a–7(b), provided that the
Covered Entity is subject to and
complies with the requirements of UK
CRR articles 434, 437 through 440, 442,
443, 445 through 449, 451 through 455;
and Companies Act sections 394, 415,
442 and 475;
(iv) The requirements of Exchange Act
rule 18a–7(c), (d), (e), (f), (g) and (h) and
the requirements of Exchange Act rule
18a–7(j) as applied to such
requirements, provided that:
(A) The Covered Entity is subject to
and complies with the requirements of
FCA CASS 6.2.2R, 6.6.2R, 6.6.3R,
6.6.33G, 6.6.34R, 7.12.2R, 7.15.2R,
7.15.3R, 7.15.20R and 7.15.21R; FCA
SUP 3.8.5R, 3.10.4R through 3.10.7R;
UK CRR articles 26(2), 132(5), 154, 191,
321, 325bi, 350, 353, 368, 418, 431 to
455, 434, 437 to 440, 442, 443, 445 to
449 and 451 to 455; Companies Act
sections 394, 415, 442 and 475; and
Capital Requirements Regulations 2013
Regulation 2(4);
(B) With respect to financial
statements the Covered Entity is
required to file annually with the UK
PRA or FCA, including a report of an
independent public accountant covering
the financial statements, the Covered
Entity:
(1) Simultaneously sends a copy of
such annual financial statements and
the report of the independent public
accountant covering the annual
financial statements to the Commission
in the manner specified on the
Commission’s website;
(2) Includes with the transmission the
contact information of an individual
who can provide further information
about the financial statements and
report;
(3) Includes with the transmission the
report of an independent public
accountant required by Exchange Act
rule 18a–7(c)(1)(i)(C) covering the
annual financial statements if UK laws
do not require the Covered Entity to
engage an independent public
accountant to prepare a report covering
the annual financial statements;
provided, however, that such report of
the independent public accountant may
be prepared in accordance with
generally accepted auditing standards in
UK that the independent public
accountant uses to perform audit and
attestation services and the accountant
complies with UK independence
requirements;
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(4) Includes with the transmission the
reports required by Exchange Act rule
18a–7(c)(1)(i)(B) and (C) addressing the
statements identified in Exchange Act
rule 18a–7(c)(3) or (c)(4), as applicable,
that relate to Exchange Act rule 18a–4;
provided, however, that the report of the
independent public accountant required
by Exchange Act rule 18a–7(c)(1)(i)(C)
may be prepared in accordance with
generally accepted auditing standards in
the UK that the independent public
accountant uses to perform audit and
attestation services and the accountant
complies with UK independence
requirements; and
(5) Includes with the transmission the
supporting schedules and
reconciliations, as applicable, required
by Exchange Act rules 18a–7(c)(2)(ii)
and (iii), respectively, relating to
Exchange Act rule 18a–2; and
(6) Includes with the transmission the
supporting schedules and
reconciliations, as applicable, required
by Exchange Act rules 18a–7(c)(2)(ii)
and (iii), respectively, relating to
Exchange Act rules 18a–4 and 18a–4a;
and
(C) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(v) The requirements of Exchange Act
rule 18a–7(i), provided that:
(A) The Covered Entity is subject to
and complies with the requirements of
FCA SUP 16.3.17R and PRA Regulatory
Reporting Rule 18; and
(B) The Covered Entity:
(1) Simultaneously sends a copy of
any notice required to be sent by UK
law cited in paragraph (f)(3)(v)(A) of the
Order to the Commission in the manner
specified on the Commission’s website;
and
(2) Includes with the transmission the
contact information of an individual
who can provide further information
about the matter that is the subject of
the notice.
(4)(i) Provide Notification. The
requirements of the following
provisions of Exchange Act rule 18a–8,
provided that the Covered Entity
complies with the relevant conditions in
this paragraph (f)(4)(i) and with the
applicable conditions in paragraph
(f)(4)(ii):
(A) The requirements of paragraphs
(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4)
of Exchange Act rule 18a–8 and the
requirements of Exchange Act rule 18a–
8(h) as applied to such requirements,
provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA PRIN 2.1.1R and 11; PRA
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Fundamental Rule 7; FCA SUP 15.3.1R,
15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R,
15.3.17R and 15.3.21R; FCA CASS
6.6.57R, 7.15.33R and Schedule 2; PRA
Notifications Rules 2.1, 2.4, 2.5, 2.6, 2.8
and 2.9; FCA SYSC 18.6.1R and 18.6.4G;
FCA IFPRU 2.4.1R; and PRA General
Organisational Requirements 2A.2,
2A.1(2) and 2A.3 to 2A.6; and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(B) The requirements of Exchange Act
rule 18a–8(c) and the requirements of
Exchange Act rule 18a–8(h) as applied
to such requirements, provided that the
Covered Entity is subject to and
complies with the requirements of FCA
PRIN 2.1.1R and 11; PRA Fundamental
Rule 7; FCA SUP 15.3.1R, 15.3.11R,
15.3.12G, 15.3.14G, 15.3.15R, 15.3.17R
and 15.3.21R; FCA CASS 6.6.57R,
7.15.33R and Schedule 2; PRA
Notifications Rules 2.1, 2.4, 2.5, 2.6, 2.8
and 2.9; FCA SYSC 18.6.1R and 18.6.4G;
FCA IFPRU 2.4.1R; and PRA General
Organisational Requirements 2A.2,
2A.1(2) and 2A.3 to 2A.6;
(C) The requirements of Exchange Act
rule 18a–8(d) and the requirements of
Exchange Act rule 18a–8(h) as applied
to such requirements, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA PRIN 2.1.1R and 11; PRA
Fundamental Rule 7; FCA SUP 15.3.1R,
15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R,
15.3.17R and 15.3.21R; FCA CASS
6.6.57R, 7.15.33R and Schedule 2; PRA
Notifications Rules 2.1, 2.4, 2.5, 2.6, 2.8
and 2.9; FCA SYSC 18.6.1R and 18.6.4G;
FCA IFPRU 2.4.1R; and PRA General
Organisational Requirements 2A.2,
2A.1(2) and 2A.3 through 2A.6; and
(2) This Order does not extend to the
requirements of Exchange Act rule 18a–
8(d) to give notice with respect to books
and records required by Exchange Act
rule 18a–5 for which the Covered Entity
does not apply substituted compliance
pursuant to this Order;
(D) The requirements of Exchange Act
rule 18a–8(e) and the requirements of
Exchange Act rule 18a–8(h) as applied
to such requirements, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA PRIN 2.1.1R and 11; PRA
Fundamental Rule 7; FCA SUP 15.3.1R,
15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R,
15.3.17R and 15.3.21R; FCA CASS
6.6.57R, 7.15.33R and Schedule 2; PRA
Notifications Rules 2.1, 2.4, 2.5, 2.6, 2.8
and 2.9; FCA SYSC 18.6.1R and 18.6.4G;
FCA IFPRU 2.4.1R; and PRA General
Organisational Requirements 2A.2,
2A.1(2) and 2A.3 through 2A.6;
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(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order;
(3) This Order does not extend to the
requirements of Exchange act rule 18a–
8(e) relating to Exchange Act rule 18a–
2 or to the requirements of Exchange
Act rule 18a–8(h) as applied to such
requirements; and
(4) This Order does not extend to the
requirements of Exchange act rule 18a–
8(e) relating to Exchange Act rule 18a–
4 or to the requirements of Exchange
Act rule 18a–8(h) as applied to such
requirements;
(ii) Paragraph (f)(4)(i) is subject to the
following further conditions:
(A) The Covered Entity:
(1) Simultaneously sends a copy of
any notice required to be sent by UK
law cited in this paragraph of the Order
to the Commission in the manner
specified on the Commission’s website;
and
(2) Includes with the transmission the
contact information of an individual
who can provide further information
about the matter that is the subject of
the notice;
(B) This Order does not extend to the
requirements of paragraphs (a)(2) and
(b)(3), and of Exchange Act rule 18a–8
relating to Exchange Act rule 18a–2 or
to the requirements of Exchange Act
rule 18a–8(h) as applied to such
requirements;
(C) This Order does not extend to the
requirements of paragraph (g) of rule
18a–8 or to the requirements of
Exchange Act rule 18a–8(h) as applied
to such requirements.
(5) Securities Counts. The
requirements of Exchange Act rule 18a–
9, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
FCA CASS 6.2.1R, 6.2.2R, 6.3.4A–1R,
6.3.6AR, 6.6.2R, 6.6.3R, 6.6.33G,
6.6.34R, 6.6.4R, 6.6.47G, 6.6.5G, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.32R(3),
7.13.33R(3), 7.15.2R, 7.15.5R, 7.15.9R,
7.15.3R, 7.15.8R, 7.15.20R, 7.15.21G,
10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E;
FCA SUP 3.10.4R–3.10.7R; UK MiFID
Org Reg articles 74 and 75; UK EMIR
article 11(1)(b); and UK EMIR RTS
articles 12 and 13; and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order.
(6) Daily Trading Records. The
requirements of Exchange Act section
15F(g), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
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17:17 Apr 07, 2021
Jkt 253001
FCA COND at paragraphs 2C, 2D, 3B,
3C, 5D and 5F; PRA Fundamental Rules
2 and 6; FCA PRIN 2.1.1.R(2) and (3);
PRA Recordkeeping Rule 2.1; and FCA
SYSC 9.1.1AR; and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act section
15F(e) and Exchange Act rules 18a–1
through 18a–1d pursuant to this Order.
(7) Examination and Production of
Records. Notwithstanding the forgoing
provisions of paragraph (f) of this Order,
this Order does not extend to, and
Covered Entities remain subject to, the
requirement of Exchange Act section
15F(f) to keep books and records open
to inspection by any representative of
the Commission and the requirement of
Exchange Act rule 18a–6(g) to furnish
promptly to a representative of the
Commission legible, true, complete, and
current copies of those records of the
Covered Entity that are required to be
preserved under Exchange Act rule 18a–
6, or any other records of the Covered
Entity that are subject to examination or
required to be made or maintained
pursuant to Exchange Act section 15F
that are requested by a representative of
the Commission.
(8) English Translations.
Notwithstanding the forgoing provisions
of paragraph (f) of this Order, to the
extent documents are not prepared in
the English language, Covered Entities
must promptly furnish to a
representative of the Commission upon
request an English translation of any
record, report, or notification of the
Covered Entity that is required to be
made, preserved, filed, or subject to
examination pursuant to Exchange Act
section 15F of this Order.
(g) Definitions
(1) ‘‘Covered Entity’’ means an entity
that:
(i) Is a security-based swap dealer or
major security-based swap participant
registered with the Commission;
(ii) Is not a ‘‘U.S. person,’’ as that term
is defined in rule 3a71–3(a)(4) under the
Exchange Act;
(iii) Is a ‘‘MiFID investment firm’’ or
‘‘third country investment firm,’’ as
such terms are defined in the FCA
Handbook Glossary, that has permission
from the FCA or PRA under Part 4A of
FSMA to carry on regulated activities
relating to investment services and
activities in the United Kingdom; and
(iv) Is supervised by the FCA under
the fixed supervision model and, if the
firm is a PRA-authorized person, also
supervised by the PRA as a Category 1
firm.
(2) ‘‘Capital Requirements Regulations
2013’’ means the UK Capital
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Fmt 4701
Sfmt 4703
Requirements Regulations 2013, as
amended from time to time.
(3) ‘‘Companies Act’’ means the UK
Companies Act 2006, as amended from
time to time.
(4) ‘‘FCA’’ means the UK’s Financial
Conduct Authority.
(5) ‘‘FCA BIFPRU’’ means the
Prudential Sourcebook for Banks,
Building Societies and Investment
Firms of the FCA Handbook, as
amended from time to time.
(6) ‘‘FCA CASS’’ means the Client
Asset Sourcebook of the FCA Handbook,
as amended from time to time.
(7) ‘‘FCA COBS’’ means the Conduct
of Business Sourcebook of the FCA
Handbook, as amended from time to
time.
(8) ‘‘FCA COND’’ means the
Threshold Conditions of the FCA
Handbook, as amended from time to
time.
(9) ‘‘FCA Enforcement Guide’’ means
the Enforcement Guide of the FCA
Handbook, as amended from time to
time.
(10) ‘‘FCA FCG’’ means the Financial
Crime Guide of the FCA Handbook, as
amended from time to time.
(11) ‘‘FCA FIT’’ means the Fit and
Proper test for Employees and Senior
Personnel Sourcebook of the FCA
Handbook, as amended from time to
time.
(12) ‘‘FCA Handbook’’ means the
FCA’s Handbook of rules and guidance,
as amended from time to time.
(13) ‘‘FCA Handbook Glossary’’ means
the Glossary part of the FCA’s
Handbook of rules and guidance, as
amended from time to time.
(14) ‘‘FCA IFPRU’’ means the
Prudential Sourcebook for Investment
Firms of the FCA Handbook, as
amended from time to time.
(15) ‘‘FCA PRIN’’ means the
Principles for Businesses Sourcebook of
the FCA Handbook, as amended from
time to time.
(16) ‘‘FCA PROD’’ means the Product
Intervention and Product Governance
Sourcebook of the FCA Handbook, as
amended from time to time.
(17) ‘‘FCA SUP’’ means the
Supervision Sourcebook of the FCA
Handbook, as amended from time to
time.
(18) ‘‘FCA SYSC’’ means the Senior
Management Arrangements, Systems
and Controls Sourcebook of the FCA
Handbook, as amended from time to
time.
(19) ‘‘FSMA’’ means the UK’s
Financial Services and Markets Act
2000, as amended from time to time.
(20) ‘‘ICVC’’ means investment
company with variable capital as
defined in the FCA Handbook Glossary.
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(21) ‘‘MLR 2017’’ means the UK’s
Money Laundering, Terrorist Financing
and Transfer of Funds (Information on
the Payer) Regulations 2017, as
amended from time to time.
(22) ‘‘PRA’’ means the UK’s
Prudential Regulation Authority.
(23) ‘‘PRA Capital Buffer Rules’’
means the Capital Buffer Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(24) ‘‘PRA Certification Rules’’ means
the Certification Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(25) ‘‘PRA Definition of Capital
Rules’’ means the Definition of Capital
Part of the PRA Rulebook for CRR
Firms, as amended from time to time.
(26) ‘‘PRA Fitness and Proprietary
Rules’’ means the Fitness and Propriety
Part of the PRA Rulebook for CRR
Firms, as amended from time to time.
(27) ‘‘PRA Fundamental Rules’’ means
the Fundamental Rules Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(28) ‘‘PRA General Organisational
Requirements’’ means the General
Organisational Requirements Part of the
PRA Rulebook for CRR Firms, as
amended from time to time.
(29) ‘‘PRA Internal Capital Adequacy
Assessment Rules’’ means the Internal
Capital Adequacy Assessment Part of
the PRA Rulebook for CRR Firms, as
amended from time to time.
(30) ‘‘PRA Internal Liquidity
Adequacy Assessment Rules’’ means the
Internal Liquidity Adequacy
Assessment Part of the PRA Rulebook
for CRR Firms, as amended from time to
time.
(31) ‘‘PRA Liquidity Coverage
Requirement—UK Designated
Investment Firms Rules’’ means the
PRA Liquidity Coverage Requirement—
UK Designated Investment Firms Part of
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17:17 Apr 07, 2021
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the PRA Rulebook for CRR Firms, as
amended from time to time.
(32) ‘‘PRA Notifications Rules’’ means
the Notifications Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(33) ‘‘PRA Outsourcing Rules’’ means
the Outsourcing Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(34) ‘‘PRA Recordkeeping Rules’’
means the Recordkeeping Part of the
PRA Rulebook for CRR Firms, as
amended from time to time.
(35) ‘‘PRA Regulatory Reporting
Rules’’ means the Regulatory Reporting
Part of the PRA Rulebook for CRR
Firms, as amended from time to time.
(36) ‘‘PRA Remuneration Rules’’
means the Remuneration Part of the
PRA Rulebook for CRR Firms, as
amended from time to time.
(37) ‘‘PRA Risk Control Rules’’ means
the Risk Control Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(38) ‘‘PRA Rulebook’’ or ‘‘PRA
Rulebook for CRR Firms’’ means the
PRA’s Rulebook for Capital Requirement
Regulation Firms, as amended from time
to time.
(39) ‘‘PRA Rulebook Glossary’’ means
the Glossary part of the PRA Rulebook
for CRR Firms, as amended from time to
time.
(40) ‘‘PRA Senior Management
Functions Rules’’ means the Senior
Management Functions Part of the PRA
Rulebook for CRR Firms, as amended
from time to time.
(41) ‘‘Prudentially regulated’’ means a
Covered Entity that has a ‘‘prudential
regulator’’ as that term is defined in
Exchange Act section 3(a)(74).
(42) ‘‘SMR’’ means the Senior
Managers Regime that forms part of the
Senior Managers and Certification
Regime, as amended from time to time.
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18421
(43) ‘‘UK’’ means the United
Kingdom.
(44) ‘‘UK CRR’’ means the UK version
of Regulation (EU) No 575/2013, as
amended from time to time.
(45) ‘‘UK CRR Reporting ITS’’ means
the UK version of Commission
Implementing Regulation (EU) 680/
2014.
(46) ‘‘UK EMIR’’ means the UK
version of the ‘‘European Market
Infrastructure Regulation,’’ Regulation
(EU) No 648/2012, as amended from
time to time.
(47) ‘‘UK EMIR Margin RTS’’ means
the UK version of Commission
Delegated Regulation (EU) 2016/2251, as
amended from time to time.
(48) ‘‘UK EMIR RTS’’ means UK
version of Commission Delegated
Regulation (EU) No 149/2013, as
amended from time to time.
(49) ‘‘UK MAR’’ means the UK
version of Market Abuse Regulation
(EU) 596/2014, as amended from time to
time.
(50) ‘‘UK MAR Investment
Recommendations Regulation’’ means
the UK version of Commission
Delegated Regulation (EU) 2016/958, as
amended from time to time.
(51) ‘‘UK MiFID Org Reg’’ means the
UK version of Commission Delegated
Regulation (EU) 2017/565, as amended
from time to time.
(52) ‘‘UK MiFIR’’ means the UK
version of the ‘‘Markets in Financial
Instruments Regulation,’’ Regulation
(EU) 600/2014, as amended from time to
time.
(53) ‘‘UK Regulated Activities Order’’
means the Financial Services and
Markets Act 2000 (Regulated Activities)
Order (SI 2001/544), as amended from
time to time.
[FR Doc. 2021–07255 Filed 4–7–21; 8:45 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Notices]
[Pages 18378-18421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07255]
[[Page 18377]]
Vol. 86
Thursday,
No. 66
April 8, 2021
Part II
Securities and Exchange Commission
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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; Notice
Federal Register / Vol. 86 , No. 66 / Thursday, April 8, 2021 /
Notices
[[Page 18378]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91476; S7-04-21]
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
AGENCY: Securities and Exchange Commission.
ACTION: Notice of application for substituted compliance determination;
proposed order.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is soliciting public comment on an application by the United
Kingdom Financial Conduct Authority (``FCA'') requesting that, pursuant
to rule 3a71-6 under the Securities Exchange Act of 1934 (``Exchange
Act''), the Commission determine that registered security-based swap
dealers and registered major security-based swap participants
(together, ``SBS Entities'') that are not U.S. persons and that are
subject to certain regulation in the United Kingdom (``UK'') may comply
with certain requirements under the Exchange Act via compliance with
corresponding requirements of the UK. The Commission also is soliciting
comment on a proposed Order providing for conditional substituted
compliance in connection with the application.
DATES: Submit comments on or before 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); or
Send an email to [email protected]. Please include
File Number S7-04-21 on the subject line.
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 S7-04-21. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (https://www.sec.gov/rules/proposed.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. Persons
submitting comments are cautioned that the Commission does not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director,
Laura Compton, Senior Special Counsel, or Pamela Carmody, Special
Counsel, at 202-551-5870, Office of Derivatives Policy, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment
on an application by the FCA requesting that the Commission determine
that SBS Entities that are not U.S. persons and that are subject to
certain regulation in the UK may satisfy certain requirements under the
Exchange Act by complying with comparable requirements in the UK. The
Commission also is soliciting comment on a proposed Order, set forth in
Attachment A, providing for conditional substituted compliance in
connection with the FCA application.
I. Background
On August 6, 2021, market participants will begin to count
security-based swap positions toward the thresholds for registration
with the Commission as an SBS Entity.\1\ Exchange Act rule 3a71-6 \2\
conditionally provides that non-U.S. SBS Entities may satisfy certain
requirements under Exchange Act section 15F \3\ by complying with
comparable regulatory requirements of a foreign jurisdiction.\4\
Substituted compliance potentially is available in connection with
requirements regarding business conduct and supervision, chief
compliance officers, trade acknowledgment and verification, non-
prudentially regulated capital and margin, recordkeeping and reporting,
portfolio reconciliation and dispute reporting, portfolio compression
and trading relationship documentation.\5\
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\1\ See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR
43872, 53954 (Aug. 22, 2019) (``Capital and Margin Adopting
Release''); see also Exchange Act Release No. 87780 (Dec. 18, 2019),
85 FR 6270, 6345-49 (Feb. 4, 2020).
\2\ 17 CFR 240.3a71-6.
\3\ 15 U.S.C. 78o-10.
\4\ The Commission also has discussed the parameters of
substituted compliance in connection with substituted compliance
requests regarding the Federal Republic of Germany and the French
Republic. See Exchange Act Release No. 90378 (Nov. 9, 2020), 85 FR
72726 (Nov. 13, 2020) (``German Notice and Proposed Order'');
Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR 85686 (Dec.
29, 2020) (``German Substituted Compliance Order''); Exchange Act
Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020)
(``French Notice and Proposed Order'').
\5\ See Exchange Act rule 3a71-6(d). Substituted compliance is
not available for antifraud prohibitions and information-related
requirements under section 15F. See Exchange Act rule 3a71-6(d)(1)
(specifying that substituted compliance is not available in
connection with the antifraud provisions of Exchange Act section
15F(h)(4)(A) and Exchange Act rule 15Fh-4(a), 17 CFR 240.15Fh-4(a),
and the information-related provisions of Exchange Act sections
15F(j)(3) and 15F(j)(4)(B)). Substituted compliance under rule 3a71-
6 also does not extend to certain other provisions of the federal
securities laws that apply to security-based swaps, such as: (1)
Additional antifraud prohibitions (see Exchange Act section 10(b),
15 U.S.C. 78j(b), Exchange Act rule 10b-5, 17 CFR 240.10b-5, and
Securities Act of 1933 section 17(a), 15 U.S.C. 77q(a)); (2)
requirements related to transactions with counterparties that are
not eligible contract participants (``ECPs'') (see Exchange Act
section 6(l), 15 U.S.C. 78f(l); Securities Act of 1933 section 5(e),
15 U.S.C. 77e(e)); (3) segregation of customer assets (see Exchange
Act section 3E, 15 U.S.C. 78c-5; Exchange Act rule 18a-4, 17 CFR
240.18a-4); (4) required clearing upon counterparty election (see
Exchange Act section 3C(g)(5), 15 U.S.C. 78c-3(g)(5)); (5)
regulatory reporting and public dissemination (see generally
Regulation SBSR, 17 CFR 242.900 et seq.); (6) SBS Entity
registration (see Exchange Act section 15F(a) and (b)); and (7)
registration of offerings (see Securities Act of 1933 section 5, 15
U.S.C. 77e).
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Substituted compliance in part is predicated on the Commission
determining the analogous foreign requirements are ``comparable'' to
the applicable requirements under the Exchange Act, after accounting
for factors such as the ``scope and objectives'' of the relevant
foreign regulatory requirements and the effectiveness of the relevant
foreign authority's or authorities' supervisory and enforcement
frameworks.\6\ Substituted compliance further requires that the
Commission and the relevant foreign financial regulatory authorities
have entered into an effective supervisory and enforcement memorandum
of understanding and/or other arrangement addressing cooperation and
other matters related to substituted compliance.\7\ A foreign
[[Page 18379]]
financial regulatory authority may submit a substituted compliance
application only if the authority provides ``adequate assurances'' that
no law or policy would impede the ability of any entity that is
directly supervised by the authority and that may register with the
Commission ``to provide prompt access to the Commission to such
entity's books and records or to submit to onsite inspection or
examination by the Commission.'' \8\
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\6\ See Exchange Act rule 3a71-6(a)(2)(i).
\7\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission and
the FCA are in the process of negotiating a memorandum of
understanding to address cooperation matters related to substituted
compliance. Because the FCA asks the Commission to permit certain
entities regulated and supervised by both the FCA and the UK
Prudential Regulation Authority (``PRA'') to use substituted
compliance, the Commission and the PRA are also in the process of
developing a memorandum of understanding or other arrangement to
address cooperation matters related to substituted compliance. These
memoranda of understanding or other arrangements will need to be in
place before the Commission may allow Covered Entities (as defined
herein) to use substituted compliance to satisfy obligations under
the Exchange Act. The Commission expects to publish any such
memorandum of understanding or arrangement on its website at
www.sec.gov under the ``Substituted Compliance'' tab, which is
located on the ``Security-Based Swap Markets'' page in the Division
of Trading and Markets section of the site.
\8\ See Exchange Act rule 3a71-6(a)(3). The FCA has satisfied
this prerequisite in the Commission's preliminary view, taking into
account information and representations that the FCA provided
regarding certain UK requirements that are relevant to the
Commission's ability to inspect, and access the books and records
of, Covered Entities (as defined herein).
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Commission rule 0-13 \9\ addresses procedures for filing
substituted compliance applications. The rule provides that the
Commission will publish a notice when a completed application has been
submitted and that any person may submit to the Commission ``any
information that relates to the Commission action requested in the
application.'' \10\
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\9\ 17 CFR 240.0-13.
\10\ See Commission rule 0-13(h). The Commission may take final
action on a substituted compliance application no earlier than 25
days following publication of the notice in the Federal Register.
See id.
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II. The FCA's Substituted Compliance Request
The FCA has submitted a complete substituted compliance application
to the Commission (``FCA Application'').\11\ Pursuant to rule 0-13, the
Commission is publishing notice of the FCA Application together with a
proposed Order to conditionally grant substituted compliance to an
entity that (1) is a security-based swap dealer or major security-based
swap participant registered with the Commission; (2) is not a ``U.S.
person,'' as that term is defined in rule 3a71-3(a)(4) under the
Exchange Act; \12\ (3) is a ``MiFID investment firm'' or ``third
country investment firm,'' as such terms are defined in the FCA
Handbook Glossary, that has permission from the FCA or PRA under Part
4A of FSMA to carry on regulated activities relating to investment
services and activities in the UK; and (4) is supervised by the FCA
under the fixed supervision model and, if the firm is a PRA-authorized
person, also supervised by the PRA as a Category 1 firm (each, a
``Covered Entity'').\13\ In making its substituted compliance
determination, the Commission will consider public comments on the FCA
Application and the proposed Order.
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\11\ See Letter from Nausicaa Delfas, Executive Director of
International, FCA, dated March 19, 2021. The FCA Application is
available on the Commission's website at: https://www.sec.gov/files/uk-financial-conduct-authority-complete-application-substituted-compliance-031921.pdf.
\12\ 17 CFR 240.3a71-3(a)(4).
\13\ The terms ``MiFID investment firm'' and ``third country
investment firm'' include credit institutions when they provide
investment services or perform investment activities in the UK. See
FCA Handbook Glossary.
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The FCA seeks substituted compliance for Covered Entities in
connection with a number of requirements under Exchange Act section
15F.
A. Relevant Market Participants and General Conditions
The Commission will consider whether to allow substituted
compliance to be used by any Covered Entity.
B. Relevant Section 15F Requirements
The FCA requests that the Commission issue an order determining
that--for substituted compliance purposes--applicable requirements in
the UK are comparable with the following requirements under Exchange
Act section 15F:
Risk control requirements--Requirements related to
internal risk management systems, trade acknowledgment and
verification, portfolio reconciliation and dispute resolution,
portfolio compression and trading relationship documentation.\14\
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\14\ See part IV, infra.
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Capital and margin requirements--Requirements related to
capital applicable to non-prudentially regulated security-based swap
dealers and requirements related to margin applicable to non-
prudentially regulated SBS Entities.\15\
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\15\ See part V, infra. The FCA requests substituted compliance
in connection with capital and margin requirements applicable to
non-prudentially regulated SBS Entities pursuant to Exchange Act
section 15F(e) and Exchange Act rules 18a-1 through 18a-1d, and 18a-
3. 17 CFR 240.18a-1 through 18a-1d, and 17 CFR 240.18a-3. The FCA
does not request substituted compliance in connection with capital
requirements applicable to non-prudentially regulated major
security-based swap participants pursuant to Exchange Act rule 18a-
2, 17 CFR 240.18a-2. The proposed Order defines the term
``prudentially regulated'' to mean an SBS Entity that has a
``prudential regulator'' as that term is defined in Exchange Act
section 3(a)(74), 15 U.S.C. 78c(a)(74). See para. (g)(41) to the
proposed Order.
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Internal supervision, chief compliance officer and
additional Exchange Act section 15F(j) requirements--Requirements
related to diligent supervision, conflicts of interest, information
gathering under Exchange Act section 15F(j) and chief compliance
officers.\16\
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\16\ See part VI, infra.
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Counterparty protection requirements--Requirements related
to disclosure of material risks and characteristics and material
incentives or conflicts of interest, ``know your counterparty,''
suitability of recommendations, fair and balanced communications,
disclosure of daily marks and disclosure of clearing rights.\17\
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\17\ See part VII, infra. The FCA is not requesting substituted
compliance in connection with: ECP verification requirements
(Exchange Act section 15F(h)(3)(A) and Exchange Act rule 15Fh-
3(a)(1), 17 CFR 240.15Fh-3(a)(1)); ``special entity'' provisions
(Exchange Act sections 15F(h)(4) and (5) and Exchange Act rules
15Fh-3(a)(2) and (3), 15Fh-4(b) and 15Fh-5, 17 CFR 240.15Fh-3(a)(2)
and (3), 240.15Fh-4(b) and 240.15Fh-5); and political contribution
provisions (Exchange Act rule 15Fh-6, 17 CFR 240.15Fh-6).
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Recordkeeping, reporting, notification and securities
count requirements--Requirements related to making and keeping current
certain prescribed records, the preservation of records, reporting,
notification and securities counts.\18\
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\18\ See part VIII, infra.
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C. Comparability Considerations and Proposed Order
Though the UK ceased to be a member of the European Union (the
``EU'') on January 31, 2020, market participants in the UK remain
subject to UK requirements implemented pursuant to EU directives, and
to EU regulations that have been added to UK law.\19\ Those
requirements include those related to: Organization, compliance
[[Page 18380]]
and conduct; \20\ risk-mitigation; \21\ prudential matters; \22\ and
certain other matters relevant to the application.\23\ In the view of
the FCA, UK requirements taken as a whole produce regulatory outcomes
that are comparable to those of the relevant requirements under the
Exchange Act.\24\
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\19\ In adding EU regulations to UK law, the UK in some cases
has adopted UK versions of these regulations that differ from the
original EU versions ``as necessary to account for the effects of
Brexit.'' See FCA Application Appendix A at 7. The Commission has
reviewed the FCA Application in light of the UK versions of these
regulations.
\20\ The Financial Services and Markets Act 2000 (``FSMA'')
gives the FCA and PRA powers to make rules and guidance for firms
within the scope of FSMA's financial services regulatory regime,
including MiFID investment firms and third country investment firms.
Relevant elements of the EU's Markets in Financial Instruments
Directive, Directive 2014/65/EU (``MiFID''), have been implemented
in the UK via provisions in the FCA Handbook and PRA Rulebook. These
provisions in the FCA Handbook and the PRA Rulebook address
organizational, compliance and conduct requirements applicable to
MiFID investment firms and third country investment firms. The UK
version of Commission Delegated Regulation (EU) 2017/565 (``UK MiFID
Org Reg'') in part supplements the FCA Handbook and the PRA Rulebook
with respect to organizational requirements for these firms. The UK
version of the Markets in Financial Instruments Regulation,
Regulation (EU) 648/2012 (``UK MiFIR''), addresses certain
recordkeeping requirements. Commission Delegated Directive (EU)
2017/593 (``MiFID Delegated Directive'') in part supplements MiFID
with regard to safeguarding client property, and in the UK has been
implemented in relevant part in the FCA Handbook and PRA Rulebook.
\21\ The UK version of the European Market Infrastructure
Regulation (``EMIR''), Regulation (EU) 648/2012 (``UK EMIR''), in
part imposes certain risk mitigation requirements on counterparties
in connection with non-centrally cleared OTC derivatives
transactions. The UK version of Delegated Regulation (EU) 149/2013
(``UK EMIR RTS'') supplements EMIR with requirements related to
confirmations, portfolio reconciliation, portfolio compression and
dispute resolution. The UK version of Delegated Regulation (EU)
2016/2251 (``UK EMIR Margin RTS'') further supplements EMIR with
requirements related to documentation and collateral.
\22\ The EU's Capital Requirements Directive IV, Directive 2013/
36/EU (``CRD''), has been adopted in the UK via provisions in the
FCA Handbook and PRA Rulebook. The FCA Handbook sets forth
prudential and related requirements applicable in relevant part to
IFPRU investment firms. The PRA Rulebook sets forth prudential and
related requirements applicable in relevant part to UK banks and UK
designated investment firms. The UK version of the Capital
Requirements Regulation (``CRR''), Regulation (EU) 575/2013 (``UK
CRR''), further addresses prudential and related requirements for
those firms. The UK version of Commission Implementing Regulation
(EU) 680/2014 (``UK CRR Reporting ITS'') sets forth implementing
technical standards regarding supervisory reporting.
\23\ The UK version of the Market Abuse Regulation, Regulation
(EU) 596/2014 (``UK MAR''), sets forth requirements to enhance
market integrity and investor protection. The UK version of the MAR
Investment Recommendations Regulation, Commission Delegated
Regulation (EU) 2016/958 (``UK MAR Investment Recommendations
Regulation''), supplements UK MAR with respect to regulatory
technical standards regarding investment recommendations. The UK's
Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017 (``MLR 2017'') sets
forth ``know your counterparty'' requirements.
\24\ The FCA Application includes a series of analyses that
compare UK requirements with the applicable requirements under the
Exchange Act in the following areas: Risk control (see FCA
Application Appendix B category 1), books and records (see FCA
Application Appendix B category 2), internal supervision and
compliance (see FCA Application Appendix B category 3) and
counterparty protection (see FCA Application Appendix B category 4).
These analyses are available on the Commission's website along with
the remainder of the FCA Application. See note 11, supra.
---------------------------------------------------------------------------
In the Commission's preliminary view, requirements under the
Exchange Act and UK requirements maintain similar approaches with
respect to achieving regulatory goals in several respects, but follow
differing approaches or incorporate disparate elements in certain other
respects. The Commission has considered those similarities and
differences when analyzing comparability and developing preliminary
views, while recognizing that differences in approach do not
necessarily preclude substituted compliance in light of the
Commission's holistic, outcomes-oriented framework for assessing
comparability.\25\
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\25\ In this context, the Commission recognizes that other
regulatory regimes will have exclusions, exceptions and exemptions
that may not align perfectly with the corresponding requirements
under the Exchange Act. Where the Commission preliminarily has found
that the UK regime produces comparable outcomes notwithstanding
those particular differences, the Commission proposes to make a
positive determination on substituted compliance. Where the
Commission preliminarily has found that those exclusions, exemptions
and exceptions lead to outcomes that are not comparable, however,
the proposal would not provide for substituted compliance.
---------------------------------------------------------------------------
Based on the Commission's analysis of the application and review of
relevant UK requirements, the proposed Order, located at Attachment A,
would grant substituted compliance subject to specific conditions and
limitations. When Covered Entities seek to rely on substituted
compliance to satisfy particular requirements under the Exchange Act,
non-compliance with the applicable UK requirements would lead to a
violation of those requirements under the Exchange Act and potential
enforcement action by the Commission (as opposed to automatic
revocation of the substituted compliance order).
III. Applicable Entities and General Conditions
A. Covered Entities for Which the Commission Is Proposing a Positive
Conditional Substituted Compliance Determination
Under the proposed Order, substituted compliance could be applied
by ``Covered Entities''--a term that would limit the scope of the
substituted compliance determination to SBS Entities that are subject
to applicable UK requirements and oversight. Consistent with the
parameters of substituted compliance under Exchange Act rule 3a71-6,
the proposed ``Covered Entity'' definition provides that the relevant
entity must be a security-based swap dealer or major security-based
swap participant registered with the Commission, and that the entity
cannot be a U.S. person.\26\ The proposed ``Covered Entity'' definition
further would provide that the entity must be either a MiFID investment
firm or a third country investment firm that has permission from the
FCA or PRA under Part 4A of FSMA to carry on regulated activities
relating to investment services and activities in the UK.\27\ Each
entity also must be supervised by the FCA under the fixed supervision
model and, if the firm is a PRA-authorized person, also supervised by
the PRA as a Category 1 firm.\28\ These prongs of the definition are
intended to help ensure that Covered Entities are subject to relevant
UK requirements and oversight.
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\26\ See paras. (g)(1)(i) and (ii) to the proposed Order.
\27\ See para. (g)(1)(iii) to the proposed Order.
\28\ See para. (g)(1)(iv) to the proposed Order.
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B. General Conditions and Prerequisites
Substituted compliance under the proposed Order would be subject to
a number of conditions and other prerequisites, to help ensure that the
relevant UK requirements that form the basis for substituted compliance
in practice will apply to the Covered Entity's security-based swap
business and activities, and to promote the Commission's oversight over
entities that avail themselves of substituted compliance.
1. ``Subject to and Complies With'' Applicability Provisions
Each relevant section of the proposed Order would be subject to the
condition that the Covered Entity ``is subject to and complies with''
the applicable UK requirements that are needed to establish
comparability. Accordingly, the proposed Order would not provide
substituted compliance when a Covered Entity is excused from compliance
with relevant foreign provisions, such as, for example, if relevant UK
requirements do not apply to the security-based swap activities of a
non-UK branch of a MiFID investment firm or to a third country
investment firm. In that event, the Covered Entity would not be
``subject to'' those requirements, and the Covered Entity could not
rely on substituted compliance in connection with those activities.\29\
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\29\ An SBS Entity's ``voluntary'' compliance with the relevant
UK requirements would not suffice for these purposes. Substituted
compliance reflects an alternative means by which an SBS Entity may
comply with applicable requirements under the Exchange Act, and thus
mandates that the SBS Entity be subject to the requirements needed
to establish comparability and face consequences arising from any
failure to comply with those requirements. Moreover, the
comparability assessment takes into account the effectiveness of the
supervisory compliance program administered and the enforcement
authority exercised by the FCA and/or PRA, which would not be
expected to promote comparable outcomes when compliance merely is
``voluntary.''
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[[Page 18381]]
2. Additional General Conditions
Substituted compliance under the proposed Order further would be
subject to general conditions intended to help ensure the applicability
of relevant UK requirements, and to facilitate the Commission's
oversight of firms that avail themselves of substituted compliance. In
particular:
``Regulated activities''--For each condition in the
proposed Order that requires the application of, and compliance with,
provisions of the Senior Management Arrangements, Systems and Controls
Sourcebook of the FCA Handbook (``FCA SYSC'') 4, 5, 6, 7, 9 and/or 10,
certain parts of the PRA Rulebook and/or MLR 2017, the Covered Entity's
relevant security-based swap activities must constitute ``regulated
activities'' as defined for purposes of the relevant UK provisions,
must be carried on by the Covered Entity from an establishment in the
UK and must fall within the scope of the Covered Entity's authorization
from the FCA and/or PRA to conduct regulated activities in the UK.\30\
---------------------------------------------------------------------------
\30\ See para. (a)(1) to the proposed Order.
---------------------------------------------------------------------------
UK MiFID ``investment services or activities''--For each
condition in the proposed Order that requires the application of, and
compliance with, provisions of the Product Intervention and Product
Governance Sourcebook of the FCA Handbook (``FCA PROD'') 3 and/or UK
MiFID Org Reg, the Covered Entity's relevant security-based swap
activities must constitute ``investment services or activities,'' as
defined in the FCA Handbook Glossary, must be carried on by the Covered
Entity from an establishment in the UK and must fall within the scope
of the Covered Entity's authorization from the FCA and/or PRA to
conduct regulated activities in the UK.\31\
---------------------------------------------------------------------------
\31\ See para. (a)(2) to the proposed Order. Under this
condition, a Covered Entity's security-based swap activities must
constitute ``investment services or activities'' only to the extent
that the relevant part of the proposed Order requires the entity to
be subject to and comply with the UK provisions listed in paragraph
(a)(2) to the proposed Order. The security-based swap activities
need not be ``investment services or activities'' when the relevant
part of the proposed Order does not require compliance with one of
those provisions (e.g., paragraph (e)(6) to the proposed Order
addressing substituted compliance for daily mark disclosure
requirements).
---------------------------------------------------------------------------
UK ``MiFID or equivalent third country business''--For
each condition in the proposed Order that requires the application of,
and compliance with, provisions of the Conduct of Business Sourcebook
of the FCA Handbook (``FCA COBS'') 2, 4, 6, 8A, 9A, 14 and/or 14A, the
Covered Entity's relevant security-based swap activities must
constitute ``MiFID or equivalent third country business,'' as defined
in the FCA Handbook Glossary, must be carried on by the Covered Entity
from an establishment in the UK and must fall within the scope of the
Covered Entity's authorization from the FCA and/or PRA to conduct
regulated activities in the UK.\32\
---------------------------------------------------------------------------
\32\ See para. (a)(3) to the proposed Order. Under this
condition, a Covered Entity's security-based swap activities must
constitute ``MiFID or equivalent third country business'' only to
the extent that the relevant part of the proposed Order requires the
entity to be subject to and comply with the UK provisions listed in
paragraph (a)(3) to the proposed Order. The security-based swap
activities need not be ``MiFID or equivalent third country
business'' when the relevant part of the proposed Order does not
require compliance with one of those provisions (e.g., paragraph
(e)(6) to the proposed Order addressing substituted compliance for
daily mark disclosure requirements).
---------------------------------------------------------------------------
UK ``designated investment business''--For each condition
in the proposed Order that requires the application of, and compliance
with, provisions of FCA COBS 11, the Covered Entity's relevant
security-based swap activities must constitute ``MiFID business'' that
is also ``designated investment business,'' each as defined in the FCA
Handbook Glossary, must be carried on by the Covered Entity from an
establishment in the UK and must fall within the scope of the Covered
Entity's authorization from the FCA and/or PRA to conduct regulated
activities in the UK.\33\
---------------------------------------------------------------------------
\33\ See para. (a)(4) to the proposed Order. Under this
condition, a Covered Entity's security-based swap activities must
constitute ``MiFID business'' that is also ``designated investment
business'' only to the extent that the relevant part of the proposed
Order requires the entity to be subject to and comply with FCA COBS
11. The security-based swap activities need not be ``MiFID
business'' that is also ``designated investment business'' when the
relevant part of the proposed Order does not require compliance with
FCA COBS 11 (e.g., paragraph (e)(6) addressing substituted
compliance for daily mark disclosure requirements).
---------------------------------------------------------------------------
UK ``MiFID business''--For each condition in the proposed
Order that requires the application of, and compliance with, provisions
of the Client Asset Sourcebook of the FCA Handbook (``FCA CASS'') 6
and/or 7, the Covered Entity must not be an ``ICVC'' as defined in the
FCA Handbook Glossary,\34\ the Covered Entity's relevant security-based
swap activities must constitute ``regulated activities'' as defined for
purposes of the relevant UK provisions and ``MiFID business'' as
defined in the FCA Handbook Glossary, must be carried on by the Covered
Entity from an establishment in the UK and must fall within the scope
of the Covered Entity's authorization from the FCA and/or PRA to
conduct regulated activities in the UK.\35\
---------------------------------------------------------------------------
\34\ ``ICVC'' means investment company with variable capital as
defined in the FCA Handbook Glossary.
\35\ See para. (a)(5) to the proposed Order. Under this
condition, a Covered Entity's security-based swap activities must
constitute ``regulated activities'' that is also ``MiFID business''
only to the extent that the relevant part of the proposed Order
requires the entity to be subject to and comply with the UK
provisions listed in paragraph (a)(5) to the proposed Order. The
security-based swap activities need not be ``MiFID business'' that
is also ``designated investment business'' when the relevant part of
the proposed Order does not require compliance with one of those
provisions (e.g., paragraph (e)(6) addressing substituted compliance
for daily mark disclosure requirements).
---------------------------------------------------------------------------
Activities covered by FCA SYSC 10A--For each condition in
the proposed Order that requires the application of, and compliance
with, provisions of FCA SYSC 10A, the Covered Entity's relevant
security-based swap activities must constitute activities described in
FCA SYSC 10A.1.1(2)(a), (b) and/or (c), must be carried on by the
Covered Entity from an establishment in the UK and must fall within the
scope of the Covered Entity's authorization from the FCA and/or PRA to
conduct regulated activities in the UK.\36\
---------------------------------------------------------------------------
\36\ See para. (a)(6) to the proposed Order. Under this
condition, a Covered Entity's security-based swap activities must
constitute activities described in FCA SYSC 10A.1.1(2)(a), (b) and/
or (c) only to the extent that the relevant part of the proposed
Order requires the entity to be subject to and comply with FCA SYSC
10A. The security-based swap activities need not be activities
described in those provisions when the relevant part of the proposed
Order does not require compliance with FCA SYSC 10A (e.g., paragraph
(e)(6) addressing substituted compliance for daily mark disclosure
requirements).
---------------------------------------------------------------------------
UK MiFID ``clients''--For each condition in the proposed
Order that requires the application of, and compliance with, provisions
of FCA CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 9A, 11, 14 and/or 14A,
FCA PROD 3, FCA SYSC 10.1.8, FCA SYSC 10A and/or UK MiFID Org, the
Covered Entity's relevant counterparties (or potential counterparties)
must be ``clients'' (or potential ``clients'') as defined in FCA COBS
3.2.1R.\37\
---------------------------------------------------------------------------
\37\ See para. (a)(7) to the proposed Order.
---------------------------------------------------------------------------
UK MiFID ``financial instruments''--For each condition in
the proposed Order that requires the
[[Page 18382]]
application of, and compliance with, provisions of FCA CASS 6 and/or 7,
FCA COBS 2, 4, 6, 8A, 9A, 11, 14 and/or 14A, FCA PROD 3, FCA SYSC 10A,
UK MAR, UK MAR Investment Recommendations Regulation and/or UK MiFID
Org Reg, the relevant security-based swap must be a ``financial
instrument'' as defined in Part 1 of Schedule 2 of the UK Regulated
Activities Order.\38\
---------------------------------------------------------------------------
\38\ See para. (a)(8) to the proposed Order.
---------------------------------------------------------------------------
UK CRD/CRR ``institution''--For each condition in the
proposed Order that requires the application of, and compliance with,
provisions of UK CRR, the Covered Entity must be an ``institution'' as
defined in UK CRR article 4(1)(3).\39\
---------------------------------------------------------------------------
\39\ See para. (a)(9) to the proposed Order.
---------------------------------------------------------------------------
``Common platform firm'' or ``third country firm''--For
each condition in the proposed Order that requires the application of,
and compliance with, provisions of FCA SYSC 4, 5, 6, 7, 9 and/or 10,
the Covered Entity must be either a ``common platform firm'' (other
than a ``UCITS investment firm'') or a ``third country firm,'' each as
defined in the FCA Handbook Glossary.\40\
---------------------------------------------------------------------------
\40\ See para. (a)(10) to the proposed Order.
---------------------------------------------------------------------------
``IFPRU investment firm''--For each condition in the
proposed Order that requires the application of, and compliance with,
provisions of FCA SYSC 19A, the Prudential Sourcebook for Investment
Firms of the FCA Handbook (``FCA IFPRU'') and/or the Prudential
Sourcebook for Banks, Building Societies and Investment Firms of the
FCA Handbook (``FCA BIPRU''), the Covered Entity must be an ``IFPRU
investment firm'' as defined in the FCA Handbook Glossary.\41\
---------------------------------------------------------------------------
\41\ See para. (a)(11) to the proposed Order.
---------------------------------------------------------------------------
``UK bank'' or ``UK designated investment firm''--For each
condition in the proposed Order that requires the application of, and
compliance with, provisions of FCA SYSC 19D and/or certain parts of the
PRA Rulebook, the Covered Entity must be a ``UK bank'' or ``UK
designated investment firm,'' each as defined in the FCA Handbook
Glossary (in the case of chapter 19D of FCA SYSC) or in the PRA
Rulebook Glossary (in the case of a part of the PRA Rulebook).\42\
---------------------------------------------------------------------------
\42\ See para. (a)(12) to the proposed Order.
---------------------------------------------------------------------------
Covered Entity's counterparties as UK EMIR
``counterparties''--For each condition in the proposed Order that
requires the application of, and compliance with, provisions of UK
EMIR, UK EMIR RTS and/or UK EMIR Margin RTS, if the counterparty to the
Covered Entity is not a ``financial counterparty'' or ``non-financial
counterparty'' as defined in UK EMIR articles 2(8) or 2(9),
respectively, the Covered Entity must comply with the applicable
condition as if the counterparty were a financial counterparty or non-
financial counterparty.\43\ If the Covered Entity reasonably determines
that the counterparty conducts a financial business that would cause it
to be a financial counterparty if it were UK-established and UK-
authorized, then the proposed Order would require the Covered Entity to
treat the counterparty as a financial counterparty; otherwise, the
proposed Order would require the Covered Entity to treat the
counterparty as a non-financial counterparty.\44\ In addition, the
proposed Order would provide that a Covered Entity complying with UK
EMIR could not apply substituted compliance by complying with third
country requirements that UK authorities may determine to be equivalent
to UK EMIR.\45\
---------------------------------------------------------------------------
\43\ See para. (a)(13) to the proposed Order.
\44\ See para. (a)(13)(i) to the proposed Order.
\45\ See para. (a)(13)(ii) to the proposed Order.
---------------------------------------------------------------------------
Security-based swap status under UK EMIR--For each
condition in the proposed Order that requires the application of, and
compliance with, provisions of UK EMIR, UK EMIR RTS and/or UK EMIR
Margin RTS, either: (1) The relevant security-based swap must be an
``OTC derivative'' or ``OTC derivative contract,'' as defined in UK
EMIR article 2(7), that has not been cleared by a CCP and otherwise is
subject to the provisions of UK EMIR article 11, UK EMIR RTS articles
11 through 15, and UK EMIR Margin RTS article 2; or (2) the relevant
security-based swap must have been cleared by a central counterparty
that has been authorized or recognized to clear derivatives contracts
in the UK.\46\
---------------------------------------------------------------------------
\46\ See para. (a)(14) to the proposed Order.
---------------------------------------------------------------------------
Memorandum of understanding--The Commission has an
applicable memorandum of understanding or other arrangement with the
FCA and PRA addressing cooperation with respect to the proposed Order
at the time the Covered Entity makes use of substituted compliance.\47\
---------------------------------------------------------------------------
\47\ See para. (a)(15) to the proposed Order.
---------------------------------------------------------------------------
Notice of reliance on substituted compliance--A Covered
Entity must provide notice of its intent to rely on the proposed Order
by notifying the Commission in the manner specified on the Commission's
website.\48\ In the notice, the Covered Entity would need to identify
each specific substituted compliance determination in the proposed
Order for which the Covered Entity intends to apply substituted
compliance.\49\ If a Covered Entity elects not to apply substituted
compliance with respect to a specific substituted compliance
determination in the proposed Order, it must comply with the Exchange
Act requirements subject to that determination. Further, except in the
case of the counterparty protection requirements and linked
recordkeeping requirements discussed below, the Commission has
determined that the Exchange Act requirements subject to substituted
compliance determinations in the proposed Order are entity-level
requirements. Therefore, if a Covered Entity elects to apply
substituted compliance to these entity-level requirements, it must do
so at the entity level. Finally, a Covered Entity must promptly update
the notice if it intends to modify its reliance on the positive
substituted compliance determinations in the proposed Order.\50\
---------------------------------------------------------------------------
\48\ See para. (a)(16) to the proposed Order.
\49\ If the Covered Entity intends to rely on all the
substituted compliance determinations in a given paragraph of the
Order, it can cite that paragraph in the notice. For example, if the
Covered Entity intends to rely on the capital and margin
determinations in paragraph (c) of the proposed Order, it would
indicate in the notice that it is relying on the determinations in
paragraph (c). However, if the Covered Entity intends to rely on the
margin determination but not the capital determination, it would
need to indicate in the notice that it is relying on paragraph
(c)(2) of the proposed Order (the margin determination). In this
case, paragraph (c)(1) of the proposed Order (the capital
determination) would be excluded from the notice and the Covered
Entity would need to comply with the Exchange Act capital
requirements. Further, as discussed below in section VIII.B. of this
notice, the recordkeeping and reporting determinations in the
proposed Order have been structured to provide Covered Entities with
a high level of flexibility in selecting specific requirements
within those rules for which they want to rely on substituted
compliance. For example, paragraph (f)(1)(i) of the proposed Order
sets forth the Commission's preliminary substituted compliance
determinations with respect to the requirements of Exchange Act rule
18a-5, 17 CFR 240.18a-5. These proposed determinations are set forth
in paragraphs (f)(1)(i)(A) through (O). If a Covered Entity intends
to rely on some but not all of the determinations, it would need to
identify in the notice the specific determinations in this paragraph
it intends to rely on (e.g., paragraphs (f)(1)(i)(A), (B), (C), (D),
(G), (H), (I), and (O)). For any determinations excluded from the
notice, the Covered Entity would need to comply with the Exchange
Act rule 18a-5 requirement. Finally, as discussed below in sections
VII.B.2. and VIII.B.2. of this notice, a Covered Entity would be
able to apply substituted compliance at the transaction level
(rather than the entity level) for certain counterparty protection
requirements and the recordkeeping requirements that are linked to
them. In this case, the notice would need to indicate the class of
transactions (e.g., transactions with UK counterparties) for which
the Covered Entity is applying substituted compliance with respect
to the counterparty protection requirements and linked recordkeeping
requirements.
\50\ A Covered Entity would modify its reliance on the positive
substituted compliance determinations in the proposed Order, and
thereby trigger the requirement to update its notice, if it adds or
subtracts determinations for which it is applying substituted
compliance or completely discontinues its reliance on the proposed
Order.
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[[Page 18383]]
IV. Substituted Compliance for Risk Control Requirements
A. FCA Request and Associated Analytic Considerations
The FCA Application in part requests substituted compliance in
connection with risk control requirements under the Exchange Act
relating to:
Risk management systems--Internal risk management system
requirements pursuant to Exchange Act section 15F(j)(2) and relevant
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I).\51\ Those provisions
address the obligation of SBS Entities to follow policies and
procedures reasonably designed to help manage the risks associated with
their business activities.\52\
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\51\ 17 CFR 240.15Fh-3(h)(2)(iii)(I). The FCA also is requesting
substituted compliance in connection with Exchange Act rule 18a-
1(f), 17 CFR 240.18a-1(f), which sets forth additional internal risk
management system requirements for non-prudentially regulated
security-based swap dealers. The Commission preliminarily has
considered that request holistically as part of its analysis of the
FCA's request for substituted compliance for capital requirements
for those entities. See part V, infra. The FCA is not requesting
substituted compliance in connection with Exchange Act rule 18a-
2(c), which sets forth additional internal risk management system
requirements for non-prudentially regulated major security-based
swap participants.
\52\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR
70214, 70250 (Nov. 23, 2012) (proposing capital and margin
requirements for security-based swap dealers and major security-
based swap participants). The FCA Application discusses UK
requirements that address Covered Entities' obligations related to
risk management. See FCA Application Appendix B category 1 at 19-71.
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Trade acknowledgment and verification--Trade
acknowledgment and verification requirements pursuant to Exchange Act
section 15F(i) and Exchange Act rule 15Fi-2.\53\ Those provisions help
avoid legal and operational risks by requiring definitive written
records of transactions and for procedures to avoid disagreements
regarding the meaning of transaction terms.\54\
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\53\ 17 CFR 240.15Fi-2.
\54\ See Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR
39808, 39809 & 39820 (Jun. 17, 2016) (``Trade Acknowledgment and
Verification Adopting Release''). The FCA Application discusses UK
requirements that address Covered Entities' obligations related to
confirmations. See FCA Application Appendix B category 1 at 72-84.
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Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting requirements pursuant to Exchange
Act section 15F(i) and Exchange Act rule 15Fi-3.\55\ Those provisions
require that counterparties engage in portfolio reconciliation and
resolve discrepancies in connection with uncleared security-based swaps
and promptly notify the Commission and applicable prudential regulators
regarding certain valuation disputes.\56\
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\55\ 17 CFR 240.15Fi-3.
\56\ See Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR
6359, 6360-61 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').
The FCA Application discusses UK requirements that address portfolio
reconciliation and dispute resolution and reporting. See FCA
Application Appendix B category 1 at 85-93.
---------------------------------------------------------------------------
Portfolio compression--Portfolio compression requirements
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-
4.\57\ Those provisions require that SBS Entities have procedures
addressing bilateral offset, bilateral compression and multilateral
compression in connection with uncleared security-based swaps.\58\
---------------------------------------------------------------------------
\57\ 17 CFR 240.15Fi-4.
\58\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
FCA Application discusses UK portfolio compression requirements. See
FCA Application Appendix B category 1 at 94-96.
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Trading relationship documentation--Trading relationship
documentation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-5.\59\ Those provisions require that SBS
Entities have procedures to execute written security-based swap trading
relationship documentation with their counterparties prior to, or
contemporaneously with, executing certain security-based swaps.\60\
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\59\ 17 CFR 240.15Fi-5.
\60\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
FCA Application discusses UK requirements regarding records of
agreements with counterparties. See FCA Application Appendix B
category 1 at 96-100.
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Taken as a whole, these risk control requirements help to promote
market stability by mandating that SBS Entities follow practices that
are appropriate to manage the market, credit, counterparty, operational
and legal risks associated with their security-based swap businesses.
The Commission's comparability assessment accordingly focuses on
whether the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to providing that Covered Entities
follow risk mitigation and documentation practices that are appropriate
to the risks associated with their security-based swap businesses.
B. Preliminary Views and Proposed Order
1. General Considerations
In the Commission's preliminary view based on the FCA Application
and the Commission's review of applicable provisions, relevant UK
requirements would produce regulatory outcomes that are comparable to
those associated with the above risk control requirements, by
subjecting Covered Entities to risk mitigation and documentation
practices that are appropriate to the risks associated with their
security-based swap businesses. Substituted compliance accordingly
would be conditioned on Covered Entities being subject to the UK
provisions that in the aggregate establish a framework that produces
outcomes comparable to those associated with these risk control
requirements under the Exchange Act.\61\
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\61\ In connection with risk management system requirements, a
Covered Entity must be subject to and comply with provisions of UK
law that implement MiFID article 16(4) and (5) and CRD articles 74,
76 and 79 through 87; UK CRR articles 286 through 288 and 293; UK
EMIR Margin RTS article 2; and UK MiFID Org Reg articles 21 through
24. See para. (b)(1) to the proposed Order. In connection with trade
acknowledgment and verification requirements, a Covered Entity must
be subject to and comply with the UK EMIR article 11(1)(a) and the
UK EMIR RTS article 12. See para. (b)(2) to the proposed Order. In
connection with portfolio reconciliation and dispute reporting
requirements, a Covered Entity must be subject to and comply with UK
EMIR article 11(1)(b) and UK EMIR RTS articles 13 and 15. See para.
(b)(3) to the proposed Order. In connection with portfolio
compression requirements, a Covered Entity must be subject to and
comply with UK EMIR RTS article 14. See para. (b)(4) to the proposed
Order. In connection with trading relationship documentation
requirements, a Covered Entity must be subject to and comply with UK
EMIR article 11(1)(a), UK EMIR article 12 and UK EMIR Margin RTS
article 2. See para. (b)(5) to the proposed Order.
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In connection with trade acknowledgement and verification
requirements, the Commission preliminarily believes that UK
requirements are comparable to Exchange Act requirements despite not
requiring a Covered Entity to establish, maintain and enforce written
policies and procedures that are reasonably designed to obtain prompt
verification of a trade acknowledgment. The Commission reached this
preliminary conclusion because the UK requirements instead generally
require both counterparties to provide a trade confirmation. Though
this confirmation requirement generally does not apply to a
counterparty not established in the UK, such as a U.S. person
counterparty (unless the relevant contract has a direct and substantial
effect in the UK), the Commission has considered the UK confirmation
requirements together with guidance from the European Securities and
Markets Authority (``ESMA'').\62\ In interpreting EU confirmation
[[Page 18384]]
requirements that are identical to the UK requirements referenced in
the proposed Order, that guidance provides that ``when an EU
counterparty is transacting with a third country entity, the EU
counterparty would be required to ensure that the requirements for . .
. timely confirmation . . . are met for the relevant . . . transactions
even though the third country entity would not itself be subject to
EMIR.'' \63\ That guidance also provides that compliance with the EMIR
confirmation requirements means ``reach[ing] a legally binding
agreement to all the terms of an OTC derivative contract.'' \64\ The
FCA has published guidance indicating that ESMA's guidance ``will
remain relevant [after the UK's exit from the EU] to the FCA and market
participants in their compliance with regulatory requirements.'' \65\
In the Commission's preliminary view, the UK requirements, as
interpreted by this guidance, thus are comparable to Exchange Act trade
acknowledgment and verification requirements.
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\62\ See European Securities and Markets Authority, Questions
and Answers: Implementation of the Regulation (EU) No 648/2012 on
OTC Derivatives, Central Counterparties and Trade Repositories
(EMIR), available at: https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf
(``ESMA EMIR Q&A'').
\63\ See ESMA EMIR Q&A, OTC Answer 12(b).
\64\ See ESMA EMIR Q&A, OTC Answer 5(a).
\65\ See Financial Conduct Authority, ``Brexit: Our approach to
EU non-legislative materials,'' para. 9, available at: https://www.fca.org.uk/publication/corporate/brexit-our-approach-to-eu-non-legislative-materials.pdf (``FCA Brexit Guidance''); see also FCA
Brexit Guidance at para. 12 (``We will continue to have regard to
other EU non-legislative material where and if they are relevant,
taking account of Brexit and ongoing domestic legislation. Firms,
market participants and stakeholders should also continue to do
so.'').
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In connection with trading relationship documentation requirements,
the Commission also preliminarily believes that UK requirements are
comparable to Exchange Act requirements when considered together with
this guidance. The proposed Order would require a Covered Entity to be
subject to and comply with UK EMIR article 11(1)(a), UK EMIR RTS
article 12 and UK EMIR Margin RTS article 2. By its terms, UK EMIR
Margin RTS article 2 relates to documentation of ``risk management
procedures for the exchange of collateral'' for non-centrally cleared
transactions.\66\ Exchange Act trading relationship documentation
requirements, however, apply not only to agreements related to
collateral exchange procedures but also to any other terms governing
the trading relationship between the counterparties.\67\ In the
Commission's preliminary view, UK EMIR article 11(1)(a) and UK EMIR RTS
article 12, when viewed together with the ESMA EMIR Q&A as described
above, bridge this gap by requiring counterparties to reach a legally
binding agreement to all the terms of a transaction.
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\66\ UK EMIR Margin RTS article 2(1).
\67\ See Exchange Act rule 15Fi-5(b)(1) (``The security-based
swap trading relationship documentation shall be in writing and
shall include all terms governing the trading relationship between
the security-based swap dealer or major security-based swap
participant and its counterparty. . . .'').
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While the Commission recognizes these and certain other differences
between UK requirements and the applicable risk control requirements
under the Exchange Act, in the Commission's preliminary view those
differences on balance would not preclude substituted compliance for
these requirements, particularly as requirement-by-requirement
similarity is not needed for substituted compliance.
2. Scope of Substituted Compliance
The proposed Order would permit a Covered Entity to apply
substituted compliance for one or more risk control requirements. For
example, a Covered Entity could apply substituted compliance for
internal risk management requirements but comply directly with Exchange
Act trade acknowledgment and verification, portfolio reconciliation and
dispute reporting, portfolio compression or trading relationship
documentation requirements. For any set of risk control requirements
for which a Covered Entity applies substituted compliance, however, the
proposed Order would require the Covered Entity to apply substituted
compliance at an entity level, i.e., to all of its activities subject
to that set of risk control requirements. For example, the proposed
Order would require a Covered Entity applying substituted compliance
for internal risk management requirements to comply with the comparable
UK requirements with respect to all of its risk management systems. The
Covered Entity could not choose to comply with the Exchange Act for one
part of its risk management systems and with UK requirements for
another part of its risk management systems.\68\ The Commission
preliminarily believes that this scope of substituted compliance
strikes the right balance between providing Covered Entities
flexibility to tailor the application of substituted compliance to
their business needs and ensuring that substituted compliance is
consistent with the Commission's classification of the relevant
Exchange Act risk control requirements as entity-level
requirements.\69\
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\68\ See para. (b)(1) to the proposed Order. Similarly, a
Covered Entity applying substituted compliance for trade
acknowledgment and verification requirements would have to comply
with the comparable UK requirements with respect to all security-
based swaps subject to Exchange Act trade acknowledgment and
verification requirements. See para. (b)(2) to the proposed Order. A
Covered Entity applying substituted compliance for portfolio
reconciliation and dispute reporting requirements would have to
comply with the comparable UK requirements with respect to all
security-based swaps subject to Exchange Act portfolio
reconciliation and dispute reporting requirements. See para. (b)(3)
to the proposed Order. A Covered Entity applying substituted
compliance for portfolio compression requirements would have to
comply with the comparable UK requirements with respect to all
security-based swaps subject to Exchange Act portfolio compression
requirements. See para. (b)(4) to the proposed Order. A Covered
Entity applying substituted compliance for trading relationship
documentation requirements would have to comply with the comparable
UK requirements with respect to all security-based swaps subject to
Exchange Act trading relationship documentation requirements. See
para. (b)(5) to the proposed Order.
\69\ See Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR
29960, 30064 (May 13, 2016) (``Business Conduct Adopting Release'')
(internal risk management requirements are entity-level
requirements); Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39826 (trade acknowledgment and verification
requirements are entity-level requirements); Risk Mitigation
Adopting Release, 85 FR at 6378 (portfolio reconciliation and
dispute reporting, portfolio compression and trading relationship
documentation requirements are entity-level requirements).
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3. Types of Covered Entities ``Subject to'' Comparable UK Requirements
In connection with risk management system requirements, each of the
comparable UK provisions listed in the proposed Order applies to a
uniquely defined set of UK-authorized firms.\70\ To assist UK firms in
determining whether they are subject to these provisions, the
Commission preliminarily has determined that any Covered Entity that is
an ``IFPRU investment firm,'' as defined in the FCA Handbook Glossary,
or a ``UK bank'' or ``UK designated investment firm,'' as defined in
both the FCA Handbook Glossary and the PRA Rulebook Glossary, would be
subject to all of the required UK provisions. Accordingly, those types
of firms preliminarily would be eligible to apply substituted
compliance for risk management system requirements. A Covered Entity
that is preliminarily not eligible to apply substituted compliance
[[Page 18385]]
for risk management system requirements, such as a third country
investment firm, nevertheless would be preliminarily eligible to apply
substituted compliance for other requirements addressed in the proposed
Order if it complies with the relevant parts of the proposed Order.
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\70\ The Commission preliminarily understands that FCA IFPRU and
FCA BIPRU apply to IFPRU investment firms; FCA SYSC 4 and 7 apply to
common platform firms and third country firms; FCA SYSC 19A applies
to IFPRU investment firms and their overseas firm analogues; FCA
SYSC 19D applies to UK banks, UK designated investment firms and
their overseas firm analogues; the PRA rules cited in paragraph
(b)(1) to the proposed Order apply to CRR firms as defined in the
PRA Rulebook Glossary; UK CRR applies to CRR firms as defined in
that legislation; UK EMIR Margin RTS applies to financial
counterparties; and UK MiFID Org Reg applies to MIFID investment
firms.
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In connection with trade acknowledgment and verification, portfolio
reconciliation and dispute reporting, portfolio compression and trading
relationship documentation requirements, each of the comparable UK
provisions listed in the proposed Order applies to ``financial
counterparties.'' The Commission preliminarily understands that this
term includes Covered Entities that are MiFID investment firms but not
Covered Entities that are third country investment firms. A Covered
Entity that is preliminarily not eligible to apply substituted
compliance for these Exchange Act requirements nevertheless would be
preliminarily eligible to apply substituted compliance for other
requirements addressed in the proposed Order if it complies with the
relevant parts of the proposed Order.
4. Additional Conditions and Scope Issues
Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Trading Relationship Documentation--Disclosure Regarding Legal and
Bankruptcy Status
Under the proposed Order, substituted compliance in connection with
trading relationship documentation would not extend to disclosures
regarding legal and bankruptcy status that are required by paragraph
(b)(5) to Exchange Act rule 15Fi-5 when the counterparty is a U.S.
person.\71\ Documentation requirements under applicable UK law do not
address the disclosure of information related to insolvency procedures
under U.S. law. However, the absence of such disclosure would not
appear to preclude a comparable regulatory outcome when the
counterparty is not a U.S. person, because the insolvency-related
consequences that are the subject of the disclosure would not be
applicable to non-U.S. counterparties in most cases.\72\
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\71\ Those disclosures address information regarding the status
of the SBS Entity or its counterparty as an insured depository
institution or financial counterparty, and regarding the possibility
that in certain circumstances the SBS Entity or its counterparty may
be subject to the insolvency regime set forth under Title II of the
Dodd-Frank Act or the Federal Deposit Insurance Act, which may
affect rights to terminate, liquidate or net security-based swaps.
See Risk Mitigation Adopting Release, 85 FR at 6374 (discussing
potential application of alternatives to the liquidation schemes
established under the Securities Investor Protection Act of 1970 or
the U.S. Bankruptcy Code).
\72\ See also UK EMIR Margin RTS (in part addressing procedures
providing for or specifying the terms of agreements entered into by
counterparties, including applicable governing law for non-centrally
cleared derivatives, and further providing that counterparties which
enter into a netting or collateral exchange agreement must perform
an independent legal review regarding enforceability).
---------------------------------------------------------------------------
b. Dispute Reporting--Provision of Dispute Reports Consistent With UK
Law
Under the proposed Order, substituted compliance further would be
conditioned on Covered Entities having to provide the Commission with
reports regarding disputes between counterparties, on the same basis as
the Covered Entities provide those reports to the FCA pursuant to UK
law.\73\ This condition promotes comparability with the Exchange Act
rule requiring reporting to the Commission regarding significant
valuation disputes,\74\ while leveraging UK reporting provisions to
avoid the need for Covered Entities to create additional reporting
frameworks.\75\
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\73\ See para. (b)(3)(ii) to the proposed Order.
\74\ In proposing the notice provision, the Commission
recognized that valuation inaccuracies may lead to uncollateralized
credit exposure and the potential for loss in the event of default.
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621
(Feb. 15, 2019). It thus is important that the Commission be
informed regarding valuation disputes affecting SBS Entities.
\75\ The principal difference between the two sets of
requirements concerns the timing of notices. Under Exchange Act rule
15Fi-3, SBS Entities must promptly report to the Commission
valuation disputes in excess of $20 million that have been
outstanding for three or five business days (depending on
counterparty types). Under UK EMIR RTS article 15(2), firms must
report to the FCA at least monthly any disputes between
counterparties in excess of [euro]15 million and outstanding for at
least 15 business days. The Commission is mindful that the UK
provision does not provide for notice as quickly as rule 15Fi-3(c),
but in the Commission's preliminary view, on balance this difference
would not be inconsistent with the conclusion that the two sets of
risk control requirements--taken as a whole--produce comparable
regulatory outcomes.
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V. Substituted Compliance for Capital and Margin Requirements
A. The FCA's Request and Associated Analytic Considerations
The FCA Application in part requests substituted compliance in
connection with requirements under the Exchange Act relating to:
Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 and its appendices
(collectively ``Exchange Act rule 18a-1'') applicable to certain SBS
Entities.\76\ Exchange Act rule 18a-1 helps to ensure the SBS Entity
maintains at all times sufficient liquid assets to promptly satisfy its
liabilities, and to provide a cushion of liquid assets in excess of
liabilities to cover potential market, credit, and other risks.\77\ The
rule's net liquid assets test standard protects customers and
counterparties and mitigates the consequences of an SBS Entity's
failure by promoting the ability of the firm to absorb financial shocks
and, if necessary, to self-liquidate in an orderly manner.\78\ As part
of the capital requirements, non-prudentially regulated security-based
swap dealers also must comply with the internal risk management control
requirements of Exchange Act Rule 15c3-4 with respect to certain
activities.\79\
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\76\ Exchange Act rule 18a-1 applies to non-prudentially
regulated security-based swap dealers that are not also registered
as broker-dealers, other than OTC derivatives dealers.
\77\ See Capital and Margin Adopting Release, 84 FR at 43947.
The FCA Application discusses UK requirements that address firms'
capital requirements. See FCA Application Appendix B, Annex V (Side
Letter Addressing Capital Requirements). See also FCA Application
Appendix B category 1.d. (Internal Risk Management Requirements)
(generally discussing internal risk management requirements).
\78\ See Capital and Margin Adopting Release, 84 FR at 43879-83.
The capital standard of Exchange Act rule 18a-1 is based on the net
liquid assets test of Exchange Act rule 15c3-1 applicable to broker-
dealers. Id. The net liquid assets test seeks to promote liquidity
by requiring that a firm maintain sufficient liquid assets to meet
all liabilities, including obligations to customers, counterparties,
and other creditors, and, in the event a firm fails financially, to
have adequate additional resources to wind-down its business in an
orderly manner without the need for a formal proceeding. See id. at
43879. See FCA Application Appendix B, Annex V (Side Letter
Addressing Capital Requirements).
\79\ See Exchange Act rule 18a-1(f).
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Margin--Margin requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially
regulated SBS Entities. The margin requirements are designed to protect
SBS Entities from the consequences of a counterparty's default.\80\
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\80\ See Capital and Margin Adopting Release, 84 FR at 43947;
see also id. at 43949 (``Obtaining collateral is one of the ways OTC
derivatives dealers manage their credit risk exposure to OTC
derivatives counterparties. Prior to the financial crisis, in
certain circumstances, counterparties were able to enter into OTC
derivatives transactions without having to deliver collateral. When
``trigger events'' occurred during the financial crisis, those
counterparties faced significant liquidity strains when they were
required to deliver collateral''). The FCA Application discusses UK
requirements that address firms' margin requirements. See FCA
Application Appendix B category 1.c. (Margin Requirements for
Nonbank Firms) and Annex I (Margin Haircuts (Category 1)).
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Taken as a whole, these capital and margin requirements help to
promote
[[Page 18386]]
market stability by mandating that SBS Entities follow practices to
manage the market, credit, liquidity, solvency, counterparty, and
operational risks associated with their security-based swap businesses.
The Commission's comparability assessment accordingly focuses on
whether the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to providing that Covered Entities
follow capital and margin requirements that address the risks
associated with their security-based swap businesses.
B. Preliminary Views and Proposed Order
1. General Considerations
In the Commission's preliminary view, based on the FCA Application
and the Commission's review of applicable provisions, relevant UK
capital requirements would produce regulatory outcomes that address the
risks that the above capital requirements are designed to address. As
discussed below, however, the Commission preliminarily believes that
additional conditions on applying substituted compliance with respect
to the Exchange Act capital requirements may be an appropriate
supplement to the UK capital requirements in order to produce
comparable regulatory outcomes. Substituted compliance with respect to
the capital requirements accordingly would be conditioned on Covered
Entities being subject to the UK capital requirements and additional
conditions that, in the aggregate, establish a framework that produces
outcomes comparable to those associated with the capital requirements
under Exchange Act rule 18a-1.\81\
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\81\ In connection with capital requirements, Covered Entities
must comply with: The capital requirements of UK CRR, including
recitals 40, 43 and 87, and articles 26, 28, 50 through 52, 61, 63,
92, 111, 113(1), 114 through 122, 143, 153(8), 177(2), 283, 290, 300
through 311, 312(2), 362 through 377, 382 through 383, 412(1),
413(1), 416(1), 427(1), 413, 429, 430, and 499; UK MiFID Org Reg
article 23; UK EMIR Margin RTS recital 31 and articles 2, 3(b), 7,
and 19(1)(d) and (e), (3) and (8); FCA SYSC 4.1.1R, 7.1.4R, and
7.1.18R; FCA IFPRU 2,7, 10, and 11; FCA BIPRU 12; FCA PRIN; Client
asset protection requirements under FCA CASS; PRA General
Organisational Requirements Rule 2.1; PRA Risk Control Rules 2.3 and
3.1(1), Capital Buffers Part, Internal Capital Adequacy Assessment
Part, Internal Liquidity Adequacy Assessment Part, Liquidity
Coverage Requirement--UK Designated Investment Firms Part, and
Notifications Part, of the PRA Rulebook; Banking Act 2009; Capital
Requirements Regulations 2013; Capital Requirements (Capital Buffers
and Macro-prudential Measures) Regulations 2014; Part 8 and Part 9
of the Bank Recovery and Resolution (No 2) Order 2014; Bank of
England Act 1998 (Macro-prudential Measures) (No 2) Order 2015; and
Parts 4A and 12A of FSMA. See para. (c)(1)(i) to the proposed Order.
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In the Commission's preliminary view, based on the FCA Application
and the Commission's review of applicable provisions, relevant UK
margin requirements would produce regulatory outcomes that are
comparable to those associated with the above margin requirements. For
example, in adopting its final margin requirements for non-cleared
security-based swaps, the Commission stated that it modified the
proposal to more closely align the final rule with the margin rules of
the Commodity Futures Trading Commission and the U.S. prudential
regulators and, in doing so, with the recommendations made by the Basel
Committee on Banking Supervision (``BCBS'') and the Board of the
International Organization of Securities Commissions (``IOSCO'') with
respect to margin requirements for non-centrally cleared
derivatives.\82\ Substituted compliance with respect to the margin
requirements accordingly would be conditioned on Covered Entities being
subject to those UK provisions that, the Commission has determined, in
the aggregate, establish a framework that produces outcomes comparable
to those associated with the requirements under the Exchange Act rule
18a-3.\83\
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\82\ See Capital and Margin Adopting Release, 84 FR at 43908-09;
see also BCBS/IOSCO, Margin Requirements for Non-centrally Cleared
Derivatives (April 2020), available at: https://www.bis.org/bcbs/publ/d499.pdf (``BCBS/IOSCO Paper''). The UK margin requirements
also are based on the recommendation in the BCBS/IOSCO Paper.
\83\ In connection with margin requirements, Covered Entities
must comply with: UK EMIR article 11; UK EMIR Margin RTS; UK CRR
articles 103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7), 290,
295, 296(2)(b), 297(1), 297(3), and 298(1); UK MiFID Org Reg article
23(1); FCA SYSC 4.1.1R; FCA IFPRU 2.2.18R; PRA General
Organisational Requirements Rule 2.1; and PRA Internal Capital
Adequacy Assessment Rule 4.2. See para. (c)(2) to the proposed
Order.
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While the Commission recognizes that there are certain differences
between those UK requirements and the applicable capital and margin
requirements under the Exchange Act, in the Commission's preliminary
view, those differences on balance would not preclude substituted
compliance for these requirements, particularly as requirement-by-
requirement similarity is not needed for substituted compliance.
As noted above, substituted compliance in connection with capital
requirements would be subject to certain additional conditions to help
ensure the comparability of outcomes.\84\ As discussed in more detail
below in section V.B.3. of this notice, these proposed conditions to
substituted compliance for capital are designed to promote
comparability in light of the differences between the net liquid assets
test standard of Exchange Act rule 18a-1 and the bank capital standard
applicable to Covered Entities.\85\ More specifically, in proposing the
capital conditions, the Commission has preliminarily sought to balance
the Commission's objective to promote the ability of Covered Entities
to absorb financial shocks and, if necessary, to self-liquidate in an
orderly manner while also providing them flexibility to apply
substituted compliance with respect to Exchange Act rule 18a-1.\86\
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\84\ See para. (c)(1)(ii) to the proposed Order.
\85\ See Capital and Margin Adopting Release, 84 FR at 43881
(``Consequently, in the Commission's judgment, the broker-dealer
capital standard is the appropriate standard for nonbank SBSDs
because it is designed to promote a firm's liquidity and self-
sufficiency (in other words, to account for the lack of inexpensive
funding sources that are available to banks, such as deposits and
central bank support).'').
\86\ See, e.g., Capital and Margin Adopting Release, 84 FR at
43881 (``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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2. Scope of Substituted Compliance
The proposed Order would permit a Covered Entity to apply
substituted compliance for the capital and/or margin requirements.
Thus, a Covered Entity could apply substituted compliance for Exchange
Act margin requirements by complying with UK margin requirements but
comply with Exchange Act capital requirements (rather than applying
substituted compliance to those requirements) and vice versa. However,
as to the various requirements within the capital and margin rules, the
Commission found the rules to be entity-level when adopting amendments
to Exchange Act rule 3a71-6 to make substituted compliance available
with respect to them.\87\ Consequently, under the proposed Order, a
Covered Entity must apply substituted compliance with respect to
capital and margin requirements at an entity level. For example, a
Covered Entity applying substituted compliance for capital would need
to comply with the comparable UK capital requirements at the entity
level with respect to all capital requirements and calculations.
Similarly, a Covered Entity applying substituted compliance for margin
would need to comply with the
[[Page 18387]]
comparable UK requirements at the entity level with respect to all
margin requirements and counterparties--the firm could not apply UK
margin requirements for one set of counterparties and Exchange Act
margin requirements for another set of counterparties.\88\
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\87\ See Capital and Margin Adopting Release, 84 FR at 43946-50.
\88\ See Capital and Margin Adopting Release, 84 FR at 43947
(``Margin is designed to protect the nonbank SBSD or MSBSP from the
consequences of a counterparty's default. Permitting different
margin requirements based on the location of the counterparty is not
consistent with this objective.'') (footnotes omitted).
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3. Additional Conditions
Substituted compliance in connection with capital requirements
would be subject to certain additional conditions to help ensure the
comparability of outcomes. As discussed above, 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).\89\ 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.
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\89\ 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, 1988), 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 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 (``GAAP''). 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.\90\ 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.
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\90\ See 17 CFR 240.15c3-1(c)(2).
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In comparison, Covered Entities in the UK are subject to capital
requirements applicable to prudentially regulated entities based on the
international capital standard for banks (the ``Basel capital
standard'').\91\ 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.
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\91\ See supra note 81 (citing UK capital requirements under UK
CRR). See also BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
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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 the UK margin requirements, Covered
Entities will be required to post initial margin to counterparties
unless an exception applies.\92\ 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.\93\ 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.'' \94\ 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.
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\92\ Exchange Act rule 18a-3 does not require SBS Entities to
post initial margin (though it does not prohibit the practice).
\93\ See Capital and Margin Adopting Release, 84 FR at 43887-88.
\94\ See id. at 43887.
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To address this potential liquidity difference, substituted
compliance with respect to Exchange Act rule 18a-1
[[Page 18388]]
would 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 initial written
notice to the Commission of its intent to rely on substituted
compliance under condition (a)(16) to the proposed Order.\95\
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\95\ See para. (c)(1)(ii) to the proposed Order.
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The first proposed 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,\96\ that equals or exceeds the Covered Entity's current
liabilities coming due in the next 365 days.\97\ 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 proposed 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.\98\ The 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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\96\ See standard supervisory haircuts under the Basel capital
standards. BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
\97\ See para. (c)(1)(ii)(A) to the proposed Order.
\98\ See Capital and Margin Adopting Release, 84 FR at 43881
(``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 proposed condition would require that a Covered Entity
make a quarterly record listing: (1) The assets maintained pursuant to
the first 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.\99\ The requirement to create this record would
enable the Commission or Commission staff to monitor compliance with
the proposed condition and facilitate examination of the Covered Entity
with regard to substituted compliance. The proposed 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.
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\99\ See para. (c)(1)(ii)(B) to the proposed Order.
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In proposing these two conditions, the Commission acknowledges that
the Basel capital standard includes the liquidity coverage ratio
(``LCR''). However, 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 proposed 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. This is consistent with the goal of ensuring comparability
of outcomes.
The third proposed 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.\100\ This 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 is
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.
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\100\ See para. (c)(1)(ii)(C) to the proposed Order.
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The fourth 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.\101\ 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.
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\101\ See para. (c)(1)(ii)(D) to the proposed Order.
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The Commission is mindful that compliance with these 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.\102\ On balance, however, these
proposed conditions to substituted compliance for capital are designed
to ensure the comparability of outcomes in light of the differences
between the net liquid
[[Page 18389]]
assets test and the Basel capital standard. If these conditions are
included in the final order, the Commission intends to monitor their
impact on firms and to make adjustments to them as appropriate.
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\102\ 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 proposed capital
conditions.
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VI. Substituted Compliance for Internal Supervision, Chief Compliance
Officers and Additional Exchange Act Section 15F(j) Requirements
A. FCA Request and Associated Analytic Considerations
The FCA also requests substituted compliance in connection with
requirements under the Exchange Act relating to:
Internal supervision--Diligent supervision is required
pursuant to Exchange Act rule 15Fh-3(h),\103\ and Exchange Act section
15F(j)(5) requires conflict of interest systems and procedures. These
provisions generally require that SBS Entities establish, maintain and
enforce supervisory policies and procedures that reasonably are
designed to prevent violations of applicable law, and implement certain
systems and procedures related to conflicts of interest.\104\
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\103\ 17 CFR 240.15Fh-3(h).
\104\ The FCA Application addresses UK provisions that address
firms' supervisory frameworks, persons with supervisory authority,
supervisory policies and procedures, general compliance and internal
recordkeeping, investigation of personnel, conflicts of interest,
personal trading and remuneration. See FCA Application Appendix B
category 3 at 190-214, 217-48.
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Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and Exchange
Act rule 15Fk-1.\105\ These provisions in general require that SBS
Entities designate individuals with the responsibility and authority to
establish, administer and review compliance policies and procedures, to
resolve conflicts of interest, and to prepare and certify an annual
compliance report to the Commission.\106\
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\105\ 17 CFR 240.15Fk-1.
\106\ The FCA Application discusses UK requirements that address
compliance officers and their responsibilities, compliance officer
appointment, removal and compensation, related conflict of interest
provisions and compliance-related reports. See FCA Application
Appendix B category 3 at 249-74.
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Additional Exchange Act section 15F(j) requirements--
Additional requirements related to information-gathering pursuant to
Exchange Act section 15F(j)(4)(A), and certain antitrust prohibitions
specified by Exchange Act section 15F(j)(6).\107\
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\107\ Section 15F(j)(4)(A) particularly requires firms to have
systems and procedures to obtain necessary information to perform
functions required under section 15F. The FCA Application in turn
discusses UK provisions generally addressing information gathering
and disclosure. See FCA Application Appendix B category 3 at 214-15.
Section 15F(j)(6) prohibits firms from adopting any process or
taking any action that results in any unreasonable restraint of
trade, or to impose any material anticompetitive burden on trading
or clearing. The FCA Application addresses EU antitrust
requirements. See FCA Application Appendix B category 3 at 216-17.
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Taken as a whole, these internal supervision, chief compliance
officer and additional Exchange Act section 15F(j) requirements help to
promote SBS Entities' use of structures, processes and responsible
personnel reasonably designed to promote compliance with applicable
law, to identify and cure instances of non-compliance and to manage
conflicts of interest. The comparability assessment accordingly may
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that Covered
Entities have structures and processes reasonably designed to promote
compliance with applicable law, identify and cure instances of non-
compliance and to manage conflicts of interest, in part through the
designation of an individual with responsibility and authority over
compliance matters.
B. Preliminary Views and Proposed Order
1. General Considerations
Based on the FCA Application and the Commission's review of
applicable provisions, in the Commission's preliminary view the
relevant UK requirements would produce regulatory outcomes that are
comparable to those associated with the above-described internal
supervision, chief compliance officer, conflict of interest and
information-related requirements by providing that Covered Entities
have structures and processes that reasonably are designed to promote
compliance with applicable law and to identify and cure instances of
non-compliance and manage conflicts of interest.\108\ As elsewhere,
this part of the proposed Order conditions substituted compliance on
Covered Entities being subject to and complying with specified UK
requirements that are necessary to establish comparability.\109\
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\108\ This portion of the proposed Order accordingly would
extend generally to the internal supervision provisions of Exchange
Act rule 15Fh-3(h), the requirement in Exchange Act section
15F(j)(4)(A) to have systems and procedures to obtain necessary
information to perform functions required under Exchange Act section
15F and the conflict of interest provisions of Exchange Act section
15F(j)(5). See para. (d)(1) to the proposed Order. This portion of
the proposed Order does not extend to the portions of rule 15Fh-3(h)
that mandate supervisory policies and procedures in connection with:
The risk management system provisions of Exchange Act section
15F(j)(2) (which are addressed by paragraph (b)(1) to the proposed
Order in connection with internal risk management); the information-
related provisions of Exchange Act sections 15F(j)(3) and (j)(4)(B)
(for which substituted compliance is not available); or the
antitrust provisions of Exchange Act section 15F(j)(6) (for which
the Commission is not proposing to provide substituted compliance).
See para. (d)(1)(iii) to the proposed Order.
\109\ In connection with these internal supervision, chief
compliance officer and conflict of interest and information
gathering provisions, a Covered Entity must be subject to and comply
with provisions of UK law that implement MiFID articles 16 and 23
and CRD articles 74, 76, 79 through 87, 88(1), 91(1) and (2) and 92;
UK CRR article 286 through 288 and 293; UK EMIR Margin RTS article
2; and UK MiFID Org Reg articles 21 through 37 and 72 through 76 and
Annex IV. See para. (d)(3) to the proposed Order.
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The Commission recognizes that certain differences are present
between those UK requirements and the applicable requirements under the
Exchange Act. In the Commission's preliminary view, on balance,
however, those differences would not preclude substituted compliance
within the relevant outcomes-oriented context.
2. Scope of Substituted Compliance
The proposed Order would permit a Covered Entity to apply
substituted compliance for internal supervision and/or chief compliance
officer requirements. For example, a Covered Entity could apply
substituted compliance for internal supervision requirements but comply
directly with Exchange Act chief compliance officer requirements. For
either set of requirements for which a Covered Entity applies
substituted compliance, however, the proposed Order would require the
Covered Entity to apply substituted compliance at an entity level,
i.e., to all of its activities subject to that set of requirements. For
example, the proposed Order would require a Covered Entity applying
substituted compliance for internal supervision requirements to comply
with the comparable UK requirements with respect to all of its internal
supervision systems and procedures. The Covered Entity could not choose
to comply with the Exchange Act for one part of its internal
supervision systems and procedures and with UK requirements for another
part of its internal supervision systems and procedures.\110\ The
Commission preliminarily believes that this scope of substituted
compliance strikes the right balance between providing Covered Entities
[[Page 18390]]
flexibility to tailor the application of substituted compliance to
their business needs and ensuring that substituted compliance is
consistent with the Commission's classification of the relevant
Exchange Act requirements as entity-level requirements.\111\
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\110\ See para. (d)(1) to the proposed Order. Similarly, a
Covered Entity applying substituted compliance for chief compliance
officer requirements would have to comply with the comparable UK
requirements with respect to all security-based swaps subject to
Exchange Act trade acknowledgment and verification requirements. See
para. (d)(2) to the proposed Order.
\111\ See Business Conduct Adopting Release, 81 FR at 30064
(diligent supervision and chief compliance officer requirements are
entity-level requirements).
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3. Types of Covered Entities ``Subject to'' Comparable UK Requirements
Each of the comparable UK provisions listed in the proposed Order
applies to a uniquely defined set of UK-authorized firms.\112\ To
assist UK firms in determining whether they are subject to these
provisions, the Commission preliminarily has determined that any
Covered Entity that is an ``IFPRU investment firm,'' as defined in the
FCA Handbook Glossary, or a ``UK bank'' or ``UK designated investment
firm,'' as defined in both the FCA Handbook Glossary and the PRA
Rulebook Glossary, and is not an ``investment company with variable
capital,'' as defined in the FCA Handbook Glossary, would be subject to
all of the required UK provisions. Accordingly, those types of firms
preliminarily would be eligible to apply substituted compliance for
internal supervision, chief compliance officer, conflict of interest
and information-related requirements. A Covered Entity that is
preliminarily not eligible to apply substituted compliance for those
requirements, such as a third country investment firm, nevertheless
would be preliminarily eligible to apply substituted compliance for
other requirements addressed in the proposed Order if it complies with
the relevant parts of the proposed Order.
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\112\ The Commission preliminarily understands that FCA CASS 6
and 7 apply to all FCA-authorized firms that are not investment
companies with variable capital; FCA COBS 11 applies to all FCA-
authorized firms; FCA IFPRU and FCA BIPRU apply to IFPRU investment
firms; FCA SYSC 4, 7, 9 and 10 (except SYSC 10.1.8) apply to common
platform firms and third country firms; FCA SYSC 10.1.8 applies to
firms that provide services to a client in the course of carrying on
regulated activities or ancillary activities or providing ancillary
services that constituted MiFID business; FCA SYSC 10A applies to
MiFID investment firms and third country investment firms; FCA SYSC
19A applies to IFPRU investment firms and their overseas firm
analogues; FCA SYSC 19D applies to UK banks, UK designated
investment firms and their overseas firm analogues; the PRA rules
cited in paragraph (d)(3) to the proposed Order apply to CRR firms
as defined in the PRA Rulebook Glossary; and UK MiFID Org Reg
applies to investment firms and credit institutions.
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4. Additional Conditions and Scope Issues
Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Application of UK Supervisory and Compliance Requirements to
Residual U.S. Requirements and Order Conditions
Under the proposed Order, substituted compliance for the relevant
internal supervision requirements would be conditioned on Covered
Entities complying with applicable UK supervisory and compliance
provisions as if those provisions also require the Covered Entity to
comply with applicable requirements under the Exchange Act and the
other applicable conditions to the Order.\113\
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\113\ See para. (d)(4) to the proposed Order.
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Even with substituted compliance, Covered Entities still would be
subject directly to a number of requirements under the Exchange Act and
to the conditions to the Order. In some cases, particular requirements
under the Exchange Act are outside the ambit of substituted
compliance.\114\ In other cases, certain requirements under the
Exchange Act may not have comparable UK requirements or may be outside
the scope of the FCA Application,\115\ or the Covered Entity may decide
not to use substituted compliance for certain requirements under the
Exchange Act. While the UK regulatory framework in general reasonably
appears to promote Covered Entities' compliance with applicable UK
laws, those requirements do not appear to promote Covered Entities'
compliance with requirements under the Exchange Act that are not
subject to substituted compliance, or promote Covered Entities'
compliance with the applicable conditions to substituted compliance.
This condition would address this issue, while still allowing Covered
Entities to use their existing internal supervision and compliance
frameworks to comply with the relevant Exchange Act requirements and
Order conditions, rather than having to establish separate special-
purpose supervision and compliance frameworks.
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\114\ As noted, substituted compliance does not extend to
antifraud prohibitions or to certain other requirements under the
Exchange Act (e.g., requirements related to transactions with
counterparties that are not ECPs and segregation requirements). See
note 5, supra.
\115\ For example, the FCA is not requesting substituted
compliance in connection with ECP verification requirements,
``special entity'' provisions and political contribution provisions.
See note 17, supra.
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b. Compliance Reports
Under the proposed Order, substituted compliance in connection with
the compliance report requirements under Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) also would be subject to the condition
that the compliance reports required pursuant to UK MiFID Org Reg
article 22(2)(c) must: (1) Be provided to the Commission annually and
in the English language; (2) include a certification under penalty of
law that the report is accurate and complete; and (3) address the
Covered Entity's compliance with other applicable conditions to the
proposed Order.\116\
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\116\ See para. (d)(2)(ii) to the proposed Order. UK MiFID Org
Reg article 22(2)(c) particularly requires that a Covered Entity's
compliance function ``report to the management body, on at least an
annual basis, on the implementation and effectiveness of the overall
control environment for investment services and activities, on the
risks that have been identified and on the complaints-handling
reporting as well as remedies undertaken or to be undertaken[.]''
Under the proposed condition, those reports, as submitted to the
Commission and the Covered Entity's management body, also would
address the Covered Entity's compliance with the other conditions to
the proposed Order (in addition to addressing the Covered Entity's
compliance with applicable UK provisions).
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Although certain UK requirements address a Covered Entity's use of
internal compliance reports, those provisions do not require it to
submit compliance reports to the Commission. Under this condition, a
Covered Entity could leverage the compliance reports that it otherwise
must produce, by extending those reports to address compliance with the
conditions to the proposed Order.\117\
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\117\ In practice, a Covered Entity may satisfy this condition
by identifying relevant Order conditions and reporting on the
implementation and effectiveness of its controls with regard to
compliance with those Order conditions.
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c. Antitrust Considerations
Under the proposed Order, substituted compliance would not extend
to Exchange Act section 15F(j)(6) (and related internal supervision
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an
alternative means of compliance would not lead to outcomes comparable
to that statutory prohibition.\118\
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\118\ See also German Substituted Compliance Order, 85 FR at
85691-92. The Commission is not taking any position regarding the
applicability of the section 15F(j)(6) antitrust prohibitions in the
cross-border context. Non-U.S. SBS Entities should assess the
applicability of those prohibitions to their security-based swap
businesses.
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VII. Substituted Compliance for Counterparty Protection Requirements
A. FCA Request and Associated Analytic Considerations
The FCA further requests substituted compliance in connection with
provisions under the Exchange Act relating to:
[[Page 18391]]
Disclosure of material risks and characteristics and
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) \119\ requires that SBS Entities disclose to certain
counterparties to a security-based swap certain information about the
material risks and characteristics of the security-based swap, as well
as material incentives or conflicts of interest that the SBS Entity may
have in connection with the security-based swap. These provisions
address the need for security-based swap market participants to have
information that is sufficient to make informed decisions regarding
potential transactions involving particular counterparties and
particular financial instruments.\120\
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\119\ 17 CFR 240.15Fh-3(b).
\120\ See Business Conduct Adopting Release, 81 FR at 29983-86.
The FCA Application discusses UK requirements that address
disclosure of product information and firm information. See FCA
Application Appendix B category 4 at 292-303.
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``Know your counterparty''--Exchange Act rule 15Fh-3(e)
\121\ requires that SBS Entities establish, maintain and enforce
written policies and procedures to obtain and retain certain
information regarding a counterparty that is necessary for conducting
business with that counterparty. This provision accounts for the need
that SBS Entities obtain essential counterparty information necessary
to promote effective compliance and risk management.\122\
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\121\ 17 CFR 240.15Fh-3(e).
\122\ See Business Conduct Adopting Release, 81 FR at 29993-94.
The FCA Application discusses UK suitability requirements regarding
information that firms must obtain regarding counterparties. See FCA
Application Appendix B category 4 at 313-20.
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Suitability--Exchange Act rule 15Fh-3(f) \123\ requires a
security-based swap dealer that recommends to certain counterparties a
security-based swap or trading strategy involving a security-based
swap, to undertake reasonable diligence to understand the potential
risks and rewards associated with the recommendation and to have a
reasonable basis to believe that the recommendation is suitable for the
counterparty.\124\ This provision accounts for the need to guard
against security-based swap dealers making unsuitable
recommendations.\125\
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\123\ 17 CFR 240.15Fh-3(f).
\124\ See Business Conduct Adopting Release, 81 FR at 29994-
30000. A security-based swap dealer may satisfy its counterparty-
specific suitability obligation with respect to an ``institutional
counterparty,'' as defined in Exchange Act rule 15Fh-3(f)(4), if the
security-based swap dealer reasonably determines that the
counterparty or its agent is capable of independently evaluating
relevant investment risks, the counterparty or its agent represents
in writing that it is exercising independent judgment in evaluating
the recommendation, and the security-based swap dealer discloses
that it is acting as counterparty and is not undertaking to assess
the suitability of the recommendation for the counterparty. See
Exchange Act rule 15Fh-3(f)(2) and (3).
\125\ See Business Conduct Adopting Release, 81 FR at 29997. The
FCA Application discusses UK suitability requirements that are more
targeted for transactions with ``professional clients.'' See FCA
Application Appendix B category 4 at 321-32.
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Fair and balanced communications--Exchange Act rule 15Fh-
3(g) \126\ requires that SBS Entities communicate with counterparties
in a fair and balanced manner based on principles of fair dealing and
good faith. These provisions promote complete and honest communications
as part of SBS Entities' security-based swap businesses.\127\
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\126\ 17 CFR 240.15Fh-3(g).
\127\ See Business Conduct Adopting Release, 81 FR at 30000-02.
The FCA Application discusses UK requirements that address
communications standards. See FCA Application Appendix B category 4
at 275-91.
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Daily mark disclosure--Exchange Act rule 15Fh-3(c) \128\
requires that SBS Entities provide daily mark information to certain
counterparties. These provisions address the need for market
participants to have effective access to daily mark information
necessary to manage their security-based swap positions.\129\
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\128\ 17 CFR 240.15Fh-3(c).
\129\ See Business Conduct Adopting Release, 81 FR at 29986-91.
The FCA Application discusses UK requirements that address
valuation, portfolio reconciliation and trade reporting. See FCA
Application Appendix B category 4 at 304-12.
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Clearing rights disclosure--Exchange Act rule 15Fh-3(d)
\130\ requires that SBS Entities provide certain counterparties with
information regarding clearing rights under the Exchange Act.\131\
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\130\ 17 CFR 240.15Fh-3(d).
\131\ Exchange Act section 3C(g)(5), provides certain rights for
counterparties to select the clearing agency at which a security-
based swap is cleared. For all security-based swaps that an SBS
Entity enters into with certain counterparties, the counterparty has
the sole right to select the clearing agency at which the security-
based swap is cleared. For security-based swaps that are not subject
to mandatory clearing (pursuant to Exchange Act sections 3C(a) and
(b), 15 U.S.C. 78c-3(a) and (b)) and that an SBS Entity enters into
with certain counterparties, the counterparty also may elect to
require clearing of the security-based swap. Substituted compliance
is not available in connection with this provision. The FCA
Application discusses UK provisions that address clearing rights.
See FCA Application Appendix B category 4 at 333-40.
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Taken as a whole, the counterparty protection requirements under
section 15F of the Exchange Act help to ``bring professional standards
of conduct to, and increase transparency in, the security-based swap
market and to require [SBS Entities] to treat parties to these
transactions fairly.'' \132\ The comparability assessment accordingly
may focus on whether the analogous foreign requirements--taken as a
whole--produce similar outcomes with regard to promoting professional
standards of conduct, increasing transparency and requiring Covered
Entities to treat parties fairly.
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\132\ See Business Conduct Adopting Release, 81 FR at 30065.
These transaction-level requirements generally apply only to a non-
U.S. SBS Entity's activities involving U.S. counterparties (unless
the transaction is arranged, negotiated or executed in the United
States). In particular, for non-U.S. SBS Entities, the counterparty
protection requirements under Exchange Act section 15F(h) apply only
to the SBS Entity's transactions with U.S. counterparties (apart
from certain transactions conducted through a foreign branch of the
U.S. counterparty), or to transactions arranged, negotiated or
executed in the United States. See Exchange Act rule 3a71-3(c), 17
CFR 240.3a71-3(c) (exception from business conduct requirements for
a security-based swap dealer's ``foreign business''); see also
Exchange Act rule 3a71-3(a)(3), (8) and (9), 17 CFR 240.3a71-
3(a)(3), (8) and (9) (definitions of ``transaction conducted through
a foreign branch,'' ``U.S. business'' and ``foreign business'').
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B. Preliminary Views and Proposed Order
1. General Considerations
Based on the FCA Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant UK requirements produce regulatory outcomes that are
comparable to counterparty protection requirements under Exchange Act
section 15F(h) related to disclosure of material risks and
characteristics, disclosure of material incentives or conflicts of
interest, ``know your counterparty,'' suitability, fair and balanced
communications and daily mark disclosure, by subjecting Covered
Entities to obligations that promote standards of professional conduct,
transparency and the fair treatment of parties. The proposed Order
accordingly would provide conditional substituted compliance in
connection with those requirements.\133\ The proposed Order
preliminarily does not provide substituted compliance in connection
with requirements related to clearing rights disclosure, however, for
reasons addressed below.
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\133\ See generally para. (e) to the proposed Order.
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In taking this proposed approach, the Commission recognizes that
there are certain differences between relevant UK requirements, on the
one hand, and the relevant disclosure, ``know your counterparty,''
suitability and communications requirements under the Exchange Act, on
the other hand. On balance, however, in the Commission's preliminary
view, those differences, when coupled with the conditions in the
proposed Order, are not so material as to be inconsistent with
substituted
[[Page 18392]]
compliance within the requisite outcomes-oriented framework. As
elsewhere, the counterparty protection provisions of the proposed Order
in part condition substituted compliance on Covered Entities being
subject to, and complying with, specified UK requirements that are
necessary to establish comparability.\134\ Substituted compliance in
connection with these counterparty protection requirements also would
be subject to specific conditions and limitations necessary to promote
consistency in regulatory outcomes.
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\134\ In connection with requirements related to disclosure of
information regarding material risks and characteristics, a Covered
Entity must be subject to and comply with provisions of UK law that
implement MiFID article 24(4) and either UK MiFID Org Reg articles
48 through 50 or provisions of UK law that reflect UK MiFID Org Reg
articles 48 through 50, in each case in relation to the security-
based swap for which substituted compliance is applied. See para.
(e)(1) to the proposed Order. In connection with requirements
related to disclosure of information regarding material incentives
or conflicts of interest, a Covered Entity must be subject to and
comply with either: (1) Provisions of UK law that implement MiFID
article 23(2) and (3) and UK MiFID Org Reg articles 33 through 35;
(2) provisions of UK law that implement MiFID article 24(9) and
MiFID Delegated Directive article 11(5); or (3) UK MAR article 20(1)
and UK MAR Investment Recommendations Regulation articles 5 and 6,
in each case in relation to the security-based swap for which
substituted compliance is applied. See para. (e)(2) to the proposed
Order. In connection with ``know your counterparty'' requirements, a
Covered Entity must be subject to and comply with provisions of UK
law that implement MiFID article 16(2); UK MiFID Org Reg articles
21, 22, 25, 26 and applicable parts of Annex I; provisions of UK law
that implement CRD articles 74(1) and 85(1), MLD articles 11 and 13
and MLD articles 8(3) and 8(4)(a) as applied to policies, controls
and procedures regarding customer due diligence, in each case in
relation to the security-based swap counterparty for which
substituted compliance is applied. See para. (e)(3) to the proposed
Order. In connection with suitability requirements, a Covered Entity
must be subject to and comply with provisions of UK law that
implement MiFID articles 24(2) and (3) and 25(1) and (2) and UK
MiFID Org Reg articles 21(1)(b) and (d), 54 and 55, in each case in
relation to the recommendation of a security-based swap or trading
strategy involving a security-based swap for which substituted
compliance is applied. See para. (e)(4)(i) to the proposed Order. In
connection with fair and balanced communications requirements, a
Covered Entity must be subject to and comply with provisions of UK
law that implement either MiFID article 24(1) and (3) or MiFID
article 30(1); provisions of UK law that implement MiFID article
24(4) and (5); either UK MiFID Org Reg articles 46 through 48 or
provisions of UK law that reflect UK MiFID Org Reg articles 46
through 48; UK MAR Investment Recommendations Regulation articles 3
and 4; and UK MAR articles 12(1)(c), 15 and 20(1), in each case in
relation to the communication for which substituted compliance is
applied. See para. (e)(5) to the Proposed Order. In connection with
daily mark disclosure requirements, Covered Entities must be
required to reconcile, and in fact reconcile, the portfolio
containing the security-based swap for which substituted compliance
is applied, on each business day pursuant to UK EMIR articles
11(1)(b) and 11(2) and UK EMIR RTS article 13. See para. (e)(6) to
the Proposed Order.
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2. Scope of Substituted Compliance
The proposed Order would permit a Covered Entity to apply
substituted compliance for one or more counterparty protection
requirements. For example, a Covered Entity could apply substituted
compliance for fair and balanced communications requirements but comply
directly with Exchange Act requirements related to disclosure of
information regarding material risks and characteristics, disclosure of
information regarding material incentives or conflicts of interest,
``know your counterparty,'' suitability and daily mark disclosure. A
Covered Entity also may decide to apply substituted compliance for a
particular set of counterparty protection requirements, such as fair
and balance communications, for some activities and comply directly
with Exchange Act requirements for other activities. For example, the
proposed Order would allow a Covered Entity applying substituted
compliance for fair and balanced communications requirements to comply
with the comparable UK requirements with respect to communications with
UK counterparties that are subject to the Exchange Act and to comply
directly with Exchange Act requirements with respect to U.S. person
counterparties.\135\ The Commission preliminarily believes that this
scope of substituted compliance would provide Covered Entities
flexibility to tailor the application of substituted compliance to
their business needs in a manner consistent with the Commission's
classification of the relevant Exchange Act counterparty protection
requirements as transaction-level requirements.\136\
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\135\ See para. (e)(5) to the proposed Order. Similarly, a
Covered Entity applying substituted compliance for requirements to
disclose information regarding material risks and characteristics
could comply with the comparable UK requirements with respect to
some security-based swaps and comply directly with Exchange Act
requirements with respect to other security-based swaps. See para.
(e)(1) to the proposed Order. A Covered Entity applying substituted
compliance for requirements to disclose information regarding
material incentives or conflicts of interest could comply with the
comparable UK requirements with respect to some security-based swaps
and comply directly with Exchange Act requirements with respect to
other security-based swaps. See para. (e)(2) to the proposed Order.
A Covered Entity applying substituted compliance for ``know your
counterparty'' requirements could comply with the comparable UK
requirements with respect to some security-based swap counterparties
and comply directly with Exchange Act requirements with respect to
other counterparties. See para. (e)(3) to the proposed Order. A
Covered Entity applying substituted compliance for suitability
requirements could comply with the comparable UK requirements with
respect to some recommendations of a security-based swap or trading
strategy involving a security-based swap and comply directly with
Exchange Act requirements with respect to other recommendations. See
para. (e)(4) to the proposed Order. A Covered Entity applying
substituted compliance for daily mark disclosure requirements could
comply with the comparable UK requirements with respect to some
security-based swaps and comply directly with Exchange Act
requirements with respect to other security-based swaps. See para.
(e)(6) to the proposed Order.
\136\ See Business Conduct Adopting Release, 81 FR at 30065
(counterparty protection requirements are transaction-level
requirements).
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3. Types of Covered Entities ``Subject to'' Comparable UK Requirements
Each of the comparable UK provisions listed in the proposed Order
applies to a uniquely defined set of UK-authorized firms.\137\ To
assist UK firms in determining whether they are subject to these
provisions, the Commission preliminarily has determined that any
Covered Entity would be subject to the required UK requirements related
to disclosure of material risks and characteristics, disclosure of
material incentives or conflicts of interest, suitability and fair and
balanced communications. Accordingly, any
[[Page 18393]]
Covered Entity preliminarily would be eligible to apply substituted
compliance for disclosure of material risks and characteristics,
disclosure of material incentives or conflicts of interest, suitability
and fair and balanced communications requirements. In connection with
``know your counterparty'' requirements, the Commission also
preliminarily has determined that any Covered Entity that is an ``IFPRU
investment firm,'' as defined in the FCA Handbook Glossary, or a ``UK
bank'' or ``UK designated investment firm,'' as defined in both the FCA
Handbook Glossary and the PRA Rulebook Glossary, would be subject to
all of the required UK provisions and thus eligible to apply
substituted compliance for Exchange Act ``know your counterparty''
requirements. In connection with daily mark disclosure requirements,
the Commission preliminarily has determined that any Covered Entity
that is a ``financial counterparty''--that is, a Covered Entity that is
a MiFID investment firm rather than a third country investment firm--
would be subject to all of the required UK provisions and thus eligible
to apply substituted compliance for Exchange Act daily mark disclosure
requirements. A Covered Entity that is preliminarily not eligible to
apply substituted compliance for ``know your counterparty'' and/or
daily mark disclosure requirements, such as a third country investment
firm, nevertheless would be preliminarily eligible to apply substituted
compliance for other requirements addressed in the proposed Order if it
complies with the relevant parts of the proposed Order.
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\137\ In connection with requirements related to disclosure of
information regarding material risks and characteristics, the
Commission preliminarily understands that FCA COBS 2, 6, 9A and 14
apply to MiFID investment firms and third country investment firms
and the UK MiFID Org Reg applies to investment firms and credit
institutions. In connection with requirements related to disclosure
of information regarding material incentives or conflicts of
interest, the Commission preliminarily understands that FCA COBS 2
applies to MiFID investment firms and third country investment
firms; FCA SYSC 10.1.8 applies to firms that provide services to a
client in the course of carrying on regulated activities or
ancillary activities or providing ancillary services that constitute
MiFID business; UK MAR article 20 applies to all natural and legal
persons; and UK MiFID Org Reg applies to investment firms and credit
institutions. In connection with ``know your counterparty''
requirements, the Commission preliminarily understands that FCA
IFPRU applies to IFPRU investment firms; FCA SYSC 4 and 6 apply to
common platform firms and third country firms; MLR 2017 applies to,
among others, investment firms and credit institutions; the PRA
rules cited in paragraph (e)(3) to the proposed Order apply to CRR
firms as defined in the PRA Rulebook Glossary; and UK MiFID Org Reg
applies to investment firms and credit institutions. In connection
with suitability requirements, the Commission preliminarily
understands that FCA COBS 4 and 9A and PROD 3 apply to MiFID
investment firms and third country investment firms; FCA SYSC 5
applies to common platform firms and third country firms; and UK
MiFID Org Reg applies to investment firms and credit institutions.
In connection with fair and balanced communications requirements,
the Commission preliminarily understands that FCA COBS 2, 4, 6, 8A,
9A, 14 and 14A apply to MiFID investment firms and third country
investment firms; UK MAR articles 12(1)(c) and 15 and UK MAR
Investment Recommendations Regulation article 5 apply to all natural
and legal persons; and UK MiFID Org Reg applies to investment firms
and credit institutions. In connection with daily mark disclosure
requirements, the Commission preliminarily understands that UK EMIR
and UK EMIR RTS apply to financial counterparties.
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4. Additional Conditions and Scope Issues
a. Daily Mark Disclosure
The proposed Order would provide substituted compliance in
connection with daily mark disclosure requirements pursuant to Exchange
Act rule 15Fh-3(c) to the extent that the Covered Entity participates
in daily portfolio reconciliation exercises that include the relevant
security-based swap pursuant to UK requirements.\138\ The FCA
Application takes the view that UK requirements directing certain types
of derivatives counterparties to mark-to-market (or mark-to-model)
uncleared transactions each day are comparable to Exchange Act
requirements. In the Commission's preliminary view, however, these UK
mark-to-market (or mark-to-model) requirements are not comparable to
Exchange Act requirements because the UK requirements do not require
disclosure to counterparties. In the alternative, the FCA Application
notes that certain derivatives counterparties must report to a UK trade
repository updated daily valuations for each OTC derivative contract
and that all counterparties have the right to access these valuations
at the relevant UK trade repository. In the Commission's preliminary
view, in practice, U.S. counterparties may encounter challenges when
attempting to access daily marks for different security-based swaps
reported to multiple UK trade repositories with which they may not
otherwise have business relationships. In addition, the information may
be less current, given the time necessary for reporting and for the
trade repository to make the information available.\139\ For these
reasons, in the Commission's preliminary view, these UK reporting
requirements also are not comparable to Exchange Act requirements.
Finally, the FCA Application describes the EU's portfolio
reconciliation requirements for uncleared OTC derivative contracts,
which include a requirement to exchange valuations of those contracts
directly between counterparties. The required frequency of portfolio
reconciliations varies depending on the types of counterparties and the
size of the portfolio of OTC derivatives between them, with daily
reconciliation required only for the largest portfolios. For security-
based swaps to which the UK's daily portfolio reconciliation
requirements apply (i.e., security-based swaps of a financial
counterparty or non-financial counterparty subject to the clearing
obligation in UK EMIR, if the counterparties have 500 or more OTC
derivatives contracts outstanding with each other \140\), the
Commission preliminarily views these requirements as comparable to
Exchange Act requirements. For all other security-based swaps in
portfolios that are not required to be reconciled on each business day,
the Commission preliminarily views the UK's portfolio reconciliation
requirements as not comparable to Exchange Act requirements and is
proposing not to make a positive substituted compliance determination.
---------------------------------------------------------------------------
\138\ The Commission received a comment on the German Notice and
Proposed Order suggesting that a similar condition should apply only
to security-based swaps with U.S. counterparties; for all other
transactions subject to Exchange Act daily mark requirements, the
commenter proposed that the Commission grant substituted compliance
if the Covered Entity complies with EU mark-to-market (or mark-to-
model) and reporting requirements. See Letter from Kyle Brandon,
Managing Director, Head of Derivative Policy, SIFMA (Dec. 8, 2020)
(``SIFMA Letter'') at 6. The Commission did not adopt that
bifurcated approach. See German Substituted Compliance Order, 85 FR
at 85694-95. Similarly, the Commission is proposing one approach to
substituted compliance for daily mark requirements in response to
the FCA Application. This approach would provide substituted
compliance for daily mark requirements based on comparability of
outcomes with respect to transactions with U.S. counterparties to
the same extent as it would provide substituted compliance with
respect to all other transactions.
\139\ The Commission received a comment on the German Notice and
Proposed Order that EU reporting requirements similar to the UK
requirements cited by the FCA are comparable to Exchange Act daily
mark requirements. See SIFMA Letter at 5. The commenter stated that
the access and timing challenges should not be as relevant for EU
and other non-U.S. counterparties if they are already subject to EU
reporting obligations and that in its experience data is available
promptly from trade repositories. See id. The commenter's position,
however, highlights that U.S. counterparties, as well as non-U.S.
counterparties without existing business relationships with multiple
UK trade repositories, still may encounter challenges in receiving
timely marks from these trade reports. See also German Substituted
Compliance Order, 85 FR at 85694-95.
\140\ See UK EMIR RTS article 13(3)(a)(i); UK EMIR article 10.
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b. No Substituted Compliance in Connection With Clearing Rights
Disclosure
The proposed Order would not provide substituted compliance in
connection with clearing rights disclosure requirements pursuant to
Exchange Act rule 15Fh-3(d). For those requirements, the FCA
Application cites certain provisions related to clearing rights in the
UK that are unrelated to the clearing rights provided by Exchange Act
section 3C(g)(5).\141\ The section 3C(g)(5) clearing rights are not
eligible for substituted compliance, and the UK provisions do not
require disclosure of these section 3C(g)(5) clearing rights. In the
Commission's preliminary view, substituted compliance based on UK
clearing provisions would not lead to comparable disclosure of a
counterparty's clearing rights under the Exchange Act.
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\141\ See note 131, supra.
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c. Suitability
Under the proposed Order, substituted compliance in connection with
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would
be conditioned on the requirement that the counterparty be a per se
``professional client'' as defined in FCA COBS and not be a ``special
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange
Act rule 15Fh-2(d).\142\ Accordingly, the proposed Order would not
provide substituted compliance for Exchange Act suitability
requirements for a recommendation made to a counterparty
[[Page 18394]]
that is a ``retail client'' or an elective ``professional client,'' as
such terms are defined in FCA COBS,\143\ or for a ``special entity'' as
defined in the Exchange Act. In the Commission's preliminary view,
absent such a condition the UK suitability requirements would not be
expected to produce a counterparty protection outcome that is
comparable with the outcome produced by the suitability requirements
under the Exchange Act.\144\
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\142\ 17 CFR 240.15Fh-2(d). See para. (e)(4)(ii) to the proposed
Order.
\143\ FCA COBS 3.5 describes which clients are ``professional
clients.'' FCA COBS 3.5.2R describes the types of clients considered
to be professional clients unless the client elects non-professional
treatment; these clients are per se professional clients. FCA COBS
3.5.3R describes the types of clients who may be treated as
professional clients on request; these clients are elective
professional clients. See FCA COBS 3.5.
\144\ The Commission recognizes that Exchange Act rules permit
security-based swap dealers, when making a recommendation to an
``institutional counterparty,'' to satisfy some elements of the
suitability requirement if the security-based swap dealer reasonably
determines that the counterparty or its agent is capable of
independently evaluating relevant investment risks, the counterparty
or its agent represents in writing that it is exercising independent
judgment in evaluating recommendations, and the security-based swap
dealer discloses to the counterparty that it is acting as
counterparty and is not undertaking to assess the suitability of the
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this
alternative applies are only a subset of the ``professional
clients'' to whom more narrowly tailored suitability requirements
apply under UK law. The Commission notes that the institutional
counterparty alternative under the Exchange Act would remain
available, in accordance with its terms, for recommendations that
are not eligible for, or for which a Covered Entity does not rely
on, substituted compliance.
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VIII. Substituted Compliance for Recordkeeping, Reporting,
Notification, and Securities Count Requirements
A. FCA Request and Associated Analytic Considerations
The FCA Application in part requests substituted compliance for
requirements applicable to SBS Entities under the Exchange Act relating
to:
Recordmaking--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\145\
---------------------------------------------------------------------------
\145\ See 17 CFR 240.18a-5. The FCA Application discusses UK
requirements that address firms' record creation obligations related
to matters such as financial condition, operations, transactions,
counterparties and their property, personnel and business conduct.
See FCA Application Appendix B category 2 at 101-28, 136-39.
---------------------------------------------------------------------------
Record Preservation--Exchange Act section 15F(g) and
Exchange Act rule 18a-6 require preservation of records.\146\
---------------------------------------------------------------------------
\146\ See 15 U.S.C. 780-10(g); 17 CFR 240.18a-6. The FCA
Application discusses UK requirements that address firms' record
preservation obligations related to records that firms are required
to create, as well as additional records such as records of
communications. See FCA Application Appendix B category 2 at 140-71.
---------------------------------------------------------------------------
Reporting--Exchange Act rule 18a-7 requires certain
reports.\147\
---------------------------------------------------------------------------
\147\ See 17 CFR 240.18a-7. The FCA Application discusses UK
requirements that address firms' obligations to make certain
reports. See FCA Application Appendix B category 2 at 172-80, 185-
89.
---------------------------------------------------------------------------
Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\148\
---------------------------------------------------------------------------
\148\ See 17 CFR 240.18a-8. The FCA Application discusses UK
requirements that address firms' obligations to make certain
notifications. See FCA Application Appendix B category 2 at 181-85.
---------------------------------------------------------------------------
Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a
quarterly securities count.\149\
---------------------------------------------------------------------------
\149\ See 17 CFR 240.18a-9. The FCA Application discusses UK
requirements that address firms' obligations to perform securities
counts. See FCA Application Appendix B category 2 at 129-36.
---------------------------------------------------------------------------
Taken as a whole, the recordkeeping, reporting, notification, and
securities count requirements that apply to SBS Entities are designed
to promote the prudent operation of the firm's security-based swap
activities, assist the Commission in conducting compliance examinations
of those activities, and alert the Commission to potential financial or
operational problems that could impact the firm and its customers. The
comparability assessment accordingly may focus on whether the analogous
foreign requirements--taken as a whole--produce comparable outcomes
with regard to recordkeeping, reporting, notification, securities
counts, and related practices that support the Commission's oversight
of these registrants. A foreign jurisdiction need not have analogues to
every requirement under Commission rules to receive a positive
substituted compliance determination.\150\
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\150\ Rule 3a71-6 sets forth additional analytic considerations
in connection with substituted compliance for the Commission's
recordkeeping, reporting, notification, and securities count
requirements. In particular, Exchange Act rule 3a71-6(d)(6) provides
that the Commission intends to consider (in addition to any
conditions imposed) ``whether the foreign financial regulatory
system's required records and reports, the timeframes for recording
or reporting information, the accounting standards governing the
records and reports, and the required format of the records and
reports'' are comparable to applicable provisions under the Exchange
Act, and whether the foreign provisions ``would permit the
Commission to examine and inspect regulated firms' compliance with
the applicable securities laws.''
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B. Preliminary Views and Proposed Order
1. General Considerations
Based on the FCA Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant UK requirements, subject to the conditions and limitations of
the proposed Order, would produce regulatory outcomes that are
comparable to the outcomes associated with the vast majority of the
recordkeeping, reporting, notification, and securities count
requirements under the Exchange Act applicable to SBS Entities pursuant
to Exchange Act section 15F(g) and Exchange Act rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9.
In reaching this preliminary conclusion, the Commission recognizes
that there are certain differences between those UK requirements and
the applicable recordkeeping, reporting, notification, and securities
count requirements under the Exchange Act. In the Commission's
preliminary view, on balance, those differences generally would not be
inconsistent with substituted compliance for these requirements. As
noted, requirement-by-requirement similarity is not needed for
substituted compliance.
However, the Commission is structuring its preliminary 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 and reporting rules for which they want to apply
substituted compliance. This flexibility is intended to permit Covered
Entities to leverage existing recordkeeping and reporting systems that
are designed to comply with the broker-dealer recordkeeping and
reporting requirements on which the recordkeeping and reporting
requirements applicable to SBS Entities are based. For example, it may
be more efficient for a Covered Entity to comply with certain Exchange
Act requirements within a given recordkeeping or reporting rule (rather
than apply substituted compliance) because it can utilize systems that
its affiliated broker-dealer has implemented to comply with them.
As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility results in preliminary substituted
compliance determinations with respect to the different categories of
records these rules require SBS Entities to make, keep current, and/or
preserve. The objectives of these rules--taken as a whole--is to assist
the Commission in monitoring and examining for compliance with Exchange
Act requirements applicable to SBS Entities as well as to promote the
prudent operation of these firms.\151\ The
[[Page 18395]]
Commission preliminarily believes the comparable UK recordkeeping rules
achieve these outcomes with respect to compliance with UK requirements
for which positive substituted compliance determinations are being made
in this proposed Order (e.g., capital and margin requirements). At the
same time, the recordkeeping rules address different categories of
records through distinct requirements within the rules. 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) can be viewed in isolation as a distinct
recordkeeping rule. Therefore, it may be appropriate to make
substituted compliance determinations at this level of Exchange Act
rules 18a-5 and 18a-6.
---------------------------------------------------------------------------
\151\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
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As discussed in more detail below, the Commission's preliminary
view is that substituted compliance is appropriate for most of the
requirements within these rules. However, certain of the requirements
are fully or partially linked to substantive Exchange Act requirements
for which a positive substituted compliance determination is not being
made under the proposed Order. In these cases, a positive substituted
compliance determination is not being made 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
requirement for which there is not a positive determination. In
particular, a positive substituted compliance determination is not
being made for recordkeeping, reporting, or notification requirements
linked to the following Exchange Act rules for which a positive
substituted compliance determination is not being made: (1) Exchange
Act rule 10b-10 (``Rule 10b-10 Exclusion''); (2) Exchange Act rule
15Fh-4 (``Rule 15Fh-4 Exclusion''); (3) Exchange Act rule 15Fh-5
(``Rule 15Fh-5 Exclusion''); (4) Exchange Act rule 15Fh-6 (``Rule 15Fh-
6 Exclusion''); (5) Exchange Act rule 18a-2 (``Rule 18a-2 Exclusion'');
(6) Exchange Act rule 18a-4 (``Rule 18a-4 Exclusion''); and (7)
Regulation SBSR (``Regulation SBSR Exclusion'').
In addition, certain of the requirements in the 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, substituted
compliance with the linked requirement in the recordkeeping, reporting,
or notification rule is conditioned on the Covered Entity applying
substituted compliance to the linked substantive Exchange Act
requirement. This is the case regardless of whether the requirement is
fully or partially linked to the substantive Exchange Act requirement.
The recordkeeping, reporting, and notification requirements that are
linked to a substantive Exchange Act requirement are designed and
tailored to assist the Commission in monitoring and examining an SBS
Entity's compliance with the substantive Exchange Act requirement. UK
recordkeeping, reporting, and notification requirements are designed to
perform a similar role with respect to the UK requirements to which
they are linked. Consequently, this condition is designed to ensure
that the records, reports, and notifications of a Covered Entity align
with the substantive Exchange Act or UK requirement to which they are
linked. For these reasons, substituted compliance for recordkeeping,
reporting, and notification requirements linked to the following
Exchange Act rules is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act rule: (1)
Exchange Act rule 15Fh-3 (``Rule 15Fh-3 Condition''); (2) Exchange Act
rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act rule 15Fi-3
(``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4 (``Rule 15Fi-
4 Condition''); (5) Exchange Act rule 15Fi-5 (``Rule 15Fi-5
Condition''); (6) Exchange Act rule 15Fk-1 (``Rule 15Fk-1 Condition'');
(7) Exchange Act rule 18a-1 (``Rule 18a-1 Condition''); (8) Exchange
Act rule 18a-3 (``Rule 18a-3 Condition''); (8) Exchange Act rule 18a-5
(``Rule 18a-5 Condition'') and (9) Exchange Act rule 18a-7 (``Rule 18a-
7 Condition'').
Moreover, 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.
Therefore, substituted compliance with respect to these recordkeeping
and reporting requirements is subject to the condition that the Covered
Entity applies substituted compliance with respect to Exchange Act rule
18a-1 and its appendices (i.e., the Rule 18a-1 Condition). This
approach is designed to ensure that, if the Covered Entity does not
apply substituted compliance with respect to Exchange Act rule 18a-1,
it makes and preserves records and files reports that the Commission
uses to monitor and examine for compliance with the Exchange Act rule
18a-1 and its appendices, and that the firm makes and preserves records
to assist it in complying with these rules.
2. Scope of Substituted Compliance
The structure of the preliminary substituted compliance
determinations with respect to Exchange Act rules 18a-5, 18a-6, 18a-7,
18a-8, and 18a-9 as well as Exchange Act Section 15F(g) would permit a
covered entity to apply substituted compliance with respect to certain
of these rules (e.g., Exchange Act rules 18a-5 and 18a-6) and comply
with the Exchange Act requirements of the remaining rules and statute
(i.e., Exchange Act rules 18a-7, 18a-8, and 18a-9, as well as Exchange
Act Section 15F(g)). Moreover, as discussed above, the Commission is
structuring its preliminary substituted compliance determinations in
the Order with respect to the recordkeeping and reporting rules to
provide Covered Entities with greater flexibility to select distinct
requirements within the broader recordkeeping and reporting rules for
which they want to apply substituted compliance. As applied to Exchange
Act rules 18a-5 and 18a-6, this approach of providing greater
flexibility results in preliminary substituted compliance
determinations with respect to the different categories of records
these rules require SBS Entities to make, keep current, and/or
preserve. For example, a Covered Entity could apply substituted
compliance with respect Exchange Act rule 18a-5 requirements to make
and keep current records of trade blotters \152\ but comply directly
with Exchange Act rule 18a-5 requirements to make and keep current
employment records.\153\
---------------------------------------------------------------------------
\152\ See para. (f)(1)(i)(A) to the proposed Order (relating to
substituted compliance for Exchange Act rule 18a-5(a)(1) and
(b)(1)).
\153\ See para. (f)(1)(i)(K) to the proposed Order (relating to
substituted compliance for Exchange Act rule 18a-5(a)(10) and
(b)(8)).
---------------------------------------------------------------------------
In this regard, the Commission found the recordkeeping, reporting,
notification, and securities count rules to be entity-level when
adopting amendments to Exchange Act rule 3a71-6 to make substituted
compliance available with respect to them.\154\ Consequently, aside
from a limited exception for recordkeeping requirements linked to
customer
[[Page 18396]]
protection rules,\155\ a Covered Entity must apply substituted
compliance at the entity level if it chooses to apply substituted
compliance with respect to Exchange Act rule 18a-9 and Exchange Act
Section 15F(g). Further, with respect to a distinct substituted
compliance determination for a requirement within rule 18a-5, 18a-6,
18a-7, or 18a-8, a Covered Entity must apply substituted compliance
with respect to the determination at the entity level. For example, a
Covered Entity applying substituted compliance for Exchange Act rule
18a-5 requirements to make and keep current records of trade blotters
pursuant to paragraph (f)(1)(i)(A) of the proposed Order would have to
comply with the comparable UK requirements at the entity level. The
Covered Entity could not choose to comply with the Exchange Act for one
part of its trade blotters and with UK requirements for another part of
its trade blotters. The Commission preliminarily believes that this
scope of substituted compliance strikes the right balance between
providing Covered Entities flexibility to tailor the application of
substituted compliance to their business needs and ensuring that
substituted compliance is consistent with the Commission's
classification of the Exchange Act recordkeeping, reporting,
notification and securities count requirements as entity-level
requirements.\156\
---------------------------------------------------------------------------
\154\ See 84 FR 68550, 68596-97 (Dec. 16, 2019), Exchange Act
Release No. 87005 (Sept. 19, 2019) (``Recordkeeping Adopting
Release'').
\155\ See paras. (f)(1)(i)(M) and (f)(2)(i)(K) to the proposed
Order (permitting substituted compliance on a transaction level). As
discussed below, these recordkeeping requirements are linked to
transaction level counterparty protection requirements.
\156\ Id.
---------------------------------------------------------------------------
With respect to requirements in Exchange Act rules 18a-5 and 18a-6
linked to counterparty protection rules (i.e., Exchange Act rules 15Fh-
3(b), (c), (e), (f) and (g)), the proposed Order would permit a Covered
Entity to apply substituted compliance to some security-based swap
activities and comply directly with Exchange Act requirements for other
activities.\157\ As discussed in section VII.B.2. of this notice, a
Covered Entity may decide to apply substituted compliance for a
particular set of counterparty protection requirements, such as fair
and balanced communications, for some activities and comply directly
with Exchange Act requirements for other activities.\158\ For example,
the proposed Order would allow a Covered Entity applying substituted
compliance for fair and balanced communications requirements to comply
with the comparable UK requirements with respect to communications with
UK counterparties that are subject to the Exchange Act and to comply
directly with Exchange Act requirements with respect to U.S. person
counterparties.
---------------------------------------------------------------------------
\157\ See paras. (f)(1)(ii)(B) and (f)(2)(ii)(A) of the proposed
Order; see also para. (f)(1)(i)(M) of the proposed Order (the
preliminary substituted compliance determination with respect to
Exchange Act rules 18a-5(a)(17) and (b)(13)) and para. (f)(2)(i)(K)
of the proposed Order (the preliminary substituted compliance
determination with respect to Exchange Act rules 18a-6(b)(1)(xii)
and (b)(2)(vii)).
\158\ See Business Conduct Adopting Release, 81 FR at 30065
(counterparty protection requirements are transaction-level
requirements).
---------------------------------------------------------------------------
To accommodate the transaction-level approach to the counterparty
protection rules, the proposed Order would allow a Covered Entity to
apply substituted compliance to requirements of Exchange Act rules 18a-
5 and 18a-6 linked to the counterparty protection rules consistently
with how the firm is applying substituted compliance with respect to
the counterparty protection rules. For example, if the Covered Entity
is applying substituted compliance with respect to Exchange Act rule
15Fh-3(g) for UK counterparties and complying with Exchange Act rule
15Fh-3(g) for U.S. person counterparties, the Covered Entity could
apply substituted compliance with respect to the linked requirements of
Exchange Act rule 18a-5 for UK counterparties and comply with the
linked requirements of Exchange Act rule 18a-5 for U.S. person
counterparties.
The Commission preliminarily believes that this scope of
substituted compliance would provide Covered Entities flexibility to
tailor the application of substituted compliance to their business
needs in a manner consistent with the Commission's classification of
the relevant Exchange Act counterparty protection requirements as
transaction-level requirements. In proposing this significant
flexibility for the application of substituted compliance, the
Commission nevertheless would expect Covered Entities to ensure that
the manner in which they choose to apply substituted compliance allows
them to comply with the requirements to keep books and records open to
inspection by any representative of the Commission and promptly furnish
to a representative of the Commission legible, true, complete and
current copies of the Covered Entity's records.\159\
---------------------------------------------------------------------------
\159\ See also para. (f)(7) to the proposed Order.
---------------------------------------------------------------------------
3. Exchange Act Rule 18a-5
Exchange Act rule 18a-5 requires SBS Entities to make and keep
current various types of records. The requirements for SBS Entities
that do not have a prudential regulator are set forth in paragraph (a)
of the rule.\160\ The requirements for SBS Entities that do have a
prudential regulator are set forth in paragraph (b) of the rule.\161\
The Commission preliminarily is making a positive substituted
compliance determination for many of the requirements set forth in
these paragraphs.
---------------------------------------------------------------------------
\160\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
\161\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
---------------------------------------------------------------------------
However, certain of these requirements are linked to substantive
Exchange Act requirements for which a positive substituted compliance
is not being made under the proposed Order. In these cases, a positive
substituted compliance determination is not being made for the linked
requirement in Exchange Act rule 18a-5 or the portion of the
requirement in Exchange Act rule 18a-5 that is linked to the
substantive Exchange Act requirement.\162\
---------------------------------------------------------------------------
\162\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-5
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) The portion of Exchange Act rules 18a-5(a)(6) and
(b)(6) that relates to confirmations with respect to securities
(other than security based swaps) is subject to the Rule 10b-10
Exclusion; (2) the portion of Exchange Act rule 18a-5(a)(9) that
relates to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (3) Exchange Act rules 18a-5(a)(13) and (14) and (b)(9)
and (10) are fully linked to Exchange Act rule 18a-4 and, therefore,
are subject to the Rule 18a-4 Exclusion; (4) the portions of
Exchange Act rules 18a-5(a)(16) and (b)(12) that relate to Exchange
Act rule 15Fh-6 are subject to the Rule 15Fh-6 Exclusion; (5) the
portions of Exchange Act rules 18a-5(a)(17) and (b)(13) that relate
to Exchange Act rules 15Fh-4 are subject to the Rule 15Fh-4
Exclusion; and (6) the portions of Exchange Act rules 18a-5(a)(17)
and (b)(13) that relate to Exchange Act rule 15Fh-5 are subject to
the 15Fh-5 Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-5
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-5 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\163\
---------------------------------------------------------------------------
\163\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a-5(a)(6), (a)(15), (b)(6) and
(b)(11) are linked to Exchange Act rule 15Fi-2 and, therefore, are
subject to the Rule 15Fi-2 Condition; (2) Exchange Act rule 18a-
5(a)(9) is linked to Exchange Act rule 18a-1 and, therefore, is
subject to the Rule 18a-1 Condition; (3) Exchange Act rule 18a-
5(a)(12) is linked to Exchange Act rule 18a-3 and, therefore, is
subject to the Rule 18a-3 Condition; (4) Exchange Act rules 18a-
5(a)(17) and (b)(13) are linked to Exchange Act rule 15Fh-3 and,
therefore, are subject to the Rule 15Fh-3 Condition; (5) Exchange
Act rules 18a-5(a)(17) and (b)(13) are linked to Exchange Act rule
15Fk-1, and therefore, are subject to the Rule 15Fk-1 Condition; (6)
Exchange Act rules 18a-5(a)(18)(i) and (ii) or (b)(14)(i) and (ii)
are linked to Exchange Act rule 15Fi-3 and, therefore, are subject
to the Rule 15Fi-3 Condition; and (7) Exchange Act rules 18a-
5(a)(18)(iii) and (b)(14)(iii) are linked to Exchange Act rule 15Fi-
4 and, therefore, are subject to the Rule 15Fi-4 Condition.
---------------------------------------------------------------------------
[[Page 18397]]
Moreover, there are certain requirements in Exchange Act rule 18a-5
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, substituted compliance
with respect to these requirements of Exchange Act rule 18a-5 is
subject to the condition that the Covered Entity applies substituted
compliance with respect to Exchange Act rule 18a-1 and its appendices
(i.e., the Rule 18a-1 Condition).\164\
---------------------------------------------------------------------------
\164\ Substituted compliance with the requirements of Exchange
Act rules 18a-5(a)(1), (2), (3), (4), (5), (7), (8), and (9) is
conditioned on the SBS Entity applying substituted compliance to
Exchange Act rule 18a-1 and its appendices.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the recordmaking requirements of Exchange Act rule 18a-5 is subject to
the condition that the SBS Entity: (1) Preserves all of the data
elements necessary to create the records required by Exchange Act rules
18a-5(a)(1), (2), (3), (4), and (7) (if not prudentially regulated) or
Exchange Act rules 18a-5(b)(1), (2), (3), and (7) (if prudentially
regulated); and (2) upon request furnishes promptly to representatives
of the Commission the records required by those rules (``SEC Format
Condition'').\165\ This condition is modeled on the alternative
compliance mechanism in paragraph (c) of Exchange Act rule 18a-5. In
effect, a Covered Entity applying substituted compliance with respect
to these requirements of Exchange Act rule 18a-5 would need to comply
with the comparable UK requirements. However, under the SEC Format
Condition, the Covered Entity would need to produce a record that is
formatted in accordance with the requirements of rule 18a-5 at the
request of Commission staff. The objective is to require--on a very
limited basis--the production of a record that consolidates the
information required by Exchange Act rules 18a-5(a)(1), (2), (3), (4),
and (7) (if not prudentially regulated) or Exchange Act rules 18a-
5(b)(1), (2), (3), and (7) (if prudentially regulated) in a single
record and, as applicable, in a blotter or ledger format. This will
assist the Commission staff in reviewing the information on the record.
---------------------------------------------------------------------------
\165\ See para. (f)(1)(ii) to the proposed Order.
---------------------------------------------------------------------------
The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-5 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-5 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) any additional conditions, including any partial
exclusions from positive substituted compliance.\166\
---------------------------------------------------------------------------
\166\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-5;
namely that the SBS Entity: (1) Must be subject to and comply with
specified requirements of foreign law; (2) remains subject to the
requirement of Exchange Act section 15F(f) to keep books and records
open to inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records (see discussion below); and (3)
must promptly furnish to a representative of the Commission upon
request an English translation of certain records (see discussion
below). See paras. (f)(7) and (8) to the proposed Order (with
respect to the second and third conditions).
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Additional conditions
and partial
exclusions
----------------------------------------------------------------------------------------------------------------
(f)(1)(i)(A).............. (a)(1)............. (b)(1)............ Trade blotters.... (1) SEC Format
Condition; (2) Rule
18a-1 Condition for ]
(a)(1).
(f)(1)(i)(B).............. (a)(2)............. .................. General ledger.... (1) SEC Format
Condition; (2) Rule
18a-1 Condition for ]
(a)(2).
(f)(1)(i)(C).............. (a)(3)............. (b)(2)............ Account ledgers... (1) SEC Format
Condition; (2) Rule
18a-1 Condition for ]
(a)(3).
(f)(1)(i)(D).............. (a)(4)............. (b)(3)............ Stock record...... (1) SEC Format
Condition; (2) Rule
18a-1 Condition for ]
(a)(4).
(f)(1)(i)(E).............. ................... (b)(4)............ Memoranda of N/A.
brokerage orders.
(f)(1)(i)(F).............. (a)(5)............. (b)(5)............ Memoranda of Rule 18a-1 Condition
proprietary for ] (a)(5).
orders.
(f)(1)(i)(G).............. (a)(6), (a)(15).... (b)(6), (b)(11)... Confirmations, (1) Rule 15Fi-2
trade Condition; (2) Rule
verification. 10b-10 Exclusion.
(f)(1)(i)(H).............. (a)(7)............. (b)(7)............ Accountholder (1) SEC Format
information. Condition; (2) Rule
18a-1 Condition for ]
(a)(7).
(f)(1)(i)(I).............. (a)(8)............. .................. Options positions. Rule 18a-1 Condition.
(f)(1)(i)(J).............. (a)(9)............. .................. Trial balances, (1) Rule 18a-1
computation of Condition; (2) Rule
net capital and 18a-2 Exclusion.
tangible net
worth.
(f)(1)(i)(K).............. (a)(10)............ (b)(8)............ Associated N/A.
person's
employment
application.
(f)(1)(i)(L).............. (a)(12)............ .................. Non-cleared margin Rule 18a-3 Condition.
rule calculations.
(f)(1)(i)(M).............. (a)(17)............ (b)(13)........... Compliance with (1) Rule 15Fh-3
business conduct Condition; (2) Rule
requirements. 15Fk-1 Condition; (3)
Rule 15Fh-4 Exclusion;
(4) Rule 15Fh-5
Exclusion.
(f)(1)(i)(N).............. (a)(18)(i), (b)(14)(i), Portfolio Rule 15Fi-3 Condition.
(a)(18)(ii). (b)(14)(ii). reconciliation.
[[Page 18398]]
(f)(1)(i)(O).............. (a)(18)(iii)....... (b)(14)(iii)...... Portfolio Rule 15Fi-4 Condition.
compression.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-5
for which a positive substituted compliance determination is not being
made because they are fully linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
is not being made by listing in each row: (1) The paragraph of the
proposed Order that sets forth the determination; (2) the paragraph(s)
of Exchange Act rule 18a-5 to which the determination applies; (3) a
brief description of the records required by those paragraphs; and (4)
the exclusion from substituted compliance.
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(1)(ii)(B)............. (a)(13)............ (b)(9)............ Possession or Rule 18a-4 Exclusion.
control records.
(f)(1)(ii)(B)............. (a)(14)............ (b)(10)........... Reserve Rule 18a-4 Exclusion.
computations.
(f)(1)(ii)(B)............. (a)(16)............ (b)(12)........... Political Rule 15Fh-6 Exclusion.
contribution
records.
----------------------------------------------------------------------------------------------------------------
4. Exchange Act Rule 18a-6
Exchange Act rule 18a-6 requires an SBS Entity to preserve certain
types of records if it makes or receives them (in addition to the
records the SBS Entity is required to make and keep current pursuant to
Exchange Act rule 18a-5). Exchange Act rule 18a-6 also prescribes the
time period that these additional records and the records required to
be made and kept current pursuant to Exchange Act rule 18a-5 must be
preserved and the manner in which they must be preserved.\167\
Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the
records that an SBS Entity must retain if it makes or receives them and
prescribes the retention periods for these records as well as for the
records that must be made and kept current pursuant to Exchange Act
rule 18a-5. Certain of these paragraphs prescribe requirements
separately for SBS Entities that do not have a prudential regulator and
SBS Entities that do have a prudential regulator.\168\
---------------------------------------------------------------------------
\167\ See 17 CFR 240.18a-5.
\168\ Paragraphs (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a-6 apply to SBS Entities that do not have a
prudential regulator. Paragraphs (a)(2), (b)(2), (d)(2)(ii), and
(d)(3)(ii) of Exchange Act rule 18a-6 apply to SBS Entities that
have a prudential regulator. Paragraphs (c), (d)(1), (d)(4), (d)(5),
(e), (f), (g), and (h) of Exchange Act rule 18a-6 apply to SBS
Entities irrespective of whether they have a prudential regulator.
---------------------------------------------------------------------------
Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for preserving records electronically. Paragraph (f) sets
forth requirements for when records are prepared or maintained by a
third party. Paragraph (g) requires that an SBS Entity must furnish
promptly to a representative of the Commission legible, true, complete,
and current copies of those records of the SBS Entity that are required
to be preserved under Exchange Act rule 18a-6, or any other records of
the SBS Entity that are subject to examination or required to be made
or maintained pursuant to section 15F of the Exchange Act that are
requested by a representative of the Commission.
The Commission is making a preliminary positive substituted
compliance determination for many of the requirements set forth in
paragraphs (a) through (f) of Exchange Act rule 18a-6.\169\ However,
certain of these requirements are fully or partially linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made under the proposed Order. In
these cases, a positive substituted compliance determination is not
being made for the linked requirement in Exchange Act rule 18a-6.\170\
---------------------------------------------------------------------------
\169\ The Commission does not believe it would be appropriate to
grant substituted compliance with respect to the requirements in
paragraph (g) of Exchange Act rule 18a-6 because there is no
comparable requirement in the UK to produce these records to a
representative of the Commission.
\170\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) The portion of Exchange Act rule 18a-6(b)(1)(v)
relating to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (2) Exchange Act rule 18a-6(b)(1)(viii)(L) is fully
linked to Exchange Act Rule 18a-4 and, therefore, is subject to the
Rule 18a-4 Exclusion; (3) the portion of Exchange Act rule 18a-
6(b)(1)(viii)(M) relating to Exchange Act rule 18a-2 is subject to
the Rule 18a-2 Exclusion; (4) Exchange Act rules 18a-6(b)(1)(xi) and
(b)(2)(vi) are fully linked to Regulation SBSR and, therefore, are
subject to the Regulation SBSR Exclusion; (5) Exchange Act rules
18a-6(b)(1)(xiii) and 18a-6(b)(2)(viii) are fully linked to Exchange
Act rules 15Fh-4 and, therefore, are subject to the Rule 15Fh-4
Exclusion; and (6) Exchange Act rules 18a-6(b)(1)(xiii) and 18a-
6(b)(2)(viii) are fully linked to Exchange Act rules 15Fh-5 and,
therefore, are subject to the Rule 15Fh-5 Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-6
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-6 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\171\
---------------------------------------------------------------------------
\171\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a-6(b)(1)(v) is linked to
Exchange Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; (2) Exchange Act rules 18a-6(b)(1)(viii) and (b)(2)(v)
are linked to Exchange Act rule 18a-7 and, therefore are subject to
the Rule 18a-7 Condition; (3) Exchange Act rule 18a-6(b)(1)(viii) is
linked to Exchange Act rule 18a-1 and, therefore, is subject to the
Rule 18a-1 Condition; (4) Exchange Act rule 18a-6(b)(1)(ix) is
linked to Exchange Act rule 18a-1 and, therefore, is subject to the
Rule 18a-1 Condition; (5) Exchange Act rule 18a-6(b)(1)(x) is linked
to Exchange Act rule 18a-1 and, therefore, is subject to the Rule
18a-1 Condition; (6) Exchange Act rules 18a-6(b)(1)(xii) and
(b)(2)(vii) are linked to Exchange Act rule 15Fh-3 and, therefore,
is subject to the Rule 15Fh-3 Condition; (7) Exchange Act rules 18a-
6(b)(1)(xii) and (b)(2)(vii) are linked to Exchange Act rule 15Fk-1
and, therefore, is subject to the Rule 15Fk-1 Condition; (8)
Exchange Act rules 18a-6(d)(4) and (d)(5) are linked to Exchange act
rule 15Fi-3 and, therefore, are subject to the Rule 15Fi-3
Condition; (9) Exchange Act rules 18a-6(d)(4) and (d)(5) are linked
to Exchange act rule 15Fi-4 and, therefore, are subject to the Rule
15Fi-4 Condition; and (10) Exchange Act rules 18a-6(d)(4) and (d)(5)
are linked to Exchange act rule 15Fi-3 and, therefore, are subject
to the Rule 15Fi-5 Condition.
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[[Page 18399]]
Moreover, there are certain requirements in Exchange Act rule 18a-6
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, substituted compliance
with respect to these requirements of Exchange Act rule 18a-6 is
subject to the Rule 18a-1 Condition.\172\
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\172\ Substituted compliance with the requirements of Exchange
Act rules 18a-6(b)(1)(ii), (b)(1)(iii), (b)(1)(vi), (b)(1)(vii),
(d)(2)(i), and (d)(3)(i) is conditioned on the SBS Entity applying
substituted compliance to Exchange Act rule 18a-1 and its
appendices.
---------------------------------------------------------------------------
The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-6 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance is not being made under this Order.\173\
---------------------------------------------------------------------------
\173\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-6;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See para. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).
Exchange Act Rule 18a-6
[Record preservation]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Conditions and partial
exclusions
----------------------------------------------------------------------------------------------------------------
(f)(2)(i)(A).............. (a)(1)............. (a)(2)............ 6 year record N/A.
preservation.
(f)(2)(i)(B).............. (b)(1)(i).......... (b)(2)(i)......... 3 year record N/A.
preservation.
(f)(2)(i)(C).............. (b)(1)(ii), .................. Bank records, Rule 18a-1 Condition.
(b)(1)(iii). bills.
(f)(2)(i)(D).............. (b)(1)(iv)......... (b)(2)(ii)........ Communications.... N/A.
(f)(2)(i)(E).............. (b)(1)(v).......... .................. Trial balances.... (1) Rule 18a-1
Condition; (2) Rule
18a-2 Exclusion.
(f)(2)(i)(F).............. (b)(1)(vi)......... (b)(2)(iii)....... Account documents. Rule 18a-1 Condition
for ] (b)(1)(vi).
(f)(2)(i)(G).............. (b)(1)(vii)........ (b)(2)(iv)........ Written agreements Rule 18a-1 Condition
for ] (b)(1)(vii).
(f)(2)(i)(H).............. (b)(1)(viii)....... (b)(2)(v)......... Information (1) Rule 18a-7
supporting Condition; (2) Rule
financial reports. 18a-2 Exclusion for ]
(b)(1)(viii)(M).
(f)(2)(i)(I).............. (b)(1)(ix)......... .................. Rule 15c3-4 risk Rule 18a-1 Condition.
management
records.
(f)(2)(i)(J).............. (b)(1)(x).......... .................. Credit risk Rule 18a-1 Condition.
determinations.
(f)(2)(i)(K).............. (b)(1)(xii)........ (b)(2)(vii)....... Business conduct (1) Rule 15Fh-3
standard records. Condition; (2) Rule
15Fk-1 Condition.
-----------------------------------------
(f)(2)(i)(L).............. (c) Corporate N/A.
documents.
-----------------------------------------
(f)(2)(i)(M).............. (d)(1) Associated N/A.
person's
employment
application.
-----------------------------------------
(f)(2)(i)(N).............. (d)(2)(i).......... (d)(2)(ii)........ Regulatory Rule 18a-1 Condition
authority reports. for ] (d)(2)(i).
(f)(2)(i)(O).............. (d)(3)(i).......... (d)(3)(ii)........ Compliance, Rule 18a-1 Condition
supervisory, and for ] (d)(3)(i).
procedures
manuals.
-----------------------------------------
(f)(2)(i)(P).............. (d)(4), (d)(5) Portfolio (1) Rule 15Fi-3
reconciliation. Condition; (2) Rule
15Fi-4 Condition; (3)
Rule 15Fi-5 Condition.
-----------------------------------------
(f)(2)(i)(Q).............. (e) Electronic storage N/A.
system.
-----------------------------------------
(f)(2)(i)(R).............. (f) Third-party N/A.
recordkeeper.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-6
for which for which a positive substituted compliance determination is
not being made because they are fully linked to substantive Exchange
Act requirements for which a positive substituted compliance
determination is not being made by listing in each row: (1) The
paragraph of the proposed Order that sets forth the determination; (2)
the paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) the exclusion from substituted compliance.
[[Page 18400]]
Exchange Act Rule 18a-6
[Preservation]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(2)(ii)................ (b)(1)(xi)......... (b)(2)(vi)........ Regulation SBSR Regulation SBSR
information. Exclusion.
(f)(2)(i)(H)(4)........... (b)(1)(viii)(L).... .................. Possession or Rule 18a-4 Exclusion.
control
information.
(f)(2)(ii)................ (b)(1)(xiii)....... (b)(2)(viii)...... Special entity (1) Rule 15Fh-4
documents. Exclusion; (2) Rule
15Fh-5 Exclusion.
----------------------------------------------------------------------------------------------------------------
5. Exchange Act Rule 18a-7
Paragraph (a)(1) of Exchange Act rule 18a-7 requires SBS Entities
that are not prudentially regulated to file monthly unaudited reports
about its financial and operational condition using the FOCUS Report
Part II. Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS
Entities that are prudentially regulated to file quarterly periodic
unaudited reports about their financial and operational condition using
the FOCUS Report Part IIC. The FOCUS Report Part IIC elicits less
information than the FOCUS Report Part II because the Commission does
not have responsibility for overseeing the capital and margin
requirements applicable to these entities. Paragraph (a)(3) of Exchange
Act rule 18a-7 requires SBS Entities that are not prudentially
regulated and have been authorized by the Commission to compute net
capital under Exchange Act rule 18a-1 using models to file certain
monthly or quarterly information related to their use of models.
Paragraph (b) of Exchange Act rule 18a-7 requires SBS Entities that are
not prudentially regulated to make certain financial information
available on their websites. Paragraphs (c), (d), (e), (f), (g), and
(h) of Exchange Act rule 18a-7 set forth requirements for SBS Entities
that are not prudentially regulated to annually file financial
statements and certain reports, as well as reports covering those
statements and reports prepared by an independent public accountant.
Paragraph (i) of Exchange Act rule 18a-7 requires SBS Entities that do
not have a prudential regulator to notify the Commission when they
change their fiscal year. Finally, Paragraph (j) of Exchange Act rule
18a-7 sets forth requirements with respect to the reports that must be
filed with the Commission under the rule.\174\
---------------------------------------------------------------------------
\174\ See 17 CFR 240.18a-7.
---------------------------------------------------------------------------
The Commission preliminarily is making a positive substituted
compliance determination for all of these paragraphs of Exchange Act
rule 18a-7. As discussed below, substituted compliance with respect to
these paragraphs of Exchange Act rule 18a-7 is subject to certain
conditions.
First, certain of the requirements in Exchange Act rule 18a-7 are
fully or partially linked to substantive Exchange Act requirements for
which a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-7 is conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement.\175\
---------------------------------------------------------------------------
\175\ Substituted compliance with the following requirements of
Exchange Act rule 18a-7 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a-7(a)(1) is linked to Exchange
Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; (2) Exchange Act rule 18a-7(a)(3) is linked to Exchange
Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; and (3) Exchange Act rules 18a-7(c), (d), (e), (f), (g)
and (h) taken as a whole are linked to Exchange Act rule 18a-1 and,
therefore, are subject to the Rule 18a-1 Condition.
---------------------------------------------------------------------------
Second, under the proposed Order, substituted compliance with
respect to the requirement in Exchange Act rule 18a-7 to file periodic
unaudited financial and operational information on the FOCUS Report
Part II or Part IIC is subject to the condition that the Covered Entity
file with the Commission periodic unaudited financial and operational
information in the manner and format specified by the Commission by
order or rule (``Manner and Format Condition'') and present the
financial information in accordance with GAAP that the firm uses to
prepare general purpose publicly available or available to be issued
financial statements in the UK (``UK GAAP Condition'').\176\
---------------------------------------------------------------------------
\176\ See para. (f)(3)(i) to the proposed Order. Under this
approach, Covered Entities would be permitted to present the
information reported in the FOCUS Report in accordance with GAAP
that the firm uses to prepare publicly available or available to be
issued general purpose financial statements in its home jurisdiction
instead of U.S. GAAP if other GAAP, such as International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), is used by the SBS Entity in preparing
publicly available or available to be issued general purpose
financial statements in the UK.
---------------------------------------------------------------------------
As noted above, Exchange Act rule 18a-7 requires SBS Entities, on a
monthly basis (if not prudentially regulated) or on a quarterly basis
(if prudentially regulated), to file an unaudited financial and
operational report on the FOCUS Report Part II (if not prudentially
regulated) or Part IIC (if prudentially regulated). The Commission will
use the FOCUS Reports filed by the SBS Entities to both monitor the
financial and operational condition of individual SBS Entities and to
perform comparisons across SBS Entities. The FOCUS Report Parts II and
IIC are standardized forms that elicit specific information through
numbered line items. This facilitates cross-firm analysis and
comprehensive monitoring of all SBS Entities registered with the
Commission. Further, the Commission has designated the Financial
Industry Regulatory Authority, Inc. (``FINRA'') to receive the FOCUS
Reports from SBS Entities.\177\ Broker-dealers registered with the
Commission currently file their FOCUS Reports with FINRA through the
eFOCUS system it administers. Using FINRA's eFOCUS system will enable
broker-dealers, security-based swap dealers, and major security-based
swap participants to file FOCUS Reports on the same platform using the
same preexisting templates, software, and procedures.
---------------------------------------------------------------------------
\177\ See Order Designating Financial Industry Regulatory
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------
The Commission preliminarily believes that it would be appropriate
to condition substituted compliance with respect to Exchange Act rule
18a-7 on the Covered Entity filing unaudited financial and operational
information in a manner and format that facilitates cross-firm analysis
and comprehensive monitoring of all SBS Entities registered with the
Commission. For example, the Commission could by order or rule require
SBS Entities to file the financial and operational information with
FINRA using the FOCUS Report Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated) but permit the information input
into the form to
[[Page 18401]]
be the same information the SBS Entity reports to the FCA or PRA.\178\
---------------------------------------------------------------------------
\178\ The Commission anticipates that it would be appropriate to
tailor the line items required to be reported pursuant to this
condition and is requesting comment on which, if any, line items in
FOCUS Report Part II (if not prudentially regulated) and Part IIC
(if prudentially regulated) the SBS Entity does not otherwise report
or record pursuant to applicable laws or regulations. Further, the
Commission is requesting comment on whether it would be appropriate
as a condition to substitute compliance for SBS Entities to file a
FOCUS Report Part II (if not prudentially regulated) or Part IIC (if
prudentially regulated) with a limited number of the required line
items filled out for two years. During this time, the Commission
could further evaluate the scope of information SBS Entities should
file.
---------------------------------------------------------------------------
Third, under the proposed Order, substituted compliance in
connection with the requirement that Covered Entities without a
prudential regulator file audited annual reports under Exchange Act
rule 18a-7 is subject to five conditions.\179\ The first condition is
that the SBS Entity simultaneously sends a copy of the financial
statements the Covered Entity is required to file with the UK PRA or
FCA, including a report of an independent public accountant covering
the financial statements, to the Commission in the manner specified on
the Commission's website (``SEC Filing Condition''). Because UK laws
would not otherwise require the financial statements and report of the
independent public accountant covering the financial statements to be
filed with the Commission, the purpose of this condition is to ensure
the Commission receives the financial statements and report to more
effectively supervise and monitor SBS Entities.
---------------------------------------------------------------------------
\179\ See para. (f)(3)(iv) to the proposed Order.
---------------------------------------------------------------------------
The second condition is that the SBS Entity includes with the
transmission of the annual financial statements and report the contact
information of an individual who can provide further information about
the financial statements and reports (``Contact Information
Condition''). This would assist the Commission staff in promptly
contacting an individual at the SBS Entity who can respond to questions
that information on the financial statements or report may raise about
the Covered Entity's financial or operational condition.
The third condition is that the SBS Entity includes with the
transmission the report of an independent public accountant required by
Exchange Act rule 18a-7(c)(1)(i)(C) covering the annual financial
statements if UK laws do not require the Covered Entity to engage an
independent public accountant to prepare a report covering the annual
financial statements (``Accountant's Report Condition''). The third
condition further provides that the report of the independent public
accountant may be prepared in accordance with generally accepted
auditing standards (``GAAS'') in the UK that are used to perform audit
and attestation services and the accountant complies with UK
independence requirements. According to the FCA Application, UK laws
only require certain investment firms (depending on their size) to have
their financial statements audited, so this condition ensures that all
SBS Entities subject to the requirement in rule 18a-7 to file audited
annual reports are required to have their financial statements audited.
The fourth condition is that an SBS Entity that is a security-based
swap dealer must file the reports required by Exchange Act rule 18a-
7(c)(1)(i)(B) and (C) addressing the statements identified in Exchange
Act rule 18a-7(c)(3) or (c)(4), as applicable, that relate to Exchange
Act rule 18a-4 (``Rule 18a-4 Limited Exclusion'').\180\ These reports
are designed to provide the Commission with information about an SBS
Entity's compliance with Rule 18a-4. As discussed above, a positive
substituted compliance determination is not being made for Exchange Act
rule 18a-4 and, therefore, this condition is designed to provide the
Commission with similar compliance information. Under this condition,
Covered Entities will need to file a limited compliance report that
includes the statements relating to Rule 18a-4 \181\ or exemption
report if the Covered Entity claims an exemption from Rule 18a-4. The
Covered Entity also will need to file the report of an independent
public accountant covering the limited compliance report or exemption
report. The fourth condition further provides that the report of the
independent public accountant may be prepared in accordance with GAAS
in the UK that are used to perform audit and attestation services and
the accountant complies with UK independence requirements.
---------------------------------------------------------------------------
\180\ The Commission views this as a limited exclusion from the
availability of substituted compliance for these requirements
because the proposed Order permits these reports relating Exchange
Act rule 18a-4 to be included with the UK regulatory reports the
Covered Entities will file with the Commission and because the
reports can be prepared in accordance with UK GAAS (as discussed
below).
\181\ The limited compliance report would not need to address
Exchange Act rule 18a-9 if the Covered Entity is applying
substituted compliance to this requirement. Further, as discussed
above, substituted compliance with paragraphs (c) through (h) of
Exchange Act rule 18a-7 is conditioned on the Covered Entity
applying substituted compliance to Exchange Act rule 18a-1.
Therefore, the Covered Entity would not need to address that rule in
the compliance report. Finally, the Covered Entity would not need to
address an account statement rule of a self-regulatory organization.
---------------------------------------------------------------------------
The fifth condition is that a Covered Entity that is a security-
based swap dealer files the supporting schedules required by Exchange
Act rule 18a-7(c)(1)(i)(A) and (C) addressing the statements identified
in Exchange Act rules 18a-7(c)(2)(ii) and (iii) that relate to Exchange
Act rule 18a-4 if the SBS Entity is not exempt from Exchange Act rule
18a-4 (i.e., a Rule 18a-4 Limited Exclusion). These supporting
schedules are the Computation for Determination of Security-Based Swap
Customer Reserve Requirements and the Information Relating to the
Possession or Control Requirements for Security-Based Swap Customers,
which are designed to provide the Commission with information about an
SBS Entity's compliance with Rule 18a-4.
Fourth, under the proposed Order, substituted compliance in
connection with the requirement that Covered Entities file notice of a
change in fiscal year under Exchange Act rule 18a-7(i) is conditioned
on the SBS Entity simultaneously sending a copy of the notice of change
in fiscal year that the Covered Entity is required to file with the UK
PRA or FCA to the Commission in the manner specified on the
Commission's website (``SEC Filing Condition''). Because UK laws would
not otherwise require the notice of a change in fiscal year to be filed
with the Commission, the purpose of this condition is to ensure the
Commission receives the notice to more effectively supervise and
monitor SBS Entities.
The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-7 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-7 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made under the proposed
Order.\182\
---------------------------------------------------------------------------
\182\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See paras. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).
[[Page 18402]]
Exchange Act Rule 18a-7
[Reporting]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Conditions and partial
exclusions
----------------------------------------------------------------------------------------------------------------
(f)(3)(i)................. (a)(1)............. (a)(2)............ File FOCUS Reports (1) Manner and Format
Condition; (2) UK GAAP
Condition; (3) Rule
18a-1 Condition for ]
(a)(1).
(f)(3)(ii)................ (a)(3)............. .................. Information (1) Rule 18a-1
related to Condition.
capital models.
(f)(3)(iii)............... (b)................ .................. Publish certain N/A.
financial
information.
(f)(3)(iv)................ (c), (d), (e), (f), .................. File annual (1) SEC Filing
(g), (h). audited reports. Condition; (2) Contact
Information Condition;
(3) Accountant's
Report Condition; (4)
Rule 18a-4 Limited
Exclusion; (5) Rule
18a-1 Condition.
(f)(3)(v)................. (i)................ .................. Notice of fiscal SEC Filing Condition.
year change.
----------------------------------------------------------------------------------------------------------------
6. Exchange Act Rule 18a-8
Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\183\ Paragraphs
(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) of Exchange Act rule
18a-8 require an SBS Entity that is a security-based swap dealer and
that does not have a prudential regulator to provide notifications
related to the capital requirements of Exchange Act rule 18a-1.
Paragraphs (a)(2) and (b)(3) Exchange Act rule 18a-8 require an SBS
Entity that is a major security-based swap participant and that does
not have a prudential regulator to provide notifications related to the
capital requirements of Exchange Act rule 18a-8. Paragraph (c) Exchange
Act rule 18a-8 requires an SBS Entity that is a security-based swap
dealer and that files a notice of adjustment to its reported capital
category with a U.S. prudential regulator to transmit a copy of the
notice to the Commission. Paragraph (d) of Exchange Act rule 18a-8, in
pertinent part, requires an SBS Entity to provide notification to the
Commission if it fails to make and keep current books and records under
Exchange Act rule 18a-5 and to transmit a subsequent report on what is
being done to correct the situation. Paragraph (e) of Exchange Act rule
18a-8, in pertinent part, requires an SBS Entity that is a security-
based swap dealer and that does not have a prudential regulator to
provide notification if it has a material weakness under Exchange Act
rule 18a-7 and to transmit a subsequent report on what is being done to
correct the situation. Paragraph (g) of Exchange Act rule 18a-8, in
pertinent part, requires an SBS Entity that is a security-based swap
dealer to provide notification if it fails to make a required deposit
into its special reserve account for the exclusive benefit of security-
based swap customers under Exchange Act rule 18a-4. Finally, paragraph
(h) sets forth requirements for transmitting the notifications
described above.
---------------------------------------------------------------------------
\183\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------
The Commission preliminarily makes a positive substituted
compliance determination for a number of the notification requirements
set forth in these paragraphs. However, certain of these requirements
are linked to substantive Exchange Act requirements for which a
positive substituted compliance determination is not being made under
the proposed Order. In these cases, a positive substituted compliance
determination is not being made for the linked requirement in Exchange
Act rule 18a-8 or the portion of the requirement in Exchange Act rule
18a-8 that is linked to the substantive Exchange Act requirement.\184\
---------------------------------------------------------------------------
\184\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-8
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) Exchange Act rules 18a-8(a)(3) and (b)(3) are fully
linked to Exchange Act rule 18a-2 and, therefore, are subject to the
Rule 18a-2 Exclusion; (2) the portion of Exchange Act rule 18a-8(e)
that relates to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (3) the portion of Exchange Act rule 18a-8(e) that
relates to Exchange Act rule 18a-4 is subject to the Rule 18a-4
Exclusion; and (4) Exchange Act rule 18a-8(g) is fully linked to
Exchange act rule 18a-4 and, therefore, is subject to the Rule 18a-4
Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-8
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-8 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\185\
---------------------------------------------------------------------------
\185\ Substituted compliance with the following requirements of
Exchange Act rule 18a-8 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a-8(a)(1)(i) and (ii), (b)(1),
(b)(2), and (b)(4) are linked to Exchange Act rule 18a-1 and,
therefore, are subject to the Rule 18a-1 Condition; and (2) Exchange
Act rules 18a-8(d) is linked to Exchange Act rule 18a-5 and,
therefore, is subject to the Rule 18a-5 Condition with respect to
any category of records required to be made and kept current by that
rule. Consequently, if the Covered Entity does not apply substituted
compliance with respect to a category of record required to be made
and kept current by Exchange Act rule 18a-5, the Covered Entity
would need to provide the notification required by Exchange Act rule
18a-8(d) if it fails to make and keep current that category of
record.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the notification requirements of Exchange Act rule 18a-8 is subject to
the condition that the SBS Entity: (1) Simultaneously sends a copy of
any notice required to be sent by UK notification laws to the
Commission in the manner specified on the Commission's website; and (2)
includes with the transmission the contact information of an individual
who can provide further information about the matter that is the
subject of the notice (i.e., the ``Contact Information Condition'').
The purpose of this condition is to alert the Commission to financial
or operational problems that could adversely affect the firm--the
objective of Exchange Act rule 18a-8.
The following table summarizes the Commission's proposed positive
[[Page 18403]]
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-8 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-8 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made.\186\
---------------------------------------------------------------------------
\186\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See paras. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).
Exchange Act Rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Conditions and partial
exclusions
----------------------------------------------------------------------------------------------------------------
(f)(4)(i)(A).............. (a)(1)(i), .................. Capital notices... (1) Rule 18a-1
(a)(1)(ii), Condition; (2) SEC
(b)(1), (b)(2), Filing Condition; (3)
(b)(4). Contact Information
Condition.
(f)(4)(i)(B).............. (c)................ .................. Prudential (1) SEC Filing
regulator capital Condition; (2) Contact
category Information Condition.
adjustment
notices.
(f)(4)(i)(C).............. (d)................ .................. Books and records (1) Rule 18a-5
notices. Condition; (2) SEC
Filing Condition; (3)
Contact Information
Condition.
(f)(4)(i)(D).............. (e)................ .................. Material weakness (1) Rule 18a-1
notices. Condition; (2) Rule
18a-2 Exclusion; (3)
Rule 18a-4 Limited
Exclusion; (4) SEC
Filing Condition; (5)
Contact Information
Condition.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-8
for which a positive substituted compliance determination is not being
made because they are fully linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
is not being made by listing in each row: (1) The paragraph of the
proposed Order that sets forth the determination; (2) the paragraph(s)
of Exchange Act rule 18a-8 to which the determination applies; (3) a
brief description of the records required by those paragraphs; and (4)
the exclusion from substituted compliance.
Exchange Act Rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description.. Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(4)(ii)(B)............. (a)(2)............. (b)(3)............ MSBSP capital Rule 18a-2 Exclusion.
notices.
(f)(4)(ii)(C)............. (g)................ .................. Reserve account Rule 18a-4 Exclusion.
notices.
----------------------------------------------------------------------------------------------------------------
7. Exchange Act Rule 18a-9
Exchange Act rule 18a-9 requires SBS Entities that are security-
based swap dealers and that do not have a prudential regulator to
examine and count the securities they physically hold, account for the
securities that are subject to their control or direction but are not
in their physical possession, verify the locations of securities under
certain circumstances, and compare the results of the count and
verification with their records.\187\ The Commission preliminarily is
making a positive substituted compliance determination' for this
rule.\188\
---------------------------------------------------------------------------
\187\ See 17 CFR 240.18a-9.
\188\ See para. (f)(5) to the proposed Order.
---------------------------------------------------------------------------
8. Exchange Act Section 15F(g)
Exchange Act Section 15F(g) requires SBS Entities to maintain daily
trading records.\189\ The Commission preliminarily believes UK law
produces a comparable result in terms of its daily trading
recordkeeping requirements.\190\ Accordingly, the Commission
preliminarily is making a positive substituted compliance determination
for the self-executing requirements in this paragraph.\191\
---------------------------------------------------------------------------
\189\ See 15 U.S.C. 78o-10(g).
\190\ See FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; FCA SYSC 9.1.1AR.
\191\ See para. (f)(6) to the proposed Order.
---------------------------------------------------------------------------
9. Examination and Production of Records
Every Covered Entity registered with the Commission, whether
complying directly with Exchange Act requirements or relying on
substituted compliance as a means of complying with the Exchange Act,
is required to satisfy the inspection and production requirements
imposed on such entities under the Exchange Act.\192\ Covered Entities
may make, keep, and preserve records, subject to the conditions
described above, in a manner prescribed by applicable UK requirements.
The Commission notes that as an element of its substituted compliance
application, the FCA has provided the Commission with adequate
assurances that no law or policy would impede the ability of any entity
that is directly supervised by the
[[Page 18404]]
authority and that may register with the Commission ``to provide prompt
access to the Commission to such entity's books and records or to
submit to onsite inspection or examination by the Commission.''
Consistent with those assurances and the requirements that apply to all
Covered Entities under the Exchange Act, Covered Entities will need to
keep books and records open to inspection by any representative of the
Commission and to furnish promptly to a representative of the
Commission legible, true, complete, and current copies of those records
of the firm that these entities are required to preserve under Exchange
Act rule 18a-6 (which would include records for which a positive
substituted compliance determination is being made with respect to
Exchange Act rule 18a-6 under the Order), or any other records of the
firm that are subject to examination or required to be made or
maintained pursuant to Exchange Act section 15F that are requested by a
representative of the Commission.\193\
---------------------------------------------------------------------------
\192\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g).
\193\ See para. (f)(6) to the proposed Order.
---------------------------------------------------------------------------
10. English Translations
The proposed Order states that to the extent documents are not
prepared in the English language, SBS Entities must furnish to a
representative of the Commission upon request an English translation of
any record, report, or notification of the SBS Entity that is required
to be made, preserved, filed, or subject to examination pursuant to
Exchange Act section 15F or the UK Order.\194\ This requirement
addresses difficulties that Commission examinations staff would have
examining SBS Entities that furnish documents in a foreign language.
While acknowledging that English is widely spoken in the UK, this
requirement is included to address foreign branches of UK SBS Entities
that may prepare documents in foreign languages. Such English
translations would be required to be provided promptly.
---------------------------------------------------------------------------
\194\ See para. (f)(7) to the proposed Order.
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IX. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness in the UK
A. General Considerations
As noted above, 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 the supervisory program administered, and the
enforcement authority exercised'' by the foreign financial regulatory
authority. 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. This prerequisite, however, also
recognizes that differences among the supervisory and enforcement
regimes should not be assumed to reflect flaws in one regime or
another.\195\
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\195\ See generally Business Conduct Adopting Release, 81 FR at
30079.
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In connection with these considerations, the FCA Application
includes information regarding the UK supervisory and enforcement
framework applicable to derivatives markets and market participants.
This includes information regarding the supervisory and enforcement
authority afforded to the FCA and the PRA to promote compliance with
applicable requirements, applicable supervisory and enforcement tools
and capabilities, consequences of non-compliance, and the application
of the FCA's and PRA's supervisory and enforcement practices in the
cross-border context. After review of this information, the Commission
preliminarily believes that the framework is reasonably designed to
promote compliance with the laws where substituted compliance has been
requested.
In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission particularly has considered the following factors:
B. Supervisory Framework in the UK
Supervision of banks and investment firms (together, ``firms'')
that conduct security-based swap business in the UK is conducted by the
FCA and the PRA. At the time of this application, all firms that will
be using substituted compliance are dually-regulated by the FCA and
PRA. Although both supervisors take a broad view of their supervisory
powers, the FCA is primarily responsible for conduct, anti-money
laundering, trade acknowledgment and verification, portfolio
reconciliation and dispute reporting, portfolio compression, trading
relationship documentation and securities count requirements, while the
PRA is primarily responsible for capital, margin, internal supervision,
chief compliance officer and risk management requirements. Both the FCA
and the PRA are responsible for recordkeeping, reporting and
notification requirements, and both have the ability to request records
needed for supervision from firms through the supervisory process. In
addition, the FCA and the PRA set priorities in their annual business
plans which also sets forth the thematic reviews that will be conducted
each year. These thematic reviews focus on particular areas of risk or
products across several firms and key findings are made public to
promote consistency across the market.
1. FCA
For large firms, such as those that will be applying to be
security-based swap dealers in the United States, the FCA uses a firm-
specific supervision program (``fixed supervision'') and assigns at
least one supervisor dedicated to supervising the firm. The supervisor
has regular interaction with the firm, including meetings, emails,
phone calls and video calls. The supervisor reviews the monthly and
quarterly reports that are submitted by firms. If a supervisor sees a
red flag on a report, the supervisor may take a number of actions such
as contacting the firm's senior management or requiring a skilled
person review. This supervisor also works with specialists, who monitor
specific activities at the firm, such as financial crimes, and provide
support to the primary supervisor.
The FCA meets with each firm subject to fixed supervision to
conduct a strategy meeting, which allows the firm to inform the FCA of
their business strategy for the next two years.\196\ This strategy
meeting feeds into the firm evaluation, which is the FCA's assessment
of the firm using the FAM methodology.\197\ Before a firm evaluation is
finalized, the supervisor presents the FAM analysis, a description of
the key risks at the firm, and a workplan to address those risks to
senior management for approval. Once the workplan is approved, the firm
is sent a letter that summarizes the supervisory team's assessment of
the firm and gives the firm an overview of what to expect from a
supervisory perspective over the next year.
---------------------------------------------------------------------------
\196\ Depending on the regulatory cycle of the firm, these
meetings typically occur at least every two years.
\197\ More information on FCA's supervisory approach, including
a description of the FAM methodology, is available at: https://www.fca.org.uk/publication/corporate/our-approach-supervision-final-report-feedback-statement.pdf.
---------------------------------------------------------------------------
When the FCA identifies a risk or issue at a firm that requires
remediation,
[[Page 18405]]
the FCA can take a number of corrective actions and strives to choose
the one that is appropriate and proportionate to the circumstances. If
the FCA determines that the issue is minor then the supervisor may
discuss with the firm how the matter is best resolved and follow up
with the firm to ensure adequate steps have been taken. For more
significant issues, the supervisor can deploy a range of regulatory
tools to achieve a specific outcome. The common tools used by the FCA
include starting a deep dive; \198\ requiring the firm to commit to
certain action (for example, varying a firm's ability to conduct
business until a prescribed action is taken); or requiring review by a
third party, such as a skilled person review.\199\ If these actions
fail, or if the issue is considered harmful enough, the matter will be
referred to the FCA Enforcement division for investigation.
---------------------------------------------------------------------------
\198\ A deep dive is a focused, forward-looking assessment of a
firm to investigate a specific area of potential risk. Deep dives
are designed to be focused assessments, looking at specific risks,
rather than wide ranging assessments that, for example, look at
controls within a firm generally.
\199\ More information on skilled person reviews is available
at: https://www.fca.org.uk/about/supervision/skilled-persons-reviews.
---------------------------------------------------------------------------
2. PRA
The PRA divides all firms into the five categories for supervisory
purposes, with category 1 (``CAT1'') being the most significant firms
whose size, interconnectedness, complexity and business type give them
the capacity to cause significant disruption to the UK financial system
by failing, or by carrying on their business in an unsafe manner.\200\
All firms that will be registering as security-based swap dealers in
the United States are CAT1 firms and are assigned several supervisors
to monitor the firm. These supervisors have frequent interactions
(typically daily) with the firms, including regular meetings with the
firm's executive management. Supervisors review information submitted
by a firm and this information is periodically validated, either
through onsite inspection by the PRA supervisory and specialist risk
staff, or by third-parties. Supervisors examine for risks in the firm's
business model and analyze where and how a firm makes money, the risks
involved in doing so, and how the firm is funded. PRA staff regularly
engages with firms on business performance, governance and management,
external context impact, capital, liquidity, risk controls, and
resolvability. The supervisors work with risk specialists and other
staff who offer expertise in certain areas (e.g., credit risk,
operational risk, governance) to monitor the firm.
---------------------------------------------------------------------------
\200\ Information on the PRA's supervisory approach, including
the factors it uses to divide firms into the different categories,
is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/approach/banking-approach-2018.pdf?la=en&hash=3445FD6B39A2576ACCE8B4F9692B05EE04D0CFE3.
---------------------------------------------------------------------------
The PRA conducts an annual internal meeting regarding each firm
called a ``periodic summary meeting'' (``PSM'') to discuss the major
risks at the firm, the supervisory strategy, and proposed remedial
actions, including guidance about the adequacy of a firm's capital and
liquidity. After the PSM, the PRA sends an annual letter to each firm
outlining the key risks that are of greatest concern, which require
action by the firm. The PRA verifies that action is taken on the key
risks identified in the PSM, and actively engages with the firm's audit
committee and non-executive directors on the progress made to address
the most significant risks. Less significant issues identified in the
PSM are conveyed to the firm to be addressed autonomously and the PRA
expects confirmation by the most appropriate senior individual within
the firm (e.g., the chief executive officer, finance director, or chair
of the audit committee) that these issues have been closed.
When the PRA detects supervisory issues at a firm, it has the power
to require firms to take corrective actions, such as conducting an
internal audit or appointing a monitor to review certain aspects of the
firm's regulatory reports. The PRA may also determine that further
information is needed and can, for example, require an external audit,
conduct its own inspection or appoint an independent skilled person
that will produce a report on the topic to the PRA. The PRA may conduct
its own onsite inspection, which involves risk specialists and other
technical staff, when it wants to review a certain area, such as a
particular business line or a model review. The inspections are in-
depth, focused reviews that involve discussions with staff, reviews of
internal documents at the firm, and testing to ensure the information
provided by the firm to the PRA is accurate. If a firm does not take
appropriate corrective action as required, the PRA may open an
enforcement proceeding.
C. Enforcement Authority in the UK
Similar to the supervision regime, enforcement of banks and
investment firms located in the UK is conducted by the FCA and the PRA.
As with supervisory powers, the FCA is primarily responsible for
conduct, anti-money laundering, trade acknowledgment and verification,
portfolio reconciliation and dispute reporting, portfolio compression,
trading relationship documentation and securities count requirements,
while the PRA is primarily responsible for capital, margin, internal
supervision, chief compliance officer and risk management requirements.
Both the FCA and PRA are responsible for recordkeeping, reporting and
notification requirements.
1. FCA
Within the FCA, enforcement investigations are carried out by the
relevant department of the organization's Enforcement and Market
Oversight Division (``EMO''). EMO has three investigation departments:
(1) Unauthorized business; (2) retail; and (3) wholesale. Most
investigations into firms subject to substituted compliance would fall
into the wholesale category. The FCA gathers information through
voluntary submissions and interviews, and may compel information,
documents or testimony as necessary, and subject to limitations on use.
In addition to the authority to investigate and impose sanctions for
regulatory misconduct, the FCA can simultaneously prosecute criminal
offenses such as insider trading and unauthorized business and
promotion activities. The FCA has many sanctions and remedies for
wrongdoing available for use. Among its sanctioning powers are: Public
censure, financial penalties, disciplinary prohibitions, and suspension
or restriction orders. In deciding which sanction to apply, the FCA
considers relevant circumstances including steps taken to mitigate or
remedy the harm and the level of cooperation. The FCA resolves many
matters by settlement. Additionally, as required by law, it publishes
Final Notices regarding enforcement, subject to certain public interest
limitations on publication.
2. PRA
The decision to open an investigation at the PRA is typically made
jointly by a senior supervisor and a senior representative of the PRA's
enforcement team. Once these individuals decide to investigate,
investigators are appointed and the PRA sends a notice to the subject.
Like the FCA, the PRA is empowered to require certain information or
documents from authorized firms. Under certain circumstances,
investigators also can require a person that is neither the subject of
the investigation nor connected with the subject to attend an interview
and answer questions and/or
[[Page 18406]]
provide information necessary to the investigation. At the end of an
investigation, the investigators will report to the PRA and make a
recommendation. The possible recommendations include, among others, (1)
taking no further action; (2) imposing an enforcement sanction against
the subject, which may start settlement discussions or steps towards a
contested process; (3) imposing requirements or other supervisory
measures against a firm; or (4) opening additional investigations.\201\
The PRA is empowered to impose sanctions such as publishing a public
statement regarding misconduct, called ``public censure,'' directing
persons to refrain from conduct, prohibiting a person from holding an
office or position, or imposing a financial penalty.\202\ In
determining the appropriate amount of penalty, the PRA considers: (1)
Any disgorgement to be ordered; (2) the seriousness of the misconduct;
(3) any adjustment for aggravating or mitigating factors; (4) any
adjustment for deterrence; and (5) reductions for settlement discount
and/or serious financial hardship. In resolving actions, the PRA seeks
first to determine whether an appropriate settlement can be reached. If
one cannot be reached, the investigation team recommends action to the
Enforcement Decision Making Committee, which is the PRA's decision-
making body for contested enforcement cases.\203\ As with the FCA, the
PRA is required by law to publish Final Notices regarding enforcement,
subject to certain public interest limitations on publication.
---------------------------------------------------------------------------
\201\ See PRA Regulatory Investigations Guide, available at:
https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/pra-statutory-powers/regulatory-investigations-guide.pdf?la=en&hash=7170036F5249F21F15236504A8CC94E6F65D5EE2, April
2019 at 8.
\202\ See Enforcement Decision Making Committee Policy Statement
PS/EDMC2018, available at: https://www.bankofengland.co.uk/-/media/boe/files/paper/2018/enforcement-decision-making-committee-policy-statement.pdf?la=en&hash=2F1E211F8BDB9B23A054DD770CBE342EB381020E
(``Enforcement Decision Making Committee Policy Statement PS/
EDMC2018''), at 1 (citing Section 832ZR of the Banking Act of 2009).
\203\ Enforcement Decision Making Committee Policy Statement PS/
EDMC2018.
---------------------------------------------------------------------------
X. Request for Comment
Commenters are invited to address all aspects of the application,
the Commission's preliminary views and the proposed Order.
A. General Aspects of the Comparability Assessments and Proposed Order
The Commission requests comment regarding the preliminary views and
proposed Order in connection with each of the general ``regulatory
outcome'' categories addressed above. Commenters particularly are
invited to address, among other issues, whether the relevant UK
provisions generally are sufficient to produce regulatory outcomes that
are comparable to the outcomes associated with requirements under the
Exchange Act, and whether the conditions and limitations of the
proposed Order would adequately address potential gaps in the relevant
regulatory outcomes or would otherwise result in any implementation or
other practical issues.
Further, the Commission requests comment regarding whether the
proposed conditions and limitations guard against comparability gaps
arising from the cross-border application of UK requirements (including
when SBS Entities conduct security-based swap business through branches
located in the United States or in third countries).
With respect to the proposed conditions and limitations, commenters
also are invited to address any differences between UK regulatory
requirements and frameworks and either the German requirements and
frameworks that formed the basis for the Commission's conditional grant
of substituted compliance for Germany or the French requirements and
frameworks that formed the basis for the Commission's proposed
conditional grant of substituted compliance for France.\204\ Would the
responses to any of the questions that the Commission asked in
connection with the German Notice and Proposed Order and/or the French
Notice and Proposed Order differ if those questions applied to UK
regulatory requirements and frameworks?
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\204\ See German Substituted Compliance Order, 85 FR at 85868;
French Notice and Proposed Order, 85 FR at 85720; see also German
Notice and Proposed Order, 85 FR at 72729-30.
---------------------------------------------------------------------------
B. Risk Control Requirements
The Commission further requests comment regarding the proposed
grant of substituted compliance in connection with requirements under
the Exchange Act related to internal risk management systems, trade
acknowledgement and verification, portfolio reconciliation and dispute
reporting, and trading relationship documentation. Commenters
particularly are invited to address the basis for substituted
compliance in connection with those risk control requirements, and the
proposed conditions and limitations connected to substituted compliance
for those requirements.
In addition to these general matters, the Commission invites
commenters to address the Commission's preliminary analysis that UK
EMIR trade acknowledgment and verification and trading relationship
documentation requirements are comparable to Exchange Act requirements
when viewed in light of the ESMA EMIR Q&A and the addition of the new
general condition concerning a Covered Entity's application of UK EMIR
requirements, and without the need to rely on UK requirements that
implement MiFID documentation requirements. Should the Commission
instead require Covered Entities to comply both with UK EMIR
requirements related to trade acknowledgment and verification and
trading relationship documentation and with UK requirements that
implement MiFID documentation requirements?
With respect to portfolio reconciliation and dispute reporting
requirements, the Commission also invites commenters to address the
condition requiring a Covered Entity to provide the Commission with
reports regarding disputes between counterparties on the same basis as
the Covered Entity provides those reports to the FCA pursuant to UK
law. Would differences in the timing of dispute reports made pursuant
to Exchange Act requirements as compared to reports made pursuant to UK
law make UK portfolio reconciliation and dispute reporting requirements
not comparable to Exchange Act requirements?
With respect to all risk control requirements, commenters also are
invited to address any differences between UK regulatory requirements
and frameworks and either the German requirements and frameworks that
formed the basis for the Commission's conditional grant of substituted
compliance for Germany or the French requirements and frameworks that
formed the basis for the Commission's proposed conditional grant of
substituted compliance for France.\205\ Would the responses to any of
the questions about risk control requirements that the Commission asked
in connection with the German Notice and Proposed Order and/or the
French Notice and Proposed Order differ if those questions applied to
UK regulatory requirements and frameworks?
---------------------------------------------------------------------------
\205\ See German Substituted Compliance Order, 85 FR at 85689-
91; French Notice and Proposed Order, 85 FR 85724-25; see also
German Notice and Proposed Order, 85 FR at 72730-32.
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[[Page 18407]]
C. Capital and Margin Requirements
1. Capital
The Commission further requests comment regarding the comparability
analysis of UK capital requirements with Exchange Act capital
requirements for non-prudentially regulated security-based swap
dealers. Commenters particularly are invited to address the basis for
substituted compliance in connection with those requirements, and the
proposed conditions and limitations connected to substituted compliance
for those requirements. Does UK law taken as a whole produce regulatory
outcomes that are comparable to those of Exchange Act rule 18a-1? Are
there any additional conditions that should be applied to substituted
compliance for these capital requirements to promote comparable
regulatory outcomes?
The Commission also requests comment and supporting data on the
proposed capital conditions. The purpose of the potential conditions
would be to address the concern that, while the Basel capital standard
contains requirements designed to address liquidity such as the LCR,
net stable funding ratio (``NSFR''), and an internal liquidity adequacy
assessment process (``liquidity assessment process''), 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.
The Commission also requests comment on whether Covered Entities
that are not banks have access to short-term liquidity through Central
Bank facilities in the UK that are available to banks (e.g., Sterling
Monetary Framework through the Bank of England). 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 proposed 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 also requests comment on and seeks information about
the assets, liabilities, and capital of the Covered Entities that would
apply substituted compliance with respect to Exchange Act rule 18a-1.
The Commission further requests comment on what specific types of non-
prudentially regulated security-based swap dealers in the UK would be
relying on a substituted compliance determination with respect to
capital requirements under 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 proposed capital conditions. For example, do the Covered Entities
that would apply substituted compliance with respect to Exchange Act
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 Commission requests comment on the capital conditions that
would require a Covered Entity to: (1) Maintain 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; and (2) makes a quarterly record listing: (a) The assets
maintained pursuant to the first proposed 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. 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
Commission requests comment on how these conditions would compare to
the LCR.
The Commission also requests comment and supporting data on the
proposed condition that a Covered Entity maintain at least $100 million
of equity capital composed of ``highly liquid assets'' as defined in
the Basel capital standard. 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 Commission also requests comment and supporting data on the
proposed condition that a Covered Entity includes its most recent
audited or unaudited statement of financial condition filed with its
local supervisor with its initial written notice to the Commission of
its intent to rely on substituted compliance. Are there other
[[Page 18408]]
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 the UK 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. The Commission 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 proposed
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.
Please identify and describe any potential impacts on the way
Covered Entities currently conduct their business with respect to
implementing the proposed 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 capital condition include 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 there be 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 also requests comment on whether the Commission
should consider imposing other 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. If so, explain why? Please explain which
threshold may be appropriate or suggest an alternative.
The Commission further requests comment on whether there will be
any non-prudentially regulated security-based swap dealers in the UK
other than PRA-designated investment firms that would be seeking
substituted compliance. In addition, HM Treasury, the PRA and the FCA
published a joint statement announcing that they had decided to target
an implementation date of January 1, 2022 for the new prudential rules
for investment firms. The Commission further requests comment on
whether any investment firms that may be relying on the Commission's
proposed substituted compliance determination with respect to Exchange
Act rule 18a-1 would potentially be covered under this new capital
regime for investment firms in the UK. If so, should these capital
requirements be included in any Commission final order regarding the
determination of substituted compliance with respect to the capital
requirements of the Commission and the UK? If so, explain how they are
comparable to the capital requirements for non-prudentially regulated
security-based swap dealers under the Exchange Act.
With respect to capital requirements, commenters also are invited
to address any differences between UK regulatory requirements and
frameworks and the French requirements and frameworks that formed the
basis for the Commission's proposed conditional grant of substituted
compliance for France.\206\ Would the responses to any of the questions
about capital requirements that the Commission asked in connection with
the French Notice and Proposed Order differ if those questions applied
to UK regulatory requirements and frameworks? \207\
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\206\ See French Notice and Proposed Order, 85 FR 85726.
\207\ See French Notice and Proposed Order, 85 FR 85736-37.
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The Commission further requests comment on whether there would be
any non-prudentially regulated major security-based swap participants
in the UK that would be seeking substituted compliance with respect to
Exchange Act rule 18a-2.
2. Margin
The Commission further requests comment regarding the Commission's
preliminary view that the UK margin requirements are comparable to the
Exchange Act margin requirements for non-prudentially regulated
security-based swap dealers and major security-based swap participants.
Commenters particularly are invited to address the basis for
substituted compliance in connection with those requirements. Does UK
law taken as a whole produce regulatory outcomes that are comparable to
those of Exchange Act rule 18a-3? Are there any additional conditions
that should be applied to substituted compliance for these margin
requirements to promote comparable regulatory outcomes?
The Commission further requests comment on whether the haircuts
required under the UK EMIR Margin RTS are comparable to the collateral
haircuts required under paragraph (c)(3) of Exchange Act rule 18a-3.
The Commission also requests comment whether the standardized grid for
computing initial margin under the UK EMIR Margin RTS is comparable to
the standardized approach for computing initial margin under paragraph
(d)(1) of Exchange Act rule 18a-3.
With respect to margin requirements, commenters also are invited to
address any differences between UK regulatory requirements and
frameworks and the French requirements and frameworks that formed the
basis for the Commission's proposed conditional
[[Page 18409]]
grant of substituted compliance for France.\208\ Would the responses to
any of the questions about margin requirements that the Commission
asked in connection with the French Notice and Proposed Order differ if
those questions applied to UK regulatory requirements and frameworks?
\209\
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\208\ See French Notice and Proposed Order, 85 FR 85726.
\209\ See French Notice and Proposed Order, 85 FR 85736.
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D. Internal Supervision, Chief Compliance Officer and Additional
Exchange Act Section 15F(j) Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to internal supervision and chief compliance
officers, as well as additional Exchange Act section 15F(j)
requirements. Commenters particularly are invited to address the basis
for substituted compliance in connection with those risk control
requirements, and the proposed conditions and limitations connected to
substituted compliance for those requirements.
With respect to internal supervision and chief compliance officers
requirements, as well as additional Exchange Act section 15F(j)
requirements, commenters also are invited to address any differences
between UK regulatory requirements and frameworks and either the German
requirements and frameworks that formed the basis for the Commission's
conditional grant of substituted compliance for Germany or the French
requirements and frameworks that formed the basis for the Commission's
proposed conditional grant of substituted compliance for France.\210\
In particular, the proposed Order would require a Covered Entity to be
subject to, and comply with, in part provisions of UK law that
implement CRD article 92, whereas the German Substituted Compliance
Order requires, and the French Notice and Proposed Order would require,
compliance with provisions that implement CRD articles 92 through 95.
Should the Commission apply to these three orders (and to any other
substituted compliance orders in jurisdictions with requirements based
on CRD) the approach to these provisions in the proposed Order or the
approach in the German Substituted Compliance Order and French Notice
and Proposed Order? Similarly, the proposed Order would require a
Covered Entity to be subject to, and comply with, in part UK CRR
articles 286 through 288 and 293, whereas the German Substituted
Compliance Order does not require, and the French Notice and Proposed
Order would not require, compliance with comparable provisions of EU
law. Should the Commission apply to these three order (and to any other
substituted compliance orders in jurisdictions with requirements based
on CRR) the approach to these provisions in the proposed Order or the
approach in the German Substituted Compliance Order and French Notice
and Proposed Order? In addition, would the responses to any of the
questions about internal supervision or chief compliance officer
requirements, or the additional Exchange Act section 15F(j)
requirements, that the Commission asked in connection with the German
Notice and Proposed Order and/or the French Notice and Proposed Order
differ if those questions applied to UK regulatory requirements and
frameworks?
---------------------------------------------------------------------------
\210\ See generally German Substituted Compliance Order, 85 FR
at 85691-92; French Notice and Proposed Order, 85 FR 85726-28; see
also German Notice and Proposed Order, 85 FR at 72732-34.
---------------------------------------------------------------------------
E. Counterparty Protection Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with counterparty protection
requirements under the Exchange Act. Commenters particularly are
invited to address the basis for substituted compliance in connection
with the counterparty protection requirements, and the proposed
conditions and limitations connected to substituted compliance for
those requirements.
The Commission also requests comment on the scope of UK ``know your
counterparty'' and daily mark requirements to which a Covered Entity
must be subject if it relies on substituted compliance. Third country
investment firms (a term that includes third country credit
institutions when providing investment services or performing
investment activities in the UK) are not subject to these UK
requirements and therefore would not be eligible to apply substituted
compliance for Exchange Act ``know your counterparty'' or daily mark
requirements. Do any such third country investment firms currently plan
to apply, or believe they might in the future apply, substituted
compliance for Exchange Act ``know your counterparty'' or daily mark
requirements? Are any other UK requirements applicable to third country
investment firms comparable to Exchange Act ``know your counterparty''
or daily mark requirements?
With respect to all counterparty protection requirements,
commenters also are invited to address any differences between UK
regulatory requirements and frameworks and either the German
requirements and frameworks that formed the basis for the Commission's
conditional grant of substituted compliance for Germany or the French
requirements and frameworks that formed the basis for the Commission's
proposed conditional grant of substituted compliance for France.\211\
Would the responses to any of the questions about counterparty
protection requirements that the Commission asked in connection with
the German Notice and Proposed Order and/or the French Notice and
Proposed Order differ if those questions applied to UK regulatory
requirements and frameworks?
---------------------------------------------------------------------------
\211\ See generally German Substituted Compliance Order, 85 FR
at 85692-95; French Notice and Proposed Order, 85 FR 85728-30; see
also German Notice and Proposed Order, 85 FR at 72734-36.
---------------------------------------------------------------------------
F. Recordkeeping, Reporting, Notification, and Securities Count
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to recordkeeping, reporting, notification, and
securities counts, as well as the requirement of Exchange Act section
15F(g). Commenters particularly are invited to address the basis for
substituted compliance in connection with those requirements, and the
proposed conditions and limitations connected to substituted compliance
for those requirements. Does UK law taken as a whole produce regulatory
outcomes that are comparable to those of Exchange Act section 15F(g)
and Exchange Act rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9? In this
regard, commenters are invited to address the UK laws cited for each
substituted compliance determination with respect to the distinct
requirements within Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8
(i.e., the rules for which a more granular approach to substituted
compliance is being taken). With respect to each substituted compliance
determination, the Commission seeks comment on the following matters:
(1) Will the UK laws cited for the determination result in a comparable
regulatory outcome; (2) are there additional or alternative UK laws
that should be cited to achieve a comparable regulatory outcome; and
(3) are any of the UK laws cited for the determination
[[Page 18410]]
unnecessary to achieve a comparable regulatory outcome?
Commenters particularly are invited to address the proposed
condition with respect to Exchange Act rule 18a-5 that the Covered
Entity: (1) Preserve all of the data elements necessary to create the
records required by Exchange Act rules 18a-5(a)(1), (2), (3), (4), and
(7) (if not prudentially regulated) or Exchange Act rules 18a-5(b)(1),
(2), (3), and (7) (if prudentially regulated); and (2) upon request
furnish promptly to representatives of the Commission the records
required by those rules. Do the relevant UK laws require SBS Entities
to retain the data elements necessary to create the records required by
these rules? If not, please identify which data elements are not
preserved pursuant to the relevant UK laws. Further, how burdensome
would it be for an SBS Entity to format the data elements into the
records required by these rules (e.g., a blotter, ledger, or securities
record, as applicable) if the firm was requested to do so? In what
formats do SBS Entities in the UK produce this information to the PRA,
FCA, or other UK authorities? How do those formats differ from the
formats required by Exchange Act rules 18a-5(a)(1), (2), (3), (4), and
(7) (if not prudentially regulated) or Exchange Act rules 18a-5(b)(1),
(2), (3), and (7) (if prudentially regulated)?
Is it 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? Explain why
or why not. For example, would it be more efficient for a Covered
Entity to comply with certain Exchange Act requirements within a given
recordkeeping or reporting rule (rather than apply substituted
compliance) because it can utilize systems that its affiliated broker-
dealer has implemented to comply with them? If so, explain why. If not,
explain why not. Is it appropriate to permit Covered Entities to take a
more granular approach to the requirements within these recordkeeping
rules? 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.
Certain of the Commission's recordkeeping, reporting, and
notification requirements are fully or partially linked to substantive
Exchange Act requirements for which a positive 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 a substantive Exchange Act requirement? 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? 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? 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.
Commenters also are invited to address the proposal that a positive
substituted compliance determination with respect to Exchange Act rule
18a-7 would be conditioned on the Covered Entity filing financial and
operational information with the Commission in the manner and format
specified by the Commission by order or rule. With respect to FOCUS
Report Part II, not all of the line items on the report may be as
pertinent to a non-prudentially regulated SBS Entity if a positive
substituted compliance determination is made with respect to capital or
margin. With respect to FOCUS Report Part IIC, because the Commission
does not have responsibility to administer capital and margin
requirements for prudentially regulated SBS Entities, the FOCUS Report
Part IIC elicits much less information than the FOCUS Report Part II or
the financial reports SBS Entities file with UK authorities. Should the
Commission require Covered Entities to file the financial and
operational information using the FOCUS Report Part II (if not
prudentially regulated) or Part IIC (if prudentially regulated)? Are
there line items on the FOCUS Report Part II or Part IIC that elicit
information that is not included in the reports SBS Entities file with
the FCA or PRA? If so, do SBS Entities record that information in their
required books and records? Please identify any information that is
elicited in the FOCUS Report Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated) that is not: (1) Included in the
financial reports filed by SBS Entities with the FCA or PRA; or (2)
recorded in the books and records required of SBS Entities. With
respect to FOCUS Report Part IIC, would the answer to these questions
change if references to FFIEC Form 031 were not included in the FOCUS
Report Part IIC? If so, how? As a preliminary matter, as a condition of
substituted compliance should SBS Entities file a limited amount of
financial and operational information on the FOCUS Report Part II (if
not prudentially regulated) or Part IIC (if prudentially regulated) for
a
[[Page 18411]]
period of two years to further evaluate the burden of requiring all
applicable line items to be filled out? If so, which line items should
be required? To the extent that SBS Entities otherwise report or record
information that is responsive to the FOCUS Report Part II or Part IIC,
how could the information on these reports be integrated into a
database of filings the Commission or its designee will maintain for
filers of the FOCUS Report Parts II and IIC (e.g., the eFOCUS system)
to achieve the objective of being able to perform cross-form analysis
of information entered into the uniquely numbered line items on the
forms?
Commenters also are invited to address the proposal that a positive
substituted compliance determination with respect to the requirement to
file annual audited reports pursuant to Exchange Act rule 18a-7 would
be subject to five conditions. For example, comment is sought on the
first and third conditions that would permit the SBS Entity to
simultaneously transmit to the Commission a copy of the financial
statements the SBS Entity is required to file annually with a UK
regulator, and, if not already required, require the SBS Entity to
engage an independent public accountant to prepare a report covering
the annual financial statements. Are there any concerns with the
Commission accepting financial statements that are prepared in
accordance with UK GAAP and audited by an independent public accountant
in accordance with UK GAAS? In addition, are there any concerns with
the public accountant being independent in accordance with local UK
requirements? Further, the third condition would require SBS Entities
that are not required under UK law to file a report of an independent
public accountant covering their financial statements to file such an
accountant's report. This condition is based on the fact that UK law
only requires certain investment firms (depending on their size) to
have their financial statements audited. Do the firms in the UK that
are not subject to the requirement to file audited financial reports
engage in security-based swap activities? If so, are they likely to
register with the Commission as a non-prudentially regulated security-
based swap dealer or major security-based swap participant?
With respect to recordkeeping, reporting, notification, and
securities count requirements, commenters also are invited to address
any differences between UK regulatory requirements and frameworks and
either the German requirements and frameworks that formed the basis for
the Commission's conditional grant of substituted compliance for
Germany or the French requirements and frameworks that formed the basis
for the Commission's proposed conditional grant of substituted
compliance for France.\212\ Would the responses to any of the questions
about recordkeeping, reporting, notification, and securities count
requirements that the Commission asked in connection with the German
Notice and Proposed Order and the French Notice and Proposed Order
differ if those questions applied to UK regulatory requirements and
frameworks?
---------------------------------------------------------------------------
\212\ See generally German Substituted Compliance Order, 85 FR
at 85695-97; French Notice and Proposed Order, 85 FR 85730-34.
---------------------------------------------------------------------------
G. Supervisory and Enforcement Issues
The Commission further requests comment regarding how to weigh
considerations regarding supervisory and enforcement effectiveness in
the UK as part of the comparability assessments. Commenters
particularly are invited to address relevant issues regarding the
effectiveness of UK supervision and enforcement over firms that may
register with the Commission as SBS Entities, including but not limited
to issues regarding:
UK supervisory and enforcement authority, supervisory
inspection practices and the use of alternative supervisory tools, and
enforcement tools and practices;
UK supervisory and enforcement effectiveness with respect
to derivatives such as security-based swaps; and
UK supervision and enforcement in the cross-border context
(e.g., any differences between the oversight of firms' businesses
within the UK and the oversight of activities and branches outside of
the UK, including within the United States).
By the Commission.
Dated: April 5, 2021.
Vanessa A. Countryman,
Secretary.
Attachment A
It is hereby determined and ordered, pursuant to rule 3a71-6 under
the Exchange Act, that a Covered Entity (as defined in paragraph (g)(1)
of this Order) may satisfy the requirements under the Exchange Act that
are addressed in paragraphs (b) through (f) of this Order so long as
the Covered Entity is subject to and complies with relevant
requirements of the United Kingdom and with the conditions to this
Order, as amended or superseded from time to time.
(a) General Conditions
This Order is subject to the following general conditions, in
addition to the conditions specified in paragraphs (b) through (f):
(1) Activities as UK ``regulated activities.'' For each condition
in paragraphs (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions of
FCA SYSC 4, 5, 6, 7, 9 and/or 10, PRA General Organisational
Requirements, PRA Recordkeeping Rules, PRA Remuneration Rules, PRA Risk
Control Rules and/or MLR 2017, the Covered Entity's relevant security-
based swap activities constitute ``regulated activities'' as defined
for purposes of the relevant UK provisions, are carried on by the
Covered Entity from an establishment in the United Kingdom and fall
within the scope of the Covered Entity's authorization from the FCA
and/or the PRA to conduct regulated activities in the United Kingdom.
(2) Activities as UK MiFID ``investment services or activities.''
For each condition in paragraphs (b) through (f) of this Order that
requires the application of, and the Covered Entity's compliance with,
provisions of FCA PROD 3 and/or UK MiFID Org Reg, the Covered Entity's
relevant security-based swap activities constitute ``investment
services or activities,'' as defined in the FCA Handbook Glossary, are
carried on by the Covered Entity from an establishment in the United
Kingdom and fall within the scope of the Covered Entity's authorization
from the FCA and/or PRA to conduct regulated activities in the United
Kingdom.
(3) Activities as UK ``MiFID or equivalent third country
business.'' For each condition in paragraphs (b) through (f) of this
Order that requires the application of, and the Covered Entity's
compliance with, provisions of FCA COBS 2, 4, 6, 8A, 9A, 14 and/or 14A,
the Covered Entity's relevant security-based swap activities constitute
``MiFID or equivalent third country business,'' as defined in the FCA
Handbook Glossary, are carried on by the Covered Entity from an
establishment in the United Kingdom and fall within the scope of the
Covered Entity's authorization from the FCA and/or PRA to conduct
regulated activities in the United Kingdom.
(4) Activities as UK ``designated investment business.'' For each
condition in paragraphs (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions of
FCA
[[Page 18412]]
COBS 11, the Covered Entity's relevant security-based swap activities
constitute ``MiFID business'' that is also ``designated investment
business,'' each as defined in the FCA Handbook Glossary; are carried
on by the Covered Entity from an establishment in the United Kingdom;
and fall within the scope of the Covered Entity's authorization from
the FCA and/or PRA to conduct regulated activities in the United
Kingdom.
(5) Activities as UK ``MiFID business.'' For each condition in
paragraphs (b) through (f) of this Order that requires the application
of, and the Covered Entity's compliance with, provisions of FCA CASS 6
and/or 7, the Covered Entity is not an ICVC as defined in the FCA
Handbook Glossary and the Covered Entity's relevant security-based swap
activities constitute ``regulated activities'' as defined for purposes
of the relevant UK provisions and ``MiFID business'' as defined in the
FCA Handbook Glossary; are carried on by the Covered Entity from an
establishment in the United Kingdom and fall within the scope of the
Covered Entity's authorization from the FCA and/or the PRA to conduct
regulated activities in the United Kingdom.
(6) Activities covered by FCA SYSC 10A. For each condition in
paragraphs (b) through (f) of this Order that requires the application
of, and the Covered Entity's compliance with, provisions of FCA SYSC
10A, the Covered Entity's relevant security-based swap activities
constitute activities described in FCA SYSC 10A.1.1(2)(a), (b) and/or
(c); are carried on by the Covered Entity from an establishment in the
United Kingdom and fall within the scope of the Covered Entity's
authorization from the FCA and/or the PRA to conduct regulated
activities in the United Kingdom.
(7) Counterparties as UK MiFID ``clients.'' For each condition in
paragraphs (b) through (f) of this Order that requires the application
of, and the Covered Entity's compliance with, provisions of FCA CASS 6
and/or 7, FCA COBS 2, 4, 6, 8A, 9A, 11, 14 and/or 14A, FCA PROD 3, FCA
SYSC 10.1.8, FCA SYSC 10A and/or UK MiFID Org Reg, the relevant
counterparty (or potential counterparty) to the Covered Entity is a
``client'' (or potential ``client''), as defined in COBS 3.2.1R.
(8) Security-based swaps as UK MiFID ``financial instruments.'' For
each condition in paragraphs (b) through (f) of this Order that
requires the application of, and the Covered Entity's compliance with,
provisions of FCA CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 9A, 11, 14
and/or 14A, FCA PROD 3, FCA SYSC 10A, UK MAR, UK MAR Investment
Recommendations Regulation and/or UK MiFID Org Reg, the relevant
security-based swap is a ``financial instrument,'' as defined in Part 1
of Schedule 2 of the UK Regulated Activities Order.
(9) Covered Entity as UK CRD/CRR ``institution.'' For each
condition in paragraph (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions of
UK CRR, the Covered Entity is an ``institution,'' as defined in UK CRR
article 4(1)(3).
(10) Covered Entity as UK ``common platform firm'' or ``third
country firm.'' For each condition in paragraph (b) through (f) of this
Order that requires the application of, and the Covered Entity's
compliance with, provisions of FCA SYSC 4, 5, 6, 7, 9 and/or 10, the
Covered Entity is either a ``common platform firm'' (other than a
``UCITS investment firm'') or a ``third country firm,'' each as defined
in the FCA Handbook Glossary.
(11) Covered Entity as UK ``IFPRU investment firm.'' For each
condition in paragraph (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions of
FCA SYSC 19A, FCA IFPRU and/or FCA BIPRU, the Covered Entity is an
``IFPRU investment firm,'' as defined in the FCA Handbook Glossary.
(12) Covered Entity as ``UK bank'' or ``UK designated investment
firm.'' For each condition in paragraph (b) through (f) of this Order
that requires the application of, and the Covered Entity's compliance
with, provisions of FCA SYSC 19D, PRA Internal Capital Adequacy
Assessment Rules, PRA Internal Liquidity Adequacy Assessment Rules, PRA
General Organisational Requirements, PRA Remuneration Rules and/or PRA
Risk Control Rules, the Covered Entity is a ``UK bank'' or ``UK
designated investment firm,'' each as defined in the FCA Handbook
Glossary (in the case of a provision of FCA SYSC 19D) or as defined in
the PRA Rulebook Glossary (in the case of a provision of a PRA rule).
(13) Covered Entity's counterparties as UK EMIR ``counterparties.''
For each condition in paragraphs (b) through (e) of this Order that
requires the application of, and the Covered Entity's compliance with,
provisions of UK EMIR, UK EMIR RTS and/or UK EMIR Margin RTS, if the
counterparty to the Covered Entity is not a ``financial counterparty''
or ``non-financial counterparty'' as defined in UK EMIR articles 2(8)
or 2(9), respectively, the Covered Entity complies with the applicable
condition of this Order:
(i) As if the counterparty were a financial counterparty, if the
Covered Entity reasonably determines that the counterparty would be a
financial counterparty if it were established in the UK and authorized
by an appropriate UK authority, or, otherwise, as if the counterparty
were a non-financial counterparty; and
(ii) Without regard to the application of UK EMIR article 13.
(14) Security-based swap status under UK EMIR. For each condition
in paragraphs (b) through (e) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions of
UK EMIR and/or other UK requirements adopted pursuant to those
provisions, either:
(i) The relevant security-based swap is an ``OTC derivative'' or
``OTC derivative contract,'' as defined in UK EMIR article 2(7), that
has not been cleared by a CCP and otherwise is subject to the
provisions of UK EMIR article 11, UK EMIR RTS articles 11 through 15,
and UK EMIR Margin RTS article 2; or
(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 UK.
(15) Memorandum of Understanding with the FCA and the PRA. The
Commission has a supervisory and enforcement memorandum of
understanding and/or other arrangement with the FCA and the PRA
addressing cooperation with respect to this Order at the time the
Covered Entity complies with the relevant requirements under the
Exchange Act via compliance with one or more provisions of this Order.
(16) Notice to Commission. A Covered Entity relying on this Order
must provide notice of its intent to rely on this Order by notifying
the Commission in writing. Such notice must be sent to the Commission
in the manner specified on the Commission's website. The notice must
include the contact information of an individual who can provide
further information about the matter that is the subject of the notice.
The notice must identify each specific substituted compliance
determination within paragraphs (b) through (f) of the Order for which
the Covered Entity intends to apply substituted compliance. A Covered
Entity must promptly provide an amended notice if it modifies its
reliance on the substituted compliance determinations in this Order.
[[Page 18413]]
(b) Substituted Compliance in Connection With Risk Control Requirements
This Order extends to the following provisions related to risk
control:
(1) Internal risk management. The requirements of Exchange Act
section 15F(j)(2) and related aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that the Covered Entity is subject to and
complies with the requirements of:
(i) Either {FCA IFPRU 2.2.7R(2), 2.2.17R through 2.2.28R, 2.2.30R
and 2.2.32R through 2.2.35R; and FCA BIPRU 12.3.4R, 12.3.5R, 12.3.7R,
12.3.8R, 12.3.22AR, 12.3.22BR, 12.3.27R, 12.4.-2R, 12.4.-1R, 12.4.5AR,
12.4.10R and 12.4.11R{time} or {PRA Internal Capital Adequacy
Assessment Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1 through 8.5,
9.1, 10.1, 10.2 and 11.1 through 11.3; and PRA Internal Liquidity
Adequacy Assessment Rules 3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 11.1,
11.2, 11.4, 12.1, 12.3, and 12.4{time} ;
(ii) FCA PRIN 2.1.1R(3);
(iii) FCA SYSC 4.1.1R(1), 4.1.2R, 7.1.4R, 7.1.17R, 7.1.18R,
7.1.18BR, 7.1.19R, 7.1.20R, 7.1.21R and 7.1.22R and, if the Covered
Entity is a UK bank or UK designated investment firm, also PRA General
Organisational Requirements Rule 2.1 and 2.2 and PRA Risk Control Rules
2.3, 2.7 and 3.1 through 3.5;
(iv) Either {FCA SYSC 19A.2.1R{time} or {FCA SYSC 19D.2.1R and PRA
Remuneration Rule 6.2{time} ;
(v) Either {FSMA schedule 6 part 2D and FCA COND 2.4.1A{time} or
{FSMA schedule 6 parts 3C and 5D, FCA COND 2.4.1C and PRA Fundamental
Rules 3 through 6{time} ;
(vi) UK CRR articles 286 through 288 and 293;
(vii) UK EMIR Margin RTS article 2; and
(viii) UK MiFID Org Reg articles 21 through 24.
(2) Trade acknowledgement and verification. The requirements of
Exchange Act rule 15Fi-2, provided that the Covered Entity is subject
to and complies with the requirements of UK EMIR article 11(1)(a) and
UK EMIR RTS article 12.
(3) Portfolio reconciliation and dispute reporting. The
requirements of Exchange Act rule 15Fi-3, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of UK EMIR article 11(1)(b) and UK EMIR RTS articles 13
and 15;
(ii) The Covered Entity provides the Commission with reports
regarding disputes between counterparties on the same basis as it
provides those reports to the FCA pursuant to UK EMIR RTS article
15(2).
(4) Portfolio compression. The requirements of Exchange Act rule
15Fi-4, provided that the Covered Entity is subject to and complies
with the requirements of UK EMIR RTS article 14.
(5) Trading relationship documentation. The requirements of
Exchange Act rule 15Fi-5, other than paragraph (b)(5) to that rule when
the counterparty is a U.S. person, provided that the Covered Entity is
subject to and complies with the requirements of UK EMIR article
11(1)(a), UK EMIR RTS article 12 and UK EMIR Margin RTS article 2.
(c) Substituted Compliance in Connection With Capital and Margin
(1) Capital. The requirements of Exchange Act section 15F(e) and
Exchange Act rules 18a-1, and 18a-1a through d, provided that:
(i) The Covered Entity is subject to and complies with the capital
requirements of: The UK CRR, including recitals 40, 43 and 87, and
articles 26, 28, 50 through 52, 61, 63, 92, 111, 113(1), 114 through
122, 143, 153(8), 177(2), 283, 290, 300 through 311, 312(2), 362
through 377, 382 through 383, 412(1), 413(1), 416(1), 427(1), 413, 429,
430, and 499; UK MiFID Org Reg article 23; UK EMIR Margin RTS, recital
31, articles 2, 3(b), 7, and 19(1)(d) and (e), (3) and (8); FCA SYSC
4.1.1R, 7.1.4R and 7.1.18R; Chapters 2,7, 10, 11 of FCA IFPRU; Chapter
12 of FCA BIPRU; FCA PRIN; Client asset protection requirements under
the FCA CASS; PRA General Organisational Requirements Rule 2.1; PRA
Risk Control Rules 2.3 and 3.1(1); PRA Capital Buffers Rules; PRA
Internal Capital Adequacy Assessment Rules; PRA Internal Liquidity
Adequacy Assessment Rules; PRA Liquidity Coverage Requirement--UK
Designated Investment Firms Rules; PRA Notifications Rules; Banking Act
2009; Capital Requirements Regulations 2013; Capital Requirements
(Capital Buffers and Macro-prudential Measures) Regulations 2014; Part
8 and Part 9 of the Bank Recovery and Resolution (No 2) Order 2014;
Bank of England Act 1998 (Macro-prudential Measures) (No 2) Order 2015;
and Parts 4A and 12A of FSMA; and
(ii) The Covered Entity:
(A) 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;
(B) Makes a quarterly record listing:
(1) The assets maintained pursuant to paragraph (c)(1)(ii)(A),
their value, and the amount of their applicable haircuts;
(2) The aggregate amount of the liabilities coming due in the next
365 days; and
(C) Maintains at least $100 million of equity capital composed of
``highly liquid assets'' as defined in the Basel capital standard; and
(D) Includes its most recent statement of financial condition filed
with its local supervisor whether audited or unaudited with its initial
written notice to the Commission of its intent to rely on substituted
compliance under condition (a)(16) above.
(2) Margin. The requirements of Exchange Act section 15F(e) and
Exchange Act rule 18a-3, provided that the Covered Entity is subject to
and complies with the requirements of: UK EMIR article 11; UK EMIR
Margin RTS; UK CRR articles 103, 105(3); 105(10); 111(2), 224, 285,
286, 286(7), 290, 295, 296(2)(b), 297(1), 297(3), and 298(1); UK MiFID
Org Reg article 23(1); FCA SYSC 4.1.1R; FCA IFPRU 2.2.18R; PRA General
Organisational Requirements Rule 2.1; and PRA Internal Capital Adequacy
Assessment Rule 4.2.
(d) Substituted Compliance in Connection With Internal Supervision and
Compliance Requirements and Certain Exchange Act Section 15F(j)
Requirements
This Order extends to the following provisions related to internal
supervision and compliance and Exchange Act section 15F(j)
requirements:
(1) Internal supervision. The requirements of Exchange Act rule
15Fh-3(h) and Exchange Act sections 15F(j)(4)(A) and (j)(5), provided
that:
(i) The Covered Entity is subject to and complies with the
requirements identified in paragraph (d)(3) to this Order;
(ii) The Covered Entity complies with paragraph (d)(4) to this
Order; and
(iii) This paragraph (d) does not extend to the requirements of
paragraph (h)(2)(iii)(I) to rule 15Fh-3 to the extent those
requirements pertain to compliance with Exchange Act sections
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to the general and
supporting provisions of paragraph (h) to rule 15Fh-3 in connection
with those Exchange Act sections.
(2) Chief compliance officers. The requirements of Exchange Act
section 15F(k) and Exchange Act rule 15Fk-1, provided that:
(i) The Covered Entity is subject to and complies with the
requirements
[[Page 18414]]
identified in paragraph (d)(3) to this Order;
(ii) All reports required pursuant to UK MiFID Org Reg article
22(2)(c) must also:
(A) Be provided to the Commission at least annually and in the
English language;
(B) Include a certification that, under penalty of law, the report
is accurate and complete; and
(C) Address the firm's compliance with other applicable conditions
to this Order in connection with requirements for which the Covered
Entity is relying on this Order.
(3) Applicable supervisory and compliance requirements. Paragraphs
(d)(1) and (d)(2) are conditioned on the Covered Entity being subject
to and complying with the following requirements:
(i) FCA CASS 6.2.1R, 7.11.1R and 7.12.1R;
(ii) FCA COBS 11.7A.3R;
(iii) Either {FCA IFPRU 2.2.7R(2), 2.2.17R through 2.2.28R, 2.2.30R
and 2.2.32R through 2.2.35R; and FCA BIPRU 12.3.4R, 12.3.5R, 12.3.7R,
12.3.8R, 12.3.22AR, 12.3.22BR, 12.3.27R, 12.4.-2R, 12.4.-1R, 12.4.5AR,
12.4.10R and 12.4.11R{time} or {PRA Internal Capital Adequacy
Assessment Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1 through 8.5,
9.1, 10.1, 10.2 and 11.1 through 11.3; and PRA Internal Liquidity
Adequacy Assessment Rules 3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 11.1,
11.2, 11.4, 12.1, 12.3 and 12.4{time} ;
(iv) FCA PRIN 2.1.1R(3);
(v) FCA SYSC 4.1.1R(1), 4.1.2R, 4.3A.1R, 4.3A.3R, 4.3A.4R, 7.1.4R,
7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R, 7.1.20R, 7.1.21R, 7.1.22R,
9.1.1AR, 10.1.3R, 10.1.7R, 10.1.8R, 10A.1.6R, 10A.1.8R, 10A.1.11R and
24.2.6R(8) and, if the Covered Entity is a UK bank or UK designated
investment firm, also PRA Allocation of Responsibilities Rule 4.1(16);
PRA General Organisational Requirements Rules 2.1, 2.2 and 5.1 through
5.3; PRA Record Keeping Rule 2.1; PRA Risk Control Rules 2.3, 2.7 and
3.1 through 3.5; and PRA Senior Management Functions Rule 8.2;
(vi) Either {FCA SYSC 19A.2.1R, 19A.3.1R(1), 19A.3.3R, 19A.3.7R
through 19A.3.11R, 19A.3.14R, 19A.3.16R and 19A.3.35AR{time} or {FCA
SYSC 19D.2.1R, 19D.3.1R, 19D.3.3R, 19D.3.7R through 19D.3.11R,
19D.3.15R, 19D.3.17R and 19D.3.37R and PRA Remuneration Rules 3.1, 4.2,
5.1, 6.2, 6.3, 6.4, 7.2, 7.3, 8.1, 8.2 and 15.2{time} ;
(vii) Either {FSMA schedule 6 part 2D and FCA COND 2.4.1A{time} or
{FSMA schedule 6 parts 3C and 5D, FCA COND 2.4.1C and PRA Fundamental
Rules 3 through 6{time} ;
(viii) UK CRR articles 286 through 288 and 293;
(ix) UK EMIR Margin RTS article 2; and
(x) UK MiFID Org Reg articles 21 through 37 and 72 through 76 and
Annex IV.
(4) Additional condition to paragraph (d)(1). Paragraph (d)(1)
further is conditioned on the requirement that the Covered Entity
complies with the provisions specified in paragraph (d)(3) as if those
provisions also require compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions to this Order in connection
with requirements for which the Covered Entity is relying on this
Order.
(e) Substituted Compliance in Connection With Counterparty Protection
Requirements
This Order extends to the following provisions related to
counterparty protection:
(1) Disclosure of information regarding material risks and
characteristics. The requirements of Exchange Act rule 15Fh-3(b)
relating to disclosure of material risks and characteristics of one or
more security-based swaps subject thereto, provided that the Covered
Entity, in relation to that security-based swap, is subject to and
complies with the requirements of:
(i) FCA COBS 2.2A.2R, 6.1ZA.11R, 6.1ZA.12R, 6.2B.33R, 9A.3.6R and
14.3A.3R; and
(ii) Either {UK MiFID Org Reg articles 48 through 50{time} or {FCA
COBS 6.1ZA.9UK, 6.1ZA.14UK, and 14.3A.5UK{time} .
(2) Disclosure of information regarding material incentives or
conflicts of interest. The requirements of Exchange Act rule 15Fh-3(b)
relating to disclosure of material incentives or conflicts of interest
that a Covered Entity may have in connection with one or more security-
based swaps subject thereto, provided that the Covered Entity, in
relation to that security-based swap, is subject to and complies with
the requirements of either:
(i) FCA SYSC 10.1.8R and UK MiFID Org Reg articles 33 to 35;
(ii) FCA COBS 2.3A.5R, 2.3A.6R, 2.3A.7E and 2.3A.10R through
2.3A.14R; or
(iii) UK MAR article 20(1) and UK MAR Investment Recommendations
Regulation articles 5 and 6.
(3) ``Know your counterparty.'' The requirements of Exchange Act
rule 15Fh-3(e), as applied to one or more security-based swap
counterparties subject thereto, provided that the Covered Entity, in
relation to the relevant security-based swap counterparty, is subject
to and complies with the requirements of:
(i) FCA SYSC 6.1.1R;
(ii) UK MiFID Org Reg articles 21, 22, 25, 26 and applicable parts
of Annex I;
(iii) FCA SYSC 4.1.1R(1);
(iv) Either {FCA IFPRU 2.2.7R(2) and 2.2.32R{time} or {PRA General
Organisational Requirement 2.1 and PRA Internal Capital Adequacy
Assessment Rule 10.1{time} ;
(v) MLR 2017 Regulations 27 and 28; and
(v) MLR 2017 Regulations 19(1) through (3), as applied to policies,
controls and procedures regarding customer due diligence.
(4) Suitability. The requirements of Exchange Act rule 15Fh-3(f),
as applied to one or more recommendations of a security-based swap or
trading strategy involving a security-based swap subject thereto,
provided that:
(i) The Covered Entity, in relation to the relevant recommendation,
is subject to and complies with the requirements of:
(A) FCA COBS 4.2.1R, 9A.2.1R and 9A.1.16R;
(B) FCA PROD 3.2.1R and 3.3.1R;
(C) FCA SYSC 5.1.5AAR and 5.1.5ABR; and
(D) UK MiFID Org Reg articles 21(1)(b) and (d), 54 and 55; and
(ii) The counterparty to which the Covered Entity makes the
recommendation is a ``professional client'' mentioned in FCA COBS
3.5.2R and is not a ``special entity'' as defined in Exchange Act
section 15F(h)(2)(C) and Exchange Act rule 15Fh-2(d).
(5) Fair and balanced communications. The requirements of Exchange
Act rule 15Fh-3(g), as applied to one or more communications subject
thereto, provided that the Covered Entity, in relation to the relevant
communication, is subject to and complies with the requirements of:
(i) Either {FCA COBS 2.1.1R and FCA COBS 4.2.1R{time} or {FCA COBS
2.1.1AR and FCA COBS 4.2.1R{time} ;
(ii) FCA COBS 2.2A.2R, 2.2A.3R, 6.1ZA.11R, 6.1ZA.12R, 6.1ZA.13R,
6.2B.33R, 6.2B.34R, 9A.3.6R and 14.3A.3R;
(iii) Either {UK MiFID Org Reg articles 46 through 48{time} or
{FCA COBS 4.5A.9UK, 4.7.-1AUK, 6.1ZA.5UK, 6.1ZA.8UK, 6.1ZA.17UK,
6.1ZA.19UK, 6.1ZA.20UK, 8A.1.5UK to 8A.1.7UK, 14.3A.5UK, 14.3A.7UK and
14.3A.9UK{time} ;
(iv) UK MAR Investment Recommendations Regulation articles 3 and 4;
and
(v) UK MAR articles 12(1)(c), 15 and 20(1).
[[Page 18415]]
(6) Daily mark disclosure. The requirements of Exchange Act rule
15Fh-3(c), as applied to one or more security-based swaps subject
thereto, provided that the Covered Entity is required to reconcile, and
does reconcile, the portfolio containing the relevant security-based
swap on each business day pursuant to UK EMIR articles 11(1)(b) and
11(2) and UK EMIR RTS article 13.
(f) Substituted Compliance in Connection With Recordkeeping, Reporting,
Notification, and Securities Count Requirements
This Order extends to the following provisions that apply to a
Covered Entity related to recordkeeping, reporting, notification and
securities counts:
(1)(i) Make and keep current certain records. The requirements of
the following provisions of Exchange Act rule 18a-5, provided that the
Covered Entity complies with the relevant conditions in this paragraph
(f)(1)(i) and with the applicable conditions in paragraph (f)(1)(ii):
(A) The requirements of Exchange Act rule 18a-5(a)(1) or (b)(1), as
applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK MiFID Org Reg articles 74, 75, 76 and Annex IV; UK
MiFIR article 25(1); and FCA SYSC 10A.1.6R, 10A.1.8R; and
(2) With respect to the requirements of Exchange Act rule 18a-
5(a)(1), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order.
(B) The requirements of Exchange Act rule 18a-5(a)(2), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA IFPRU 2.2.7R(1); PRA Internal Capital Adequacy
Assessment Rule 3.1; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A-1R,
6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK MiFID Org Reg
articles 72(1), 74 and 75; and UK EMIR article 39(4); and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(C) The requirements of Exchange Act rule 18a-5(a)(3) or (b)(2), as
applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A-1R, 6.3.6AR,
6.6.4R, 6.6.5G, 6.6.2R, 6.6.3R, 6.6.33G, 6.6.34R, 6.6.8R, 7.12.1R,
7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3), 7.15.2R,
7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R, 7.15.21G,
10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK MiFID Org Reg articles 72(1),
74 and 75; and UK EMIR article 39(4); and
(2) With respect to the requirements of Exchange Act rule 18a-
5(a)(3), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(D) The requirements of Exchange Act rule 18a-5(a)(4) or (b)(3), as
applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK CRR articles 103 and 103(b)(ii); FCA COND at
paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA Fundamental Rules 2 and 6;
FCA PRIN 2.1.1.R(2) and (3); PRA Recordkeeping Rule 2.1; UK MiFID Org
Reg articles 59, 74, 75 and 76 and Annex IV; UK MiFIR article 25(1);
FCA SYSC 9.1.1AR, 10A.1.6R and 10A.1.8R; FCA COBS 8A.1.9R, 9A.2.1R,
9.1.1AR, 16A.2.1 R and 16A.3.1UK; UK EMIR articles 9(2) and 11(1)(a);
MLR 2017 Regulations 28(10) and (18) and 28 through 30; and FCA FCG
3.1.7; and
(2) With respect to the requirements of Exchange Act rule 18a-
5(a)(4), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(E) The requirements of Exchange Act rule 18a-5(b)(4) provided that
the Covered Entity is subject to and complies with the requirements of
FCA COBS 8A.1.9R, 16A.2.1 R, 16A.3.1UK; UK MiFID Org Reg article 59;
FCA SYSC 9.1.1AR; and UK EMIR articles 9(2) and 11(1)(a);
(F) The requirements of Exchange Act rule 18a-5(a)(5) or (b)(5), as
applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK MiFID Org Reg articles 74, 75, 76 and Annex IV; UK
MiFIR article 25(1); FCA SYSC 10A.1.6R, 10A.1.8R; and UK MiFID Org Reg
article 76; and
(2) With respect to the requirements of Exchange Act rule 18a-
5(a)(5), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(G) The requirements of Exchange Act rules 18a-5(a)(6) and (a)(15)
or (b)(6) and (b)(11), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; UK MiFID Org Reg articles 59, 74, 75 76 and
Annex IV; UK MiFIR article 25(1); FCA SYSC 9.1.1AR, 10A.1.6R and
10A.1.8R; FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1R and 16A.3.1UK;
UK EMIR articles 9(2) and 11(1)(a); MLR 2017 Regulations 28(10) and
(18) and 28-30; and FCA FCG 3.1.7;
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 15Fi-2 pursuant to this Order; and
(3) This Order does not extend to the requirements of Exchange Act
rule 18a-5(a)(6) and (b)(6) to make and keep current books and records
of confirmations of purchases and sales of securities other than
security-based swaps;
(H) The requirements of Exchange Act rule 18a-5(a)(7) or (b)(7), as
applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK MiFIR article 25(1); MLR 2017 Regulations 28 through
30; FCA FCG 3.1.7; FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1 R and
16A.3.1UK; FCA SYSC 9.1.1AR, 10A.1.6R and 10A.1.8R; FCA COND at
paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA Fundamental Rules 2 and 6;
FCA PRIN 2.1.1.R(2) and (3); PRA Recordkeeping Rule 2.1; UK MiFID Org
Reg articles 59, 74, 75 and 76 and Annex IV; and UK EMIR articles 9(2)
and 11(1)(a); and
(2) With respect to the requirements of Exchange Act rule 18a-
5(a)(7), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(I) The requirements of Exchange Act rule 18a-5(a)(8), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; UK MiFID Org Reg articles 59, 72(1), 74, 75 76
and Annex IV; UK MiFIR article 25(1); FCA SYSC 9.1.1AR, 10A.1.6R and
10A.1.8R; FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1 R and 16A.3.1UK;
UK EMIR articles 9(2) and 11(1)(a); MLR 2017 Regulations 28(10) and
(18) and 28 through 30; and FCA FCG 3.1.7; and
[[Page 18416]]
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order.;
(J) The requirements of Exchange Act rule 18a-5(a)(9), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA IFPRU 2.2.7R(1); PRA Internal Capital Adequacy
Assessment Rule 3.1; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A-1R,
6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK EMIR article 39(4);
and UK MiFID Org Reg articles 72(1), 74, and 75;
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order; and
(3) This Order does not extend to the requirements of Exchange Act
rule 18a-5(a)(9) relating to Exchange Act rule 18a-2;
(K) The requirements of Exchange Act rule 18a-5(a)(10) and (b)(8),
provided that the Covered Entity is subject to and complies with the
requirements of FSMA sections 63F(2), 63F(5), 63(2A), 60A(2) and (5);
PRA Fitness and Propriety Rules 2.6 and 2.9; SMR Applications and
Notifications Rules 2.1, 2.2 and 2.6; PRA Certification Rules; PRA
Fundamental Rules 2 and 6; PRA Recordkeeping Rule 2.1; PRA Internal
Capital Adequacy Assessment Rule 3.1; PRA General Organisational
Requirements Rules 5.1 and 5.2; FCA SUP 3.10.4R through 3.10.7R,
10C.10.8D, 10C.10.8AD, 10C.15, 10C.10.14G, 10C.10.16R, 10C.10.21G and
10C Annex 3D; FCA SYSC 4.3A.1R., 4.3A.3R, 4.3A.3R, 10.1.7R, 27 and
27.2.5G; FCA FIT 2.1, 2.2 and 2.3; UK MiFID Org Reg articles 21(1)(a),
35;
(L) The requirements of Exchange Act rule 18a-5(a)(12), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of UK CRR articles 103, 105(3) and 105(10); FCA IFPRU
2.2.7R(1); PRA Internal Capital Adequacy Assessment Rule 3.1; FCA CASS
6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A-1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R,
6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R, 7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R,
7.13.32R(3), 7.13.33R(3), 7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R,
7.15.9R, 7.15.20R, 7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK
EMIR article 39(4); and MiFID Org Reg. articles 72(1), 74 and 75;
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rule 18a-3
pursuant to this Order;
(M) The requirements of Exchange Act rule 18a-5(a)(17) and (b)(13),
as applicable, regarding one or more provisions of Exchange Act rules
15Fh-3 or 15Fk-1 for which substituted compliance is available under
this Order, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; FCA SYSC 9.1.1AR and 10A.1.6R; UK MiFID Org Reg
articles 72, 73, 76(8)(b) and Annex I; and UK EMIR article 39(5), in
each case with respect to the relevant security-based swap or activity;
(2) With respect to the portion of Exchange Act rule 18a-5(a)(17)
and (b)(13) that relates to Exchange Act rule 15Fh-3, the Covered
Entity applies substituted compliance for such business conduct
standard(s) of Exchange Act rule 15Fh-3 pursuant to this Order, as
applicable, with respect to the relevant security-based swap or
activity; and
(3) With respect to the portion of Exchange Act rule 18a-5(a)(17)
and (b)(13) that relates to Exchange Act rule 15Fk-1, the Covered
Entity applies substituted compliance for Exchange Act section 15F(k)
and Exchange Act rule 15Fk-1 pursuant to this Order;
(N) The requirements of Exchange Act rule 18a-5(a)(18)(i) and (ii)
or (b)(14)(i) and (ii), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK EMIR article 11(1)(b); and UK EMIR RTS article
15(1); and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-3 pursuant to this Order; and
(O) The requirements of Exchange Act rule 18a-5(a)(18)(iii) or
(b)(14)(iii), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK EMIR article 11(1)(b); and UK EMIR RTS article
15(1), in each case with respect to such security-based swap
portfolio(s); and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-4 pursuant to this Order.
(ii) Paragraph (f)(1)(i) is subject to the following further
conditions:
(A) Paragraphs (f)(1)(i)(A) through (D) and (H) are subject to the
condition that the Covered Entity preserves all of the data elements
necessary to create the records required by the applicable Exchange Act
rules cited in such paragraphs and upon request furnishes promptly to
representatives of the Commission the records required by those rules;
(B) A Covered Entity may apply the substituted compliance
determination in paragraph (f)(1)(i)(M) to records of compliance with
Exchange Act rule 15Fh-3(b), (c), (e), (f) and (g) in respect of one or
more security-based swaps or activities related to security-based
swaps; and
(C) This Order does not extend to the requirements of Exchange Act
rule 18a-5(a)(13), (a)(14), (a)(16), (b)(9), (b)(10) or (b)(12).
(2)(i) Preserve certain records. The requirements of the following
provisions of Exchange Act rule 18a-6, provided that the Covered Entity
complies with the relevant conditions in this paragraph (f)(2)(i) and
with the applicable conditions in paragraph (f)(2)(ii):
(A) The requirements of Exchange Act rule 18a-6(a)(1) or (a)(2), as
applicable, provided that the Covered Entity is subject to and complies
with the requirements of UK MiFID Org Reg articles 59, 72(1), 74, 75,
76 and Annex IV; FCA SYSC 9.1.1AR, 9.1.2R, 10A.1.6R and 10A.1.8R; FCA
IFPRU 2.2.7R(1); PRA Internal Capital Adequacy Assessment Rule 3.1; PRA
Fundamental Rules 2 and 6; PRA Recordkeeping Rules 2.1 and 2.2; FCA
COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1 R and 16A.3.1UK; FCA PRIN
2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A-1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R,
6.6.8R, 7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK CRR articles 103 and
103(b)(ii); FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; MLR 2017
Regulations 28 through 30; UK MiFID Org Reg article 72(1), 74 and 75;
UK MiFIR article 25(1); and UK EMIR article 9(2), 39(4) and 11(1)(a);
(B) The requirements of Exchange Act rule 18a-6(b)(1)(i) or
(b)(2)(i), as applicable, provided that the Covered Entity is subject
to and complies with the requirements of UK MiFID Org Reg articles 59,
72(1), 74, 75, 76 and Annex IV; FCA SYSC 9.1.1AR, 9.1.2R, 10A.1.6R and
10A.1.8R; FCA IFPRU 2.2.7R(1); PRA Internal Capital Adequacy Assessment
Rule 3.1; PRA Fundamental Rules 2 and 6; PRA Recordkeeping Rules 2.1
and 2.2; FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1 R and 16A.3.1UK;
FCA PRIN
[[Page 18417]]
2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A-1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R,
6.6.8R, 7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK CRR articles 103 and
103(b)(ii); FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; MLR 2017
Regulations 28(10) and (18) and 28 through 30; UK MiFID Org Reg
articles 72(1), 74 and 75; UK MiFIR article 25(1); and UK EMIR articles
9(2), 39(4) and 11(1)(a);
(C) The requirements of Exchange Act rule 18a-6(b)(1)(ii) and
(iii), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA IFPRU 2.2.7R(1); PRA Internal Capital Adequacy
Assessment Rule 3.1; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR, 6.3.4A-1R,
6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R, 6.6.8R,
7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK MiFID Org Reg
articles 72(1), 74 and 75; PRA Recordkeeping Rules 2.1 and 2.2; FCA
SYSC 9.1.1AR and 9.1.2R; UK EMIR articles 9(2), 25(1) and 39(4); FCA
COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; and PRA Fundamental Rules
2 and 6; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(D) The requirements of Exchange Act rule 18a-6(b)(1)(iv) or
(b)(2)(ii), as applicable, provided that the Covered Entity is subject
to and complies with the requirements of FCA SYSC 9.1.1AR, 10A.1.6R and
10A.1.8R; FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; MLR 2017
Regulations 28(18), 28(10) and 28 through 30; PRA Internal Capital
Adequacy Assessment Rule 3.1; PRA Fundamental Rules 2 and 6; PRA
Recordkeeping Rules 2.1 and 2.2; FCA CASS 6.2.1R, 6.2.2R, 6.3.2AR,
6.3.4A-1R, 6.3.6AR, 6.6.2R, 6.6.3R, 6.6.4R, 6.6.5G, 6.6.33G, 6.6.34R,
6.6.8R, 7.12.1R, 7.12.2R, 7.13.12R, 7.13.25R, 7.13.32R(3), 7.13.33R(3),
7.15.2R, 7.15.3R, 7.15.4G, 7.15.5R, 7.15.8R, 7.15.9R, 7.15.20R,
7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and 10.1.9E; UK CRR articles 103 and
103(b)(ii); FCA PRIN 2.1.1.R(2) and (3); FCA FCG 3.1.7; FCA IFPRU
2.2.7R(1); FCA COBS 8A.1.9R, 9.1.1AR, 9A.2.1R, 16A.2.1 R and 16A.3.1UK;
FCA SYSC 9.1.1AR, 9.1.2R, 10A.1.6R and 10A.1.8R; UK MiFID Org Reg
articles 59, 72, 72(1), 73, 74, 75, 76, 76(8)(b), Annex I and Annex IV;
UK MiFIR article 25(1); and UK EMIR articles 9(2), 11(1)(a), 39(4) and
39(5);
(E) The requirements of Exchange Act rule 18a-6(b)(1)(v), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of UK CRR articles 99, 104(1)(j), 294, 394, 415, 430 and
Part Six: Title II & Title III; UK CRR Reporting ITS annexes I, II,
III, IV, V, VIII, IX, X, XI, XII, XIII and article 14; PRA
Recordkeeping Rules 2.1 and 2.2; FCA SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg article 72(1); UK MiFIR article 25(1); and UK EMIR article
9(2);
(2) With respect to the requirements of Exchange Act rule 18a-
6(b)(1)(v), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant this Order; and
(3) This Order does not extend to the requirements of Exchange Act
rule 18a-6(b)(1)(v) relating to Exchange Act rule 18a-2;
(F) The requirements of Exchange Act rule 18a-6(b)(1)(vi) or
(b)(2)(iii), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COBS 8A.1.9R; PRA Recordkeeping Rules 2.1 and 2.2;
FCA SYSC 9.1.1AR and 9.1.2R; UK MiFID Org Reg articles 72(1) and 73;
FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA Fundamental Rules
2 and 6; and FCA PRIN 2.1.1.R(2) and (3); UK MiFIR article 25(1); and
UK EMIR article 9(2); and
(2) With respect to the requirements of Exchange Act rule 18a-
6(b)(1)(vi), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(G) The requirements of Exchange Act rule 18a-6(b)(1)(vii) or
(b)(2)(iv), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COBS 8A.1.9R, 16A.2.1 R, and 16A.3.1; PRA
Recordkeeping Rules 2.1 and 2.2; FCA SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg articles 59, 72(1) and 73; UK MiFIR article 25(1); UK EMIR
articles 9(2) and 11(1)(a); FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; PRA Fundamental Rules 2 and 6; and FCA PRIN 2.1.1.R(2) and (3);
and
(2) With respect to the requirements of Exchange Act rule 18a-
6(b)(1)(vii), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(H) The requirements of Exchange Act rule 18a-6(b)(1)(viii) or
(b)(2)(v), as applicable, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of UK CRR articles 99, 104(1)(j), 294, 394, 415, 430 and
Part Six: Title II & Title III; UK CRR Reporting ITS article 14 and
annexes I, II, III, IV, V, VIII, IX, X, XI, XII, XIII; PRA
Recordkeeping Rules 2.1 and 2.2; FCA SYSC 9.1.1AR and 9.1.2R; UK MiFID
Org Reg article 72(1); UK MiFIR article 25(1); and UK EMIR article
9(2);
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 18a-7 pursuant to this Order;
(3) With respect to the requirements of Exchange Act rule 18a-
6(b)(1)(viii), the Covered Entity applies substituted compliance for
the requirements of Exchange Act section 15F(e) and Exchange Act rules
18a-1 through 18a-1d pursuant to this Order;
(4) This Order does not extend to the requirements of Exchange Act
rule 18a-6(b)(1)(viii)(L); and
(5) This Order does not extend to the requirements of Exchange Act
rule 18a-6(b)(1)(viii)(M) relating to Exchange Act rule 18a-2.
(I) The requirements of Exchange Act rule 18a-6(b)(1)(ix), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA SYSC 4.1.1(1)R, 4.1.1R(1), 6.1.1R, 7.1.4R, 9.1.1AR,
9.1.2R and 10.1.7R; FCA COBS 2.3A.32R; UK MiFID Org Reg articles
22(3)(c), 23, 23(1)(b), 24, 25(2), 26, 29(2)(c), 35 and 72(1); PRA Risk
Control Rule 2.3; PRA Internal Capital Adequacy Assessment Rules 3
through 11; FCA IFPRU 2.2.7R, 2.2.17R through 2.2.35R and 2.2.44R; UK
CRR articles 286 and 293(1)(d); UK EMIR RTS; PRA Recordkeeping Rule 2.1
and 2.2; UK MiFIR article 25(1); UK EMIR articles 9(2) and 11; UK EMIR
RTS; FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA Fundamental
Rules 2 and 6; and FCA PRIN 2.1.1.R(2) and (3); and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(J) The requirements of Exchange Act rule 18a-6(b)(1)(x), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA IFPRU 2.2.7R; PRA Internal Capital Adequacy
Assessment Rule 3.1; PRA Recordkeeping Rules 2.1 and 2.2; FCA SYSC
9.1.1AR and 9.1.2R; UK MiFID Org Reg article 72(1); UK MiFIR article
25(1); UK EMIR article 9(2); FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D
and 5F; PRA Fundamental Rules 2 and 6; FCA
[[Page 18418]]
PRIN 2.1.1.R(2) and (3); PRA Recordkeeping Rule 2.1; and FCA SYSC
9.1.1AR; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(K) The requirements of Exchange Act rule 18a-6(b)(1)(xii) or
(b)(2)(vii), as applicable, regarding one or more provisions of
Exchange Act rules 15Fh-3 or 15Fk-1 for which substituted compliance is
available under this Order, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of MLD4 articles 11 and 14; MLR 2017 Regulations 27
through 30; PRA Recordkeeping Rule 2.1 and 2.2; FCA SYSC 9.1.1AR and
9.1.2R; UK MiFID Org Reg article 72(1); UK MiFIR article 25(1); and UK
EMIR article 9(2), in each case with respect to the relevant security-
based swap or activity;
(2) With respect to the portion of Exchange Act rule 18a-
6(b)(1)(xii) or (b)(2)(vii) that relates to Exchange Act rule 15Fh-3,
the Covered Entity applies substituted compliance for such business
conduct standard(s) of Exchange Act rule 15Fh-3 pursuant to this Order,
as applicable, with respect to the relevant security-based swap or
activity; and
(3) With respect to the portion of Exchange Act rule 18a-
6(b)(1)(xii) or (b)(2)(vii), as applicable, that relates to Exchange
Act rule 15Fk-1, the Covered Entity applies substituted compliance for
Exchange Act section 15F(k) and Exchange Act rule 15Fk-1 pursuant to
this Order;
(L) The requirements of Exchange Act rule 18a-6(c), provided that
the Covered Entity is subject to and complies with the requirements of
PRA Recordkeeping Rules 2.1 and 2.2; FCA SYSC 9.1.1AR and 9.1.2R; UK
MiFID Org Reg article 72(1); UK MiFIR article 25(1); and UK EMIR
article 9(2);
(M) The requirements of Exchange Act rule 18a-6(d)(1), provided
that the Covered Entity is subject to and complies with the
requirements of PRA General Organisational Requirements Rule 5.2; FSMA
sections 60A(2), 63(2A), 63F(2) and (5); PRA Fitness and Propriety
Rules 2.6 and 2.9; FCA SUP 10C.10.8D, 10C.10.8AD 10C.15, 10C Annex 3D,
10C.10.14G, 10C.10.16R, and 10C.10.21G; SMR Applications and
Notifications Rules 2.1, 2.2 and 2.6; PRA Certification Rule 2.1; FCA
SYSC 4.3A.1R, 4.3A.3R, 9.1.1AR, 9.1.2R, 10.1.7R, 27 and 27.2.5G; FCA
FIT 2.1, 2.2 and 2.3; PRA General Organisational Requirements Rules 5.1
and 5.2; UK MiFID Org Reg articles 21(1)(a), 35 and 72(1); and PRA
Recordkeeping Rules 2.1 and 2.2;
(N) The requirements of Exchange Act rule 18a-6(d)(2), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of PRA Recordkeeping Rules 2.1 and 2.2; FCA SYSC 9.1.1AR
and 9.1.2R; UK MiFID Org Reg articles 72(1) and 72(3); UK MiFIR article
25(1); and UK EMIR article 9(2); and
(2) With respect to the requirements of Exchange Act rule 18a-
6(d)(2)(i), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(O) The requirements of Exchange Act rule 18a-6(d)(3), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); FCA SYSC
6.1.1R, 9.1.1AR, 9.1.2R and 10A.1.6R; PRA Recordkeeping Rules 2.1 and
2.2; UK MiFID Org Reg articles 72, 72(1), 73, 76(8)(b) and Annex I; UK
MiFIR article 25(1); and UK EMIR article 9(2) and 39(5); and
(2) With respect to the requirements of Exchange Act rule 18a-
6(d)(3)(i), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(P) The requirements of Exchange Act rule 18a-6(d)(4) and (d)(5),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COBS 8A.1.9R; PRA Recordkeeping Rules 2.1 and 2.2;
FCA SYSC 4.1.1R(1), 9.1.1AR and 9.1.2R; UK MiFID Org Reg articles 24,
25(2), 72(1) and 73; UK MiFIR article 25(1); and UK EMIR article 9(2);
and
(2) The Covered Entity applies substituted compliance for Exchange
Act rules 15Fi-3, 15Fi-4, and 15Fi-5 pursuant to this Order;
(Q) The requirements of Exchange Act rule 18a-6(e), provided that
the Covered Entity is subject to and complies with the requirements of
FCA COBS 8A.1.9R; PRA Recordkeeping Rules 2.1 and 2.2; FCA SYSC 4.1.1R,
9.1.1AR and 9.1.2R; UK MiFID Org Reg articles 21(2), 58, 72(1) and
72(3); UK MiFIR article 25(1); and UK EMIR article 9(2); and
(R) The requirements of Exchange Act rule 18a-6(f), provided that
the Covered Entity is subject to and complies with the requirements of
PRA Outsourcing Rule 2.1; EBA Guidelines on Outsourcing section 13.3;
PRA Recordkeeping Rules 2.1 and 2.2; FCA SYSC 8.1.1R, 9.1.1AR and
9.1.2R; UK MiFID Org Reg articles 31(1) and 72(1); UK MiFIR article
25(1); and UK EMIR article 9(2).
(ii) Paragraph (f)(2)(i) is subject to the following further
conditions:
(A) A Covered Entity may apply the substituted compliance
determination in paragraph (f)(2)(i)(K) to records related to Exchange
Act rule 15Fh-3(b), (c), (e), (f) and (g) in respect of one or more
security-based swaps or activities related to security-based swaps; and
(B) This Order does not extend to the requirements of Exchange Act
rule (b)(1)(xi), (b)(1)(xiii), (b)(2)(vi), or (b)(2)(viii).
(3) File Reports. The requirements of the following provisions of
Exchange Act rule 18a-7, provided that the Covered Entity complies with
the relevant conditions in this paragraph (f)(3):
(i) The requirements of Exchange Act rule 18a-7(a)(1) or (a)(2), as
applicable, and the requirements of Exchange Act rule 18a-7(j) as
applied to such requirements, provided that:
(A) The Covered Entity is subject to and complies with the
requirements of FSMA sections 137A, 137G and 137T; CRD article
104(1)(j); PRA Definition of Capital Rule 4.5; UK CRR articles 99, 394,
430 and Part Six: Title II & Title III; and UK CRR Reporting ITS
annexes I, II, III, IV, V, VIII, IX, X, XI, XII and XIII;
(B) The Covered Entity files periodic unaudited financial and
operational information with the Commission or its designee in the
manner and format required by Commission rule or order and presents the
financial information in the filing in accordance with generally
accepted accounting principles that the Covered Entity uses to prepare
general purpose publicly available or available to be issued financial
statements in the UK; and
(C) With respect to the requirements of Exchange Act rule 18a-
7(a)(1), the Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(ii) The requirements of Exchange Act rule 18a-7(a)(3) and the
requirements of Exchange Act rule 18a-7(j) as applied to such
requirements, provided that:
(A) The Covered Entity is subject to and complies with the
requirements of UK CRR articles 99, 394, 431 to 455, 432, 433, 434, 437
to 440, 442, 443, 445 to 449, 451 to 455, 452 and 455; UK CRR Reporting
ITS annexes I, II, VIII and IX; FSMA sections 137A, 137G and 137T; PRA
Definition of Capital Rule 4.5; and Companies Act sections 394, 415,
442 and 475; and
[[Page 18419]]
(B) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(iii) The requirements of Exchange Act rule 18a-7(b), provided that
the Covered Entity is subject to and complies with the requirements of
UK CRR articles 434, 437 through 440, 442, 443, 445 through 449, 451
through 455; and Companies Act sections 394, 415, 442 and 475;
(iv) The requirements of Exchange Act rule 18a-7(c), (d), (e), (f),
(g) and (h) and the requirements of Exchange Act rule 18a-7(j) as
applied to such requirements, provided that:
(A) The Covered Entity is subject to and complies with the
requirements of FCA CASS 6.2.2R, 6.6.2R, 6.6.3R, 6.6.33G, 6.6.34R,
7.12.2R, 7.15.2R, 7.15.3R, 7.15.20R and 7.15.21R; FCA SUP 3.8.5R,
3.10.4R through 3.10.7R; UK CRR articles 26(2), 132(5), 154, 191, 321,
325bi, 350, 353, 368, 418, 431 to 455, 434, 437 to 440, 442, 443, 445
to 449 and 451 to 455; Companies Act sections 394, 415, 442 and 475;
and Capital Requirements Regulations 2013 Regulation 2(4);
(B) With respect to financial statements the Covered Entity is
required to file annually with the UK PRA or FCA, including a report of
an independent public accountant covering the financial statements, the
Covered Entity:
(1) Simultaneously sends a copy of such annual financial statements
and the report of the independent public accountant covering the annual
financial statements to the Commission in the manner specified on the
Commission's website;
(2) Includes with the transmission the contact information of an
individual who can provide further information about the financial
statements and report;
(3) Includes with the transmission the report of an independent
public accountant required by Exchange Act rule 18a-7(c)(1)(i)(C)
covering the annual financial statements if UK laws do not require the
Covered Entity to engage an independent public accountant to prepare a
report covering the annual financial statements; provided, however,
that such report of the independent public accountant may be prepared
in accordance with generally accepted auditing standards in UK that the
independent public accountant uses to perform audit and attestation
services and the accountant complies with UK independence requirements;
(4) Includes with the transmission the reports required by Exchange
Act rule 18a-7(c)(1)(i)(B) and (C) addressing the statements identified
in Exchange Act rule 18a-7(c)(3) or (c)(4), as applicable, that relate
to Exchange Act rule 18a-4; provided, however, that the report of the
independent public accountant required by Exchange Act rule 18a-
7(c)(1)(i)(C) may be prepared in accordance with generally accepted
auditing standards in the UK that the independent public accountant
uses to perform audit and attestation services and the accountant
complies with UK independence requirements; and
(5) Includes with the transmission the supporting schedules and
reconciliations, as applicable, required by Exchange Act rules 18a-
7(c)(2)(ii) and (iii), respectively, relating to Exchange Act rule 18a-
2; and
(6) Includes with the transmission the supporting schedules and
reconciliations, as applicable, required by Exchange Act rules 18a-
7(c)(2)(ii) and (iii), respectively, relating to Exchange Act rules
18a-4 and 18a-4a; and
(C) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(v) The requirements of Exchange Act rule 18a-7(i), provided that:
(A) The Covered Entity is subject to and complies with the
requirements of FCA SUP 16.3.17R and PRA Regulatory Reporting Rule 18;
and
(B) The Covered Entity:
(1) Simultaneously sends a copy of any notice required to be sent
by UK law cited in paragraph (f)(3)(v)(A) of the Order to the
Commission in the manner specified on the Commission's website; and
(2) Includes with the transmission the contact information of an
individual who can provide further information about the matter that is
the subject of the notice.
(4)(i) Provide Notification. The requirements of the following
provisions of Exchange Act rule 18a-8, provided that the Covered Entity
complies with the relevant conditions in this paragraph (f)(4)(i) and
with the applicable conditions in paragraph (f)(4)(ii):
(A) The requirements of paragraphs (a)(1)(i), (a)(1)(ii), (b)(1),
(b)(2), and (b)(4) of Exchange Act rule 18a-8 and the requirements of
Exchange Act rule 18a-8(h) as applied to such requirements, provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA PRIN 2.1.1R and 11; PRA Fundamental Rule 7; FCA SUP
15.3.1R, 15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R, 15.3.17R and 15.3.21R;
FCA CASS 6.6.57R, 7.15.33R and Schedule 2; PRA Notifications Rules 2.1,
2.4, 2.5, 2.6, 2.8 and 2.9; FCA SYSC 18.6.1R and 18.6.4G; FCA IFPRU
2.4.1R; and PRA General Organisational Requirements 2A.2, 2A.1(2) and
2A.3 to 2A.6; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(B) The requirements of Exchange Act rule 18a-8(c) and the
requirements of Exchange Act rule 18a-8(h) as applied to such
requirements, provided that the Covered Entity is subject to and
complies with the requirements of FCA PRIN 2.1.1R and 11; PRA
Fundamental Rule 7; FCA SUP 15.3.1R, 15.3.11R, 15.3.12G, 15.3.14G,
15.3.15R, 15.3.17R and 15.3.21R; FCA CASS 6.6.57R, 7.15.33R and
Schedule 2; PRA Notifications Rules 2.1, 2.4, 2.5, 2.6, 2.8 and 2.9;
FCA SYSC 18.6.1R and 18.6.4G; FCA IFPRU 2.4.1R; and PRA General
Organisational Requirements 2A.2, 2A.1(2) and 2A.3 to 2A.6;
(C) The requirements of Exchange Act rule 18a-8(d) and the
requirements of Exchange Act rule 18a-8(h) as applied to such
requirements, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA PRIN 2.1.1R and 11; PRA Fundamental Rule 7; FCA SUP
15.3.1R, 15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R, 15.3.17R and 15.3.21R;
FCA CASS 6.6.57R, 7.15.33R and Schedule 2; PRA Notifications Rules 2.1,
2.4, 2.5, 2.6, 2.8 and 2.9; FCA SYSC 18.6.1R and 18.6.4G; FCA IFPRU
2.4.1R; and PRA General Organisational Requirements 2A.2, 2A.1(2) and
2A.3 through 2A.6; and
(2) This Order does not extend to the requirements of Exchange Act
rule 18a-8(d) to give notice with respect to books and records required
by Exchange Act rule 18a-5 for which the Covered Entity does not apply
substituted compliance pursuant to this Order;
(D) The requirements of Exchange Act rule 18a-8(e) and the
requirements of Exchange Act rule 18a-8(h) as applied to such
requirements, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA PRIN 2.1.1R and 11; PRA Fundamental Rule 7; FCA SUP
15.3.1R, 15.3.11R, 15.3.12G, 15.3.14G, 15.3.15R, 15.3.17R and 15.3.21R;
FCA CASS 6.6.57R, 7.15.33R and Schedule 2; PRA Notifications Rules 2.1,
2.4, 2.5, 2.6, 2.8 and 2.9; FCA SYSC 18.6.1R and 18.6.4G; FCA IFPRU
2.4.1R; and PRA General Organisational Requirements 2A.2, 2A.1(2) and
2A.3 through 2A.6;
[[Page 18420]]
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order;
(3) This Order does not extend to the requirements of Exchange act
rule 18a-8(e) relating to Exchange Act rule 18a-2 or to the
requirements of Exchange Act rule 18a-8(h) as applied to such
requirements; and
(4) This Order does not extend to the requirements of Exchange act
rule 18a-8(e) relating to Exchange Act rule 18a-4 or to the
requirements of Exchange Act rule 18a-8(h) as applied to such
requirements;
(ii) Paragraph (f)(4)(i) is subject to the following further
conditions:
(A) The Covered Entity:
(1) Simultaneously sends a copy of any notice required to be sent
by UK law cited in this paragraph of the Order to the Commission in the
manner specified on the Commission's website; and
(2) Includes with the transmission the contact information of an
individual who can provide further information about the matter that is
the subject of the notice;
(B) This Order does not extend to the requirements of paragraphs
(a)(2) and (b)(3), and of Exchange Act rule 18a-8 relating to Exchange
Act rule 18a-2 or to the requirements of Exchange Act rule 18a-8(h) as
applied to such requirements;
(C) This Order does not extend to the requirements of paragraph (g)
of rule 18a-8 or to the requirements of Exchange Act rule 18a-8(h) as
applied to such requirements.
(5) Securities Counts. The requirements of Exchange Act rule 18a-9,
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA CASS 6.2.1R, 6.2.2R, 6.3.4A-1R, 6.3.6AR, 6.6.2R,
6.6.3R, 6.6.33G, 6.6.34R, 6.6.4R, 6.6.47G, 6.6.5G, 6.6.8R, 7.12.1R,
7.12.2R, 7.13.12R, 7.13.32R(3), 7.13.33R(3), 7.15.2R, 7.15.5R, 7.15.9R,
7.15.3R, 7.15.8R, 7.15.20R, 7.15.21G, 10.1.2G, 10.1.3R, 10.1.7 and
10.1.9E; FCA SUP 3.10.4R-3.10.7R; UK MiFID Org Reg articles 74 and 75;
UK EMIR article 11(1)(b); and UK EMIR RTS articles 12 and 13; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order.
(6) Daily Trading Records. The requirements of Exchange Act section
15F(g), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; and FCA SYSC 9.1.1AR; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act section 15F(e) and Exchange Act rules 18a-
1 through 18a-1d pursuant to this Order.
(7) Examination and Production of Records. Notwithstanding the
forgoing provisions of paragraph (f) of this Order, this Order does not
extend to, and Covered Entities remain subject to, the requirement of
Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the requirement
of Exchange Act rule 18a-6(g) to furnish promptly to a representative
of the Commission legible, true, complete, and current copies of those
records of the Covered Entity that are required to be preserved under
Exchange Act rule 18a-6, or any other records of the Covered Entity
that are subject to examination or required to be made or maintained
pursuant to Exchange Act section 15F that are requested by a
representative of the Commission.
(8) English Translations. Notwithstanding the forgoing provisions
of paragraph (f) of this Order, to the extent documents are not
prepared in the English language, Covered Entities must promptly
furnish to a representative of the Commission upon request an English
translation of any record, report, or notification of the Covered
Entity that is required to be made, preserved, filed, or subject to
examination pursuant to Exchange Act section 15F of this Order.
(g) Definitions
(1) ``Covered Entity'' means an entity that:
(i) Is a security-based swap dealer or major security-based swap
participant registered with the Commission;
(ii) Is not a ``U.S. person,'' as that term is defined in rule
3a71-3(a)(4) under the Exchange Act;
(iii) Is a ``MiFID investment firm'' or ``third country investment
firm,'' as such terms are defined in the FCA Handbook Glossary, that
has permission from the FCA or PRA under Part 4A of FSMA to carry on
regulated activities relating to investment services and activities in
the United Kingdom; and
(iv) Is supervised by the FCA under the fixed supervision model
and, if the firm is a PRA-authorized person, also supervised by the PRA
as a Category 1 firm.
(2) ``Capital Requirements Regulations 2013'' means the UK Capital
Requirements Regulations 2013, as amended from time to time.
(3) ``Companies Act'' means the UK Companies Act 2006, as amended
from time to time.
(4) ``FCA'' means the UK's Financial Conduct Authority.
(5) ``FCA BIFPRU'' means the Prudential Sourcebook for Banks,
Building Societies and Investment Firms of the FCA Handbook, as amended
from time to time.
(6) ``FCA CASS'' means the Client Asset Sourcebook of the FCA
Handbook, as amended from time to time.
(7) ``FCA COBS'' means the Conduct of Business Sourcebook of the
FCA Handbook, as amended from time to time.
(8) ``FCA COND'' means the Threshold Conditions of the FCA
Handbook, as amended from time to time.
(9) ``FCA Enforcement Guide'' means the Enforcement Guide of the
FCA Handbook, as amended from time to time.
(10) ``FCA FCG'' means the Financial Crime Guide of the FCA
Handbook, as amended from time to time.
(11) ``FCA FIT'' means the Fit and Proper test for Employees and
Senior Personnel Sourcebook of the FCA Handbook, as amended from time
to time.
(12) ``FCA Handbook'' means the FCA's Handbook of rules and
guidance, as amended from time to time.
(13) ``FCA Handbook Glossary'' means the Glossary part of the FCA's
Handbook of rules and guidance, as amended from time to time.
(14) ``FCA IFPRU'' means the Prudential Sourcebook for Investment
Firms of the FCA Handbook, as amended from time to time.
(15) ``FCA PRIN'' means the Principles for Businesses Sourcebook of
the FCA Handbook, as amended from time to time.
(16) ``FCA PROD'' means the Product Intervention and Product
Governance Sourcebook of the FCA Handbook, as amended from time to
time.
(17) ``FCA SUP'' means the Supervision Sourcebook of the FCA
Handbook, as amended from time to time.
(18) ``FCA SYSC'' means the Senior Management Arrangements, Systems
and Controls Sourcebook of the FCA Handbook, as amended from time to
time.
(19) ``FSMA'' means the UK's Financial Services and Markets Act
2000, as amended from time to time.
(20) ``ICVC'' means investment company with variable capital as
defined in the FCA Handbook Glossary.
[[Page 18421]]
(21) ``MLR 2017'' means the UK's Money Laundering, Terrorist
Financing and Transfer of Funds (Information on the Payer) Regulations
2017, as amended from time to time.
(22) ``PRA'' means the UK's Prudential Regulation Authority.
(23) ``PRA Capital Buffer Rules'' means the Capital Buffer Part of
the PRA Rulebook for CRR Firms, as amended from time to time.
(24) ``PRA Certification Rules'' means the Certification Part of
the PRA Rulebook for CRR Firms, as amended from time to time.
(25) ``PRA Definition of Capital Rules'' means the Definition of
Capital Part of the PRA Rulebook for CRR Firms, as amended from time to
time.
(26) ``PRA Fitness and Proprietary Rules'' means the Fitness and
Propriety Part of the PRA Rulebook for CRR Firms, as amended from time
to time.
(27) ``PRA Fundamental Rules'' means the Fundamental Rules Part of
the PRA Rulebook for CRR Firms, as amended from time to time.
(28) ``PRA General Organisational Requirements'' means the General
Organisational Requirements Part of the PRA Rulebook for CRR Firms, as
amended from time to time.
(29) ``PRA Internal Capital Adequacy Assessment Rules'' means the
Internal Capital Adequacy Assessment Part of the PRA Rulebook for CRR
Firms, as amended from time to time.
(30) ``PRA Internal Liquidity Adequacy Assessment Rules'' means the
Internal Liquidity Adequacy Assessment Part of the PRA Rulebook for CRR
Firms, as amended from time to time.
(31) ``PRA Liquidity Coverage Requirement--UK Designated Investment
Firms Rules'' means the PRA Liquidity Coverage Requirement--UK
Designated Investment Firms Part of the PRA Rulebook for CRR Firms, as
amended from time to time.
(32) ``PRA Notifications Rules'' means the Notifications Part of
the PRA Rulebook for CRR Firms, as amended from time to time.
(33) ``PRA Outsourcing Rules'' means the Outsourcing Part of the
PRA Rulebook for CRR Firms, as amended from time to time.
(34) ``PRA Recordkeeping Rules'' means the Recordkeeping Part of
the PRA Rulebook for CRR Firms, as amended from time to time.
(35) ``PRA Regulatory Reporting Rules'' means the Regulatory
Reporting Part of the PRA Rulebook for CRR Firms, as amended from time
to time.
(36) ``PRA Remuneration Rules'' means the Remuneration Part of the
PRA Rulebook for CRR Firms, as amended from time to time.
(37) ``PRA Risk Control Rules'' means the Risk Control Part of the
PRA Rulebook for CRR Firms, as amended from time to time.
(38) ``PRA Rulebook'' or ``PRA Rulebook for CRR Firms'' means the
PRA's Rulebook for Capital Requirement Regulation Firms, as amended
from time to time.
(39) ``PRA Rulebook Glossary'' means the Glossary part of the PRA
Rulebook for CRR Firms, as amended from time to time.
(40) ``PRA Senior Management Functions Rules'' means the Senior
Management Functions Part of the PRA Rulebook for CRR Firms, as amended
from time to time.
(41) ``Prudentially regulated'' means a Covered Entity that has a
``prudential regulator'' as that term is defined in Exchange Act
section 3(a)(74).
(42) ``SMR'' means the Senior Managers Regime that forms part of
the Senior Managers and Certification Regime, as amended from time to
time.
(43) ``UK'' means the United Kingdom.
(44) ``UK CRR'' means the UK version of Regulation (EU) No 575/
2013, as amended from time to time.
(45) ``UK CRR Reporting ITS'' means the UK version of Commission
Implementing Regulation (EU) 680/2014.
(46) ``UK EMIR'' means the UK version of the ``European Market
Infrastructure Regulation,'' Regulation (EU) No 648/2012, as amended
from time to time.
(47) ``UK EMIR Margin RTS'' means the UK version of Commission
Delegated Regulation (EU) 2016/2251, as amended from time to time.
(48) ``UK EMIR RTS'' means UK version of Commission Delegated
Regulation (EU) No 149/2013, as amended from time to time.
(49) ``UK MAR'' means the UK version of Market Abuse Regulation
(EU) 596/2014, as amended from time to time.
(50) ``UK MAR Investment Recommendations Regulation'' means the UK
version of Commission Delegated Regulation (EU) 2016/958, as amended
from time to time.
(51) ``UK MiFID Org Reg'' means the UK version of Commission
Delegated Regulation (EU) 2017/565, as amended from time to time.
(52) ``UK MiFIR'' means the UK version of the ``Markets in
Financial Instruments Regulation,'' Regulation (EU) 600/2014, as
amended from time to time.
(53) ``UK Regulated Activities Order'' means the Financial Services
and Markets Act 2000 (Regulated Activities) Order (SI 2001/544), as
amended from time to time.
[FR Doc. 2021-07255 Filed 4-7-21; 8:45 am]
BILLING CODE 8011-01-P
