Notice of Application for the Amendment of Substituted Compliance Determination Regarding Security-Based Swap Entities Subject to Regulation in the Federal Republic of Germany; Proposed Amendments to Order, 46500-46534 [2021-17644]
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Federal Register / Vol. 86, No. 157 / Wednesday, August 18, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92647; File No. S7–08–21]
Notice of Application for the
Amendment of Substituted
Compliance Determination Regarding
Security-Based Swap Entities Subject
to Regulation in the Federal Republic
of Germany; Proposed Amendments to
Order
August 12, 2021.
Securities and Exchange
Commission.
ACTION: Notice of application for
amended substituted compliance
determination; proposed amendments to
order.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
soliciting public comment on an
application by the Bundesanstalt fu¨r
Finanzdienstleistungsaufsicht
(‘‘BaFin’’), pursuant to rule 3a71–6
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’), requesting that
the Commission amend an existing
substituted compliance Order for
Germany to extend the Order to
nonbank capital and margin
requirements (the ‘‘Amended
Application’’). The Commission also is
soliciting comment on proposed
amendments to the Order and is
proposing to amend and restate the
Order (the ‘‘proposed Amended
Order’’).
SUMMARY:
Submit comments on or before
September 13, 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–
08–21 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 S7–08–21. 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/other.shtml). Typically, comments
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are also available for website viewing
and printing in the Commission’s Public
Reference Room, 100 F Street NW,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 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, 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 the Amended Application.
The Commission also is proposing to
amend and restate the Order in certain
other ways, and is soliciting comment
on the proposed Amended Order set
forth in Attachment A.
I. Introduction
Rule 3a71–6 under the Exchange Act
provides a framework whereby non-U.S.
security-based swap dealers and major
security-based swap participants (‘‘SBS
Entities’’) may satisfy certain
requirements under Exchange Act
section 15F by complying with
comparable regulatory requirements of a
foreign jurisdiction. Substituted
compliance is intended to promote
efficiency and competition within the
security-based swap market by helping
to address potential duplication and
inconsistency between relevant U.S. and
foreign requirements, making it possible
for SBS Entities to leverage their
existing systems and practices to
comply with relevant Exchange Act
requirements in conjunction with their
compliance with relevant foreign
requirements.1
Pursuant to rule 3a71–6, in December
2020 the Commission issued a
substituted compliance Order to provide
that German SBS Entities may use
substituted compliance with conditions
to satisfy certain requirements under the
Exchange Act related to risk control,
internal supervision and compliance,
counterparty protection, and books and
records.2 That Order (and the
1 Exchange Act Release No. 90765 (Dec. 22, 2020),
85 FR 85686, 85687 (Dec. 29, 2020) (‘‘Order’’).
2 Id. at 85689–97.
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underlying application from BaFin) did
not address substituted compliance for
Exchange Act capital and margin
requirements applicable to SBS Entities
without a prudential regulator.3
In the Commission’s preliminary
view, certain developments warrant
modifications to the substituted
compliance Order for Germany. First,
since finalizing the Order, the
Commission has finalized substituted
compliance orders for SBS Entities
subject to regulation in the French
Republic (‘‘France’’) 4 and the United
Kingdom (‘‘UK’’).5 When finalizing the
French and UK Orders, the Commission
had the benefit of additional public
comment, some of which also
referenced the Order.6 Particularly given
3 Section 15F(e)(1)(B) of the Exchange Act
provides that SBS Entities for which there is not a
prudential regulator shall meet such minimum
capital requirements and minimum initial and
variation margin requirements as the Commission
shall by rule or regulation prescribe. The term
‘‘prudential regulator’’ is defined in Section 1(a)(39)
of the Commodity Exchange Act (7 U.S.C. 1(a)(39))
and that definition is incorporated by reference in
Section 3(a)(74) of the Exchange Act. Pursuant to
the definition, the Board of Governors of the
Federal Reserve System (‘‘Federal Reserve’’), the
Office of the Comptroller of the Currency (‘‘OCC’’),
the Federal Deposit Insurance Corporation
(‘‘FDIC’’), the Farm Credit Administration, or the
Federal Housing Finance Agency is the ‘‘prudential
regulator’’ of an SBS Entity if the entity is directly
supervised by that agency. The Commission
adopted Exchange Act rules 18a–1 through 18a–1d
(capital) and 18a–3 (margin) pursuant to Section
15F(e)(1)(B) of the Exchange Act. See Exchange Act
Release No. 86175 (June 21, 2019) 84 FR 43872,
43879 (Aug. 22, 2019) (‘‘Capital and Margin
Adopting Release’’).
4 Exchange Act Release No. 92494 (July 23, 2021],
86 FR 41612 (Aug. 2, 2021) (‘‘French Order’’). See
also Exchange Act No. 90766 (Dec. 22, 2020), 85 FR
85720 (Dec. 29, 2020) (‘‘French Substituted
Compliance Notice and Proposed Order’’);
Exchange Act Release No. 91477 (Apr. 5, 2021), 86
FR 18341 (Apr. 8, 2021) (‘‘Reopening Release’’).
5 Exchange Act Release No. 92529 (July 30, 2021),
86 FR 43318 (August 6, 2021) (‘‘UK Order’’). See
also Exchange Act Release No. 91476 (Apr. 5, 2021),
86 FR 18378 (Apr. 8, 2021) (‘‘UK Substituted
Compliance Notice and Proposed Order’’).
6 See, e.g., Letter from Kyle Brandon, Managing
Director, Head of Derivative Policy, SIFMA (Jan. 25,
2021) (‘‘SIFMA Letter I’’); Letter from Wim Mijs,
Chief Executive Officer, European Banking
Federation (Jan. 25, 2021) (‘‘EBF Letter I’’)
(generally supporting the SIFMA Letter I); Letter
from Etienne Barel, Deputy Chief Executive Officer,
French Banking Federation (Jan. 25, 2021) (‘‘FBF
Letter I’’), Letter from Kyle Brandon, Managing
Director, Head of Derivative Policy, SIFMA (May 3,
2021) (‘‘SIFMA Letter II’’); Letter from Wim Mijs,
Chief Executive Officer, European Banking
Federation (May 3, 2021) (‘‘EBF Letter II’’); Letter
from Etienne Barel, Deputy Chief Executive Officer,
French Banking Federation (May 3, 2021) (‘‘FBF
Letter II’’); Letter from Americans for Financial
Reform Education Fund (May 3, 2021) (‘‘AFREF
Letter’’); Letter from Dennis M. Kelleher, President
and CEO, Stephen Hall, Legal Director and
Securities Specialist, and Jason Grimes, Senior
Counsel, Better Markets, Inc. (May 3, 2021) (‘‘Better
Markets Letter’’). Comments may be found on the
Commission’s website at: https://www.sec.gov/
comments/s7-22-20/s72220.htm.
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substantial similarity of the three
regimes, the Commission believes that
modifications to the Order may be
necessary for consistency. The
Commission is therefore proposing to
amend the Order to align with the
French and UK orders where
appropriate.
Moreover, BaFin’s Amended
Application requests that the
Commission extend the Order to also
provide for substituted compliance for
the capital requirements of Exchange
Act Section 15F(e) and Exchange Act
rules 18a–1 through 18a–1d
(collectively, ‘‘Exchange Act Rule 18a–
1’’), the margin requirements Exchange
Act Section 15F(e) and Exchange Act
rule 18a–3, and related recordkeeping,
reporting, notification, and securities
count requirements.7 As discussed in
parts IV and VII below, the Commission
is proposing to amend the Order to
conditionally permit German SBS
Entities to comply with these
requirements via substituted
compliance.8
II. Scope of Substituted Compliance
and Additional General Conditions
A. Scope of Substituted Compliance
For entity-level Exchange Act
requirements,9 a Covered Entity must
from Thorsten Po¨tzsch, Chief Executive
Director of BaFin’s Resolution Sector, BaFin, to
Vanessa Countryman, Secretary, Commission, dated
August 12, 2021. The Amended Application is
available on the Commission’s website at: https://
www.sec.gov/page/exchange-act-substitutedcompliance-and-listed-jurisdiction-applicationssecurity-based-swap.
8 The Amended Application requests substituted
compliance with respect to investment firms and
credit institutions that are authorized by BaFin to
provide investment services or perform investment
activities in Germany and are supervised by the
ECB (or have a licensing application pending with
the ECB as of the date of this application letter) as
a significant institution. See Amended Application
at 1. As such, the Commission is proposing to
amend the definition of Covered Entity to conform
to the request and the information provided. See
para. (g)(1)(iii).
9 The entity-level requirements relate to non-bank
capital and margin, books and records (other than
those linked to the counterparty protection rules),
internal risk management systems, trade
acknowledgement and verification, portfolio
reconciliation, compression, trading relationship
documentation, and internal supervision and chief
compliance officer requirements See Capital and
Margin Adopting Release, 84 FR 43879; Exchange
Act Release No. 87005 (June 19, 2019) 84 FR 68550,
68596 (Dec. 16, 2019) (‘‘Books and Records
Adopting Release’’); Exchange Act Release No.
78011 (June 8, 2016) 81 FR 39808, 39827 (June 17,
2016) (‘‘TAV Adopting Release’’); Exchange Act
Release No. 87782 (Dec. 18, 2019) 85 FR 6359, 6378
(Feb. 4, 2020) (‘‘Risk Mitigation Adopting Release’’);
Exchange Act Release No. 77617 (Apr. 14, 2016), 81
FR 29960, 30064 (May 13, 2016) (‘‘Business
Conduct Adopting Release’’). Transaction-level
requirements encompass business conduct
requirements for the protection of counterparties,
and additional provisions for the protection of
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choose either to apply substituted
compliance pursuant to the Order with
respect to all security-based swap
business subject to the relevant German
and EU requirements or to comply
directly with the Exchange Act with
respect to all such business; a Covered
Entity may not choose to apply
substituted compliance for some of the
business subject to the relevant German
or EU requirements and comply directly
with the Exchange Act for another part
of the business that is subject to the
relevant German and EU requirements.
Additionally, for entity-level Exchange
Act requirements, if the Covered Entity
also has security-based swap business
that is not subject to the relevant
German requirements, the Covered
Entity must either comply directly with
the Exchange Act for that business or
comply with the terms of another
applicable substituted compliance
order.10 For transaction-level Exchange
Act requirements,11 a Covered Entity
may decide to apply substituted
compliance for some of its securitybased swap business and to comply
directly with the Exchange Act (or
comply with another applicable
substituted compliance order) for other
parts of its security-based swap
business.
B. Proposed Revision of General
Condition Regarding Notice
The Commission also is proposing to
modify the Order’s general condition
requiring that Covered Entities provide
the Commission with written notice of
their intent to rely on substituted
compliance. To promote clarity in the
notice regarding the Covered Entity’s
intended use of substituted compliance,
the Commission is proposing to amend
the general condition to require that the
notice identify each specific substituted
compliance determination for which the
Covered Entity intends to apply
substituted compliance.12 The
special entities. See also Business Conduct
Adopting Release, 81 FR 30065.
10 In the context of the EMIR counterparties
condition in para. (a)(5) of the proposed Amended
Order, a Covered Entity must choose (1) to apply
substituted compliance pursuant to the Order—
including compliance with para. (a)(5) as
applicable—for a particular set of entity-level
requirements with respect to all of its business that
would be subject to the relevant EMIR-based
requirement if the counterparty were the relevant
type of counterparty, or (2) to comply directly with
the Exchange Act with respect to such business.
11 Transaction-level requirements are the
counterparty protection requirements and the books
and records requirements related to those
counterparty protection requirements.
12 See para. (a)(9) of the proposed Amended
Order. To promote up-to-date notice, the proposal
further would require the Covered Entity to amend
the notice if it modifies the scope of its reliance on
substituted compliance. In addition, the proposal
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46501
modification would be consistent with
the conditions for notification included
in the Commission’s other substituted
compliance orders.13
would make a technical modification to the general
condition to clarify that the notice must be sent to
the Commission in the manner specified on the
Commission’s website (in lieu of the condition’s
current reference to an email address specified on
that website).
13 See French Order, 86 FR 41658; UK Order, 86
FR 43371. As explained in the French and UK
Orders, under the proposed amended notification
provision, if a Covered Entity intends to rely on all
the substituted compliance determinations in a
given paragraph of the Order, it could 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
Amended 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 Amended Order (the margin
determination). In this case, paragraph (c)(1) of the
proposed Amended 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 part VII.B.1, the amended
recordkeeping and reporting determinations in the
proposed Amended 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 Amended Order sets forth
the Commission’s substituted compliance
preliminary determinations with respect to the
requirements of Exchange Act rule 18a–5, 17 CFR
240.18a–5. These preliminary determinations are
set forth in paragraphs (f)(1)(i)(A) through (O) of the
proposed Amended Order. If a Covered Entity
intends to rely on some but not all of the
preliminary determinations, it would need to
identify in the notice the specific preliminary
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, 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 Exchange Act counterparty protection
requirements and linked recordkeeping
requirements. Similarly, as discussed above, a
Covered Entity would be able to apply substituted
compliance for entity-level Exchange Act
requirements to all of its security-based swap
business that is eligible for substituted compliance
under the proposed Amended Order, and may
either comply directly with the Exchange Act or
apply substituted compliance under another
applicable order for its security-based swap
business that is not eligible for substituted
compliance under the proposed Amended Order. In
this case, the notice would need to indicate the
scope of security-based swap business (e.g.,
security-based swap business carried on from an
establishment in the UK) for which the Covered
Entity is applying substituted compliance with
respect to the relevant Exchange Act entity-level
requirements. A Covered Entity would modify its
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C. Additional Condition Regarding
Notification Requirements Related to
Changes in Capital
Consistent with the UK and French
Orders, the Commission is proposing to
add a general condition that Covered
Entities with a prudential regulator
relying on substituted compliance
pursuant to the proposed Amended
Order must apply substituted
compliance with respect to the
requirements of Exchange Act rule 18a–
8(c) and the requirements of Exchange
Act rule 18a–8(h) as applied to
Exchange Act rule 18a–8(c).14 In the UK
and French Orders, the Commission
took a granular approach with respect to
substituted compliance determinations
regarding the Exchange Act
recordkeeping, reporting, and
notification requirements.
Consequently, a Covered Entity may
comply directly with certain of the
Exchange Act’s recordkeeping,
reporting, and notification provisions
while applying substituted compliance
to others. In taking this granular
approach, the Commission conditioned
substituted compliance with certain of
the discrete recordkeeping, reporting,
and notification requirements on the
Covered Entity applying substituted
compliance for the substantive
Exchange Act requirement to which
they are linked.15 Further, the
Commission conditioned substituted
compliance with respect to the
substantive requirement on the Covered
Entity applying substituted compliance
for the linked recordkeeping, reporting,
or notification requirement. These
linked conditions are designed to ensure
that a Covered Entity consistently
applies substituted compliance with
respect to the substantive Exchange Act
requirement and the Exchange Act
recordkeeping, reporting, or notification
requirement that complements the
substantive requirement.
Exchange Act rule 18a–8(c) generally
requires every prudentially regulated
security-based swap dealer that files a
notice of adjustment of its reported
capital category with the Federal
Reserve, the OCC, or the FDIC to give
notice of this fact that same day by
transmitting a copy of the notice of
adjustment of reported capital category
reliance on the positive substituted compliance
determinations in the Order, and thereby trigger the
requirement to update its notice, if it adds or
subtracts determinations for which it is applying
substituted compliance or completely discontinues
its reliance on the proposed Amended Order.
14 See para. (a)(11) of the proposed Amended
Order. See also French Order, 86 FR 41620–22; UK
Order, 86 FR 43330–31.
15 See French Order, 86 FR 41621; UK Order, 86
FR 43330.
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in accordance with Exchange Act rule
18a–8(h).16 Exchange Act rule 18a–8(h)
sets forth the manner in which every
notice or report required to be given or
transmitted pursuant to Exchange Act
rule 18a–8 must be made.17 While
Exchange Act rule 18a–8(c) is not linked
to a substantive Exchange Act
requirement, it is linked to substantive
capital requirements applicable to
prudentially regulated SBS Entities in
the U.S. (i.e., capital requirements of the
Federal Reserve, the OCC, or the FDIC).
Therefore, to implement the granular
approach adopted in the U.K. and
French Orders, the Commission is
proposing to add a general condition
that Covered Entities with a prudential
regulator relying on substituted
compliance must apply substituted
compliance with respect to the
requirements of Exchange Act rule 18a–
8(c) and the requirements of Exchange
Act rule 18a–8(h) as applied to
Exchange Act rule (c).
In its application, BaFin citied several
German and EU provisions as providing
similar outcomes to the notification
requirements of Exchange Act rule 18a–
8.18 This general condition is necessary
in order to clarify that a prudentially
regulated Covered Entity must provide
the Commission with copies of any
notifications regarding changes in the
Covered Entity’s capital situation
required by German or EU law. In
particular, absent this condition, a
prudentially regulated Covered Entity
could elect not to apply substituted
compliance with respect to Exchange
Act rule 18a–8(c). However, because the
Covered Entity is not required to
provide any notifications to the Federal
Reserve, the OCC, or the FDIC,
‘‘compliance’’ with the provisions of
Exchange Act rule 18a–8(c) raises a
question as to the Covered Entity’s
obligations under this proposed
Amended Order to provide the
Commission with notification of
changes in capital.
The Commission adopted Exchange
Act Rule 18a–8(c) to require SBS
Entities with a prudential regulator to
give notice to the Commission when
filing an adjustment of reported capital
category because such notices may
indicate that the entity is in or is
16 See
17 CFR 240.18a–8(c).
17 CFR 240.18a–8(h).
18 These German provisions include KWG section
25a(1) sentence 6 no. 3, and FinDAG section 4d,
which provide, among other things, processes for
employees to report breaches of certain EU
regulations, and the establishment of systems by
BaFin to accept reports of potential or actual
violations of laws, ordinances, general rulings, and
regulations and directives of the EU.
17 See
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approaching financial difficulty.19 The
Commission has a regulatory interest in
being notified of changes in the capital
of a prudentially regulated Covered
Entity, as it could signal the firm is in
or approaching financial difficulty and
presents a risk to U.S. security-based
swap markets and participants. For the
foregoing reasons, the Commission is
conditioning applying substituted
compliance pursuant to the proposed
Amended Order on the general
condition that a prudentially regulated
Covered Entity apply substituted
compliance with respect to Exchange
Act rule 18a–8(c) and the requirements
of Exchange Act rule 18a–8(h) as
applied to Exchange Act rule 18a–8(c).
D. Proposed Amendment to General
Condition Regarding EU Cross-Border
Matters
The Commission also is proposing to
modify the Order’s general condition
related to EU cross-border matters.
Substituted compliance under the Order
in part is predicated on BaFin being
responsible for the supervision and
enforcement of Covered Entities in
connection with certain MiFID
provisions that constitute conditions to
individual substituted compliance
provisions.20 That general condition is
intended to help ensure that the
prerequisites to substituted compliance
with respect to supervision and
enforcement are satisfied in practice
when MiFID allocates responsibility for
ensuring compliance to another EU
Member State. Because MiFIR is subject
to similar allocation provisions,21 the
Commission is proposing to incorporate
references to MiFIR requirements into
the general condition.22 This change
would be consistent with the French
Order.23
E. Additional MOU-Related General
Condition
In light of the Amended Application,
the Commission also is proposing to add
a new general condition that would
predicate substituted compliance on the
presence of a supervisory and
enforcement memorandum of
understanding between the Commission
and the European Central Bank (‘‘ECB’’)
19 See Exchange Act Release No. 71958 (Sept. 19,
2019), 84 FR 68550, 68589–90 (Dec. 16, 2019)
(‘‘Recordkeeping and Reporting Adopting Release’’)
(citing Exchange Act Release No. 71958 (Aug. 17,
2014) 79 FR 25193 (May 2, 2014) at 25249).
20 See part III.A, infra.
21 See MiFID art. 35(8) (in part allocating
responsibility over MiFIR articles 14 to 26 to
competent authorities in member states in which
branches are located).
22 See article (a)(10) of the proposed Amended
Order.
23 See para. (a)(10) of the French Order.
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and/or BaFin, pertaining to information
owned by the ECB.24 The Commission’s
access to this ECB information will
assist the Commission’s effective
oversight of Covered Entities that use
substituted compliance in connection
with capital and margin requirements.
III. Proposed Changes to Risk Control
and Internal Supervision
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A. Background—Order’s MiFID
Prerequisites Related to Trade
Acknowledgment and Verification and
Trading Relationship Documentation
Under the Order, substituted
compliance for trade acknowledgement
and verification and for trading
relationship documentation in part
requires that relevant SBS Entities
(‘‘Covered Entities’’ as defined in the
Order) comply with certain
requirements under MiFID (plus the
German implementation of MiFID) and
with certain requirements under
EMIR.25 Commenters expressed concern
that the interplay between those
particular MiFID conditions and a
separate EU cross-border condition to
the Order in practice would preclude
the availability of substituted
compliance for entities that have
branches in other EU Member States.26
24 See para. (a)(8) of the proposed Amended
Order.
25 See paras. (b)(2) and (b)(5) of the proposed
Amended Order.
26 See SIFMA Letter I at 3–6 (commenting on the
French Substituted Compliance Notice and
Proposed Order but stating that the concerns
applied equally to the German Order). In relevant
part, the cross-border condition of paragraph (a)(10)
of the proposed Amended Order states that if
responsibility for ensuring compliance with any
provision of MiFID or MiFIR (or EU or German
implementing requirement) that is a condition for
substituted compliance is allocated to an authority
in a Member State of the EU in whose territory a
Covered Entity provides a service, BaFin must be
the authority responsible for supervision and
enforcement of that provision. In practice (pursuant
to MiFID article 35), this allocation of oversight
applies to requirements pursuant to MiFID article
25 (‘‘assessment of suitability and appropriateness
and reporting to clients’’) as well as certain other
MiFID provisions not relevant here. In the
commenter’s view, application of those MiFID
article 25 conditions in connection with trade
acknowledgment and verification requirements and
trading relationship documentation requirements
would ‘‘in practice lead to an untenable patchwork
of substituted compliance.’’ See SIFMA Letter I at
3. The commenter further states that SBS Entities
‘‘operating branches throughout the EU’’ would not
be able to avail themselves of substituted
compliance in connection with these requirements
‘‘unless authorities or regulated SBS Entities in
every or nearly every one of the 27 EU Member
States submit their own substituted compliance
applications covering local branches of SBS
Entities, and the Commission reviews and responds
to those applications and enters into memoranda of
understanding . . . with authorities in each of these
Member States.’’ That problem does not arise in
connection with requirements under EMIR, which
does not allocate oversight of a German entity’s
compliance to authorities in other EU Member
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The commenters requested that the
Commission remove those particular
MiFID conditions, arguing that
compliance with EMIR conditions
standing alone still would produce
regulatory outcomes comparable to
those of the trade acknowledgement and
verification requirement and the trading
relationship documentation requirement
under the Exchange Act.27
After careful consideration, the
Commission is proposing to amend the
Order to address those concerns and for
consistency with the French Order. The
Order’s EU cross-border condition
provides an important safeguard to help
ensure that firms that avail themselves
of substituted compliance are subject to
appropriate regulatory supervision and
enforcement. At the same time, the
Commission recognizes the significance
of commenter concerns that the
interplay between the EU cross-border
condition and the MiFID conditions
associated with trade acknowledgment
and verification and with trading
relationship documentation could have
the effect of unnecessarily interfering
with the use of substituted compliance
when other provisions standing alone
are sufficient for the Commission to
make a positive substituted compliance
determination.28 As discussed below,
the Commission is proposing to revise
the Order’s conditions related to trade
acknowledgment and verification and to
trading relationship documentation, by
removing MiFID-related conditions and
instead relying solely on EMIR
conditions to establish comparability for
those requirements.
B. Proposed Addition of EMIR-Related
General Conditions
The proposed amendments addressed
below would remove MiFID conditions
and rely solely on EMIR conditions to
establish comparability in connection
with trade acknowledgment and
verification and trading relationship
documentation. This heightened
reliance on EMIR highlights the need for
safeguards to help ensure that there will
be no opportunity for gaps that may
prevent the EMIR provisions in practice
States. That problem also does not arise in
connection with other requirements under MiFID
(e.g., MiFID art. 16 organizational provisions) that
are not subject to the same allocation of oversight.
27 See SIFMA letter I at 5–6.
28 SBS Entities subject to regulation in France are
subject to the condition, and the proposed change
would be consistent with the French Order. See
para. (a)(10) of the French Order. The Commission
addressed certain of the other issues raised by
commenters when extending the comment period
for the French Substituted Compliance Notice and
Proposed Order. See Reopening Release, 86 FR
18341 (discussing commenter concerns regarding
the scope of reliance on substituted compliance and
the EU cross-border condition).
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46503
from producing outcomes consistent
with those of the Exchange Act rules.
The Commission accordingly is
proposing to add two EMIR-related
general conditions to the Order to help
preclude such gaps.29
The first condition provides that the
Covered Entity must comply with the
applicable condition of the proposed
Amended Order as if the counterparty
were the type of counterparty that
would trigger the application of the
relevant EMIR-based requirements. If
the Covered Entity reasonably
determines that its counterparty would
be a financial counterparty 30 if not for
the counterparty’s location and/or lack
of regulatory authorization in the EU,
the condition further requires the
Covered Entity to treat the counterparty
as if the counterparty were a financial
counterparty, rather than as another
type of counterparty to which the
relevant EMIR-based requirements may
apply.31 By requiring a Covered Entity
to treat its counterparty as a type of
counterparty that would trigger the
application of the relevant EMIR-based
requirements, the condition will require
the Covered Entity to perform the
relevant obligations pursuant to those
EMIR-based requirements and thus to
act in a way that is comparable to
Exchange Act requirements.32
29 The proposed addition of two new EMIRrelated general conditions as paragraphs (a)(5) and
(a)(6) of the proposed Amended Order would
necessitate renumbering of certain of the extant
general conditions, and also suggests the need to
clarify the captions for certain of the other proposed
general conditions (e.g., recaptioning proposed
general conditions (a)(1) through (a)(3) of the
proposed Amended Order to specifically refer to
MiFID, and recaptioning of proposed general
condition (a)(4) to specifically refer to CRD/CRR).
30 EMIR article 2(8) defines ‘‘financial
counterparty’’ to encompass investment firms,
credit institutions, insurers and certain other types
of businesses that have been authorized in
accordance with EU law. Under EMIR, the
distinction between financial counterparties and
other types of counterparties such as non-financial
counterparties is manifested, inter alia, in
connection with confirmation timing standards. See
EMIR RTS article 12.
31 See para. (a)(5) of the proposed Amended
Order.
32 In other words, the Covered Entity would be
subject to the relevant requirements under EMIR
even if the counterparty is not an ‘‘undertaking’’
(such as by virtue of being a natural person), or is
not established in the EU (by virtue of being a U.S.
person or otherwise being established in some nonEU jurisdiction). The issue of whether the Covered
Entity must treat the counterparty as a ‘‘financial
counterparty’’ or ‘‘non-financial counterparty’’
would turn on whether the counterparty’s business
would require that it be registered pursuant to the
categories identified in the EMIR article 2(8)
‘‘financial counterparty’’ definition (e.g., an
authorized investment firm, credit institution,
insurance undertaking) were the counterparty
subject to the applicable authorization
requirements. This approach generally appears to
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In addition, the Commission is
proposing to revise the Order to account
for the fact that the relevant trade
acknowledgement and verification and
trading relationship documentation
rules under the Exchange Act do not
apply to security-based swaps cleared
by a clearing agency registered with the
Commission (or exempt from
registration), while the analogous EMIR
provisions exclude instruments that are
cleared by a central counterparty that
has been authorized or recognized to
clear derivatives contracts in the EU. In
particular—to help ensure that
substituted compliance is available in
connection with an instrument that has
been cleared at an EU-authorized or EUrecognized central counterparty (and
hence is not within the Exchange Act
rule’s exclusion but also is not subject
to relevant EMIR requirements)—the
Commission is proposing a new general
condition that, for each part of the Order
that requires compliance with EMIRrelated requirements, either: (i) The
relevant security-based swap is an ‘‘OTC
derivative’’ or ‘‘OTC derivative
contract,’’ as defined in EMIR article
2(7), that has not been cleared by a
central counterparty and otherwise is
subject to the provisions of EMIR article
11, EMIR RTS articles 11 through 15,
and 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 by a
relevant authority in the EU.33
be consistent with European guidance. See
European Securities and Markets Authority,
‘‘Questions and Answers: Implementation of the
Regulation (EU) No 648/2012 on OTC derivatives,
central counterparties and trade repositories
(EMIR)’’ (https://www.esma.europa.eu/sites/
default/files/library/esma70-1861941480-52_qa_on_
emir_implementation.pdf) answer 5(a) (stating that
compliance with the EMIR confirmation
requirement necessitates that the counterparties
must reach a legally binding agreement to all terms
of the OTC derivative contract, and that the EMIR
RTS ‘‘implies’’ that both parties must comply and
agree in advance to a specific process to do so);
answer 12(b) (stating that where an EU counterparty
transacts with a third country entity, the EU
counterparty generally must ensure that the EMIR
requirements for portfolio reconciliation, dispute
resolution, timely confirmation and portfolio
compression are met for the relevant portfolio and/
or transactions even though the third country entity
would not itself be subject to EMIR; this is subject
to special processes when the European
Commission has declared the third country
requirements to be comparable to EU requirements).
33 See para. (a)(6) of the proposed Amended
Order. Prong (i) to this proposed condition would
be satisfied by uncleared instruments that fall
within the ambit of the EMIR requirements at issue.
The alternative prong (ii) would be satisfied when
instruments fall outside the ambit of those EMIR
requirements by virtue of being cleared in the EU,
akin to the Exchange Act rules’ exclusion for
security-based swaps cleared by clearing agencies
registered with the Commission.
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C. Proposed Revisions to Conditions
Related to Trade Acknowledgment and
Verification, and Trading Relationship
Documentation
Consistent with the French Order 34
the Commission is proposing to modify
the Order to remove the existing MiFID
conditions to substituted compliance for
trade acknowledgment and verification.
Substituted compliance instead would
be conditioned solely on compliance
with the confirmation provisions of
EMIR article 11(1)(a) and EMIR RTS
article 12.35 Those EMIR provisions
promote comparable risk control goals
as the Exchange Act rule by providing
for definitive written records of
transactions. While the Commission
recognizes that MiFID confirmation
requirements also help to promote that
goal, the Commission preliminarily
believes that the EMIR provisions alone
are sufficient for regulatory
comparability, and recognizes that in
practice the interplay between the EU
cross-border condition and MiFID
confirmation requirements may
unnecessarily limit the use of
substituted compliance and its
associated efficiency benefits.
The Commission similarly is
proposing to modify the Order to
remove the existing MiFID conditions to
substituted compliance for trading
relationship documentation, and also to
add the above EMIR confirmation
provisions (reflecting that the Exchange
Act trading relationship documentation
rule requires that the necessary
documentation include trade
acknowledgments and verifications 36).
Together with EMIR Margin RTS article
2 provisions that address risk
management procedures related to the
exchange of collateral, including
procedures related to the terms of all
necessary agreements to be entered into
by counterparties (e.g., payment
obligations, netting conditions, events of
default, calculation methods, transfers
of rights and obligations upon
termination, and governing law), the
EMIR conditions promote comparable
risk mitigation purposes as the trading
relationship documentation rule under
the Exchange Act by promoting
certainty regarding the relevant
framework governing the counterparties.
Here too, while the Commission
recognizes that MiFID documentation
requirements also promote that goal, the
Commission preliminarily believes the
EMIR provisions alone are sufficient for
regulatory comparability, and
34 See
35 See
para. (b)(2) of the French Order.
para. (b)(2) of the proposed Amended
Order.
36 See Exchange Act rule 15Fi–5(b)(2).
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recognizes that in practice the interplay
between the EU cross-border condition
and MiFID documentation provisions
may limit the use of substituted
compliance and its associated regulatory
benefits.37
D. Proposed Revisions to Internal Risk
Management and Internal Supervision
The Commission is also proposing to
incorporate—as part of the relevant
conditions in paragraph (b)(1) of the
proposed Amended Order relating to
internal risk management—MiFID
articles 16 and 23 and the related
implementing provisions, MiFID Org
Reg articles 25 through 37, 72 through
76 and Annex IV, as well as CRD
articles 88(1), 91(1)–(2) and (7)–(9) and
the related implementing provisions.38
These provisions address additional
aspects of a Covered Entity’s
management of the risks posed by
internal governance and organization,
business operations, conflicts of interest
with and between clients, and senior
staff remuneration policies and were
part of the Commission’s comparability
determination for entities subject to
regulation in France. The Commission is
also incorporating CRR articles 286–88
and 293 and EMIR Margin RTS article
2 to the conditions of paragraph (d)(3)
of the proposed Amended Order relating
to internal supervision.39 These
provisions relate to counterparty credit
risk and risk management generally and
collateral-related risk management
procedures and were also part of the
Commission’s comparability analysis in
the French Order.40 Also consistent
with the French Order, the Commission
is proposing to delete CRD article 93
and the related implementing
provisions from both paragraph (d)(1)
and (d)(3), as those provisions relate to
remuneration policies for institutions
that benefit from exceptional (German
and EU) government intervention. 41
IV. Proposed Substituted Compliance in
Connection With Capital and Margin
A. BaFin’s Request and Associated
Analytic Considerations
The Amended Application in part
requests substituted compliance in
connection with requirements under the
Exchange Act relating to:
37 These proposed changes are consistent with the
French Order. See paras. (a)(5) and (a)(6) of the
French Order.
38 See para. (b)(1) of the proposed Amended
Order.
39 See para. (d)(3) of the proposed Amended
Order.
40 See paras. (b)(1) and (d)(3) of the French Order.
41 See paras. (b)(1) and (d)(3) of the proposed
Amended Order.
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• Capital—Capital requirements
pursuant to Exchange Act section 15F(e)
and Exchange Act rule 18a–1 and 18a–
1a through 18a–1d applicable to certain
SBS Entities.42 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.43 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.44 As
part of the capital requirements,
security-based swap dealers without a
prudential regulator also must comply
with the internal risk management
control requirements of Exchange Act
Rule 15c3–4 with respect to certain
activities.45
• Margin—Margin requirements
pursuant to Exchange Act section 15F(e)
and Exchange Act rule 18a–3 for nonprudentially regulated SBS Entities.46
The margin requirements are designed
to protect SBS Entities from the
42 Exchange Act rule 18a–1 applies to securitybased swap dealers that: (1) Do not have a
prudential regulator; and (2) are either (a) not
dually registered with the Commission as a brokerdealer or (b) are dually registered with the
Commission as a special purpose broker-dealer
known as an OTC derivatives dealer. Security-based
swap dealers that are dually registered with the
Commission as a full-service broker-dealer are
subject to the capital requirements of Exchange Act
rule 15c3–1 (17 CFR 240.15c3–1) for which
substituted compliance is not available. See 17 CFR
240.3a71–6(d)(4)(i) (making substituted compliance
available only with respect to the capital
requirements of Exchange Act section 15F(e) and
Exchange Act rule 18a–1).
43 See Capital and Margin Adopting Release, 84
FR 43947. The Amended Application discusses EU
and German requirements that address firms’
capital requirements. See Amended Application
Annex A category 3 (Side Letter Addressing Capital
Requirements). See also Amended Application
Annex A category 4 (Internal Risk Management
Requirements) (generally discussing internal risk
management requirements).
44 See Capital and Margin Adopting Release, 84
FR 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 Amended Application Annex A
category 3 (Side Letter Addressing Capital
Requirements).
45 See 17 CFR 240.15c3–4 and 18a–1(f).
46 17 CFR 240.18a–3.
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consequences of a counterparty’s
default.47
Taken as a whole, these capital and
margin requirements help to promote
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. Capital—Preliminary Views and
Proposed Amended Order
In the Commission’s preliminary
view, based on the Amended
Application and the Commission’s
review of applicable provisions,
additional conditions on applying
substituted compliance with respect to
the Exchange Act capital requirements
are necessary in order to produce
comparable regulatory outcomes.
Consequently, substituted compliance
with respect to the capital requirements
of Exchange Act rule 18a–1 would be
conditioned on Covered Entities being
subject to and complying with relevant
EU and German capital requirements.48
However, the proposed Amended Order
would include the additional conditions
discussed below that, in the aggregate,
would be designed to establish a
framework that produces outcomes
comparable to those associated with the
47 See Capital and Margin Adopting Release, 84
FR 43947, 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 Amended
Application discusses EU and German requirements
that address firms’ margin requirements. See
Amended Application Annex A category 4 (Margin
Requirements for Nonbank Firms).
48 In connection with capital requirements,
Covered Entities must comply with: CRR, Part One
(General Provisions) Article 6(1), Part Two (Own
Funds), Part Three (Capital Requirements), Part
Four (Large Exposures), Part Five (Exposures to
Transferred Credit Risk), Part Six (Liquidity), and
Part Seven (Leverage); MiFID Org Reg article 23;
BRRD articles 45(6) and 81(1); CRD articles 73, 79,
86, 129, 129(1), 130, 130(1), 130(5), 131, 133,
133(1), 133(4), 141, and 142(1) and (2); EMIR
Margin RTS articles 2, 3(b), 7, and 19(1)(d) and (e),
(3) and (8); KWG sections 10b–10h, 10i(2)–(9),
25a(1) sentence 3 no. 2 and no. 3b), 33(1) sentence
1c),; SAG section 49(2), 49d, 62(1), 138(1); and
SolvV section 37. See para. (c)(1)(i) of the proposed
Amended Order.
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capital requirements of Exchange Act
rule 18a–1.
The first additional capital condition
would require that the Covered Entity
apply substituted compliance with
respect to Exchange Act rules 18a–
5(a)(9) (a record making requirement),
18a–6(b)(1)(x) (a record preservation
requirement), and 18a–8(a)(1)(i),
(a)(1)(ii), (b)(1), (b)(2), and (b)(4)
(notification requirements relating to
capital).49 These recordkeeping and
notification requirements are directly
linked to the capital requirements of
Exchange Act rule 18a–1. As discussed
below in part VII.B.1 of this release, the
proposed Amended Order conditions
substituted compliance with respect to
these recordkeeping and notification
requirements on the Covered Entity
applying substituted compliance with
respect to Exchange Act rule 18a–1.50
This proposed capital condition would
do the reverse: Condition substituted
compliance with respect to Exchange
Act rule 18a–1 on the Covered Entity
applying substituted compliance for
these linked recordkeeping and
notification requirements. This
additional capital condition is designed
to provide clarity as to the Covered
Entity’s obligations under these
recordkeeping and notification
requirements when applying substituted
compliance with respect to Exchange
Act rule 18a–1 pursuant the proposed
Amended Order.
The second additional capital
condition would be designed to ensure
comparable regulatory outcomes
between the standard of Exchange Act
rule 18a–1 and the capital standard of
the relevant EU and German laws,
which is based on the international
capital standard for banks (the ‘‘Basel
capital standard’’).51 In particular, 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 15c3–1.52 The net liquid assets test
49 See para. (c)(1)(ii) of the proposed Amended
Order. This additional condition is included in the
French and UK Orders. See French Order, 86 FR
41659; UK Order, 86 FR 43372.
50 See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A)
of the proposed Amended Order.
51 See note 48, supra (citing EU and German
capital requirements under the CRR). See also Basel
Committee on Banking Supervision (‘‘BCBS’’), The
Basel Framework, available at: https://www.bis.org/
basel_framework/.
52 See, e.g., Capital and Margin Adopting Release,
84 FR 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
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is designed to promote liquidity.53 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).54 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
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.’’).
53 See id. (‘‘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).’’).
54 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).
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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.55 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. An SBS Entity that
is meeting its minimum tentative 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.56 The final step in computing net
capital is to take prescribed percentage
deductions (standardized haircuts) or
model-based deductions from the markto-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.
In comparison, the Basel capital
standard counts as capital assets that
Exchange Act rule 18a–1 would exclude
55 See
17 CFR 240.15c3–1(c)(2).
highly liquid assets under Exchange Act
Rule 18a–1 are otherwise known as ‘‘allowable
assets’’ because they are not deducted when
computing net capital. See Books and Records
Adopting Release, 84 FR 68673–74, 68677–80 (the
sections of the amended Part II of the FOCUS
Report setting forth the assets side of the balance
sheet and the net capital computation). Illiquid
assets otherwise known as ‘‘non-allowable assets’’
are deducted when computing net capital. Id.
Allowable assets include cash, certain unsecured
receivables from broker-dealers and clearing
organizations, reverse repurchase agreements,
securities borrowed, fully secured customer margin
loans, and proprietary securities, commodities, and
swaps positions. Id. The term ‘‘high quality liquid
assets’’ or ‘‘HQLA’’ are defined under the Basel
capital standard’s liquidity coverage ratio (‘‘LCR’’)
and generally consist of cash and specific classes of
liquid securities. See BCBS, LCR30—High-quality
liquid assets (under the Basel capital standards),
available at: https://www.bis.org/basel_framework/
chapter/LCR/30.htm?. Generally, cash and
securities that qualify as HQLA under the LCR
would be allowable assets under Exchange Act rule
18a–1.
56 The
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(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 would 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 EU margin requirements, Covered
Entities will be required to post initial
margin to counterparties unless an
exception applies.57 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.58 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.’’ 59 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.
In summary, there are key differences
between the net liquid assets test of
Exchange Act rule 18a–1 and the Basel
capital standard applicable to Covered
Entities. Those differences in terms of
the types of assets that count as
regulatory capital and how regulatory
57 Exchange Act rule 18a–3 does not require SBS
Entities to post initial margin (though it does not
prohibit the practice).
58 See Capital and Margin Adopting Release, 84
FR 43887–88.
59 See id. at 43887.
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capital is calculated lead to different
regulatory outcomes. In particular, the
net liquid assets test produces a
regulatory outcome in which the SBS
Entity has more than one dollar of
highly liquid assets for each dollar of
unsubordinated liabilities.60 The Basel
capital standard—while having
measures designed to promote
liquidity—does not produce this
regulatory outcome.61 Therefore, the
Commission preliminarily believes that
an additional capital condition is
needed to bridge the gap between these
two capital standards and thereby
achieve more comparable regulatory
outcomes in terms of promoting liquid
balance sheets for SBS Entities and
Covered Entities.
However, in seeking to bridge this
regulatory gap, the additional condition
should take into account that Covered
Entities are or will be subject to EU and
German laws and measures designed to
promote liquidity. In particular,
Covered Entities are or will be subject
to: (1) Requirements to hold an amount
of HQLA to meet expected payment
obligations under stressed conditions
for thirty days (the ‘‘LCR
requirement’’); 62 (2) requirements to
hold a diversity of stable funding
instruments sufficient to meet long-term
obligations under both normal and
stressed conditions (the ‘‘NSFR
requirements’’); 63 (3) requirements to
perform liquidity stress tests and
manage liquidity risk (the ‘‘internal
liquidity assessment requirements’’); 64
and (4) regular reviews of a Covered
Entity’s liquidity risk management
processes (the ‘‘liquidity review
process’’).65 These EU and German laws
and measures will require Covered
Entities to hold significant levels of
liquid assets. However, the laws and
measures on their own, do not impose
a net liquid assets test. Therefore, the
Commission preliminarily believes that
an additional condition is necessary to
supplement these requirements.
The Commission has taken into
account the EU and German liquidity
60 As discussed above, highly liquid assets under
Exchange Act rule 18a–1 are also known as
‘‘allowable assets’’ and generally are consistent with
the LCR’s HQLA.
61 The Basel capital standard does not preclude a
firm from having more than a dollar of highly liquid
assets for each dollar of unsubordinated liabilities.
Thus, a firm operating pursuant to the standard may
structure its assets and liabilities in a manner that
achieves this result. However, the standard does not
mandate this result. Rather, it would accommodate
a firm that seeks to maintain this level of liquidity
on its own accord.
62 See CRR, Article 412(1).
63 See CRR, Articles 413, 428a and 428az.
64 See KWG, Article 25a(1), sentence 3 no. 3b).
65 See KWG, Article 6b(2) no.7.
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laws and measures discussed above in
making a substituted compliance
determination with respect to Exchange
Act rule 18a–1, and in tailoring
additional capital conditions designed
to achieve comparable regulatory
outcomes. The LCR, NSFR, and internal
liquidity assessment requirements
collectively will require Covered
Entities to maintain pools of
unencumbered HQLA to cover potential
cash outflows during a 30-day stress
period, to fund long-term obligations
with stable funding instruments, and to
manage liquidity risk. These
requirements—coupled with
supervisory reviews of the liquidity risk
management practices of Covered
Entities—will require Covered Entities
to hold significant levels of liquid
assets. These requirements and
measures in combination with the other
capital requirements applicable to
Covered Entities provide a starting
foundation for making a positive
substituted compliance determination
with respect to the capital requirements
of Exchange Act section 15F(e) and
Exchange Act rule 18a–1. However, the
Commission preliminarily believes that
more is needed to achieve a comparable
regulatory outcome to the net liquid
assets test of Exchange Act rule 18a–1.
For these reasons, the proposed
Amended Order includes an additional
capital condition that would impose a
simplified net liquid assets test.66 This
simplified test would require the
Covered Entity to hold more than one
dollar of liquid assets for each dollar of
liabilities. The simplified net liquid
assets test—when coupled with the CRR
capital requirements,67 LCR
requirements, NSFR requirements,
internal liquidity assessment
requirements, and liquidity review
process—is designed to produce a
regulatory outcome that is comparable
to the net liquid assets test of Exchange
Act rule 18a–1 (i.e., sufficient liquidity
to cover liabilities and to promote the
maintenance of highly liquid balance
sheets).
More specifically, substituted
compliance with respect to Exchange
Act rule 18a–1 would be subject to the
condition that a Covered Entity: (1)
Maintains liquid assets (as defined in
the proposed condition) that have an
aggregate market value that exceeds the
amount of the Covered Entity’s total
liabilities by at least $100 million before
applying the deduction specified in the
proposed condition, and by at least $20
million after applying the deduction
specified in the proposed condition; (2)
makes and preserves for three years a
quarterly record that: (a) Identifies and
values the liquid assets maintained as
defined in the proposed condition, (b)
compares the amount of the aggregate
value the liquid assets maintained
pursuant to the proposed condition to
the amount of the Covered Entity’s total
liabilities and shows the amount of the
difference between the two amounts
(‘‘the excess liquid assets amount’’), and
(c) shows the amount of the deduction
specified in the proposed condition and
the amount that deduction reduces the
excess liquid assets amount; (3) notifies
the Commission in writing within 24
hours in the manner specified on the
Commission’s website if the Covered
Entity fails to meet the requirements of
the proposed condition and includes in
the notice the contact information of an
individual who can provide further
information about the failure to meet the
requirements; and (4) 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.68
Under the first prong of this
additional capital condition, the
Covered Entity would be required to
maintain liquid assets (as defined in the
proposed capital condition) that have an
aggregate market value that exceeds the
amount of the Covered Entity’s total
liabilities by at least: (1) $100 million
before applying a deduction (as
specified in the proposed capital
condition); and (2) $20 million after
applying the deduction.69 The first
prong is designed to be consistent with
the $100 million tentative net capital
requirement of Exchange Act rule 18a–
1 applicable to SBS Entities approved to
use models. As discussed above,
Exchange Act rule 18a–1 requires SBS
Entities that have been approved to use
models to maintain at least $100 million
in tentative net capital. And, tentative
net capital is the amount that an SBS
Entity’s liquid assets exceed its total
unsubordinated liabilities before
applying haircuts. The first prong would
require the Covered Entity to subtract
66 See para. (c)(1)(iii) of the proposed Amended
Order. This additional condition is included in the
French and UK Orders. See French Order, 86 FR
41659; UK Order, 86 FR 43372.
See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) of
the proposed Amended Order.
67 See, e.g., CRR, Part 1 (Own Funds, including
Tier 1 capital) and Part 2 (Capital Requirements).
68 See para. (c)(1)(iii) of the proposed Amended
Order. This proposed additional condition is
included in the French and UK Orders. See French
Order, 86 FR 41659; UK Order, 86 FR 43372.
69 See para. (c)(1)(iii)(A)(1) of the proposed
Amended Order. The definition of ‘‘liquid assets’’
and the method of calculating the deductions are
discussed below.
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total liabilities from total liquid assets.
The amount remaining will need to
equal or exceed $100 million. The first
prong also is designed to be consistent
with the $20 million fixed-dollar
minimum net capital requirement of
Exchange Act rule 18a–1. As discussed
above, net capital is calculated by
applying haircuts (deductions) to
tentative net capital and the fixed-dollar
minimum requires that net capital must
equal or exceed $20 million. The first
prong would require the Covered Entity
to subtract total liabilities from total
liquid assets and then apply the
deduction to the difference. The amount
remaining after the deduction would
need to equal or exceed $20 million.
For the purposes of the first prong,
‘‘liquid assets’’ would be defined as: (1)
Cash and cash equivalents; (2)
collateralized agreements; (3) customer
and other trading related receivables; (4)
trading and financial assets; and (5)
initial margin posted by the Covered
Entity to a counterparty or third-party
(subject to certain conditions discussed
below).70 These categories of liquid
assets are designed to align with assets
that are considered allowable assets for
purposes of calculating net capital
under Exchange Act rule 18a–1.71
Further, the first four categories of
liquid assets also are designed to align
with how Covered Entities categorize
liquid assets on their financial
statements.
The first category of liquid assets
would be cash and cash equivalents.72
These assets would consist of cash and
demand deposits at banks (net of
overdrafts) and highly liquid
investments with original maturities of
three months or less that are readily
convertible into known amounts of cash
and subject to insignificant risk of
change in value.73 The second category
of liquid assets would be collateralized
agreements.74 These assets would
consist of secured financings where
securities serve as collateral such as
70 See para. (c)(1)(iii)(B) of the proposed
Amended Order.
71 See supra notes 56 and 60 (describing
allowable assets under Exchange Act rule 18a–1).
72 See para. (c)(1)(iii)(B)(1) of the proposed
Amended Order.
73 See, e.g., International Financial Reporting
Standards Foundation (‘‘IFRS’’), IAS 7 Statement of
Cash Flows (defining ‘‘cash’’ as comprising cash on
hand and demand deposits and ‘‘cash equivalents’’
as short-term, highly liquid investments that are
readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes
in value). See also Books and Records Adopting
Release, 84 FR 68673–74 (the section of the
amended Part II of the FOCUS Report setting forth
the assets side of the balance sheet and identifying
cash as an allowable asset in Box 200).
74 See para. (c)(1)(iii)(B)(2) of the proposed
Amended Order.
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repurchase agreements and securities
loaned transactions.75 The third
category of liquid assets would be
customer and other trading related
receivables.76 These assets would
consist of customer margin loans,
receivables from broker-dealers,
receivables related to fails to deliver,
and receivables from clearing
organizations.77 The fourth category of
liquid assets would be trading and
financial assets.78 These assets would
consist of cash market securities
positions and listed and over-thecounter derivatives positions.79
As discussed above, initial margin
posted to a counterparty is treated
differently under Exchange Act rule
18a–1 and the Basel capital standard.
The fifth category of liquid assets would
be initial margin posted by the Covered
Entity to a counterparty or a third-party
custodian, provided: (1) The initial
margin requirement is funded by a fully
executed written loan agreement with
an affiliate of the Covered Entity; (2) the
loan agreement provides that the lender
waives re-payment of the loan until the
initial margin is returned to the Covered
Entity; and (3) the liability of the
Covered Entity to the lender can be fully
satisfied by delivering the collateral
serving as initial margin to the lender.80
As discussed above, one critical
difference between Exchange Act rule
18a–1 and the Basel capital standard is
that an SBS Entity cannot count as
capital the amount of initial margin
posted to a counterparty or third-party
custodian unless it enters into a special
loan agreement with an affiliate.81
Under the Basel capital standard, a
Covered Entity can count initial margin
posted away as capital without the need
75 See Books and Records Adopting Release, 84
FR 68673–74 (the section of the amended Part II of
the FOCUS Report setting forth the assets side of
the balance sheet and identifying securities
borrowed as an allowable asset in Boxes 240 and
250 and securities purchased under agreements to
resell as an allowable asset in Box 360).
76 See para. (c)(1)(iii)(B)(3) of the proposed
Amended Order.
77 See Books and Records Adopting Release, 84
FR 68673–74 (the section of the amended Part II of
the FOCUS Report setting forth the assets side of
the balance sheet and identifying fails to deliver as
allowable assets in Boxes 220 and 230, receivables
from clearing organizations as allowable assets in
Boxes 280 and 290, and receivables from customers
as allowable assets in Boxes 310, 320, and 330).
78 See para. (c)(1)(iii)(B)(4) of the proposed
Amended Order.
79 See Books and Records Adopting Release, 84
FR 68673–74 (the section of the amended Part II of
the FOCUS Report setting forth the assets side of
the balance sheet and identifying securities,
commodities, and swaps positions as allowable
assets in Box 12019).
80 See para. (c)(1)(iii)(B)(5) of the proposed
Amended Order.
81 See Capital and Margin Adopting Release, 84
FR 43887–88.
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to enter into a special loan arrangement
with an affiliate. Consequently, to count
initial margin posted away as a liquid
asset for purposes of this capital
condition, the Covered Entity would be
required to enter into the same type of
special agreement that an SBS Entity
must execute to count initial margin as
an allowable asset for purposes of
Exchange Act rule 18a–1.82
If an asset does not fall within one of
the five categories of ‘‘liquid assets’’ as
defined in the proposed Amended
Order,83 it would be considered nonliquid, and could not be treated as a
liquid asset for purposes of this capital
condition. For example, the following
categories of assets generally could not
be treated as liquid assets: (1)
Investments; (2) loans; and (3) other
assets. The non-liquid ‘‘investment’’
category would include the Covered
Entity’s ownership interests in
subsidiaries or other affiliates. The nonliquid ‘‘loans’’ category would include
unsecured loans and advances. The
non-liquid ‘‘other’’ assets category
would refer to assets that do not fall into
any of the other categories of liquid or
non-liquid assets. These non-liquid
‘‘other’’ assets would include furniture,
fixtures, equipment, real estate,
property, leasehold improvements,
deferred tax assets, prepayments, and
intangible assets.
As discussed above, the first prong of
this capital condition would require the
Covered Entity to subtract total
liabilities from total liquid assets and
then apply a deduction (haircut) to the
difference.84 The amount remaining
after the deduction would need to equal
or exceed $20 million. The method of
calculating the amount of the deduction
would rely on the calculations Covered
Entities must make under the Basel
capital standard.85 In particular, under
the Basel standard, Covered Entities
must risk-weight their assets. This
involves adjusting the nominal value of
each asset based on the inherent risk of
the asset. Less risky assets are adjusted
to lower values (i.e., have less weight)
than more risky assets. As a result,
Covered Entities must hold lower levels
of regulatory capital for less risky assets
and higher levels of capital for riskier
assets. Similarly, under Exchange Act
rule 18a–1, less risky assets incur lower
haircuts than riskier assets and,
82 Id.
83 See para. (c)(1)(iii)(B) of the proposed
Amended Order.
84 See para. (c)(1)(iii)(A)(1) of the proposed
Amended Order.
85 See BCBS, Risk-based capital requirements
(RBC20), available at: https://www.bis.org/basel_
framework/chapter/RBC/
20.htm?inforce=20191215&published=20191215.
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therefore, require less net capital to be
held in relation to them. Consequently,
the process of risk-weighting assets
under the Basel capital standard
provides a method to account for the
inherent risk in an asset held by a
Covered Entity similar to how the
haircuts under the Exchange Act rule
18a–1 account for the risk of assets held
by SBS Entities. For these reasons, the
Commission preliminarily believes it
would be appropriate to use the process
of risk-weighting assets under the Basel
capital standard to determine the
amount of the deduction (haircuts)
under the first prong of the third
additional capital condition.
Under the Basel capital standard,
Covered Entities must hold regulatory
capital equal to at least 8% of the
amount of their risk-weighted assets.86
Therefore, the deduction (haircut)
required for purposes of this capital
condition would be determined by
dividing the amount of the Covered
Entity’s risk-weighted assets by 12.5
(i.e., the reciprocal of 8%).87 In sum, the
Covered Entity would be required to
maintain an excess of liquid assets over
total liabilities that equals or exceeds
$100 million before the deduction
(derived from the firm’s risk-weighted
assets) and $20 million after the
deduction.88
The second prong of this capital
condition would require the Covered
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86 Id.
87 See para. (c)(1)(iii)(C) of the proposed
Amended Order. The Commission acknowledges
that a Covered Entity’s risk-weighted assets will
include components in addition to market and
credit risk charges (e.g., operational risk charges).
However, the Commission expects the combined
market and credit risk charges would make up the
substantial majority of the risk-weighted assets. In
addition, the Commission believes that this method
of calculating the deduction in the first prong of the
third additional capital condition is a reasonable
approach in that it addresses market and credit risk
similar to the process used by security-based swap
dealers authorized to use internal models to
compute market and credit risk deductions under
Exchange Act rule 18a–1. See, e.g., Exchange Act
rule 18a–1(e) (prescribing requirements to calculate
market and credit risk charges, including use of an
8% multiplication factor for calculating the credit
risk charges).
88 For example, assume a Covered Entity has total
assets of $600 million (of which $595 million are
liquid and $5 million are illiquid) and total
liabilities of $450 million. In this case, the Covered
Entity’s liquid assets would exceed total liabilities
by $145 million ($590 million minus $450 million)
and, therefore, the Covered Entity would have
excess liquid assets greater than $100 million as
required by the first prong of this capital condition.
Assume further that the Covered Entity’s riskweighted assets under the Basel capital standard
equal $400 million. In this case, the Covered
Entity’s deduction would equal $32 million ($400
million divided by 12.5). Subtracting $32 million
from $145 million leaves $113 million, which
exceeds $20 million. Therefore, the Covered Entity
would meet the second requirement of the first
prong of this capital condition.
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Entity to make and preserve for three
years a quarterly record that: (1)
Identifies and values the liquid assets
maintained pursuant to the first prong;
(2) compares the amount of the
aggregate value the liquid assets
maintained pursuant to the first prong
to the amount of the Covered Entity’s
total liabilities and shows the excess
liquid assets amount; and (3) shows the
amount of the deduction required under
the first prong and the amount that
deduction reduces the excess liquid
assets amount.89 Consequently, the
quarterly record would include details
showing whether the Covered Entity is
meeting the $100 million and $20
million requirements of the first prong.
The third prong of this capital
condition would require the Covered
Entity to notify the Commission in
writing within 24 hours in the manner
specified on the Commission’s website
if the Covered Entity fails to meet the
requirements of the first prong and
include in the notice the contact
information of an individual who can
provide further information about the
failure to meet the requirements.90 As
discussed above, the first additional
capital condition would require the
Covered Entity to apply substituted
compliance with respect to notification
requirements of Exchange Act rule 18a–
8 relating to capital.91 A Covered Entity
applying substituted compliance with
respect to Exchange Act rule 18a–8
under the proposed Amended Order
would need to simultaneously submit to
the Commission any notifications
relating to capital that it must submit to
the EU and German authorities.
However, EU and German notification
requirements do not address a failure to
adhere to the simplified net liquid
assets test that would be required by the
first prong of this capital condition.
Moreover, due to the differences
between Exchange Act rule 18a–1 and
the Basel capital standard discussed
above, a Covered Entity could fall out of
compliance with the requirements of the
first prong but still remain in
compliance with the requirements of the
Basel capital standard. Accordingly, the
third prong would require the Covered
Entity to notify the Commission if the
firm fails to meet the requirements of
the first prong. This would alert the
Commission of potential issues with the
Covered Entity’s financial condition that
89 See para. (c)(1)(iii)(A)(2) of the proposed
Amended Order.
90 See para. (c)(1)(iii)(A)(3) of the proposed
Amended Order.
91 See para. (c)(1)(ii) of the proposed Amended
Order.
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could pose risks to the firm’s customers
and counterparties.
The fourth prong of this condition
would require the Covered Entity to
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.92 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 would file with
the Commission to monitor the
appropriateness of the capital condition
if it is included in an amended 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 or an amended order
providing substituted compliance for
Exchange Act rule 18a–7.93
C. Margin—Preliminary Views and
Proposed Amended Order
In the Commission’s preliminary
view, based on the Amended
Application and the Commission’s
review of applicable provisions,
relevant EU and German margin
requirements would produce regulatory
outcomes that are comparable to those
associated with Exchange Act rule 18a–
3, provided Covered Entities are subject
to additional conditions (discussed
below) to address differences between
the two margining regimes with respect
to counterparty exceptions.
In terms of producing comparable
outcomes, in adopting Exchange Act
rule 18a–3, 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 BCBS
and the Board of the International
92 See para. (c)(1)(iii)(A)(4) of the proposed
Amended Order.
93 See part VII.B.4, infra (discussing proposed
reporting conditions with respect to applying
substituted compliance for Exchange Act rule 18a–
7).
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Organization of Securities Commissions
(‘‘IOSCO’’) with respect to margin
requirements for non-centrally cleared
derivatives.94 In this regard, Exchange
Act rule 18a–3 and the EU and German
margin rules require firms to collect
liquid collateral from a counterparty to
cover variation and/or initial margin
requirements.95 Both sets of rules also
require firms to deliver liquid collateral
to a counterparty to cover variation
margin requirements. Under both sets of
rules, the fair market value of collateral
used to meet a margin requirement must
be reduced by a haircut.96 Further, both
sets of rules permit the use of a model
(including a third party model such as
ISDA’s SIMMTM model) to calculate
initial margin.97 The initial margin
model under both sets of rules must
meet certain minimum qualitative and
quantitative requirements, including
that the model must use a 99 percent,
one-tailed confidence level with price
changes equivalent to a 10-day
movement in rates and prices.98 Both
sets of rules have common exceptions to
the requirements to collect and/or post
initial or variation margin, including
exceptions for certain commercial end
users, the Bank for International
Settlements, and certain multilateral
development banks.99 Both sets of rules
also permit a threshold below which
initial margin is not required to be
collected and incorporate a minimum
transfer amount.100 For these reasons,
substituted compliance with respect to
94 See Capital and Margin Adopting Release, 84
FR 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 EU and
German margin requirements also are based on the
recommendation in the BCBS/IOSCO Paper.
95 See 17 CFR 240.18a–3(c)(1)(ii) and the
Amended Application Annex A category 4 at 28–
31.
96 See 17 CFR 240.18a–3(c)(1)(ii) and the
Amended Application Annex A category 4 at 38–
39.
97 See 17 CFR 240.18a–3(d)(2)(i) and the
Amended Application Annex A category 4 at 12–
18.
98 See 17 CFR 240.18a–3(d)(2)(i) and the
Amended Application Annex A category 4 at 12.
The Commission must approve the use of an initial
margin model. 17 CFR 240.18a–3(d)(2)(i). EMIR
article 11(15) directs European supervisory
authorities to develop regulatory technical
standards under which initial margin models have
to be approved (initial and ongoing approval). EU
and German requirements currently provide that,
upon request, counterparties using an initial margin
model shall provide the regulators with any
documentation relating to the risk management
procedures relating to such model at any time.
EMIR Margin RTS article 2(6).
99 See 17 CFR 240.18a–3(c)(1)(iii) and the
Amended Application Annex A category 4 at 54–
63.
100 See 17 CFR 240.18a–3(c)(1)(iii) and the
Amended Application Annex A category 4 at 64–
66.
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Exchange Act rule 18a–3 would be
conditioned on Covered Entities being
subject to and complying with these EU
and German margin requirements.101
However, there would be additional
conditions to address differences in the
exceptions to collecting variation and/or
initial margin between Exchange Act
rule 18a–3 and the EU and German
margin rules. In this regard, the
Commission stated when proposing
Exchange Act rule 18a–3 that the
‘‘Dodd-Frank Act seeks to address the
risk of uncollateralized credit risk
exposure arising from OTC derivatives
by, among other things, mandating
margin requirements for non-cleared
security-based swaps and swaps.’’ 102
Further, the comparability criteria for
margin requirements under Exchange
Act rule 3a71–6 provides that prior to
making a substituted compliance
determination, the Commission intends
to consider (in addition to any
conditions imposed) whether the
foreign financial regulatory system
requires registrants to adequately cover
their current and future exposure to
OTC derivatives counterparties, and
ensures registrants’ safety and
soundness, in a manner comparable to
the applicable provisions arising under
the Exchange Act and its rules and
regulations.103 In adopting this
comparability criteria for margin
requirements, the Commission stated
that obtaining collateral is one of the
ways OTC derivatives dealers manage
their credit risk exposure to OTC
derivatives counterparties.104
To address the risk of uncollateralized
exposures, Exchange Act rule 18a–3
requires SBS Entities without a
prudential regulator to collect variation
margin from all counterparties,
including affiliates, unless an exception
applies.105 Under the EU and German
margin requirements, there are
exceptions from the variation margin
requirements for certain intragroup
transactions (i.e., transactions between
affiliates).106 In addition, Exchange Act
rule 18a–3 requires firms to collect
initial margin from all counterparties,
unless an exception applies.107 This
initial margin requirement under
Exchange Act rule 18a–3 requires the
firm to collect initial margin from a
financial counterparty such as a hedge
fund without regard to whether the
counterparty has material exposures to
non-cleared security-based swaps and
uncleared swaps. In contrast, EU and
German margin requirements do not
require Covered Entities to collect initial
margin from financial counterparties, if
their notional exposure to non-centrally
cleared derivatives does not exceed a
certain threshold on a group basis.108
In some cases these differences may
result in a Covered Entity not being
adequately collateralized to cover its
current or future exposure to these
counterparties with respect to its OTC
derivatives transactions. In addition,
differences in the counterparty
exceptions could potentially incentivize
market participants to engage in noncleared security-based swap
transactions outside of the United
States.109 Consequently, the
Commission preliminarily believes it
would be appropriate to propose
additional margin conditions to produce
comparable regulatory outcomes in
terms of counterparty exceptions
between Exchange Act rule 18a–3 and
the EU and German requirements.
The first additional condition is
designed to address differences in the
counterparty exceptions with respect to
105 See
101 See
para. (c)(2)(i) of the proposed Amended
Order. In connection with margin requirements,
Covered Entities would need to comply with: EMIR
article 11; EMIR Margin RTS; 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); MiFID
Org Reg article 23(1); CRD articles 74 and 79(b); and
KWG section 25a(1). See para. (c)(2)(i) of the
proposed Amended Order.
102 See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers; Proposed Rule,
Exchange Act Release No. 68071 (Oct. 18, 2012), 77
FR 70214, 70258 (Nov. 23, 2012).
103 See 17 CFR 240.3a71–6(d)(5)(i) and (ii).
104 See Capital and Margin Adopting Release, 84
FR 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.). Id.
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17 CFR 240.18a–3(c)(ii)(A)(1) and (2).
the Amended Application Annex A
category 4 at 60–61.
107 See 17 CFR 240.18a–3(c)(ii)(B).
108 See the Amended Application Annex A
category 4 at 7 and 63. These thresholds are being
phased-in with the last initial margin threshold set
at EUR 8 billion.
109 The Commission recognizes there are also
cases where the EU and German margin rules are
more restrictive than Exchange Act rule 18a–3. EU
margin rules require Covered Entities to post initial
margin to covered counterparties, while the
Exchange Act rule 18a–3 would permit posting but
not require it. In addition, EU margin rules also
require a Covered Entity to collect (and post) initial
margin to financial and non-financial
counterparties if their notional exposure to noncentrally cleared derivatives exceeds a certain
threshold on a group basis. In contrast, Exchange
Act rule 18a–3 does not require (but permits) a
nonbank security-based swap dealer to collect
initial margin from counterparties that are financial
market intermediaries. 17 CFR 240.18a–
3(c)(1)(iii)(B). The comparability analysis, however,
focuses on determining whether the EU and
German margin rules are comparable to Exchange
Act rule 18a–3.
106 See
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variation margin. It would require a
Covered Entity to collect variation
margin, as defined in the EMIR Margin
RTS, from a counterparty with respect
to a transaction in non-cleared securitybased swaps, unless the counterparty
would qualify for an exception under
Exchange Act rule 18a–3 from the
requirement to deliver variation margin
to the Covered Entity.110 This condition
would define variation margin by
referencing EMIR Margin RTS to
facilitate implementation of the
condition by Covered Entities. Under
this condition, for example, Covered
Entities would be required to collect
variation margin from their affiliates,
but would be permitted to comply with
all other EU and German margin
requirements, including calculation,
collateral, documentation, and timing of
collection requirements. The first
proposed additional condition would
close the gap between the counterparty
exceptions of Exchange Act rule 18a–3
and the EU and German margin rules
with respect to variation margin.
The second proposed additional
condition is designed to address the
counterparty exceptions with respect to
initial margin. It would require a
Covered Entity to collect initial margin,
as defined in the EMIR Margin RTS,
from a counterparty with respect to
transactions in non-cleared securitybased swaps, unless the counterparty
would qualify for an exception under
Exchange Act rule 18a–3 from the
requirement to deliver initial margin to
a Covered Entity.111 The condition
would define initial margin by
referencing EMIR Margin RTS to
facilitate implementation of the
condition by Covered Entities. Under
this condition, for example, Covered
Entities would be required to collect
initial margin from their certain
counterparties, but would be permitted
to comply with all other EU and German
margin requirements, including
calculation, collateral, documentation,
and timing of collection requirements.
The second proposed additional
condition would close the gap between
the counterparty exceptions of Exchange
Act rule 18a–3 and the EU and German
margin rules with respect to initial
margin.
Finally, the proposed Amended Order
also includes as a proposed margin
condition that the Covered Entity apply
110 See para. (c)(2)(ii) of the proposed Amended
Order. This proposed additional condition is
included in the French and UK Orders. See French
Order, 86 FR 41659; UK Order, 86 FR 43372.
111 See para. (c)(2)(iii) of the proposed Amended
Order. This proposed additional condition is
included in the French and UK Orders. See French
Order, 86 FR 41659; UK Order, 86 FR 43372.
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substituted compliance with respect to
Exchange Act rule 18a–5(a)(12) (a record
making requirement).112 This record
making requirement is directly linked to
the margin requirements of Exchange
Act rule 18a–3. The proposed Amended
Order conditions substituted
compliance with respect to this record
making requirement on the Covered
Entity applying substituted compliance
with respect to Exchange Act rule 18a–
3.113 This condition would do the
reverse: Condition substituted
compliance with respect to Exchange
Act rule 18a–3 on the Covered Entity
applying substituted compliance with
respect to Exchange Act rule 18a–
5(a)(12). This condition is designed to
provide clarity as to the Covered
Entity’s obligations under this record
making requirement when applying
substituted compliance with respect to
Exchange Act rule 18a–3 pursuant this
proposed Amended Order.
V. Proposed Amendments Related to
CCO Reports
A. Compliance Report Certifications
Rule 15Fk–1 states that the required
reports must include ‘‘a certification by
the chief compliance officer or senior
officer that, to the best of his or her
knowledge and reasonable belief and
under penalty of law, the information
contained in the compliance report is
accurate and complete in all material
respects.’’ 114 The standard applied in
the Order required certification that
‘‘under penalty of law, the report is
accurate and complete.’’ 115 The
Commission preliminarily believes that,
consistent with the French Order,116
further alignment of the proposed
Amended Order’s certification
requirement with that of the applicable
Exchange Act rule is appropriate.
Therefore, the proposed Amended
Order would clarify that the required
reports should be certified by ‘‘the chief
compliance officer or senior officer’’ of
the Covered Entity and that the same
certification standard contained in
Exchange Act rule 15Fk–1 would
apply.117
112 See para. (c)(2)(iv) of the proposed Amended
Order. This proposed additional condition is
included in the French and UK Orders. See French
Order, 86 FR 41659; UK Order, 86 FR 43372.
113 See para. (f)(1)(i)(L) of the proposed Amended
Order.
114 Exchange Act rule 15Fk–1(c)(2)(ii)(D); see also
Exchange Act rule 15Fk–1(e)(2) (defining ‘‘senior
officer’’ as ‘‘the chief executive officer or other
equivalent officer’’).
115 See para. (d)(2) of the Order.
116 See French Order, 86 FR 41659.
117 See para. (d)(2)(ii)(B) of the proposed
Amended Order. In addition, for consistency with
the French Order, the Commission is proposing to
incorporate CRR articles 286–88 and 293 and EMIR
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B. Timing of Compliance Report
Submission
Also consistent with the French
Order,118 the Commission is proposing
to amend the Order to clarify the timing
for Covered Entities to submit
compliance reports to the Commission.
To promote timely notice comparable to
what the Exchange Act rule provides,
the Commission is proposing to
incorporate a timing standard that
accounts for MiFID-required timing as
well as the possibility that the relevant
reports may be submitted to the
management body early. Under the
proposed Amended Order, the
applicable compliance reports must be
provided to the Commission no later
than 15 days following the earlier of: (i)
The submission of the report to the
Covered Entity’s management body; or
(ii) the time the report is required to be
submitted to the management body.119
The proposed Amended Order would
also clarify that together the reports
must cover the entire period that the
Covered Entity’s annual compliance
report referenced in Exchange Act
section 15F(k)(3) and Exchange Act rule
15Fk–1(c) would be required to
cover.120
VI. Proposed Amendments
Counterparty Protection Requirements
A. Disclosure of Information Regarding
Material Risks and Characteristics
The Commission is proposing to add
two requirements to the list of German
and EU disclosure of information
regarding material incentives or
conflicts of interest requirements that
the Covered Entity must be subject to
and comply with. The MAR Investment
Recommendations Regulation articles 5
and 6 enumerate specific obligations in
relation to disclosure of interests or of
conflicts of interest. Article 5 requires
that persons who produce
recommendations disclose in their
recommendations all relationships and
circumstances that may reasonably be
expected to impair the objectivity of the
recommendation, including interests or
conflicts of interest. Article 6 imposes
additional obligations on certain
entities, including the disclosure of
information on their interests and
conflicts of interest concerning the
issuer to which a recommendation
relates. The Commission preliminarily
believes that requiring Covered Entities
Margin RTS article 2 as part of para. (d)(3) of the
proposed Amended Order.
118 See French Order, 86 FR 41659.
119 See para. (d)(2)(D) of the proposed Amended
Order.
120 See para. (d)(2)(E) of the proposed Amended
Order.
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to be subject to and comply with MAR
Investment Recommendations
Regulation articles 5 and 6 contributes
to a determination that relevant German
and EU requirements produce
regulatory outcomes that are comparable
to relevant requirements of Exchange
Act rule 15Fh–3(b).
B. Fair and Balanced Communications
The Commission is also proposing to
modify the fair and balanced
communications section of the proposed
Amended Order.121 First, the
Commission believes that German and
EU fair and balanced communications
requirements are more comparable to
Exchange Act requirements when
considering three additional EU
requirements: MAR article 20(1) would
require the Covered Entity to present
recommendations in a manner that
ensures the information is objectively
presented and to disclose interests and
conflicts of interest concerning the
financial instruments to which the
information relates. MAR Investment
Recommendations Regulation article 3
would require a Covered Entity to
communicate only recommendations
that present facts in a way that they are
clearly distinguished from
interpretations, estimates, opinions and
other types of non-factual information;
label clearly and prominently
projections, forecasts and price targets;
indicate the relevant material
assumptions and substantial material
sources of information; and include
only reliable information or a clear
indication when there is doubt about
reliability. MAR Investment
Recommendations Regulation article 4
would require the Covered Entity to
provide in its recommendation
additional information about the factual
basis of its recommendation.
Accordingly, the Commission is adding
these three requirements to the Order’s
list of German and EU fair and balanced
communications requirements that the
Covered Entity must be subject to and
comply with.122 Second, the Order
required the Covered Entity to be
subject to and comply with MAR
Investment Recommendations
Regulation article 5,123 which relates to
obligations to disclose conflicts of
interest. As discussed above, the
Commission is requiring Covered
Entities to comply with this requirement
and with MAR Investment
Recommendations Regulation article 6
when using substituted compliance for
121 See para. (e)(2)(iii) of the proposed Amended
Order.
122 See para. (e)(5) of the Order.
123 See para. (d)(2) of the Order.
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disclosure of material incentives and
conflicts of interest requirements.
Accordingly, the Commission believes
that MAR Investment Recommendations
Regulation article 5 is less relevant to
comparability of fair and balanced
communications requirements and is
proposing to delete the reference to it in
relation to substituted compliance for
fair and balanced communications.
VII. Proposed Amendments Related to
Recordkeeping, Reporting, Notification,
and Securities Count Requirements
A. BaFin Request and Associated
Analytic Considerations
In its initial application (the ‘‘BaFin
Application’’), in part, requests
substituted compliance for requirements
applicable to SBS Entities with and
without a prudential regulator under the
Exchange Act relating to:
• Recordmaking—Exchange Act rule
18a–5 requires prescribed records to be
made and kept current.124
• Record Preservation—Exchange Act
rule 18a–6 requires preservation of
records.125
• Reporting—Exchange Act rule 18a–
7 requires certain reports.126
• Notification—Exchange Act rule
18a–8 requires notification to the
Commission when certain financial or
operational problems occur.127
• Securities Count—Exchange Act
rule 18a–9 requires non-prudentially
regulated security-based swap dealers to
perform a quarterly securities count.128
• Daily Trading Records—Exchange
Act section 15F(g) requires SBS Entities
to maintain daily trading records.129
124 See 17 CFR 240.18a–5. The BaFin Application
discusses German 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 BaFin Application Annex A
category 2 at 4–34.
125 See 17 CFR 240.18a–6. The BaFin Application
discusses German 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 BaFin Application Annex A
category 2 at 35–79.
126 See 17 CFR 240.18a–7. The BaFin Application
discusses German requirements that address firms’
obligations to make certain reports. See BaFin
Application Annex A category 2 at 80–91, 96–102.
127 See 17 CFR 240.18a–8. The BaFin Application
discusses German requirements that address firms’
obligations to make certain notifications. See BaFin
Application Annex A category 2 at 92–96, 102.
128 See 17 CFR 240.18a–9. The BaFin Application
discusses German requirements that address firms’
obligations to perform securities counts. See BaFin
Application Annex A category 2 at 27–30.
129 See 15 U.S.C. 78o–10(g). The BaFin
Application discusses German 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 BaFin Application Annex A
category 2 at 35–79.
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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.
B. Preliminary Views and Proposed
Amended Order
1. General Considerations
In issuing the Order, the Commission
found that relevant EU and German
requirements, subject to conditions and
limitations, would produce regulatory
outcomes that are comparable to the
outcomes associated with the
recordkeeping, reporting, and
notification requirements of Exchange
Act rules 18a–5, 18a–6, 18a–7, and 18a–
8 applicable to SBS Entities with a
prudential regulator. However, the
BaFin Application did not seek
substituted compliance for the Exchange
Act capital and margin requirements
applicable to SBS Entities without a
prudential regulator. Because of the
close relationship between many of the
Exchange Act recordkeeping, reporting,
and notification requirements and the
administration and oversight of
Exchange Act capital and margin
requirements, the Order did not address
substituted compliance for
recordkeeping, reporting, notification,
and securities count requirements
applicable to SBS Entities without a
prudential regulator. The Commission is
now considering substituted compliance
for these Exchange Act requirements
because the Amended Application
requests substituted compliance for the
Exchange Act capital and margin
requirements applicable to SBS Entities
without a prudential regulator. The
Commission also is considering
substituted compliance with respect to
the trading record preservation
requirements of Exchange Act section
15F(g), which are applicable to SBS
Entities with and without a prudential
regulator.
The Commission preliminarily
concludes that the relevant EU and
German requirements, subject to
conditions and limitations, would
produce regulatory outcomes that are
comparable to the outcomes associated
with the requirements of Exchange Act
rules 18a–5, 18a–6, 18a–7, 18a–8, and
18a–9 applicable to SBS Entities
without a prudential regulator and to
the outcomes associated with Exchange
Act section 15F(g) applicable to all SBS
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Entities. In reaching this preliminary
conclusion, the Commission recognizes
that there are certain differences
between the EU and German
requirements and the Exchange Act
requirements. In the Commission’s
preliminary view, on balance, those
differences generally would not be
inconsistent with substituted
compliance for these requirements.
Requirement-by-requirement similarity
is not needed for substituted
compliance.
The Order makes substituted
compliance available with respect to the
entirety of Exchange Act rules 18a–5,
18a–6, 18a–7, and 18a–8 as applicable
to Covered Entities with a prudential
regulator. Consequently, under the
Order, the Covered Entity can elect to
apply substituted compliance with
respect to the entire rule (subject to
conditions and limitations) or,
alternatively, comply with the Exchange
Act rule. The proposed Amended Order
would modify this approach to provide
all Covered Entities with greater
flexibility to select which distinct
requirements within the broader rule for
which they would apply substituted
compliance. This would not preclude a
Covered Entity from applying
substituted compliance for the entire
rule (subject to conditions and
limitations). However, it would permit
the Covered Entity to apply substituted
compliance with respect to certain
requirements of a given rule and to
comply directly with the remaining
requirements. This more granular
approach to making substituted
compliance determinations with respect
to discrete requirements within
Exchange Act rules 18a–5, 18a–6, 18a–
7, and 18a–8 (collectively, the
‘‘recordkeeping, reporting, and
notification rules’’) 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, reporting, and
notification 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, reporting, or notification
rule (rather than apply substituted
compliance) because it can utilize
systems that its affiliated broker-dealer
has implemented to comply with them.
This proposed approach is consistent
with the approach taken by the
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Commission in the French and UK
Orders.130
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 objective
of these rules—taken as a whole—is to
assist the Commission in monitoring
and examining for compliance with
substantive Exchange Act requirements
applicable to SBS Entities (e.g., capital
and margin requirements) as well as to
promote the prudent operation of these
firms.131 The Commission preliminarily
believes the comparable EU and German
recordkeeping rules achieve these
outcomes with respect to compliance
with substantive EU and German
requirements for which preliminary
positive substituted compliance
determinations are being made in this
proposed Amended Order (e.g., the
preliminary positive substituted
compliance determinations with respect
to the Exchange Act 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 the recordkeeping, reporting, and
notification rules. However, certain of
the discrete requirements in these rules
are fully or partially linked to
substantive Exchange Act requirements
for which substituted compliance is not
available or for which a positive
substituted compliance determination
would not be made under the proposed
Amended Order. In these cases, a
preliminary positive substituted
compliance determination would not be
made for the requirement that is fully
linked to the substantive requirement or
130 See French Order, 86 FR 41649; UK Order, 86
FR 43360.
131 See, e.g., Exchange Act Release No. 71958
(Apr. 17, 2014), 79 FR 25194, 25199–200 (May 2,
2014).
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to the part of the requirement that is
linked to the substantive requirement.
In particular, a preliminary positive
substituted compliance determination
would not be made, in full or in part,
for recordkeeping, reporting, or
notification requirements linked to the
following Exchange Act rules for which
substituted compliance is not available
or a positive substituted compliance
determination would not be made: (1)
Exchange Act rule 15Fh–4 (‘‘Rule 15Fh–
4 Exclusion’’); (2) Exchange Act rule
15Fh–5 (‘‘Rule 15Fh–5 Exclusion’’); (3)
Exchange Act rule 15Fh–6 (‘‘Rule 15Fh–
6 Exclusion’’); (4) Exchange Act rule
18a–2 (‘‘Rule 18a–2 Exclusion’’); (5)
Exchange Act rule 18a–4 (‘‘Rule 18a–4
Exclusion’’); (6) Regulation SBSR
(‘‘Regulation SBSR Exclusion’’); and (7)
Form SBSE and its variations (‘‘Form
SBSE Exclusion’’). This proposed
approach is consistent with the
approach taken by the Commission in
the French and UK Orders.132
In addition, certain of the
requirements in the recordkeeping,
reporting, and notification rules are
expressly linked to substantive
Exchange Act requirements where a
preliminary positive substituted
compliance determination would be
made under the proposed Amended
Order. In these cases, substituted
compliance with the linked requirement
in the recordkeeping, reporting, or
notification rule would be conditioned
on the Covered Entity applying
substituted compliance to the linked
substantive Exchange Act requirement.
This would be 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. EU and
German recordkeeping, reporting, and
notification requirements are designed
to perform a similar role with respect to
the substantive EU and German
requirements to which they are linked.
Consequently, this condition would be
designed to ensure that the records,
reports, and notifications of a Covered
Entity align with the substantive
Exchange Act or EU or German
requirement to which they are linked.
For these reasons, under the proposed
Amended Order, substituted
compliance for recordkeeping,
132 See French Order, 86 FR 41650; UK Order, 86
FR 43361.
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reporting, and notification requirements
linked to the following Exchange Act
rules would be conditioned on the
Covered 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’’); (9) Exchange Act rule 18a–
5 (‘‘Rule 18a–5 Condition’’) and (10)
Exchange Act rule 18a–7 (‘‘Rule 18a–7
Condition’’). This proposed approach is
consistent with the approach taken by
the Commission in the French and UK
Orders.133
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 of this rule.
The records also would assist the firm
in monitoring its net capital position
and, therefore, in complying with
Exchange rule 18a–1. Therefore,
substituted compliance with respect to
these recordkeeping and reporting
requirements would be subject to the
condition that the Covered Entity
applies substituted compliance with
respect to Exchange Act rule 18a–1 (i.e.,
the ‘‘Rule 18a–1 Condition’’). This
approach would be 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
that the firm makes and preserves
records to assist it in complying with
these rules.
Additionally, substituted compliance
with respect to paragraphs (a)(1), (b),
and (c) through (h) of Exchange Act rule
18a–7 would be subject to the additional
condition that the Covered Entity
applies substituted compliance with
respect to Exchange Act rule 18a–
6(b)(1)(viii) (the ‘‘Rule 18a–6(b)(1)(viii)
Condition’’). This record preservation
requirement is directly linked to the
financial and operational reporting
requirements of paragraphs (a)(1), (b),
and (c) through (h) of Exchange Act rule
133 See French Order, 86 FR 41650; UK Order, 86
FR 43361.
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18a–7 and this additional condition
would be designed to provide clarity as
to the Covered Entity’s obligations
under this record preservation
requirement when applying substituted
compliance with respect to paragraphs
(a)(1), (b), and (c) through (h) of
Exchange Act rule 18a–7 pursuant to
this proposed Amended Order. This
proposed approach is consistent with
the approach taken by the Commission
in the French and UK Orders.134
2. 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 without a
prudential regulator are set forth in
paragraph (a) of the rule.135 The
requirements for SBS Entities with a
prudential regulator are set forth in
paragraph (b) of the rule.136 The Order
makes substituted compliance available
for the requirements of paragraph (b) of
Exchange Act rule 18a–5 (subject to
conditions and limitations). The
Commission is making a preliminary
positive substituted compliance
determination for many of the
requirements of paragraph (a) of
Exchange Act rule 18a–5 and making
preliminary positive substituted
compliance determinations with respect
to paragraph (b) in a more granular
manner than the Order.137
However, certain of the requirements
in these paragraphs are linked to
substantive Exchange Act requirements
for which substituted compliance is not
available or a positive substituted
compliance would not be made under
the proposed Amended Order. In these
cases, a positive substituted compliance
determination would not be 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.138
134 See French Order, 86 FR 41650; UK Order, 86
FR 43361.
135 See paras. (a)(1) through (18) of Exchange Act
rule 18a–5.
136 See paras. (b)(1) through (14) of Exchange Act
rule 18a–6.
137 See para. (f)(1) of the proposed Amended
Order.
138 A positive preliminary substituted compliance
determination would not be made for the following
requirements of Exchange Act rule 18a–5 because
they are linked to a substantive Exchange Act
requirement for which the proposed Amended
Order would not provide substituted compliance:
(1) The portion of Exchange Act rule 18a–5(a)(9)
that relates to Exchange Act rule 18a–2 would be
subject to the Rule 18a–2 Exclusion; (2) 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, would be subject to the Rule 18a–4
Exclusion; (3) the portions of Exchange Act rules
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In addition, certain of the
requirements in Exchange Act rule 18a–
5 are fully or partially linked to
substantive Exchange Act requirements
where a preliminary positive substituted
compliance determination would be
made under the proposed Amended
Order. In these cases, substituted
compliance with the requirement in
Exchange Act rule 18a–5 would be
conditioned on the Covered Entity
applying substituted compliance to the
linked substantive Exchange Act
requirement.139
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 would be subject to the condition
that the Covered Entity applies
substituted compliance for Exchange
Act rule 18a–1 (i.e., the Rule 18a–1
Condition).140
In addition, the proposed Amended
Order would allow a Covered Entity to
apply substituted compliance on a
transaction-by-transaction basis to the
Commission’s recordkeeping
18a–5(a)(16) and (b)(12) that relate to Exchange Act
rule 15Fh–6 would be subject to the Rule 15Fh–6
Exclusion; (4) the portions of Exchange Act rules
18a–5(a)(17) and (b)(13) that relate to Exchange Act
rule 15Fh–4 would be subject to the Rule 15Fh–4
Exclusion; and (5) the portions of Exchange Act
rules 18a–5(a)(17) and (b)(13) that relate to
Exchange Act rule 15Fh–5 would be subject to the
15Fh–5 Exclusion.
139 Substituted compliance with the following
requirements of Exchange Act rule 18a–5 would be
conditioned on the Covered 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, would be
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, would be 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,
would be 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,
would be 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,
would be subject to the Rule 15Fk–1 Condition; (6)
Exchange Act rules 18a–5(a)(18)(i) and (ii) and
(b)(14)(i) and (ii) are linked to Exchange Act rule
15Fi–3 and, therefore, would be 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, would be subject to
the Rule 15Fi–4 Condition.
140 Substituted compliance with the requirements
of Exchange Act rules 18a–5(a)(1), (2), (3), (4), (5),
(7), (8), and (9) would be conditioned on the
Covered Entity applying substituted compliance to
Exchange Act rule 18a–1.
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requirements that are linked with the
counterparty protection requirements of
Exchange Act rule 15Fh–3.141 This
approach would align with the
proposed Amended Order allowing
Covered Entities to apply substituted
compliance on a transaction-bytransaction basis for the Commission’s
counterparty protection requirements.
Under the proposed Amended Order,
substituted compliance in connection
with the record making requirements of
Exchange Act rule 18a–5 would be
subject to the condition that the Covered
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’’).142 This proposed
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 EU and German
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 Exchange Act rule 18a–
5 at the request of Commission staff.
The objective would be 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 would assist the
Commission staff in reviewing the
information on the record.
The following table summarizes the
Commission’s preliminary 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 Amended Order that sets forth
the preliminary determination; (2) the
paragraph(s) of Exchange Act rule 18a–
5 to which the preliminary
determination applies; (3) a brief
description of the records required by
the paragraph(s); 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
the proposed Amended Order would
not provide substituted compliance.143
EXCHANGE ACT RULE 18a–5
[Record making]
Order 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) .............
(f)(1)(i)(H) .............
(a)(6) ........................
(a)(15) ......................
(a)(7) ........................
(b)(6) ........................
(b)(11) ......................
(b)(7) ........................
Memoranda of brokerage orders.
Memoranda of proprietary orders.
Confirmations, trade verification
(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) ......................
(f)(1)(i)(N) .............
(a)(18)(i) ...................
(a)(18)(ii) ..................
(a)(18)(iii) .................
(b)(14)(i) ...................
(b)(14)(ii) ..................
(b)(14)(iii) .................
(f)(1)(i)(O) .............
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Rule paragraph
141 See para. (f)(1)(ii)(B) of the proposed Amended
Order.
142 See para. (f)(1)(ii)(A) of the proposed
Amended Order. The Order includes this condition
for a Covered Entity with a prudential regular to
apply substituted compliance for Exchange Act rule
18a–5. The proposed Amended Order would extend
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Jkt 253001
Accountholder information ........
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.
Frm 00017
Format Condition.
18a–1 Condition for
Format Condition.
18a–1 Condition for
Format Condition.
18a–1 Condition for
Format Condition.
18a–1 Condition for
¶ (a)(3).
¶ (a)(4).
(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.
Portfolio compression ...............
Rule 15Fi–4 Condition.
Sfmt 4703
¶ (a)(2).
Rule 15Fi–2 Condition.
Portfolio reconciliation ..............
Fmt 4701
¶ (a)(1).
Rule 18a–1 Condition for ¶ (a)(5).
(1) Rule 15Fh–3 Condition.
(2) Rule 15Fk–1 Condition.
(3) Rule 15Fh–4 Exclusion.
(4) Rule 15Fh–5 Exclusion.
Rule 15Fi–3 Condition.
the scope of this condition to address Covered
Entities without a prudential regulator applying
substituted compliance for the requirements of
Exchange Act rule 18a–5.
143 The table does not include the proposed
conditions for applying substituted compliance to
Exchange Act rule 18a–5; namely that the Covered
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(1) SEC
(2) Rule
(1) SEC
(2) Rule
(1) SEC
(2) Rule
(1) SEC
(2) Rule
N/A.
Entity: (1) Must be subject to and comply with
specified requirements of foreign law; and (2) as
discussed below, must promptly furnish to a
representative of the Commission upon request an
English translation of a record. See para. (f)(8) of the
proposed Amended Order (setting forth the English
translation requirement).
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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 would not be
made because they are fully linked to
substantive Exchange Act requirements
for which the proposed Amended Order
would not provide substituted
compliance by listing in each row: (1)
The paragraph of the proposed
Amended Order that sets forth the
determination; (2) the paragraphs of
Exchange Act rule 18a–5 to which the
determination applies; (3) a brief
description of the records required by
the paragraphs; and (4) a brief
description of why the requirement is
excluded from substituted compliance.
EXCHANGE ACT RULE 18a–5
[Record making]
Order paragraph
(f)(1)(ii)(C) ............
(f)(1)(ii)(C) ............
(f)(1)(ii)(C) ............
Rule paragraph
(a)(13) ......................
(a)(14) ......................
(a)(16) ......................
(b)(9) ........................
(b)(10) ......................
(b)(12) ......................
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3. 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).144 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.
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
without a prudential regulator and SBS
Entities with a prudential regulator.145
The Order makes substituted
compliance available for the
requirements of these paragraphs
applicable to SBS Entities with a
prudential regulator. As discussed
below, the Commission is making a
preliminary positive substituted
compliance determination for many of
the requirements of these paragraphs
applicable to SBS Entities without a
prudential regulator. Further, the
Commission is making preliminary
positive substituted compliance
determinations for many of the
requirements of these paragraphs
applicable to SBS Entities with a
144 See
17 CFR 240.18a–6.
(a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a–6 apply to SBS Entities
without a prudential regulator. Paras. (a)(2), (b)(2),
(d)(2)(ii), and (d)(3)(ii) of Exchange Act rule 18a–
6 apply to SBS Entities with a prudential regulator.
Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act
rule 18a–6 apply to SBS Entities irrespective of
whether they have a prudential regulator.
145 Paras.
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Rule description
Possession or control records ..
Reserve computations ..............
Political contribution records ....
prudential regulator in a more granular
manner than the Order.
However, certain of these
requirements are fully or partially
linked to substantive Exchange Act
requirements for which a positive
substituted compliance determination
would not be made under the proposed
Amended Order. In these cases, a
positive substituted compliance
determination would not be made for
the linked requirement in Exchange Act
rule 18a–6.146
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 would be made under the
proposed Amended Order. In these
cases, substituted compliance with the
requirement in Exchange Act rule 18a–
6 would be conditioned on the Covered
Entity applying substituted compliance
146 A positive substituted compliance
determination would not be made for the following
requirements of Exchange Act rule 18a-6 because
they are linked to a substantive Exchange Act
requirement for which the proposed Amended
Order would not provide substituted compliance:
(1) The portion of Exchange Act rule 18a–6(b)(1)(v)
relating to Exchange Act rule 18a–2 would be
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, would be
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 would be 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, would be 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,
would be subject to the Rule 15Fh–4 Exclusion; (6)
Exchange Act rules 18a–6(b)(1)(xiii) and 18a–
6(b)(2)(viii) are fully linked to Exchange Act rule
15Fh–5 and, therefore, would be subject to the Rule
15Fh–5 Exclusion; (7) Exchange Act rule 18a–
6(b)(2)(v) is fully linked to Exchange Act rule 18a–
4 and, therefore, would be subject to the Rule 18a–
4 Exclusion; and (8) the portion of Exchange Act
rule 18a–6(c) relating to Form SBSE and its
variations would be subject to the Form SBSE
Exclusion.
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Exclusion
Fmt 4701
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Rule 18a–4 Exclusion.
Rule 18a–4 Exclusion.
Rule 15Fh–6 Exclusion.
to the linked substantive Exchange Act
requirement.147
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, under
the proposed Amended Order,
substituted compliance for these
requirements of Exchange Act rule 18a–
6 would be subject to the Rule 18a–1
Condition.148
Paragraph (e) of Exchange Act rule
18a–6 sets forth the requirements for
147 Substituted compliance with the following
requirements of Exchange Act rule 18a–6 would be
conditioned on the Covered 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, would be 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, would be 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,
would be 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, would be
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, would be 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, would be 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, would be
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, would be
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, would be
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, would
be subject to the Rule 15Fi–5 Condition.
148 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) would be
conditioned on the Covered Entity applying
substituted compliance to Exchange Act rule 18a–
1.
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preserving records electronically.
Paragraph (f) sets forth requirements for
when records are prepared or
maintained by a third party. The Order
makes substituted compliance available
for the requirements of paragraphs (e)
and (f) of Exchange Act rule 18a–6 if the
Covered Entity has a prudential
regulator. The proposed Amended
Order would extend this treatment to
Covered Entities without a prudential
regulator.149
Paragraph (g) of Exchange Act rule
18a–6 requires an SBS Entity to 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
Order does not make substituted
compliance available for the
requirements of paragraph (g) of
Exchange Act rule 18a–6 because there
is no comparable requirement in the EU
or Germany to produce these records to
a representative of the Commission. The
proposed Amended Order similarly
would not make substituted compliance
available for paragraph (g) of Exchange
Act rule 18a–6.
The following table summarizes the
Commission’s preliminary positive
46517
substituted compliance determinations
with respect to requirements of
Exchange Act rule 18a–6 by listing in
each row: (1) The paragraph of the
proposed Amended 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
the paragraph(s); 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
the proposed Amended Order would
not provide substituted compliance.150
EXCHANGE ACT RULE 18a–6
[Record preservation]
Order paragraph
(f)(2)(i)(A) .............
(f)(2)(i)(B) .............
(f)(2)(i)(C) .............
Rule description
Conditions and partial exclusions
(a)(2) ........................
(b)(2)(i) .....................
..................................
6 year record preservation .......
3 year record preservation .......
Bank records, bills ....................
N/A.
N/A.
Rule 18a–1 Condition.
(f)(2)(i)(D) .............
(f)(2)(i)(E) .............
(a)(1) ........................
(b)(1)(i) .....................
(b)(1)(ii) ....................
(b)(1)(iii) ...................
(b)(1)(iv) ...................
(b)(1)(v) ....................
(b)(2)(ii) ....................
..................................
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) ...................
..................................
Account documents ..................
Written agreements ..................
Information supporting financial
reports.
(f)(2)(i)(I) ...............
(b)(1)(ix) ...................
..................................
(f)(2)(i)(J) ..............
(f)(2)(i)(K) .............
(b)(1)(x) ....................
(b)(1)(xii) ..................
..................................
(b)(2)(vii) ..................
Rule 15c3–4 risk management
records.
Credit risk determinations .........
Business conduct standard
records.
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–4 Exclusion for
¶ (b)(1)(viii)(L).
(3) Rule 18a–2 Exclusion for
¶ (b)(1)(viii)(M).
Rule 18a–1 Condition.
(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 ...............
Form SBSE Exclusion.
Associated person’s employment application.
N/A.
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) .............
(f)(2)(i)(R) .............
(e)
(f)
Electronic storage system ........
Third-party recordkeeper ..........
N/A.
N/A.
The following table summarizes the
Commission’s preliminary
determinations with respect to
requirements of Exchange Act rule 18a–
6 for which a positive substituted
compliance determination would not be
made because they are fully linked to
substantive Exchange Act requirements
for which the proposed Amended Order
would not provide substituted
compliance by listing in each row: (1)
The paragraph of the proposed
Amended Order that sets forth the
determination; (2) the paragraph(s) of
Exchange Act rule 18a–6 to which the
149 See paras. (f)(2)(i)(Q) and (R) of the proposed
Amended Order.
150 The table does not include the proposed
conditions for applying substituted compliance to
Exchange Act rule 18a–6; namely that the Covered
Entity: (1) Must be subject to and complies with the
requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon
request an English translation of a record. See para.
(f)(8) of the proposed Amended Order (setting forth
the English translation requirement).
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determination applies; (3) a brief
description of the records required by
the paragraph(s); and (4) a brief
description of why the requirement is
excluded from substituted compliance.
EXCHANGE ACT RULE 18a–6
[Preservation]
Order paragraph
Rule paragraph
(f)(2)(ii) .................
(f)(2)(i)(H) .............
(b)(1)(xi) ...................
..................................
(b)(2)(vi) ...................
(b)(2)(v) ....................
(f)(2)(ii) .................
(b)(1)(xiii) .................
(b)(2)(viii) .................
4. Exchange Act Rule 18a–7
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Rule description
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 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.
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.151 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.
Paragraph (a)(2) of Exchange Act rule
18a–7 requires SBS Entities with a
prudential regulator to file the FOCUS
Report Part IIC on a quarterly basis. The
151 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 Act Release No. 88866 (May
14, 2020).
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Regulation SBSR information ...
Information supporting financial
reports.
Special entity documents .........
Order provides substituted compliance
for this requirement 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 Germany
(‘‘German GAAP Condition’’).152 The
proposed Amended Order would
continue to provide Covered Entities
with a prudential regulator substituted
compliance for paragraph (a)(2) of
Exchange Act rule 18a–7, subject to the
Manner and Format and German GAAP
Conditions.153 The Commission
continues to believe 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.154 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
152 Under the Order, Covered Entities with a
prudential regulator must 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 Covered Entity in preparing
publicly available or available to be issued general
purpose financial statements in Germany.
153 See para. (f)(3)(i) of the proposed Amended
Order.
154 In addition to the Order, the Manner and
Format condition is included in the French and UK
Orders. See French Order, 86 FR 41651; UK Order,
86 FR 43361–62.
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Regulation SBSR Exclusion.
Rule 18a–4 Exclusion.
(1) Rule 15Fh–4 Exclusion.
(2) Rule 15Fh–5 Exclusion.
the information input into the form to
be the same information the SBS Entity
reports to EU and German authorities.
Paragraph (a)(1) of Exchange Act rule
18a–7 requires SBS Entities without a
prudential regulator to file the FOCUS
Report Part II on a monthly basis. The
proposed Amended Order would
provide Covered Entities without a
prudential regulator substituted
compliance for paragraph (a)(1) of
Exchange Act rule 18a–7 subject to the
Manner and Format and German GAAP
conditions.155 However, there would
two additional conditions. First, for the
reasons discussed above, the Covered
Entity would need to apply substituted
compliance for Exchange Act Rule 18a–
1 (i.e., substituted compliance would be
subject to the Rule 18a–1 Condition).156
Second, the Covered Entity would need
to apply substituted compliance with
respect to Exchange Act rule 18a–
6(b)(1)(viii) (a record preservation
requirement) (‘‘Rule 18a–6(b)(1)(viii)
Condition’’).157 This record preservation
requirement is directly linked to the
financial and operational reporting
requirements of Exchange Act rule 18a–
7(a)(1).
Paragraph (a)(3) of Exchange Act rule
18a–7 requires SBS Entities without a
prudential regulator that 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.158
Paragraph (b) of Exchange Act rule 18a–
7 requires SBS Entities that are not
prudentially regulated to make certain
financial information available on their
155 See para. (f)(3)(i) of the proposed Amended
Order.
156 See para. (f)(3)(i)(C) of the proposed Amended
Order. See part VII.B.1, supra (discussing how
certain recordkeeping and reporting requirements
are expressly linked to or important for examining
compliance with Rule 18a–1 condition).
157 See para. (f)(3)(i)(D) of the proposed Amended
Order.
158 See 17 CFR 240.18a–7(a)(3).
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websites.159 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.160 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.161 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.162
The Commission preliminarily is
making a positive substituted
compliance determination for
paragraphs (b) through (j) of Exchange
Act rule 18a–7. As discussed below,
substituted compliance with respect to
these paragraphs of Exchange Act rule
18a–7 would be subject to certain
conditions and limitations.
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
would be made under the proposed
Amended Order. In these cases,
substituted compliance with the
requirement in Exchange Act rule 18a–
7 would be conditioned on the Covered
Entity applying substituted compliance
to the linked substantive Exchange Act
requirement.163
Second, under the proposed
Amended 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 would be subject to six
conditions.164 The first condition would
159 See
17 CFR 240.18a–7(b).
17 CFR 240.18a–7(c) through (h).
161 See 17 CFR 240.18a–7(i).
162 See 17 CFR 240.18a–7(i).
163 Substituted compliance with the following
requirements of Exchange Act rule 18a–7 would be
conditioned on the Covered Entity applying
substituted compliance to the linked substantive
Exchange Act requirement: (1) Exchange Act rule
18a–7(a)(1) is linked to Exchange Act rules 18a–1
and 18a–6(b)(1)(viii) and, therefore, would be
subject to the Rule 18a–1 Condition and the Rule
18a–6(b)(1)(viii) Condition; (2) Exchange Act rule
18a–7(a)(3) is linked to Exchange Act rule 18a–1
and, therefore, would be subject to the Rule 18a–
1 Condition; (3) Exchange Act rule 18a–7(b) is
linked to Exchange Act rule 18a–6(b)(1)(viii) and,
therefore, would be subject to the Rule 18a–
6(b)(1)(viii) Condition; and (4) Exchange Act rules
18a–7(c), (d), (e), (f), (g) and (h) taken as a whole
are linked to Exchange Act rules 18a–1 and 18a–
6(b)(1)(viii) and, therefore, would be subject to the
Rule 18a–1 Condition and the Rule 18a–6(b)(1)(viii)
Condition.
164 See para. (f)(3)(iv)(B) to the proposed
Amended Order.
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160 See
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be that the Covered Entity
simultaneously sends a copy of the
financial statements the Covered Entity
is required to file with EU or German
authorities, 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 EU and German
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 would be to provide the
Commission with the financial
statements and report to more
effectively supervise and monitor
Covered Entities.
The second condition would be that
the Covered Entity include 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
Covered 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 would be that the
Covered 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 EU and German 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 would provide that the report of
the independent public accountant may
be prepared in accordance with
generally accepted auditing standards
(‘‘GAAS’’) in Germany that are used to
perform audit and attestation services
and the accountant complies with
German independence requirements.
According to the BaFin Application,
German laws only require certain
investment firms (depending on their
size) to have their financial statements
audited, so this condition would be
designed to ensure 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 would be that a
Covered Entity that is a security-based
swap dealer would need to file the
reports required by Exchange Act rule
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46519
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’’).165
These reports are designed to provide
the Commission with information about
an SBS Entity’s compliance with Rule
18a–4. Substituted compliance is not
available 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
would need to file a limited compliance
report that includes the statements
relating to Rule 18a–4 166 or an
exemption report if the Covered Entity
claims an exemption from Rule 18a–4.
The Covered Entity also would need to
file the report of an independent public
accountant covering the limited
compliance report or exemption report.
The fourth condition further would
provide that the report of the
independent public accountant may be
prepared in accordance with GAAS in
Germany that are used to perform audit
and attestation services and the
accountant complies with German
independence requirements.
The fifth condition would be that a
Covered Entity that is a major securitybased swap participant would need to
file 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–2 for which the
proposed Amended Order would not
provide substituted compliance. These
supporting schedules are the
Computation of Tangible Net Worth.
The sixth condition would be that a
Covered Entity that is a security-based
swap dealer would need to file the
supporting schedules required by
Exchange Act rule 18a–7(c)(1)(i)(A) and
(C) addressing the statements identified
165 The Commission views this as a limited
exclusion from the availability of substituted
compliance for these requirements because the
proposed Amended Order would permit these
reports relating Exchange Act rule 18a–4 to be
included with the German regulatory reports the
Covered Entities will file with the Commission and
because the reports could be prepared in
accordance with German GAAS (as discussed
below).
166 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 paras. (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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in Exchange Act rules 18a–7(c)(2)(ii)
and (iii) that relate to Exchange Act rule
18a–4 and 18a–4a if the Covered Entity
is not exempt from Exchange Act rule
18a–4 (i.e., the 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.
Substituted compliance for Exchange
Act rule 18a–4 is not available.
The following table summarizes the
Commission’s proposed preliminary
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 Amended
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 the paragraph(s);
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
the proposed Amended Order would
not provide substituted compliance.167
EXCHANGE ACT RULE 18a–7
[Reporting]
Order paragraph
Rule paragraph
Conditions and partial exclusions
(1) Manner and Format Condition.
(2) German GAAP Condition.
(3) Rule 18a–1 Condition for ¶ (a)(1).
(4) Rule 18a–6(b)(1)(viii) 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 .......
5. Exchange Act Rule 18a–8
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Rule description
Exchange Act rule 18a–8 requires SBS
Entities to send notifications to the
Commission if certain adverse events
occur.168 The Order provides
substituted compliance for the
requirements of Exchange Act rule 18a–
8 applicable to SBS Entities with a
prudential regulator (subject to
conditions and limitations). In
particular, the requirements of: (1)
Paragraph (c) of Exchange Act rule 18a–
8 that an SBS Entity that is a securitybased swap dealer and that files a notice
of adjustment to its reported capital
category with a U.S. prudential
regulator must transmit a copy of the
notice to the Commission; (2) paragraph
(d) of the rule that an SBS Entity
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 steps being taken to correct
the situation; (3) and paragraph (h) of
the rule setting forth how to make the
167 The chart below does not include the
proposed conditions for applying substituted
compliance to Exchange Act rule 18a–7; namely
that the Covered Entity: (1) Must be subject to and
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(1) Rule 18a–6(b)(1)(viii) Condition.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
SEC Filing Condition.
Contact Information Condition.
Accountant’s Report Condition.
Rule 18a–4 Limited Exclusion.
Supporting Schedules Condition.
Rule 18a–1 Condition.
Rule 18a–6(b)(1)(viii) Condition.
notifications required by Exchange Act
18a–8.
Under the Order, substituted
compliance in connection with the
notification requirements of Exchange
Act rule 18a–8 are subject to the
conditions that the Covered Entity: (1)
Simultaneously sends a copy of any
notice required to be sent by EU or
German notification laws to the
Commission in the manner specified on
the Commission’s website (i.e., the ‘‘SEC
Filing Condition’’); 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 these
conditions is to alert the Commission to
financial or operational problems that
could adversely affect the firm—the
objective of Exchange Act rule 18a–8. In
addition, the Order does not provide
substituted compliance for paragraph (g)
of Exchange Act rule 18a–8 that an SBS
Entity that is a security-based swap
dealer 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. Substituted
compliance is not available for
Exchange Act rule 18a–4.
The proposed Amended Order would
continue to provide Covered Entities
with a prudential regulator substituted
compliance for the notification
requirements of Exchange Act rule 18a–
8 discussed above subject to the
conditions and limitations. However,
the substituted compliance
determinations would be made on a
more granular basis. Further, the
proposed Amended Order would
provide Covered Entities without a
prudential regulator substituted
compliance for these notification
requirements (also on a granular basis),
subject to the SEC Filing and Contact
Information Conditions. The proposed
Amended Order also would apply the
limitation with respect to the
notification requirements linked to
Exchange Act rule 18a–4 to Covered
Entities without a prudential regulator.
comply with specified requirements of foreign law;
and (2) must promptly furnish to a representative
of the Commission upon request an English
translation of a report. See para. (f)(8) of the
proposed Amended Order (setting forth the English
translation requirement).
168 See 17 CFR 240.18a–8.
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Exchange Act rule 18a–8 has
notification requirements that apply
exclusively to Covered Entities without
a prudential regulator. In particular,
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)
of 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–
2. 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 the
steps being taken to correct the
situation.
The Commission is preliminarily
making a positive substituted
compliance determination for a number
of the notification requirements set forth
in these paragraphs, subject to the SEC
Filing and Contact Information
Conditions. However, certain of these
requirements are linked to substantive
Exchange Act requirements for which
the proposed Amended Order would
not provide substituted compliance. In
these cases, a positive substituted
compliance determination would not be
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.169
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 would be made under the
proposed Amended Order. In these
46521
cases, substituted compliance with the
requirement in Exchange Act rule 18a–
8 would be conditioned on the SBS
Entity applying substituted compliance
to the linked substantive Exchange Act
requirement.170
The following table summarizes the
Commission’s proposed preliminary
positive substituted compliance
determinations with respect to
requirements of Exchange Act rule 18a–
8 by listing in each row: (1) The
paragraph of the proposed Amended
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
notifications required by the
paragraph(s); 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
the proposed Amended Order would
not provide substituted compliance.171
EXCHANGE ACT RULE 18a–8
[Notification]
Order paragraph
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(f)(4)(i)(A) .............
Rule paragraph
Rule description
Conditions and partial exclusions
..................................
Capital notices ..........................
(1) Rule 18a–1 Condition.
(2) SEC Filing Condition.
(3) Contact Information Condition.
(f)(4)(i)(B) .............
(a)(1)(i) .....................
(a)(1)(ii)
(b)(1)
(b)(2)
(b)(4)
(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)
(2)
(1)
(2)
(3)
(1)
(2)
(3)
(4)
(5)
SEC Filing Condition.
Contact Information Condition.
Rule 18a–5 Condition.
SEC Filing Condition.
Contact Information Condition.
Rule 18a–1 Condition.
Rule 18a–2 Exclusion.
Rule 18a–4 Limited Exclusion.
SEC Filing Condition.
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 would not be
made because they are fully linked to
substantive Exchange Act requirements
for which the proposed Amended Order
would not provide substituted
compliance by listing in each row: (1)
The paragraph of the proposed
Amended Order that sets forth the
determination; (2) the paragraph(s) of
Exchange Act rule 18a–8 to which the
169 A positive substituted compliance
determination would not be 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,
would be 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 would be 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 would be 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, would be subject to the Rule 18a–4
Exclusion.
170 Substituted compliance with the following
requirements of Exchange Act rule 18a–8 would be
conditioned on the Covered 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,
would be subject to the Rule 18a–1 Condition; and
(2) Exchange Act rule 18a–8(d) is linked to
Exchange Act rule 18a–5 and, therefore, would be
subject to the Rule 18a–5 Condition with respect to
any category of records required to made and kept
current by that rule. With respect to Exchange Act
rule 18a–8(d), 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.
171 The chart below does not include the
proposed conditions for applying substituted
compliance to Exchange Act rule 18a–8; namely
that the Covered Entity: (1) Must be subject to and
comply with specified requirements of foreign law;
and (2) must promptly furnish to a representative
of the Commission upon request an English
translation of a notification. See para. (f)(8) of the
proposed Amended Order (setting forth the English
translation requirement).
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determination applies; (3) a brief
description of the records required by
the paragraph(s); and (4) the exclusion
from substituted compliance.
EXCHANGE ACT RULE 18a–8
[Notification]
Order paragraph
(f)(4)(ii)(B) .............
(f)(4)(ii)(C) ............
Rule paragraph
(a)(2) ........................
(g) ............................
(b)(3) ........................
7. Exchange Act Section 15F(g)
Exchange Act Section 15F(g) requires
SBS Entities to maintain daily trading
records.175 The Commission
preliminarily believes EU and German
laws produce a comparable result in
terms of daily trading recordkeeping
requirements.176 Accordingly, the
Commission preliminarily is making a
positive substituted compliance
determination for the self-executing
requirements in this statute.177
8. Examination and Production of
Records
The 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
17 CFR 240.18a–9.
EMIR article 11(1)(b); EMIR RTS articles
12 and 13; WpHG section 84; HGB sections 316 and
325; and WpHG section 89 (1) sentence 1 no. 1.
174 See para. (f)(5) to the proposed Amended
Order.
175 See 15 U.S.C. 78o–10(g).
176 See WpHG section 83 para. 1; and MiFID Org
Reg article 21(1)(f), 21(4), and 72(1)
177 See para. (f)(6) to the proposed Amended
Order.
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173 See
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Exclusion
MSBSP capital notices .............
Rule 18a–2 Exclusion.
I .................................. Reserve account notices .......... Rule 18a–4 Exclusion.
6. Exchange Act Rule 18a–9
Exchange Act rule 18a–9 requires SBS
Entities that are security-based swap
dealers without 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.172 The Commission
preliminarily believes EU and German
laws produce a comparable result in
terms of securities count
requirements.173 Accordingly, the
Commission preliminarily is making a
positive substituted compliance
determination for this rule.174
172 See
Rule description
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.178 The proposed
Amended Order similarly would not
extend substituted compliance to these
inspection and production
requirements.179
Consequently, 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.
Covered Entities may make, keep, and
preserve records, subject to the
conditions described above, in a manner
prescribed by applicable EU and
German requirements. BaFin 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 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 operating under
the proposed Amended Order would
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
178 See Exchange Act section 15F(f); Exchange Act
rule 18a–6(g). The French and UK Orders do not
extend substituted compliance to these
requirements. See French Order, 86 FR 41650; UK
Order, 86 FR 43361.
179 See para. (f)(7) to the proposed Amended
Order.
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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.
9. English Translations
The proposed Amended Order
provides that to the extent documents
are not prepared in the English
language, Covered Entities would need
to 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 or the German
Order.180 This proposed condition
would be designed to addresses
difficulties that Commission
examinations staff would have
examining Covered Entities that furnish
documents in a foreign language. The
English translations would need to be
provided promptly. This condition is
included in the French and UK
Orders.181
VIII. Additional Considerations
Regarding Supervisory and
Enforcement Effectiveness Related to
Capital and Margin
A. General Considerations
Exchange Act rule 3a71–6 provides
that the Commission’s assessment of the
comparability of the requirements of the
foreign financial regulatory system take
into account ‘‘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
180 See para. (f)(8) to the proposed Amended
Order.
181 See French Order, 86 FR 41651; UK Order, 86
FR 43361.
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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.182
In the substituted compliance Order
for Germany the Commission concluded
that ‘‘the relevant supervisory and
enforcement considerations in Germany
are consistent with substituted
compliance.’’ 183 In its amended
application, BaFin provided the
Commission with additional
information on the supervision and
enforcement framework for compliance
with capital and margin requirements
applicable to significant credit
institutions. For purposes of the
supervision of capital and margin by
Germany, the Commission preliminary
believes that the relevant supervisory
and enforcement considerations for
capital and margin in Germany are
consistent with substituted compliance.
In preliminarily concluding that the
relevant supervisory and enforcement
considerations are consistent with
substituted compliance, the
Commission has considered the
supervision and enforcement framework
described in the Order as well as the
following factors:184
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B. Supervisory and Enforcement
Framework in Germany
The ECB, through its single
supervisory mechanism (‘‘SSM’’) and
executed by joint supervisory teams
(‘‘JSTs’’), supervises firms for
compliance with the CRD and CRR,
including all capital requirements. The
JSTs comprise of ECB staff, BaFin staff,
and staff from other countries in the EU
where the significant institution has a
subsidiary or branch.185 For each firm,
the JST conducts a Supervisory Review
and Evaluation Process (‘‘SREP’’), which
measures the risks for each bank. The
SREP shows where a firm stands in
terms of capital requirements and the
way it handles risks. To develop the
182 See generally Business Conduct Adopting
Release, 81 FR 30079.
183 Order, 85 FR 84697.
184 The factors described in this section are in
addition to the factors described in the German
Substituted Compliance Notice and Proposed
Order. See Exchange Act Release No. 90378 (Nov.
9, 2020), 85 FR 72726, 72739–40 (Nov. 13, 2020)
(‘‘German Substituted Compliance Notice and
Proposed Order’’).
185 Information on the ECB supervision was
obtained from the SSM Supervisory Manual, March
2018, available at: https://
www.bankingsupervision.europa.eu/ecb/pub/pdf/
ssm.supervisorymanual201803.
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SREP, supervisors review the
sustainability of each firm’s business
model, governance and risk
management by the firm, capital risks
(credit, market, operational, rate in the
banking book and equity risks), and
liquidity and funding risks. Once the
SREP is developed, the firm will receive
a letter setting forth specific measures
that must be implemented the following
year based on the firm’s individual
profile. For example, the SREP may ask
the firm to hold additional capital or set
forth qualitative requirements related to
the firm’s governance structure or
management. After these supervisory
measures are imposed, the JST will
monitor the credit institutions to ensure
that it establishes compliance with the
regulatory framework and supervisory
measures taken. If a credit institution
does not comply with such measures,
additional actions are considered.
Available actions for the JST range from
informal communication with the
supervised entity to enforcement
measures or sanctions.
Misconduct detected by the JSTs is
addressed primarily by the ECB. The
ECB has the power to enforce violations
and to impose fines on supervised
entities for breaches of directly
applicable European Union law. The
ECB can also ask national competent
authorities (such as BaFin) to open
proceedings that may lead to the
imposition of certain pecuniary and
non-pecuniary penalties.
IX. Request for Comment
A. Nonbank Capital and Margin
1. Capital
The Commission further requests
comment regarding the comparability
analysis of EU and German capital
requirements with Exchange Act capital
requirements for security-based swap
dealers without a prudential regulator.
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 EU and German 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, as a
supplement or alternative to those in the
proposed Amended Order?
The Commission requests comment
on the proposed capital condition that
is designed to bridge the gap between
the Basel capital standard and the net
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liquid assets test imposed by Exchange
Act rule 18a–1. Under this condition, a
Covered Entity would need to: (1)
Maintain liquid assets (as defined in the
proposed condition) that have an
aggregate market value that exceeds the
amount of the Covered Entity’s total
liabilities by at least $100 million before
applying the deduction specified in the
proposed condition, and by at least $20
million after applying the deduction
specified in the proposed condition; (2)
make and preserve for three years a
quarterly record that: (a) Identifies and
values the liquid assets maintained as
defined in the proposed condition, (b)
compares the amount of the aggregate
value the liquid assets maintained
pursuant to the proposed condition to
the amount of the Covered Entity’s total
liabilities and shows the amount of the
difference between the two amounts
(‘‘the excess liquid assets amount’’), and
(c) shows the amount of the deduction
specified in the proposed condition and
the amount that deduction reduces the
excess liquid assets amount; (3) notify
the Commission in writing within 24
hours in the manner specified on the
Commission’s website if the Covered
Entity fails to meet the requirements of
the proposed condition and include in
the notice the contact information of an
individual who can provide further
information about the failure to meet the
requirements; and (4) include 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.
The Commission requests comment on
each prong of this condition. Please
identify any regulatory or operational
issues in connection with adhering to
each prong of this condition. The
Commission requests comment on how
this proposed condition would compare
to the liquidity requirements a Covered
Entity is subject to under the Basel
capital standard.
For the purposes of this additional
capital condition, ‘‘liquid assets’’ would
be defined as: (1) Cash and cash
equivalents; (2) collateralized
agreements; (3) customer and other
trading related receivables; (4) trading
and financial assets; and (5) initial
margin posted by the Covered Entity to
a counterparty or third-party, subject to
certain conditions. Are these definitions
of the categories of liquid assets
sufficiently clear? For example, should
the definitions provide more detail
about the types of assets that could be
included within a category? If so, please
explain. Should the condition use
different definitions? If so, please
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explain why and suggest an alternative
definition.
For the purposes of this additional
capital condition, the deduction
(haircut) would be determined by
dividing the amount of the Covered
Entity’s risk-weighted assets by 12.5
(i.e., the reciprocal of 8%). Is this an
appropriate method of calculating the
deduction? If not, explain why and
suggest an alternative method. Would
this deduction be comparable to the
haircuts under Exchange Act rule 18a–
1? If not, explain why. More generally,
is the term ‘‘risk-weighted assets’’
understood by market participants? If
not, please explain why.
Under this proposed capital
condition, the Covered Entity would be
required to maintain an excess of liquid
assets over total liabilities that equals or
exceeds $100 million before the
deduction (derived from the firm’s riskweighted assets) and $20 million after
the deduction. Is ‘‘total liabilities’’ an
appropriate metric for this condition?
The $100 million requirement is
modeled on the minimum tentative net
capital requirement of Exchange Act
rule 18a–1 and $20 million requirement
is modeled on the minimum fixeddollar net capital requirement of the
rule. Are these appropriate requirements
for the proposed condition? If not,
explain why and suggest alternative
requirements. For example, should the
amount before applying the proposed
deduction be $50, $75, $125, or $150
million or some other amount, or should
the amount after the proposed
deductions be $10, $30, or $50 million
or some other amount? If so, explain
why.
The Commission requests comment
on the proposed capital condition that
would require the Covered Entity to
apply substituted compliance with
respect to Exchange Act rules 18a–
5(a)(9) (a record making requirement),
18a–6(b)(1)(x) (a record preservation
requirement), and 18a–8(a)(1)(i),
(a)(1)(ii), (b)(1), (b)(2), and (b)(4)
(notification requirements). Is this
proposed capital condition appropriate?
If not, explain why. Would the proposed
capital condition provide clarity as to
the Covered Entity’s obligations under
these recordkeeping and notification
requirements when applying substituted
compliance with respect to Exchange
Act rule 18a–3? If not, please explain
why.
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 Germany and capital
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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
compared to SBS Entities complying
with Exchange Act rule 18a–1? Please
describe the competitive advantages or
disadvantages and explain their impact.
Please identify and describe any
potential impacts the proposed capital
conditions would have on the way
Covered Entities currently conduct their
business.
The first proposed capital condition
for substituted compliance with
Exchange Act rule 18a–1 requires the
Covered Entity to be subject to and
comply with specific EU and German
capital and liquidity requirements.
Under Articles 7 and 8 of the CRR,
supervisory authorities can grant a
Covered Entity a waiver from these EU
and German capital and/or liquidity
requirements if its parent is subject to
them. The Bafin’s Amended Application
requests substituted compliance for
Covered Entities operating pursuant to
these waivers. The proposed Amended
Order requires the Covered Entity (i.e.,
the registrant itself) to be subject to the
specified EU and German capital and
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liquidity requirements. Accordingly, it
would not provide substituted
compliance for Exchange Act rule 18a–
1 to a Covered Entity operating pursuant
to these waivers.
However, the Commission requests
comment on whether a positive
substituted compliance determination
(subject to conditions and limitations)
could be made with respect to a Covered
Entity operating pursuant to a waiver
from compliance with the Basel capital
and liquidity requirements when its
immediate holding company is subject
to those requirements. Are there
additional conditions that could be
imposed on a Covered Entity operating
pursuant to these waivers that could
produce a comparable regulatory
outcome to Exchange Act rule 18a–1? If
so, describe the conditions and explain
how they would produce a comparable
regulatory outcome. For example,
should the Commission consider
imposing additional conditions on
either the Covered Entity and/or its
immediate holding company? In this
regard, should the Covered Entity and
its immediate holding company be
subject to the proposed four-pronged
capital condition that is designed to
bridge the gap between the Basel capital
standard and the net liquid assets test of
Exchange Act rule 18a–1? Further,
should substituted compliance be
conditioned on the Covered Entity
maintaining a pool of liquid and
unencumbered assets to meet potential
cash outflows over a 30-day (or longer
or shorter) stress period? Should the
pool of unencumbered liquid assets be
sized based on an alternative metric?
Should the Commission further
condition substituted compliance in this
fact pattern on the Covered Entity
complying with paragraph (f) under
Exchange Act rule 18a–4 (i.e., the
exemption from segregation
requirements) in order to limit its
business activities? Are there other
limits that should be placed on the
Covered Entity’s activities that would
mitigate the risk of the firm not being
directly subject to EU and German
capital and liquidity requirements? If so,
please describe them.
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 the new
prudential rules for investment firms in
the EU and Germany. If so, should the
Commission make a positive substituted
compliance determination with respect
to these capital requirements? If so,
explain how they are comparable to the
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capital requirements of Exchange Act
rule 18a–1.
Commenters also are invited to
address any differences between
German requirements and the French
and UK requirements that formed the
basis for the Commission’s conditional
grants of substituted compliance for
capital in the French and UK Orders.186
Are there reasons to take a different
approach with respect to substituted
compliance in a final German amended
order than was taken in the French and
UK Orders with respect to capital? If so,
identify the differences and explain why
they should result in a different
approach.
The Commission further requests
comment on whether there would be
major security-based swap participants
without a prudential regulator in
Germany that would seek 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 EU and
German margin requirements are
comparable to Exchange Act rule 18a–
3, subject to additional conditions to
address differences in counterparty
exceptions. Commenters particularly are
invited to address the basis for
substituted compliance in connection
with those requirements. Does EU and
German 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, as a supplement or
alternative to those in the proposed
Amended Order?
The Commission further requests
comment on whether the haircuts
required under the 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 on
whether the standardized grid for
computing initial margin under the
EMIR Margin RTS is comparable to the
standardized approach for computing
initial margin under paragraph (d)(1) of
Exchange Act rule 18a–3.
The Commission requests comment
and supporting data on the proposed
margin conditions that are designed to
address differences in the counterparty
exceptions between Exchange Act rule
18a–3 and German and EU margin
186 See French Order, 86 FR 41658–59; UK Order,
86 FR 43371–71.
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requirements. The first proposed
additional margin condition would
require a Covered Entity to collect
variation margin, as defined in the EMIR
Margin RTS, from a counterparty with
respect to a transaction in a non-cleared
security-based swap, unless the
counterparty would qualify for an
exception under Exchange Act rule 18a–
3 from the requirement to deliver
variation margin to the Covered Entity.
The second proposed additional margin
condition would require a Covered
Entity to collect initial margin, as
defined in the EMIR Margin RTS, from
a counterparty with respect to a
transaction in a non-cleared securitybased swap, unless the counterparty
would qualify for an exception under
Exchange Act rule 18a–3 from the
requirement to deliver initial margin to
the Covered Entity. Do these proposed
margin conditions accomplish the goal
of closing the gap between the
counterparty exceptions of Exchange
Act rule 18a–3 and the EU and German
margin requirements? If so, please
explain. If not, please explain why.
Would the proposed margin conditions
impact any particular type of
counterparty more than another? If so,
please explain. Does the fact that the EU
and German margin requirements have
a final phase-in date for implementation
of initial margin requirements of
September 1, 2022 impact the ability of
Covered Entities to implement the
proposed margin conditions? If so,
please explain.
The Commission also requests
comment on the proposed margin
condition that a Covered Entity apply
substituted compliance for the
requirements of Exchange Act rule 18a–
5(a)(12) (a record making requirement).
Is this proposed margin condition
appropriate? If not, explain why. Would
the proposed margin condition provide
clarity as to the Covered Entity’s
obligations under this record making
requirement when applying substituted
compliance with respect to Exchange
Act rule 18a–3? If not, please explain
why.
The Commission requests comment
on the potential benefits and costs of the
potential margin conditions. Would the
conditions promote comparable
regulatory outcomes between the margin
requirements applied to Covered
Entities in the EU and Germany and the
margin requirements of Exchange Act
rule 18a–3? If so, explain why. If not,
explain why not. The Commission is
mindful that compliance with the
proposed margin conditions would
require Covered Entities applying
substituted compliance to Exchange Act
rule 18a–3 to supplement their existing
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margin processes and documentation, as
well as to incur additional time and cost
burdens to implement the potential
margin 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 margin conditions.
The Commission requests comment
on the potential impacts the margin
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–3 and
SBS Entities that will comply with
Exchange Act rule 18a–3? Would the
conditions eliminate or mitigate
potential competitive advantages that
Covered Entities complying with EU
and German margin requirements might
have over SBS Entities complying with
the margin requirements of Exchange
Act rule 18a–3? Alternatively, would
the proposed margin conditions create
competitive disadvantages for Covered
Entities applying substituted
compliance with respect to Exchange
Act rule 18a–3 compared to SBS Entities
complying with Exchange Act rule 18a–
3? Please describe the competitive
advantages or disadvantages and
explain their impact.
Please identify and describe any
potential impacts on the way Covered
Entities currently conduct their business
with respect to implementing the
proposed margin conditions.
Commenters also are invited to
address any differences between
German requirements and the French
and UK requirements that formed the
basis for the Commission’s conditional
grants of substituted compliance for
margin in the French and UK Orders.187
Are there reasons to take a different
approach with respect to substituted
compliance in a final German amended
order than was taken in the French and
UK Orders with respect to margin? If so,
identify the differences and explain why
they should result in a different
approach.
B. Trade Acknowledgment and
Verification, and Trading Relationship
Documentation
Commenters are invited to address all
aspects of the proposed amendments
related to trade acknowledgment and
187 See French Order, 86 FR 41659; UK Order, 86
FR 43372.
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verification, and trading relationship
documentation. In this regard
commenters are invited to address the
efficacy of the proposed EMIR-related
general conditions. Commenters also are
invited to address the proposed removal
of MiFID conditions in connection with
substituted compliance for the trade
acknowledgment and verification
requirements and trading relationship
documentation requirements.
C. Recordkeeping, Reporting,
Notification, and Securities Count
Requirements
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
applicable to SBS Entities without a
prudential regulator as well as the
requirements of Exchange Act section
15F(g) applicable to all SBS Entities.
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. Do EU and German
requirements 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
EU and German 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 EU and
German laws cited for the determination
result in a comparable regulatory
outcome; (2) are there additional or
alternative EU and German laws that
should be cited to achieve a comparable
regulatory outcome; and (3) are any of
the EU and German laws cited for the
determination 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
a Covered Entity without a prudential
regulator 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). Do the
relevant EU and German laws require
Covered Entities without a prudential
regulator to retain the data elements
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necessary to create the records required
by these rules? If not, please identify
which data elements are not preserved
pursuant to the relevant EU and German
laws. Further, how burdensome would
it be for a Covered Entity without a
prudential regulator 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 Covered Entities without a
prudential regulator in the Germany
produce this information to EU and
German authorities? How do those
formats differ from the formats required
by Exchange Act rules 18a–5(a)(1), (2),
(3), (4), and (7)?
Is it appropriate to structure the
Commission’s substituted compliance
determinations in the proposed
Amended Order with respect to the
recordkeeping, reporting and
notification rules to provide Covered
Entities with greater flexibility to select
which distinct requirements within the
broader recordkeeping, reporting, and
notification 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
preliminary positive substituted
compliance determination would not be
made under the proposed Amended
Order. In these cases, should the
Commission not make a positive
substituted compliance determination
for the fully linked requirement in the
recordkeeping, reporting, and
notification rules or to the portion of the
requirement that is linked to a
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substantive Exchange Act requirement?
Explain why or why not.
Certain of the requirements in the
Commission’s recordkeeping, reporting,
and notification rules are linked to
substantive Exchange Act requirements
where a preliminary positive substituted
compliance determination would be
made under the proposed Amended
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.
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 would 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 without a prudential regulator
filing financial and operational
information with the Commission in the
manner and format specified by the
Commission by order or rule. In
addition to requesting comment about
how Covered Entities without a
prudential regulator should meet the
Manner and Format Condition, the
Commission continues to seek comment
on the how Covered Entities with a
prudential regulator should meet this
condition. With respect to the FOCUS
Report Part II, not all of the line items
on the report may be as pertinent to a
Covered Entity without a prudential
regulator if a positive substituted
compliance determination is made with
respect to capital or margin. With
respect to the FOCUS Report Part IIC,
because the Commission does not have
responsibility to administer capital and
margin requirements for prudentially
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regulated Covered Entities, the FOCUS
Report Part IIC elicits much less
information than the FOCUS Report Part
II or the financial reports Covered
Entities file with EU and/or German
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 Covered
Entities file with EU and/or German
authorities? If so, do Covered 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
Covered Entities with EU and/or
German authorities; or (2) recorded in
the books and records required of
Covered Entities. With respect to the
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 Covered 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
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 Covered 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 crossform analysis of information entered
into the uniquely numbered line items
on the forms?
Commenters also are invited to
address the proposed conditions to
applying substituted compliance for the
requirement of Exchange Act rule 18a–
7 that Covered Entities without a
prudential regulator file annual audited
reports. For example, comment is
sought on the first and third conditions
that the Covered Entity simultaneously
transmit to the Commission a copy of
the financial statements the Covered
Entity is required to file annually with
EU and/or German authorities, and, if
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not already required, that the Covered
Entity 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 EU or German GAAP
and audited by an independent public
accountant in accordance with EU or
German GAAS? In addition, are there
any concerns with the public
accountant being independent in
accordance with EU or German
requirements? Further, the third
proposed condition would require
Covered Entities that are not required
under German law to file a report of an
independent public accountant covering
their financial statements to file such an
accountant’s report. This proposed
condition is based on the fact that
German law only requires certain
investment firms (depending on their
size) to have their financial statements
audited. Do the firms in Germany 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?
Commenters also are invited to
address any differences between
German requirements and the French
and UK requirements that formed the
basis for the Commission’s conditional
grants of substituted compliance for
recordkeeping, reporting, notification,
and securities count requirements in the
French and UK Orders.188 Are there
reasons to take a different approach
with respect to substituted compliance
in a final German amended order than
was taken in the French and UK Orders
with respect to these requirements? If
so, identify the differences and explain
why they should result in a different
approach.
D. Additional Aspects of the Proposal
Commenters further are invited to
address the proposed amendments to
the Order related to written notice of a
Covered Entity’s intent to rely on
substituted compliance, regarding the
incorporation of references to MiFIR
into the general condition related to EU
cross-border issues, and the additional
MOU condition. Commenters are also
invited to address the changes to the
requirements for CCO reports, and the
provisions added and deleted from the
sections on risk control, internal
188 See French Order, 86 FR 41648–57; UK Order,
86 FR 43359–69.
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46527
supervision and counterparty protection
requirements.
In addition, commenters are invited to
address how the Commission should
weigh considerations related to
supervisory and enforcement
effectiveness related to capital and
margin, including considerations
regarding relevant EU and German
supervisory and enforcement authority,
practices and tools related to capital and
margin.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority,189
J. Matthew DeLesDernier,
Assistant 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 Federal Republic of
Germany and the European Union and with
the conditions of 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 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
MiFID, provisions of WpHG that implement
MiFID, and/or other EU and German
requirements adopted pursuant to those
provisions, the Covered Entity’s relevant
security-based swap activities constitute
‘‘investment services’’ or ‘‘investment
activities,’’ as defined in MiFID article 4(1)(2)
and in WpHG section 2(8), and fall within
the scope of the Covered Entity’s
authorization from BaFin to provide
investment services and/or perform
investment activities in the Federal Republic
of Germany.
(2) Counterparties as 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 MiFID, provisions of WpHG
that implement MiFID and/or other EU and
German requirements adopted pursuant to
those provisions, the relevant counterparty
(or potential counterparty) to the Covered
Entity is a ‘‘client’’ (or potential ‘‘client’’), as
defined in MiFID article 4(1)(9) and in WpHG
section 67(1).
(3) Security-based swaps as 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
189 17
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of MiFID, provisions of WpHG that
implement MiFID and/or other EU and
German requirements adopted pursuant to
those provisions, the relevant security-based
swap is a ‘‘financial instrument,’’ as defined
in MiFID article 4(1)(15) and in WpHG
section 2(4).
(4) Covered Entity as CRD/CRR
‘‘institution.’’ For each condition in
paragraphs (b) through (f) of this Order that
requires the application of, and the Covered
Entity’s compliance with, the provisions of
CRD, provisions of KWG that implement
CRD, CRR and/or other EU and German
requirements adopted pursuant to those
provisions, the Covered Entity is an
‘‘institution,’’ as defined in CRD article
3(1)(3), in CRR article 4(1)(3) and in KWG
section 1(1b).
(5) Counterparties as EMIR
‘‘counterparties.’’ 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
EMIR, EMIR RTS, EMIR Margin RTS and/or
other EU requirements adopted pursuant to
those provisions, if the relevant provision
applies only to the Covered Entity’s activities
with specified types of counterparties, and if
the counterparty to the Covered Entity is not
any of the specified types of counterparty,
the Covered Entity complies with the
applicable condition of this Order:
(i) As if the counterparty were the specified
type of counterparty; in this regard, if the
Covered Entity reasonably determines that
the counterparty would be a financial
counterparty if it were established in the EU
and authorized by an appropriate EU
authority, it must treat the counterparty as if
the counterparty were a financial
counterparty; and
(ii) Without regard to the application of
EMIR article 13.
(6) Security-based swap status under EMIR.
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 EMIR and/or other EU
requirements adopted pursuant to those
provisions, either:
(i) The relevant security-based swap is an
‘‘OTC derivative’’ or ‘‘OTC derivative
contract,’’ as defined in EMIR article 2(7),
that has not been cleared by a central
counterparty and otherwise is subject to the
provisions of EMIR article 11, EMIR RTS
articles 11–15, and EMIR Margin RTS article
2; or
(ii) The relevant security-based swap has
been cleared by a central counterparty that is
authorized or recognized to clear derivatives
contracts by a relevant authority in the EU.
(7) Memorandum of Understanding with
BaFin. The Commission and BaFin have a
supervisory and enforcement memorandum
of understanding and/or other arrangement
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.
(8) Memorandum of Understanding
Regarding ECB-Owned Information. The
Commission and the ECB have a supervisory
and enforcement memorandum of
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understanding and/or other arrangement
addressing cooperation with respect to this
Order as it pertains to information owned by
the ECB 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.
(9) 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 also 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.
(10) European Union Cross-Border Matters.
(i) If, in relation to a particular service
provided by a Covered Entity, responsibility
for ensuring compliance with any provision
of MiFID or MiFIR or any other EU or
German requirement adopted pursuant to
MiFID or MiFIR listed in paragraphs (b)
through (f) of this Order is allocated to an
authority of the Member State of the
European Union in whose territory a Covered
Entity provides the service, BaFin must be
the authority responsible for supervision and
enforcement of that provision or requirement
in relation to the particular service.
(ii) If responsibility for ensuring
compliance with any provision of MAR or
any other EU requirement adopted pursuant
to MAR listed in paragraphs (b) through (f)
of this Order is allocated to one or more
authorities of a Member State of the
European Union, one of such authorities
must be BaFin.
(11) Notification Requirements Related to
Changes in Capital. A Covered Entity that is
prudentially regulated relying on this Order
must apply substituted compliance with
respect to the requirements of Exchange Act
rule 18a–8(c) and the requirements of
Exchange Act rule 18a–8(h) as applied to
Exchange Act rule 18a–8(c).
(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: MiFID articles 16
and 23; WpHG sections 63, 80, 83 and 84;
MiFID Org Reg articles 21–37, 72–76 and
Annex IV; CRD articles 74, 76 and 79–87,
88(1), 91(1)–(2), 91(7)–(9) and 92, 94 and 95;
and KWG sections 25a, 25b, 25c (other than
25c(2)), 25d (other than 25d(3) and 25d(11)),
25e and 25f; CRR articles 286–88 and 293;
and EMIR Margin RTS article 2.
(2) Trade acknowledgement and
verification. The requirements of Exchange
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Act rule 15Fi–2, provided that the Covered
Entity is subject to and complies with the
requirements of EMIR article 11(1)(a) and
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 EMIR
article 11(1)(b) and EMIR RTS articles 13 and
15; and
(ii) The Covered Entity provides the
Commission with reports regarding disputes
between counterparties on the same basis as
it provides those reports to competent
authorities pursuant to 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 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 EMIR
article 11(1)(a), EMIR RTS article 12, and
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: CRR, Part One (General
Provisions) Article 6(1), Part Two (Own
Funds), Part Three (Capital Requirements),
Part Four (Large Exposures), Part Five
(Exposures to Transferred Credit Risk), Part
Six (Liquidity), and Part Seven (Leverage);
MiFID Org Reg article 23; BRRD, articles
45(6) and 81(1); CRD, articles 73, 79, 86, 129,
129(1), 130, 130(1), 130(5), 131, 133, 133(1),
133(4), 141, 142(1) and (2); EMIR Margin
RTS, articles 2, 3(b), 7, and 19(1)(d) and (e),
(3) and (8); KWG, sections 10b–10h, 10i(2)–
(9), 25a(1) sentence 3 no. 2 and no. 3 b), 33(1)
sentence 1c); SAG, section 49(2), 49d, 62(1),
138(1); and SolvV, section 37;
(ii) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rules 18a–5(a)(9), 18a–6(b)(1)(x), and
18a–8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and
(b)(4) pursuant to this Order; and
(iii)(A) The Covered Entity:
(1) Maintains liquid assets as defined in
paragraph (c)(1)(iii)(B) that have an aggregate
market value that exceeds the amount of the
Covered Entity’s total liabilities by at least
$100 million before applying the deduction
specified in paragraph (c)(1)(iii)(C) and by at
least $20 million after applying the
deduction specified in paragraph
(c)(1)(iii)(C);
(2) Makes and preserves for three years a
quarterly record that:
(a) Identifies and values the liquid assets
maintained pursuant to paragraph
(c)(1)(iii)(A)(1);
(b) Compares the amount of the aggregate
value the liquid assets maintained pursuant
to paragraph (c)(1)(iii)(A)(1) to the amount of
the Covered Entity’s total liabilities and
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shows the amount of the difference between
the two amounts (‘‘the excess liquid assets
amount’’); and
(c) Shows the amount of the deduction
specified in paragraph (c)(1)(iii)(C) and the
amount that deduction reduces the excess
liquid assets amount;
(3) The Covered Entity notifies the
Commission in writing within 24 hours in
the manner specified on the Commission’s
website if the Covered Entity fails to meet the
requirements of paragraph (c)(iii)(A)(1) and
includes in the notice the contact
information of an individual who can
provide further information about the failure
to meet the requirements; and
(4) 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)(9) above.
(B) For the purposes of paragraph
(c)(1)(iii)(A)(1), liquid assets are:
(1) Cash and cash equivalents;
(2) Collateralized agreements;
(3) Customer and other trading related
receivables;
(4) Trading and financial assets; and
(5) Initial margin posted by the Covered
Entity to a counterparty or a third-party
custodian, provided:
(a) The initial margin requirement is
funded by a fully executed written loan
agreement with an affiliate of the Covered
Entity;
(b) The loan agreement provides that the
lender waives re-payment of the loan until
the initial margin is returned to the Covered
Entity; and
(c) The liability of the Covered Entity to the
lender can be fully satisfied by delivering the
collateral serving as initial margin to the
lender.
(C) The deduction required by paragraph
(c)(1)(iii)(A) is the amount of the Covered
Entity’s risk-weighted assets calculated for
the purposes of the capital requirements
identified in paragraph (c)(1)(i) divided by
12.5.
(2) Margin. The requirements of Exchange
Act section 15F(e) and Exchange Act rule
18a–3, provided that:
(i) The Covered Entity is subject to and
complies with the requirements of: EMIR
article 11; EMIR Margin RTS; 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); MiFID Org Reg article 23(1); CRD
articles 74 and 79(b); and KWG section
25a(1);
(ii) The Covered Entity collects variation
margin, as defined in EMIR Margin RTS,
from a counterparty with respect to
transactions in non-cleared security-based
swaps, unless the counterparty would qualify
for an exception from the collateral collection
requirements under paragraph (c)(1)(iii) or
(c)(2)(iii) of Exchange Act 18a–3;
(iii) The Covered Entity collects initial
margin, as defined in the EMIR Margin RTS,
from a counterparty with respect to
transactions in non-cleared security-based
swaps, unless the counterparty would qualify
for an exception from the collateral collection
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requirements under paragraph (c)(1)(iii) of
Exchange Act rule 18a–3; and
(iv) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rule 18a–5(a)(12) pursuant to this Order.
(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) of this Order;
(ii) The Covered Entity complies with
paragraph (d)(4) of 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 identified in
paragraph (d)(3) of this Order;
(ii) All reports required pursuant to 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 signed by the
chief compliance officer or senior officer (as
defined in Exchange Act rule 15Fk–1(e)(2)) of
the Covered Entity that, to the best of the
certifier’s knowledge and reasonable belief
and under penalty of law, the report is
accurate and complete in all material
respects;
(C) Address the Covered Entity’s
compliance with:
(i) Applicable requirements under the
Exchange Act; and
(ii) The other applicable conditions of this
Order in connection with requirements for
which the Covered Entity is relying on this
Order;
(D) Be provided to the Commission no later
than 15 days following the earlier of:
(i) The submission of the report to the
Covered Entity’s management body; or
(ii) The time the report is required to be
submitted to the management body; and
(E) Together cover the entire period that
the Covered Entity’s annual compliance
report referenced in Exchange Act section
15F(k)(3) and Exchange Act rule 15Fk–1(c)
would be required to cover.
(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: MiFID articles 16 and 23;
WpHG sections 63, 80, 83 and 84; MiFID Org
Reg articles 21–37, 72–76 and Annex IV; CRD
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articles 74, 76, 79–87, 88(1), 91(1)–(2), 91(7)–
(9) and 92, 94 and 95; and KWG sections 25a,
25b, 25c (other than 25c(2)), 25d (other than
25d(3) and 25d(11)), 25e and 25f, and CRR
articles 286–88 and 293; and EMIR Margin
RTS article 2.
(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 of 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 securitybased swap, is subject to and complies with
the requirements of MiFID article 24(4),
WpHG sections 63(7) and 64(1) and MiFID
Org Reg articles 48–50.
(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) MiFID article 23(2)–(3); WpHG section
63(2); and MiFID Org Reg articles 33–35;
(ii) MiFID article 24(9); WpHG section 70;
and MiFID Delegated Directive article 11(5);
or
(iii) MAR article 20(1) and 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 MiFID article 16(2); WpHG
section 80(1); MiFID Org Reg articles 21–22,
25–26 and applicable parts of Annex I; CRD
articles 74(1) and 85(1); KWG section 25a;
MLD articles 11 and 13; GwG sections 10–11;
MLD articles 8(3) and 8(4)(a) as applied to
internal policies, controls and procedures
regarding recordkeeping of customer due
diligence activities; and GwG section 6(1)–(2)
as applied to vigilance measures regarding
recordkeeping of customer due diligence
activities.
(4) Suitability. The requirements of
Exchange Act rule 15Fh–3(f), as applied to
one or more recommendations of a securitybased swap or trading strategy involving a
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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 MiFID
articles 24(2)–(3) and 25(1)–(2);; WpHG
sections 63(5)–(6), 80(9)–(13) and 87(1)–(2);
and 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 MiFID
Annex II section I and WpHG section 67(2)
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 MiFID articles 24(1), (3) and
WpHG sections 63(1), (6) or MiFID article
30(1) and WpHG section 68(1); and
(ii) MiFID articles 24(4)–(5); WpHG
sections 63(7) and 64(1); MiFID Org Reg
articles 46–48; MAR articles 12(1)(c), 15 and
20(1); and MAR Investment
Recommendations Regulation articles 3 and
4.
(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 EMIR articles
11(1)(b) and 11(2) and 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 MiFID Org
Reg articles 74, 75, and Annex IV; and MiFIR
article 25(1); 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 CRD
article 73; MiFID Delegated Directive article
2; MiFID Org Reg articles 72, 74 and 75;
EMIR article 39(4); KWG section 10a; and
WpHG section 84; 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;
(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 MiFID
Delegated Directive article 2; MiFID Org Reg
articles 72, 74 and 75; EMIR article 39(4); and
WpHG section 84; 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 CRR
article 103; MiFID articles 16(6), 25(5), and
25(6); MiFID Org Reg articles 59, 74, 75 and
Annex IV; MiFIR article 25(1); EMIR articles
9(2) and 11(1)(a); WpHG sections 63 and 64;
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 MiFID Org Reg article 59;
EMIR articles 9(2) and 11(1)(a); MiFID
articles 16(6), 25(5), and 25(6); and WpHG
sections 63, 64, and 83 paragraphs 1 and 2;
(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 MiFID Org
Reg articles 74, 75 and Annex IV; and MiFIR
article 25(1); 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 CRR
articles 103, 105(3), and 105(10); CRD article
73; MiFID articles 16(6), 25(5), 25(6); MiFID
Delegated Directive article 2; MiFID Org Reg
articles 59, 74, 75, and Annex IV; MiFIR
article 25(1); EMIR articles 9(2), 11(1)(a), and
39(4); KWG section 10a; and WpHG sections
63, 64, 83 paragraphs 1 through 2, and 84;
and
(2) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rule 15Fi–2 pursuant to this Order;
(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 MiFIR
article 25(1); MLD4 articles 11 and 13; MiFID
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article 25(2); WpHG section 64 paragraph 3;
and GWG sections 10 and 11; 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 CRR
articles 103, 105(3), and 105(10); MiFID Org
Reg articles 59, 74, 75 and Annex IV; MiFIR
article 25(1); EMIR articles 9(2), 11(1)(a), and
39(4); MiFID articles 16(6), 25(5), and 25(6);
CRD article 73; MiFID Delegated Directive
article 2; WpHG sections 63, 64, 83
paragraphs 1 through 2, and 84; and KWG
section 10a; 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–5(a)(9), provided that:
(1) The Covered Entity is subject to and
complies with the requirements of CRD
article 73; MiFID Delegated Directive article
2; EMIR article 39(4); MiFID Org Reg articles
72, 74, and 75; KWG section 10a; and WpHG
Section 84;
(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 MiFID Org Reg
articles 21(1)(d), 35; CRD articles 88, 91(1),
91(8); MiFID article 9(1) and 16(3); KWG
sections 15, 25a(1), 25c(1) through (3),
25c(4a), 25d(1) through (3), 25d(7), 25d(11),
and 36; and WpHG sections 81(1) and 84;
(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 CRR
articles 103, 105(3) and 105(10); MiFID Org
Reg. articles 72, 74 and 75; CRD article 73;
MiFID Delegated Directive article 2; KWG
section 10a; and WpHG section 84; and
(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 MiFID Org
Reg articles 72, 73, and Annex I; MiFID
articles 16(6) and 25(2); MLD articles 11 and
13; EMIR article 39(5); WpHG sections 64
paragraph 3 and 83 paragraph 1; and GWG
sections 10 and 11, in each case with respect
to the relevant security-based swap or
activity;
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(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 EMIR
article 11(1)(b); and EMIR RTS article
15(1)(a); 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 EMIR
article 11(1)(b); and EMIR RTS article
15(1)(a), 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 MiFID Org
Reg articles 72, 74, 75, and Annex IV; CRR
article 103; MiFIR article 25(1); EMIR article
9(2); MiFID articles 16(6) and 69(2); CRD
article 73; MiFID Delegated Directive article
2; WpHG sections 6, 7, 83 paragraph 1, and
84; and KWG section 10a;
(B) The requirements of Exchange Act rule
18a–6(b)(1)(i) or (b)(2)(i), as applicable,
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provided that the Covered Entity is subject to
and complies with the requirements of MiFID
Org Reg articles 72, 74, 75, and Annex IV;
CRR article 103; MiFIR article 25(1); EMIR
article 9(2); MiFID articles 16(6) and 69(2);
CRD article 73; MiFID Delegated Directive
article 2; WpHG sections 6, 7, 83 paragraph
1, and 84; and KWG section 10a;
(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 MiFID Org
Reg articles 72, 74 and 75; EMIR article 9(2);
CRD article 73; MiFID Delegated Directive
article 2; MiFID 16(6); KWG section 10a; and
WpHG sections 83 paragraph 1, and 84; 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 CRR
article 103; MiFID Org Reg articles 72, 73, 74,
75, 76, Annex I and Annex IV; MiFIR article
25(1); EMIR article 9(2); CRD article 73;
MiFID articles 16(6), 16(7); MiFID Delegated
Directive article 2; KWG section 10a; and
WpHG sections 83 paragraphs 1 and 3
through 8, and 84;
(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 EMIR
article 9(2); CRR articles 99, 294, 394, 415,
430 and Part Six: Title II and Title III; CRR
Reporting ITS article 14 and annexes I–V and
VIII–XIII; and MiFID Org Reg article 72(1);
(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 EMIR
article 9(2); MiFID Org Reg articles 72(1) and
73; MiFID article 16(6); and WpHG section 83
paragraph 1; 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 MiFID Org
Reg articles 72(1) and 73; MiFIR article 25(1);
EMIR article 9(2); MiFID article 16(6); and
WpHG section 83 paragraph 1; 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
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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), provided that:
(1) The Covered Entity is subject to and
complies with the requirements of CRR
articles 99, 294, 394, 415, 430 and Part Six:
Title II and Title III; CRR Reporting ITS
article 14 and annexes I–V and VIII–XIII, as
applicable; and MiFID Org Reg article 72(1);
(2) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rule 18a–7(a)(1), (b), (c) through (h), and
Exchange Act rule 18a–7(j) as applied to
these requirements 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 MiFID Org
Reg articles 22(3)(c), 23, 24, 25(2), 26,
29(2)(c), 35 and 72(1); CRR articles 176, 286
and 293(1)(d); EMIR RTS; EMIR article 9(2);
MiFID articles 16(2), 16(3), 16(5), 24(9);
MiFID Delegated Directive article 11; CRD
article 73, 75–87; WpHG sections 64
paragraph 3, 70, 80 paragraph 6, and 84;
WpDVerOV section 6; and KWG sections 10a,
25a, 25c(3)(3), 25c(3)(4), 25c(4a), 25d(6),
25(8); 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 EMIR
article 9(2); MiFID Org Reg article 72(1); CRD
article 73; MiFID article 16(6); KWG section
10a; and WpHG section 83 paragraph 1; 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 EMIR
article 9(2); MLD4 articles 11 and 13; MiFID
Org Reg article 72(1); MiFID article 16(6);
GWG sections 10 and 11; and WpHG section
83 paragraph 1, 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
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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:
(1) The Covered Entity is subject to and
complies with the requirements of MiFID Org
Reg articles 21(1)(f) and 72(1); MiFID article
16(6); and WpHG section 83 paragraph 1; and
(2) This Order does not extend to the
requirements of Exchange act rule 18a–6(c)
relating to Forms SBSE, SBSE–A, SBSE–C,
SBSE–W, all amendments to these forms, and
all other licenses or other documentation
showing the registration of the Covered
Entity with any securities regulatory
authority or the U.S. Commodity Futures
Trading Commission;
(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 MiFID Org Reg articles 35
and 72(1); CRD articles 88, 91(1), 91(8);
MiFID article 9(1), 16(3), 16(6); KWG sections
25c(1) through (3), 25d(1) through (3), and
36; and WpHG sections 81(1), 83 paragraph
1, and 84;
(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 EMIR
article 9(2); MiFID Org Reg articles 72(1) and
72(3); MiFID article 16(6); and WpHG section
83 paragraph 1; 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 MiFID Org
Reg articles 21(1)(f), 72, 73, and Annex I;
MiFID article 16(6); and WpHG section 83
paragraph 1; 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 EMIR
article 9(2); MiFID Org Reg articles 24, 25(2),
72(1) and 73; MiFID articles 16(2), 16(6), and
25(5); and WpHG sections 64 paragraph 3
and 83 paragraphs 1 and 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 MiFID Org Reg articles 21(2),
58, 72(1) and 72(3); MiFID articles 16(5),
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16(6); and WpHG sections 80 paragraph 6,
and 83 paragraph 1; 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 MiFID Org Reg article 31(1);
MiFID article 16(5); and WpHG section 80
paragraph 6.
(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 18a–
6(b)(1)(xi), (b)(1)(xiii), (b)(2)(v), (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 the requirements of Exchange
Act rule 18a–7(a)(1) or (a)(2), as applicable,
provided that:
(A) The Covered Entity is subject to and
complies with the requirements of CRR
articles 99, 394, 430 and Part Six: Title II and
Title III; CRR Reporting ITS annexes I, II, III,
IV, V, VIII, IX, X, XI, XII and XIII, as
applicable;
(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 Germany;
(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; and
(D) 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 rule 18a–
6(b)(1)(viii) 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 the
requirements of Exchange Act rule 18a–
7(a)(3), provided that:
(A) The Covered Entity is subject to and
complies with the requirements of CRR
articles 99, 394, 431, 433, 452, 454, and 455;
CRR Reporting ITS annexes I, II, VIII and IX,
as applicable; and
(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:
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(A) The Covered Entity is subject to and
complies with the requirements of CRR
articles 431 through 455; and HGB sections
316 and 325; and
(B) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rule 18a–6(b)(1)(viii) pursuant to this
Order.
(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 the requirements of paragraphs
(c), (d), (e), (f), (g) and (h) of Exchange Act
rule 18a–7, provided that:
(A) The Covered Entity is subject to and
complies with the requirements of CRR
articles 26(2), 132(5), 154, 191, 321, 325bi,
350, 353, 368, 418; HGB sections 316 and
325; WpHG section 24 and 84, and 89 (1)
sentence 1 no. 1; and KWG section 26a(1);
(B) With respect to financial statements the
Covered Entity is required to file annually
with the German BaFin, 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 German 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 Germany that
the independent public accountant uses to
perform audit and attestation services and
the accountant complies with German
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
Germany that the independent public
accountant uses to perform audit and
attestation services and the accountant
complies with German 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;
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(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;
and
(D) The Covered Entity applies substituted
compliance for the requirements of Exchange
Act rule 18a–6(b)(1)(viii) pursuant to this
Order.
(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 the requirements of paragraphs
(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) of
Exchange Act rule 18a–8, provided that:
(1) The Covered Entity is subject to and
complies with the requirements of CRR
article 366(5); KWG section 25a (1) sentence
6 no. 3; and FinDAG section 4d; 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 the
requirements of Exchange Act rule 18a–8(c),
provided that the Covered Entity is subject to
and complies with the requirements of KWG
section 25a(1) sentence 6 no. 3; and FinDAG
section 4d;
(C) The requirements of Exchange Act rule
18a–8(d) and the requirements of Exchange
Act rule 18a–8(h) as applied to the
requirements of Exchange Act rule 18a–8(d),
provided that:
(1) The Covered Entity is subject to and
complies with the requirements of KWG
section 25a(1) sentence 6 no. 3; and FinDAG
section 4d; 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 the
requirements of Exchange Act rule 18a–8(e),
provided that:
(1) The Covered Entity is subject to and
complies with the requirements of KWG
section 25a(1) sentence 6 no. 3; and FinDAG
section 4d;
(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 the requirements of Exchange
act rule 18a–8(e) relating to Exchange Act
rule 18a–2; and
(4) This Order does not extend to the
requirements of Exchange act rule 18a–8(e)
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relating to Exchange Act rule 18a–4 or to the
requirements of Exchange Act rule 18a–8(h)
as applied to the requirements of Exchange
Act rule 18a–8(e) relating to Exchange Act
rule 18a–4;
(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 German 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 the requirements of Exchange
Act rule 18a–8 relating to Exchange Act rule
18a–2;
(C) This Order does not extend to the
requirements or to the requirements of
Exchange Act rule 18a–8(h) as applied to the
requirements of paragraph (g) of rule 18a–8.
(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 EMIR
article 11(1)(b); EMIR RTS articles 12 and 13;
WpHG section 84; HGB sections 316 and 325;
and WpHG section 89 (1) sentence 1 no. 1;
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 the Covered Entity is subject to
and complies with the requirements of
WpHG section 83 paragraph 1; and MiFID
Org Reg article 21(1)(f), 21(4), and 72(1).
(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.
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46533
(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; and
(iii) Is an investment firm and/or credit
institution that is authorized by BaFin to
provide investment services or perform
investment activities in Germany and is
supervised by the ECB (or has a licensing
application pending with the ECB as of
August 12, 2021) as a significant institution.
(2) ‘‘MiFID’’ means the ‘‘Markets in
Financial Instruments Directive,’’ Directive
2014/65/EU, as amended from time to time.
(3) ‘‘WpHG’’ means Germany’s
‘‘Wertpapierhandelsgesetz’’, as amended or
superseded from time to time.
(4) ‘‘MiFID Org Reg’’ means Commission
Delegated Regulation (EU) 2017/565, as
amended from time to time.
(5) ‘‘MiFID Delegated Directive’’ means
Commission Delegated Directive (EU) 2017/
593, as amended from time to time.
(6) ‘‘MLD’’ means Directive (EU) 2015/849,
as amended from time to time.
(7) ‘‘GwG’’ means Germany’s
‘‘Geldwa¨schegesetz,’’ as amended from time
to time.
(8) ‘‘MiFIR’’ means Regulation (EU) 600/
2014, as amended from time to time.
(9) ‘‘EMIR’’ means the ‘‘European Market
Infrastructure Regulation,’’ Regulation (EU)
648/2012, as amended from time to time.
(10) ‘‘EMIR RTS’’ means Commission
Delegated Regulation (EU) 149/2013, as
amended from time to time.
(11) ‘‘EMIR Margin RTS’’ means
Commission Delegated Regulation (EU) 2016/
2251, as amended from time to time.
(12) ‘‘CRR Reporting ITS’’ means
Commission Implementing Regulation (EU)
680/2014, as amended from time to time.
(13) ‘‘CRD’’ means Directive 2013/36/EU,
as amended from time to time.
(14) ‘‘KWG’’ means Germany’s
‘‘Kreditwesengesetz,’’ as amended from time
to time.
(15) ‘‘CRR’’ means Regulation (EU) 575/
2013, as amended from time to time.
(16) ‘‘MAR’’ means the ‘‘Market Abuse
Regulation,’’ Regulation (EU) 596/2014, as
amended from time to time.
(17) ‘‘MAR Investment Recommendations
Regulation’’ means Commission Delegated
Regulation (EU) 2016/958, as amended from
time to time.
(18) ‘‘FinDAG’’ means Germany’s
‘‘Finanzdienstleistungsaufsichtsgesetz,’’ as
amended from time to time.
(19) ‘‘BaFin’’ means the Bundesanstalt fu¨r
Finanzdienstleistungsaufsicht.
(20) ‘‘ECB’’ means the European Central
Bank.
(21) ‘‘WpDVerOV’’ means Germany’s
‘‘Wertpapierdienstleistungs-Verhaltens- und
-Organisationsverordnung,’’ as amended from
time to time.
(22) ‘‘SAG’’ means Germany’s ‘‘Sanierungsund Abwicklungsgesetz,’’ as amended from
time to time.
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(23) ‘‘SolvV’’ means Germany’s
‘‘Solvabilita¨tsverordnung,’’ as amended from
time to time.
[FR Doc. 2021–17644 Filed 8–17–21; 8:45 am]
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]]>Agencies
[Federal Register Volume 86, Number 157 (Wednesday, August 18, 2021)]
[Notices]
[Pages 46500-46534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17644]
[[Page 46499]]
Vol. 86
Wednesday,
No. 157
August 18, 2021
Part IV
Securities and Exchange Commission
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Notice of Application for the Amendment of Substituted Compliance
Determination Regarding Security-Based Swap Entities Subject to
Regulation in the Federal Republic of Germany; Proposed Amendments to
Order; Notice
Federal Register / Vol. 86 , No. 157 / Wednesday, August 18, 2021 /
Notices
[[Page 46500]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92647; File No. S7-08-21]
Notice of Application for the Amendment of Substituted Compliance
Determination Regarding Security-Based Swap Entities Subject to
Regulation in the Federal Republic of Germany; Proposed Amendments to
Order
August 12, 2021.
AGENCY: Securities and Exchange Commission.
ACTION: Notice of application for amended substituted compliance
determination; proposed amendments to order.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting public comment on an application by the Bundesanstalt
f[uuml]r Finanzdienstleistungsaufsicht (``BaFin''), pursuant to rule
3a71-6 under the Securities Exchange Act of 1934 (``Exchange Act''),
requesting that the Commission amend an existing substituted compliance
Order for Germany to extend the Order to nonbank capital and margin
requirements (the ``Amended Application''). The Commission also is
soliciting comment on proposed amendments to the Order and is proposing
to amend and restate the Order (the ``proposed Amended Order'').
DATES: Submit comments on or before September 13, 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 S7-08-21 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 S7-08-21. 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/other.shtml).
Typically, comments are also available for website viewing and printing
in the Commission's Public Reference Room, 100 F Street NW, Washington,
DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 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, 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 the Amended Application. The Commission also is proposing to amend
and restate the Order in certain other ways, and is soliciting comment
on the proposed Amended Order set forth in Attachment A.
I. Introduction
Rule 3a71-6 under the Exchange Act provides a framework whereby
non-U.S. security-based swap dealers and major security-based swap
participants (``SBS Entities'') may satisfy certain requirements under
Exchange Act section 15F by complying with comparable regulatory
requirements of a foreign jurisdiction. Substituted compliance is
intended to promote efficiency and competition within the security-
based swap market by helping to address potential duplication and
inconsistency between relevant U.S. and foreign requirements, making it
possible for SBS Entities to leverage their existing systems and
practices to comply with relevant Exchange Act requirements in
conjunction with their compliance with relevant foreign
requirements.\1\
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\1\ Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR 85686,
85687 (Dec. 29, 2020) (``Order'').
---------------------------------------------------------------------------
Pursuant to rule 3a71-6, in December 2020 the Commission issued a
substituted compliance Order to provide that German SBS Entities may
use substituted compliance with conditions to satisfy certain
requirements under the Exchange Act related to risk control, internal
supervision and compliance, counterparty protection, and books and
records.\2\ That Order (and the underlying application from BaFin) did
not address substituted compliance for Exchange Act capital and margin
requirements applicable to SBS Entities without a prudential
regulator.\3\
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\2\ Id. at 85689-97.
\3\ Section 15F(e)(1)(B) of the Exchange Act provides that SBS
Entities for which there is not a prudential regulator shall meet
such minimum capital requirements and minimum initial and variation
margin requirements as the Commission shall by rule or regulation
prescribe. The term ``prudential regulator'' is defined in Section
1(a)(39) of the Commodity Exchange Act (7 U.S.C. 1(a)(39)) and that
definition is incorporated by reference in Section 3(a)(74) of the
Exchange Act. Pursuant to the definition, the Board of Governors of
the Federal Reserve System (``Federal Reserve''), the Office of the
Comptroller of the Currency (``OCC''), the Federal Deposit Insurance
Corporation (``FDIC''), the Farm Credit Administration, or the
Federal Housing Finance Agency is the ``prudential regulator'' of an
SBS Entity if the entity is directly supervised by that agency. The
Commission adopted Exchange Act rules 18a-1 through 18a-1d (capital)
and 18a-3 (margin) pursuant to Section 15F(e)(1)(B) of the Exchange
Act. See Exchange Act Release No. 86175 (June 21, 2019) 84 FR 43872,
43879 (Aug. 22, 2019) (``Capital and Margin Adopting Release'').
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In the Commission's preliminary view, certain developments warrant
modifications to the substituted compliance Order for Germany. First,
since finalizing the Order, the Commission has finalized substituted
compliance orders for SBS Entities subject to regulation in the French
Republic (``France'') \4\ and the United Kingdom (``UK'').\5\ When
finalizing the French and UK Orders, the Commission had the benefit of
additional public comment, some of which also referenced the Order.\6\
Particularly given
[[Page 46501]]
substantial similarity of the three regimes, the Commission believes
that modifications to the Order may be necessary for consistency. The
Commission is therefore proposing to amend the Order to align with the
French and UK orders where appropriate.
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\4\ Exchange Act Release No. 92494 (July 23, 2021], 86 FR 41612
(Aug. 2, 2021) (``French Order''). See also Exchange Act No. 90766
(Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020) (``French Substituted
Compliance Notice and Proposed Order''); Exchange Act Release No.
91477 (Apr. 5, 2021), 86 FR 18341 (Apr. 8, 2021) (``Reopening
Release'').
\5\ Exchange Act Release No. 92529 (July 30, 2021), 86 FR 43318
(August 6, 2021) (``UK Order''). See also Exchange Act Release No.
91476 (Apr. 5, 2021), 86 FR 18378 (Apr. 8, 2021) (``UK Substituted
Compliance Notice and Proposed Order'').
\6\ See, e.g., Letter from Kyle Brandon, Managing Director, Head
of Derivative Policy, SIFMA (Jan. 25, 2021) (``SIFMA Letter I'');
Letter from Wim Mijs, Chief Executive Officer, European Banking
Federation (Jan. 25, 2021) (``EBF Letter I'') (generally supporting
the SIFMA Letter I); Letter from Etienne Barel, Deputy Chief
Executive Officer, French Banking Federation (Jan. 25, 2021) (``FBF
Letter I''), Letter from Kyle Brandon, Managing Director, Head of
Derivative Policy, SIFMA (May 3, 2021) (``SIFMA Letter II''); Letter
from Wim Mijs, Chief Executive Officer, European Banking Federation
(May 3, 2021) (``EBF Letter II''); Letter from Etienne Barel, Deputy
Chief Executive Officer, French Banking Federation (May 3, 2021)
(``FBF Letter II''); Letter from Americans for Financial Reform
Education Fund (May 3, 2021) (``AFREF Letter''); Letter from Dennis
M. Kelleher, President and CEO, Stephen Hall, Legal Director and
Securities Specialist, and Jason Grimes, Senior Counsel, Better
Markets, Inc. (May 3, 2021) (``Better Markets Letter''). Comments
may be found on the Commission's website at: https://www.sec.gov/comments/s7-22-20/s72220.htm.
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Moreover, BaFin's Amended Application requests that the Commission
extend the Order to also provide for substituted compliance for the
capital requirements of Exchange Act Section 15F(e) and Exchange Act
rules 18a-1 through 18a-1d (collectively, ``Exchange Act Rule 18a-1''),
the margin requirements Exchange Act Section 15F(e) and Exchange Act
rule 18a-3, and related recordkeeping, reporting, notification, and
securities count requirements.\7\ As discussed in parts IV and VII
below, the Commission is proposing to amend the Order to conditionally
permit German SBS Entities to comply with these requirements via
substituted compliance.\8\
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\7\ Letter from Thorsten P[ouml]tzsch, Chief Executive Director
of BaFin's Resolution Sector, BaFin, to Vanessa Countryman,
Secretary, Commission, dated August 12, 2021. The Amended
Application is available on the Commission's website at: https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap.
\8\ The Amended Application requests substituted compliance with
respect to investment firms and credit institutions that are
authorized by BaFin to provide investment services or perform
investment activities in Germany and are supervised by the ECB (or
have a licensing application pending with the ECB as of the date of
this application letter) as a significant institution. See Amended
Application at 1. As such, the Commission is proposing to amend the
definition of Covered Entity to conform to the request and the
information provided. See para. (g)(1)(iii).
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II. Scope of Substituted Compliance and Additional General Conditions
A. Scope of Substituted Compliance
For entity-level Exchange Act requirements,\9\ a Covered Entity
must choose either to apply substituted compliance pursuant to the
Order with respect to all security-based swap business subject to the
relevant German and EU requirements or to comply directly with the
Exchange Act with respect to all such business; a Covered Entity may
not choose to apply substituted compliance for some of the business
subject to the relevant German or EU requirements and comply directly
with the Exchange Act for another part of the business that is subject
to the relevant German and EU requirements. Additionally, for entity-
level Exchange Act requirements, if the Covered Entity also has
security-based swap business that is not subject to the relevant German
requirements, the Covered Entity must either comply directly with the
Exchange Act for that business or comply with the terms of another
applicable substituted compliance order.\10\ For transaction-level
Exchange Act requirements,\11\ a Covered Entity may decide to apply
substituted compliance for some of its security-based swap business and
to comply directly with the Exchange Act (or comply with another
applicable substituted compliance order) for other parts of its
security-based swap business.
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\9\ The entity-level requirements relate to non-bank capital and
margin, books and records (other than those linked to the
counterparty protection rules), internal risk management systems,
trade acknowledgement and verification, portfolio reconciliation,
compression, trading relationship documentation, and internal
supervision and chief compliance officer requirements See Capital
and Margin Adopting Release, 84 FR 43879; Exchange Act Release No.
87005 (June 19, 2019) 84 FR 68550, 68596 (Dec. 16, 2019) (``Books
and Records Adopting Release''); Exchange Act Release No. 78011
(June 8, 2016) 81 FR 39808, 39827 (June 17, 2016) (``TAV Adopting
Release''); Exchange Act Release No. 87782 (Dec. 18, 2019) 85 FR
6359, 6378 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'');
Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30064
(May 13, 2016) (``Business Conduct Adopting Release''). Transaction-
level requirements encompass business conduct requirements for the
protection of counterparties, and additional provisions for the
protection of special entities. See also Business Conduct Adopting
Release, 81 FR 30065.
\10\ In the context of the EMIR counterparties condition in
para. (a)(5) of the proposed Amended Order, a Covered Entity must
choose (1) to apply substituted compliance pursuant to the Order--
including compliance with para. (a)(5) as applicable--for a
particular set of entity-level requirements with respect to all of
its business that would be subject to the relevant EMIR-based
requirement if the counterparty were the relevant type of
counterparty, or (2) to comply directly with the Exchange Act with
respect to such business.
\11\ Transaction-level requirements are the counterparty
protection requirements and the books and records requirements
related to those counterparty protection requirements.
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B. Proposed Revision of General Condition Regarding Notice
The Commission also is proposing to modify the Order's general
condition requiring that Covered Entities provide the Commission with
written notice of their intent to rely on substituted compliance. To
promote clarity in the notice regarding the Covered Entity's intended
use of substituted compliance, the Commission is proposing to amend the
general condition to require that the notice identify each specific
substituted compliance determination for which the Covered Entity
intends to apply substituted compliance.\12\ The modification would be
consistent with the conditions for notification included in the
Commission's other substituted compliance orders.\13\
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\12\ See para. (a)(9) of the proposed Amended Order. To promote
up-to-date notice, the proposal further would require the Covered
Entity to amend the notice if it modifies the scope of its reliance
on substituted compliance. In addition, the proposal would make a
technical modification to the general condition to clarify that the
notice must be sent to the Commission in the manner specified on the
Commission's website (in lieu of the condition's current reference
to an email address specified on that website).
\13\ See French Order, 86 FR 41658; UK Order, 86 FR 43371. As
explained in the French and UK Orders, under the proposed amended
notification provision, if a Covered Entity intends to rely on all
the substituted compliance determinations in a given paragraph of
the Order, it could 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 Amended 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 Amended Order (the
margin determination). In this case, paragraph (c)(1) of the
proposed Amended 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
part VII.B.1, the amended recordkeeping and reporting determinations
in the proposed Amended 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 Amended Order sets forth the Commission's substituted
compliance preliminary determinations with respect to the
requirements of Exchange Act rule 18a-5, 17 CFR 240.18a-5. These
preliminary determinations are set forth in paragraphs (f)(1)(i)(A)
through (O) of the proposed Amended Order. If a Covered Entity
intends to rely on some but not all of the preliminary
determinations, it would need to identify in the notice the specific
preliminary 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, 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
Exchange Act counterparty protection requirements and linked
recordkeeping requirements. Similarly, as discussed above, a Covered
Entity would be able to apply substituted compliance for entity-
level Exchange Act requirements to all of its security-based swap
business that is eligible for substituted compliance under the
proposed Amended Order, and may either comply directly with the
Exchange Act or apply substituted compliance under another
applicable order for its security-based swap business that is not
eligible for substituted compliance under the proposed Amended
Order. In this case, the notice would need to indicate the scope of
security-based swap business (e.g., security-based swap business
carried on from an establishment in the UK) for which the Covered
Entity is applying substituted compliance with respect to the
relevant Exchange Act entity-level requirements. A Covered Entity
would modify its reliance on the positive substituted compliance
determinations in the Order, and thereby trigger the requirement to
update its notice, if it adds or subtracts determinations for which
it is applying substituted compliance or completely discontinues its
reliance on the proposed Amended Order.
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[[Page 46502]]
C. Additional Condition Regarding Notification Requirements Related to
Changes in Capital
Consistent with the UK and French Orders, the Commission is
proposing to add a general condition that Covered Entities with a
prudential regulator relying on substituted compliance pursuant to the
proposed Amended Order must apply substituted compliance with respect
to the requirements of Exchange Act rule 18a-8(c) and the requirements
of Exchange Act rule 18a-8(h) as applied to Exchange Act rule 18a-
8(c).\14\ In the UK and French Orders, the Commission took a granular
approach with respect to substituted compliance determinations
regarding the Exchange Act recordkeeping, reporting, and notification
requirements. Consequently, a Covered Entity may comply directly with
certain of the Exchange Act's recordkeeping, reporting, and
notification provisions while applying substituted compliance to
others. In taking this granular approach, the Commission conditioned
substituted compliance with certain of the discrete recordkeeping,
reporting, and notification requirements on the Covered Entity applying
substituted compliance for the substantive Exchange Act requirement to
which they are linked.\15\ Further, the Commission conditioned
substituted compliance with respect to the substantive requirement on
the Covered Entity applying substituted compliance for the linked
recordkeeping, reporting, or notification requirement. These linked
conditions are designed to ensure that a Covered Entity consistently
applies substituted compliance with respect to the substantive Exchange
Act requirement and the Exchange Act recordkeeping, reporting, or
notification requirement that complements the substantive requirement.
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\14\ See para. (a)(11) of the proposed Amended Order. See also
French Order, 86 FR 41620-22; UK Order, 86 FR 43330-31.
\15\ See French Order, 86 FR 41621; UK Order, 86 FR 43330.
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Exchange Act rule 18a-8(c) generally requires every prudentially
regulated security-based swap dealer that files a notice of adjustment
of its reported capital category with the Federal Reserve, the OCC, or
the FDIC to give notice of this fact that same day by transmitting a
copy of the notice of adjustment of reported capital category in
accordance with Exchange Act rule 18a-8(h).\16\ Exchange Act rule 18a-
8(h) sets forth the manner in which every notice or report required to
be given or transmitted pursuant to Exchange Act rule 18a-8 must be
made.\17\ While Exchange Act rule 18a-8(c) is not linked to a
substantive Exchange Act requirement, it is linked to substantive
capital requirements applicable to prudentially regulated SBS Entities
in the U.S. (i.e., capital requirements of the Federal Reserve, the
OCC, or the FDIC). Therefore, to implement the granular approach
adopted in the U.K. and French Orders, the Commission is proposing to
add a general condition that Covered Entities with a prudential
regulator relying on substituted compliance must apply substituted
compliance with respect to the requirements of Exchange Act rule 18a-
8(c) and the requirements of Exchange Act rule 18a-8(h) as applied to
Exchange Act rule (c).
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\16\ See 17 CFR 240.18a-8(c).
\17\ See 17 CFR 240.18a-8(h).
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In its application, BaFin citied several German and EU provisions
as providing similar outcomes to the notification requirements of
Exchange Act rule 18a-8.\18\ This general condition is necessary in
order to clarify that a prudentially regulated Covered Entity must
provide the Commission with copies of any notifications regarding
changes in the Covered Entity's capital situation required by German or
EU law. In particular, absent this condition, a prudentially regulated
Covered Entity could elect not to apply substituted compliance with
respect to Exchange Act rule 18a-8(c). However, because the Covered
Entity is not required to provide any notifications to the Federal
Reserve, the OCC, or the FDIC, ``compliance'' with the provisions of
Exchange Act rule 18a-8(c) raises a question as to the Covered Entity's
obligations under this proposed Amended Order to provide the Commission
with notification of changes in capital.
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\18\ These German provisions include KWG section 25a(1) sentence
6 no. 3, and FinDAG section 4d, which provide, among other things,
processes for employees to report breaches of certain EU
regulations, and the establishment of systems by BaFin to accept
reports of potential or actual violations of laws, ordinances,
general rulings, and regulations and directives of the EU.
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The Commission adopted Exchange Act Rule 18a-8(c) to require SBS
Entities with a prudential regulator to give notice to the Commission
when filing an adjustment of reported capital category because such
notices may indicate that the entity is in or is approaching financial
difficulty.\19\ The Commission has a regulatory interest in being
notified of changes in the capital of a prudentially regulated Covered
Entity, as it could signal the firm is in or approaching financial
difficulty and presents a risk to U.S. security-based swap markets and
participants. For the foregoing reasons, the Commission is conditioning
applying substituted compliance pursuant to the proposed Amended Order
on the general condition that a prudentially regulated Covered Entity
apply substituted compliance with respect to Exchange Act rule 18a-8(c)
and the requirements of Exchange Act rule 18a-8(h) as applied to
Exchange Act rule 18a-8(c).
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\19\ See Exchange Act Release No. 71958 (Sept. 19, 2019), 84 FR
68550, 68589-90 (Dec. 16, 2019) (``Recordkeeping and Reporting
Adopting Release'') (citing Exchange Act Release No. 71958 (Aug. 17,
2014) 79 FR 25193 (May 2, 2014) at 25249).
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D. Proposed Amendment to General Condition Regarding EU Cross-Border
Matters
The Commission also is proposing to modify the Order's general
condition related to EU cross-border matters. Substituted compliance
under the Order in part is predicated on BaFin being responsible for
the supervision and enforcement of Covered Entities in connection with
certain MiFID provisions that constitute conditions to individual
substituted compliance provisions.\20\ That general condition is
intended to help ensure that the prerequisites to substituted
compliance with respect to supervision and enforcement are satisfied in
practice when MiFID allocates responsibility for ensuring compliance to
another EU Member State. Because MiFIR is subject to similar allocation
provisions,\21\ the Commission is proposing to incorporate references
to MiFIR requirements into the general condition.\22\ This change would
be consistent with the French Order.\23\
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\20\ See part III.A, infra.
\21\ See MiFID art. 35(8) (in part allocating responsibility
over MiFIR articles 14 to 26 to competent authorities in member
states in which branches are located).
\22\ See article (a)(10) of the proposed Amended Order.
\23\ See para. (a)(10) of the French Order.
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E. Additional MOU-Related General Condition
In light of the Amended Application, the Commission also is
proposing to add a new general condition that would predicate
substituted compliance on the presence of a supervisory and enforcement
memorandum of understanding between the Commission and the European
Central Bank (``ECB'')
[[Page 46503]]
and/or BaFin, pertaining to information owned by the ECB.\24\ The
Commission's access to this ECB information will assist the
Commission's effective oversight of Covered Entities that use
substituted compliance in connection with capital and margin
requirements.
---------------------------------------------------------------------------
\24\ See para. (a)(8) of the proposed Amended Order.
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III. Proposed Changes to Risk Control and Internal Supervision
A. Background--Order's MiFID Prerequisites Related to Trade
Acknowledgment and Verification and Trading Relationship Documentation
Under the Order, substituted compliance for trade acknowledgement
and verification and for trading relationship documentation in part
requires that relevant SBS Entities (``Covered Entities'' as defined in
the Order) comply with certain requirements under MiFID (plus the
German implementation of MiFID) and with certain requirements under
EMIR.\25\ Commenters expressed concern that the interplay between those
particular MiFID conditions and a separate EU cross-border condition to
the Order in practice would preclude the availability of substituted
compliance for entities that have branches in other EU Member
States.\26\
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\25\ See paras. (b)(2) and (b)(5) of the proposed Amended Order.
\26\ See SIFMA Letter I at 3-6 (commenting on the French
Substituted Compliance Notice and Proposed Order but stating that
the concerns applied equally to the German Order). In relevant part,
the cross-border condition of paragraph (a)(10) of the proposed
Amended Order states that if responsibility for ensuring compliance
with any provision of MiFID or MiFIR (or EU or German implementing
requirement) that is a condition for substituted compliance is
allocated to an authority in a Member State of the EU in whose
territory a Covered Entity provides a service, BaFin must be the
authority responsible for supervision and enforcement of that
provision. In practice (pursuant to MiFID article 35), this
allocation of oversight applies to requirements pursuant to MiFID
article 25 (``assessment of suitability and appropriateness and
reporting to clients'') as well as certain other MiFID provisions
not relevant here. In the commenter's view, application of those
MiFID article 25 conditions in connection with trade acknowledgment
and verification requirements and trading relationship documentation
requirements would ``in practice lead to an untenable patchwork of
substituted compliance.'' See SIFMA Letter I at 3. The commenter
further states that SBS Entities ``operating branches throughout the
EU'' would not be able to avail themselves of substituted compliance
in connection with these requirements ``unless authorities or
regulated SBS Entities in every or nearly every one of the 27 EU
Member States submit their own substituted compliance applications
covering local branches of SBS Entities, and the Commission reviews
and responds to those applications and enters into memoranda of
understanding . . . with authorities in each of these Member
States.'' That problem does not arise in connection with
requirements under EMIR, which does not allocate oversight of a
German entity's compliance to authorities in other EU Member States.
That problem also does not arise in connection with other
requirements under MiFID (e.g., MiFID art. 16 organizational
provisions) that are not subject to the same allocation of
oversight.
---------------------------------------------------------------------------
The commenters requested that the Commission remove those
particular MiFID conditions, arguing that compliance with EMIR
conditions standing alone still would produce regulatory outcomes
comparable to those of the trade acknowledgement and verification
requirement and the trading relationship documentation requirement
under the Exchange Act.\27\
---------------------------------------------------------------------------
\27\ See SIFMA letter I at 5-6.
---------------------------------------------------------------------------
After careful consideration, the Commission is proposing to amend
the Order to address those concerns and for consistency with the French
Order. The Order's EU cross-border condition provides an important
safeguard to help ensure that firms that avail themselves of
substituted compliance are subject to appropriate regulatory
supervision and enforcement. At the same time, the Commission
recognizes the significance of commenter concerns that the interplay
between the EU cross-border condition and the MiFID conditions
associated with trade acknowledgment and verification and with trading
relationship documentation could have the effect of unnecessarily
interfering with the use of substituted compliance when other
provisions standing alone are sufficient for the Commission to make a
positive substituted compliance determination.\28\ As discussed below,
the Commission is proposing to revise the Order's conditions related to
trade acknowledgment and verification and to trading relationship
documentation, by removing MiFID-related conditions and instead relying
solely on EMIR conditions to establish comparability for those
requirements.
---------------------------------------------------------------------------
\28\ SBS Entities subject to regulation in France are subject to
the condition, and the proposed change would be consistent with the
French Order. See para. (a)(10) of the French Order. The Commission
addressed certain of the other issues raised by commenters when
extending the comment period for the French Substituted Compliance
Notice and Proposed Order. See Reopening Release, 86 FR 18341
(discussing commenter concerns regarding the scope of reliance on
substituted compliance and the EU cross-border condition).
---------------------------------------------------------------------------
B. Proposed Addition of EMIR-Related General Conditions
The proposed amendments addressed below would remove MiFID
conditions and rely solely on EMIR conditions to establish
comparability in connection with trade acknowledgment and verification
and trading relationship documentation. This heightened reliance on
EMIR highlights the need for safeguards to help ensure that there will
be no opportunity for gaps that may prevent the EMIR provisions in
practice from producing outcomes consistent with those of the Exchange
Act rules. The Commission accordingly is proposing to add two EMIR-
related general conditions to the Order to help preclude such gaps.\29\
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\29\ The proposed addition of two new EMIR-related general
conditions as paragraphs (a)(5) and (a)(6) of the proposed Amended
Order would necessitate renumbering of certain of the extant general
conditions, and also suggests the need to clarify the captions for
certain of the other proposed general conditions (e.g., recaptioning
proposed general conditions (a)(1) through (a)(3) of the proposed
Amended Order to specifically refer to MiFID, and recaptioning of
proposed general condition (a)(4) to specifically refer to CRD/CRR).
---------------------------------------------------------------------------
The first condition provides that the Covered Entity must comply
with the applicable condition of the proposed Amended Order as if the
counterparty were the type of counterparty that would trigger the
application of the relevant EMIR-based requirements. If the Covered
Entity reasonably determines that its counterparty would be a financial
counterparty \30\ if not for the counterparty's location and/or lack of
regulatory authorization in the EU, the condition further requires the
Covered Entity to treat the counterparty as if the counterparty were a
financial counterparty, rather than as another type of counterparty to
which the relevant EMIR-based requirements may apply.\31\ By requiring
a Covered Entity to treat its counterparty as a type of counterparty
that would trigger the application of the relevant EMIR-based
requirements, the condition will require the Covered Entity to perform
the relevant obligations pursuant to those EMIR-based requirements and
thus to act in a way that is comparable to Exchange Act
requirements.\32\
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\30\ EMIR article 2(8) defines ``financial counterparty'' to
encompass investment firms, credit institutions, insurers and
certain other types of businesses that have been authorized in
accordance with EU law. Under EMIR, the distinction between
financial counterparties and other types of counterparties such as
non-financial counterparties is manifested, inter alia, in
connection with confirmation timing standards. See EMIR RTS article
12.
\31\ See para. (a)(5) of the proposed Amended Order.
\32\ In other words, the Covered Entity would be subject to the
relevant requirements under EMIR even if the counterparty is not an
``undertaking'' (such as by virtue of being a natural person), or is
not established in the EU (by virtue of being a U.S. person or
otherwise being established in some non-EU jurisdiction). The issue
of whether the Covered Entity must treat the counterparty as a
``financial counterparty'' or ``non-financial counterparty'' would
turn on whether the counterparty's business would require that it be
registered pursuant to the categories identified in the EMIR article
2(8) ``financial counterparty'' definition (e.g., an authorized
investment firm, credit institution, insurance undertaking) were the
counterparty subject to the applicable authorization requirements.
This approach generally appears to be consistent with European
guidance. See European Securities and Markets Authority, ``Questions
and Answers: Implementation of the Regulation (EU) No 648/2012 on
OTC derivatives, central counterparties and trade repositories
(EMIR)'' (https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf) answer 5(a)
(stating that compliance with the EMIR confirmation requirement
necessitates that the counterparties must reach a legally binding
agreement to all terms of the OTC derivative contract, and that the
EMIR RTS ``implies'' that both parties must comply and agree in
advance to a specific process to do so); answer 12(b) (stating that
where an EU counterparty transacts with a third country entity, the
EU counterparty generally must ensure that the EMIR requirements for
portfolio reconciliation, dispute resolution, timely confirmation
and portfolio compression are met for the relevant portfolio and/or
transactions even though the third country entity would not itself
be subject to EMIR; this is subject to special processes when the
European Commission has declared the third country requirements to
be comparable to EU requirements).
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[[Page 46504]]
In addition, the Commission is proposing to revise the Order to
account for the fact that the relevant trade acknowledgement and
verification and trading relationship documentation rules under the
Exchange Act do not apply to security-based swaps cleared by a clearing
agency registered with the Commission (or exempt from registration),
while the analogous EMIR provisions exclude instruments that are
cleared by a central counterparty that has been authorized or
recognized to clear derivatives contracts in the EU. In particular--to
help ensure that substituted compliance is available in connection with
an instrument that has been cleared at an EU-authorized or EU-
recognized central counterparty (and hence is not within the Exchange
Act rule's exclusion but also is not subject to relevant EMIR
requirements)--the Commission is proposing a new general condition
that, for each part of the Order that requires compliance with EMIR-
related requirements, either: (i) The relevant security-based swap is
an ``OTC derivative'' or ``OTC derivative contract,'' as defined in
EMIR article 2(7), that has not been cleared by a central counterparty
and otherwise is subject to the provisions of EMIR article 11, EMIR RTS
articles 11 through 15, and 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
by a relevant authority in the EU.\33\
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\33\ See para. (a)(6) of the proposed Amended Order. Prong (i)
to this proposed condition would be satisfied by uncleared
instruments that fall within the ambit of the EMIR requirements at
issue. The alternative prong (ii) would be satisfied when
instruments fall outside the ambit of those EMIR requirements by
virtue of being cleared in the EU, akin to the Exchange Act rules'
exclusion for security-based swaps cleared by clearing agencies
registered with the Commission.
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C. Proposed Revisions to Conditions Related to Trade Acknowledgment and
Verification, and Trading Relationship Documentation
Consistent with the French Order \34\ the Commission is proposing
to modify the Order to remove the existing MiFID conditions to
substituted compliance for trade acknowledgment and verification.
Substituted compliance instead would be conditioned solely on
compliance with the confirmation provisions of EMIR article 11(1)(a)
and EMIR RTS article 12.\35\ Those EMIR provisions promote comparable
risk control goals as the Exchange Act rule by providing for definitive
written records of transactions. While the Commission recognizes that
MiFID confirmation requirements also help to promote that goal, the
Commission preliminarily believes that the EMIR provisions alone are
sufficient for regulatory comparability, and recognizes that in
practice the interplay between the EU cross-border condition and MiFID
confirmation requirements may unnecessarily limit the use of
substituted compliance and its associated efficiency benefits.
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\34\ See para. (b)(2) of the French Order.
\35\ See para. (b)(2) of the proposed Amended Order.
---------------------------------------------------------------------------
The Commission similarly is proposing to modify the Order to remove
the existing MiFID conditions to substituted compliance for trading
relationship documentation, and also to add the above EMIR confirmation
provisions (reflecting that the Exchange Act trading relationship
documentation rule requires that the necessary documentation include
trade acknowledgments and verifications \36\). Together with EMIR
Margin RTS article 2 provisions that address risk management procedures
related to the exchange of collateral, including procedures related to
the terms of all necessary agreements to be entered into by
counterparties (e.g., payment obligations, netting conditions, events
of default, calculation methods, transfers of rights and obligations
upon termination, and governing law), the EMIR conditions promote
comparable risk mitigation purposes as the trading relationship
documentation rule under the Exchange Act by promoting certainty
regarding the relevant framework governing the counterparties. Here
too, while the Commission recognizes that MiFID documentation
requirements also promote that goal, the Commission preliminarily
believes the EMIR provisions alone are sufficient for regulatory
comparability, and recognizes that in practice the interplay between
the EU cross-border condition and MiFID documentation provisions may
limit the use of substituted compliance and its associated regulatory
benefits.\37\
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\36\ See Exchange Act rule 15Fi-5(b)(2).
\37\ These proposed changes are consistent with the French
Order. See paras. (a)(5) and (a)(6) of the French Order.
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D. Proposed Revisions to Internal Risk Management and Internal
Supervision
The Commission is also proposing to incorporate--as part of the
relevant conditions in paragraph (b)(1) of the proposed Amended Order
relating to internal risk management--MiFID articles 16 and 23 and the
related implementing provisions, MiFID Org Reg articles 25 through 37,
72 through 76 and Annex IV, as well as CRD articles 88(1), 91(1)-(2)
and (7)-(9) and the related implementing provisions.\38\ These
provisions address additional aspects of a Covered Entity's management
of the risks posed by internal governance and organization, business
operations, conflicts of interest with and between clients, and senior
staff remuneration policies and were part of the Commission's
comparability determination for entities subject to regulation in
France. The Commission is also incorporating CRR articles 286-88 and
293 and EMIR Margin RTS article 2 to the conditions of paragraph (d)(3)
of the proposed Amended Order relating to internal supervision.\39\
These provisions relate to counterparty credit risk and risk management
generally and collateral-related risk management procedures and were
also part of the Commission's comparability analysis in the French
Order.\40\ Also consistent with the French Order, the Commission is
proposing to delete CRD article 93 and the related implementing
provisions from both paragraph (d)(1) and (d)(3), as those provisions
relate to remuneration policies for institutions that benefit from
exceptional (German and EU) government intervention. \41\
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\38\ See para. (b)(1) of the proposed Amended Order.
\39\ See para. (d)(3) of the proposed Amended Order.
\40\ See paras. (b)(1) and (d)(3) of the French Order.
\41\ See paras. (b)(1) and (d)(3) of the proposed Amended Order.
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IV. Proposed Substituted Compliance in Connection With Capital and
Margin
A. BaFin's Request and Associated Analytic Considerations
The Amended Application in part requests substituted compliance in
connection with requirements under the Exchange Act relating to:
[[Page 46505]]
Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 and 18a-1a through 18a-1d
applicable to certain SBS Entities.\42\ 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.\43\ 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.\44\ As part of the capital requirements, security-based swap
dealers without a prudential regulator also must comply with the
internal risk management control requirements of Exchange Act Rule
15c3-4 with respect to certain activities.\45\
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\42\ Exchange Act rule 18a-1 applies to security-based swap
dealers that: (1) Do not have a prudential regulator; and (2) are
either (a) not dually registered with the Commission as a broker-
dealer or (b) are dually registered with the Commission as a special
purpose broker-dealer known as an OTC derivatives dealer. Security-
based swap dealers that are dually registered with the Commission as
a full-service broker-dealer are subject to the capital requirements
of Exchange Act rule 15c3-1 (17 CFR 240.15c3-1) for which
substituted compliance is not available. See 17 CFR 240.3a71-
6(d)(4)(i) (making substituted compliance available only with
respect to the capital requirements of Exchange Act section 15F(e)
and Exchange Act rule 18a-1).
\43\ See Capital and Margin Adopting Release, 84 FR 43947. The
Amended Application discusses EU and German requirements that
address firms' capital requirements. See Amended Application Annex A
category 3 (Side Letter Addressing Capital Requirements). See also
Amended Application Annex A category 4 (Internal Risk Management
Requirements) (generally discussing internal risk management
requirements).
\44\ See Capital and Margin Adopting Release, 84 FR 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 Amended Application Annex A category 3 (Side Letter
Addressing Capital Requirements).
\45\ See 17 CFR 240.15c3-4 and 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.\46\ The margin requirements are designed to
protect SBS Entities from the consequences of a counterparty's
default.\47\
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\46\ 17 CFR 240.18a-3.
\47\ See Capital and Margin Adopting Release, 84 FR 43947, 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 Amended Application discusses EU and German requirements that
address firms' margin requirements. See Amended Application Annex A
category 4 (Margin Requirements for Nonbank Firms).
---------------------------------------------------------------------------
Taken as a whole, these capital and margin requirements help to
promote 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. Capital--Preliminary Views and Proposed Amended Order
In the Commission's preliminary view, based on the Amended
Application and the Commission's review of applicable provisions,
additional conditions on applying substituted compliance with respect
to the Exchange Act capital requirements are necessary in order to
produce comparable regulatory outcomes. Consequently, substituted
compliance with respect to the capital requirements of Exchange Act
rule 18a-1 would be conditioned on Covered Entities being subject to
and complying with relevant EU and German capital requirements.\48\
However, the proposed Amended Order would include the additional
conditions discussed below that, in the aggregate, would be designed to
establish a framework that produces outcomes comparable to those
associated with the capital requirements of Exchange Act rule 18a-1.
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\48\ In connection with capital requirements, Covered Entities
must comply with: CRR, Part One (General Provisions) Article 6(1),
Part Two (Own Funds), Part Three (Capital Requirements), Part Four
(Large Exposures), Part Five (Exposures to Transferred Credit Risk),
Part Six (Liquidity), and Part Seven (Leverage); MiFID Org Reg
article 23; BRRD articles 45(6) and 81(1); CRD articles 73, 79, 86,
129, 129(1), 130, 130(1), 130(5), 131, 133, 133(1), 133(4), 141, and
142(1) and (2); EMIR Margin RTS articles 2, 3(b), 7, and 19(1)(d)
and (e), (3) and (8); KWG sections 10b-10h, 10i(2)-(9), 25a(1)
sentence 3 no. 2 and no. 3b), 33(1) sentence 1c),; SAG section
49(2), 49d, 62(1), 138(1); and SolvV section 37. See para. (c)(1)(i)
of the proposed Amended Order.
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The first additional capital condition would require that the
Covered Entity apply substituted compliance with respect to Exchange
Act rules 18a-5(a)(9) (a record making requirement), 18a-6(b)(1)(x) (a
record preservation requirement), and 18a-8(a)(1)(i), (a)(1)(ii),
(b)(1), (b)(2), and (b)(4) (notification requirements relating to
capital).\49\ These recordkeeping and notification requirements are
directly linked to the capital requirements of Exchange Act rule 18a-1.
As discussed below in part VII.B.1 of this release, the proposed
Amended Order conditions substituted compliance with respect to these
recordkeeping and notification requirements on the Covered Entity
applying substituted compliance with respect to Exchange Act rule 18a-
1.\50\ This proposed capital condition would do the reverse: Condition
substituted compliance with respect to Exchange Act rule 18a-1 on the
Covered Entity applying substituted compliance for these linked
recordkeeping and notification requirements. This additional capital
condition is designed to provide clarity as to the Covered Entity's
obligations under these recordkeeping and notification requirements
when applying substituted compliance with respect to Exchange Act rule
18a-1 pursuant the proposed Amended Order.
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\49\ See para. (c)(1)(ii) of the proposed Amended Order. This
additional condition is included in the French and UK Orders. See
French Order, 86 FR 41659; UK Order, 86 FR 43372.
\50\ See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) of
the proposed Amended Order.
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The second additional capital condition would be designed to ensure
comparable regulatory outcomes between the standard of Exchange Act
rule 18a-1 and the capital standard of the relevant EU and German laws,
which is based on the international capital standard for banks (the
``Basel capital standard'').\51\ In particular, 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.\52\ The net liquid assets test
[[Page 46506]]
is designed to promote liquidity.\53\ 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).\54\ 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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\51\ See note 48, supra (citing EU and German capital
requirements under the CRR). See also Basel Committee on Banking
Supervision (``BCBS''), The Basel Framework, available at: https://www.bis.org/basel_framework/.
\52\ See, e.g., Capital and Margin Adopting Release, 84 FR 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.'').
\53\ See id. (``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).'').
\54\ 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.\55\ 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. An SBS Entity that is meeting its minimum tentative 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.\56\ 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.
---------------------------------------------------------------------------
\55\ See 17 CFR 240.15c3-1(c)(2).
\56\ The highly liquid assets under Exchange Act Rule 18a-1 are
otherwise known as ``allowable assets'' because they are not
deducted when computing net capital. See Books and Records Adopting
Release, 84 FR 68673-74, 68677-80 (the sections of the amended Part
II of the FOCUS Report setting forth the assets side of the balance
sheet and the net capital computation). Illiquid assets otherwise
known as ``non-allowable assets'' are deducted when computing net
capital. Id. Allowable assets include cash, certain unsecured
receivables from broker-dealers and clearing organizations, reverse
repurchase agreements, securities borrowed, fully secured customer
margin loans, and proprietary securities, commodities, and swaps
positions. Id. The term ``high quality liquid assets'' or ``HQLA''
are defined under the Basel capital standard's liquidity coverage
ratio (``LCR'') and generally consist of cash and specific classes
of liquid securities. See BCBS, LCR30--High-quality liquid assets
(under the Basel capital standards), available at: https://www.bis.org/basel_framework/chapter/LCR/30.htm?. Generally, cash and
securities that qualify as HQLA under the LCR would be allowable
assets under Exchange Act rule 18a-1.
---------------------------------------------------------------------------
In comparison, 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 would 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 EU margin requirements, Covered
Entities will be required to post initial margin to counterparties
unless an exception applies.\57\ 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.\58\ 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.'' \59\ 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.
---------------------------------------------------------------------------
\57\ Exchange Act rule 18a-3 does not require SBS Entities to
post initial margin (though it does not prohibit the practice).
\58\ See Capital and Margin Adopting Release, 84 FR 43887-88.
\59\ See id. at 43887.
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In summary, there are key differences between the net liquid assets
test of Exchange Act rule 18a-1 and the Basel capital standard
applicable to Covered Entities. Those differences in terms of the types
of assets that count as regulatory capital and how regulatory
[[Page 46507]]
capital is calculated lead to different regulatory outcomes. In
particular, the net liquid assets test produces a regulatory outcome in
which the SBS Entity has more than one dollar of highly liquid assets
for each dollar of unsubordinated liabilities.\60\ The Basel capital
standard--while having measures designed to promote liquidity--does not
produce this regulatory outcome.\61\ Therefore, the Commission
preliminarily believes that an additional capital condition is needed
to bridge the gap between these two capital standards and thereby
achieve more comparable regulatory outcomes in terms of promoting
liquid balance sheets for SBS Entities and Covered Entities.
---------------------------------------------------------------------------
\60\ As discussed above, highly liquid assets under Exchange Act
rule 18a-1 are also known as ``allowable assets'' and generally are
consistent with the LCR's HQLA.
\61\ The Basel capital standard does not preclude a firm from
having more than a dollar of highly liquid assets for each dollar of
unsubordinated liabilities. Thus, a firm operating pursuant to the
standard may structure its assets and liabilities in a manner that
achieves this result. However, the standard does not mandate this
result. Rather, it would accommodate a firm that seeks to maintain
this level of liquidity on its own accord.
---------------------------------------------------------------------------
However, in seeking to bridge this regulatory gap, the additional
condition should take into account that Covered Entities are or will be
subject to EU and German laws and measures designed to promote
liquidity. In particular, Covered Entities are or will be subject to:
(1) Requirements to hold an amount of HQLA to meet expected payment
obligations under stressed conditions for thirty days (the ``LCR
requirement''); \62\ (2) requirements to hold a diversity of stable
funding instruments sufficient to meet long-term obligations under both
normal and stressed conditions (the ``NSFR requirements''); \63\ (3)
requirements to perform liquidity stress tests and manage liquidity
risk (the ``internal liquidity assessment requirements''); \64\ and (4)
regular reviews of a Covered Entity's liquidity risk management
processes (the ``liquidity review process'').\65\ These EU and German
laws and measures will require Covered Entities to hold significant
levels of liquid assets. However, the laws and measures on their own,
do not impose a net liquid assets test. Therefore, the Commission
preliminarily believes that an additional condition is necessary to
supplement these requirements.
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\62\ See CRR, Article 412(1).
\63\ See CRR, Articles 413, 428a and 428az.
\64\ See KWG, Article 25a(1), sentence 3 no. 3b).
\65\ See KWG, Article 6b(2) no.7.
---------------------------------------------------------------------------
The Commission has taken into account the EU and German liquidity
laws and measures discussed above in making a substituted compliance
determination with respect to Exchange Act rule 18a-1, and in tailoring
additional capital conditions designed to achieve comparable regulatory
outcomes. The LCR, NSFR, and internal liquidity assessment requirements
collectively will require Covered Entities to maintain pools of
unencumbered HQLA to cover potential cash outflows during a 30-day
stress period, to fund long-term obligations with stable funding
instruments, and to manage liquidity risk. These requirements--coupled
with supervisory reviews of the liquidity risk management practices of
Covered Entities--will require Covered Entities to hold significant
levels of liquid assets. These requirements and measures in combination
with the other capital requirements applicable to Covered Entities
provide a starting foundation for making a positive substituted
compliance determination with respect to the capital requirements of
Exchange Act section 15F(e) and Exchange Act rule 18a-1. However, the
Commission preliminarily believes that more is needed to achieve a
comparable regulatory outcome to the net liquid assets test of Exchange
Act rule 18a-1.
For these reasons, the proposed Amended Order includes an
additional capital condition that would impose a simplified net liquid
assets test.\66\ This simplified test would require the Covered Entity
to hold more than one dollar of liquid assets for each dollar of
liabilities. The simplified net liquid assets test--when coupled with
the CRR capital requirements,\67\ LCR requirements, NSFR requirements,
internal liquidity assessment requirements, and liquidity review
process--is designed to produce a regulatory outcome that is comparable
to the net liquid assets test of Exchange Act rule 18a-1 (i.e.,
sufficient liquidity to cover liabilities and to promote the
maintenance of highly liquid balance sheets).
---------------------------------------------------------------------------
\66\ See para. (c)(1)(iii) of the proposed Amended Order. This
additional condition is included in the French and UK Orders. See
French Order, 86 FR 41659; UK Order, 86 FR 43372.
See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) of the
proposed Amended Order.
\67\ See, e.g., CRR, Part 1 (Own Funds, including Tier 1
capital) and Part 2 (Capital Requirements).
---------------------------------------------------------------------------
More specifically, substituted compliance with respect to Exchange
Act rule 18a-1 would be subject to the condition that a Covered Entity:
(1) Maintains liquid assets (as defined in the proposed condition) that
have an aggregate market value that exceeds the amount of the Covered
Entity's total liabilities by at least $100 million before applying the
deduction specified in the proposed condition, and by at least $20
million after applying the deduction specified in the proposed
condition; (2) makes and preserves for three years a quarterly record
that: (a) Identifies and values the liquid assets maintained as defined
in the proposed condition, (b) compares the amount of the aggregate
value the liquid assets maintained pursuant to the proposed condition
to the amount of the Covered Entity's total liabilities and shows the
amount of the difference between the two amounts (``the excess liquid
assets amount''), and (c) shows the amount of the deduction specified
in the proposed condition and the amount that deduction reduces the
excess liquid assets amount; (3) notifies the Commission in writing
within 24 hours in the manner specified on the Commission's website if
the Covered Entity fails to meet the requirements of the proposed
condition and includes in the notice the contact information of an
individual who can provide further information about the failure to
meet the requirements; and (4) 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.\68\
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\68\ See para. (c)(1)(iii) of the proposed Amended Order. This
proposed additional condition is included in the French and UK
Orders. See French Order, 86 FR 41659; UK Order, 86 FR 43372.
---------------------------------------------------------------------------
Under the first prong of this additional capital condition, the
Covered Entity would be required to maintain liquid assets (as defined
in the proposed capital condition) that have an aggregate market value
that exceeds the amount of the Covered Entity's total liabilities by at
least: (1) $100 million before applying a deduction (as specified in
the proposed capital condition); and (2) $20 million after applying the
deduction.\69\ The first prong is designed to be consistent with the
$100 million tentative net capital requirement of Exchange Act rule
18a-1 applicable to SBS Entities approved to use models. As discussed
above, Exchange Act rule 18a-1 requires SBS Entities that have been
approved to use models to maintain at least $100 million in tentative
net capital. And, tentative net capital is the amount that an SBS
Entity's liquid assets exceed its total unsubordinated liabilities
before applying haircuts. The first prong would require the Covered
Entity to subtract
[[Page 46508]]
total liabilities from total liquid assets. The amount remaining will
need to equal or exceed $100 million. The first prong also is designed
to be consistent with the $20 million fixed-dollar minimum net capital
requirement of Exchange Act rule 18a-1. As discussed above, net capital
is calculated by applying haircuts (deductions) to tentative net
capital and the fixed-dollar minimum requires that net capital must
equal or exceed $20 million. The first prong would require the Covered
Entity to subtract total liabilities from total liquid assets and then
apply the deduction to the difference. The amount remaining after the
deduction would need to equal or exceed $20 million.
---------------------------------------------------------------------------
\69\ See para. (c)(1)(iii)(A)(1) of the proposed Amended Order.
The definition of ``liquid assets'' and the method of calculating
the deductions are discussed below.
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For the purposes of the first prong, ``liquid assets'' would be
defined as: (1) Cash and cash equivalents; (2) collateralized
agreements; (3) customer and other trading related receivables; (4)
trading and financial assets; and (5) initial margin posted by the
Covered Entity to a counterparty or third-party (subject to certain
conditions discussed below).\70\ These categories of liquid assets are
designed to align with assets that are considered allowable assets for
purposes of calculating net capital under Exchange Act rule 18a-1.\71\
Further, the first four categories of liquid assets also are designed
to align with how Covered Entities categorize liquid assets on their
financial statements.
---------------------------------------------------------------------------
\70\ See para. (c)(1)(iii)(B) of the proposed Amended Order.
\71\ See supra notes 56 and 60 (describing allowable assets
under Exchange Act rule 18a-1).
---------------------------------------------------------------------------
The first category of liquid assets would be cash and cash
equivalents.\72\ These assets would consist of cash and demand deposits
at banks (net of overdrafts) and highly liquid investments with
original maturities of three months or less that are readily
convertible into known amounts of cash and subject to insignificant
risk of change in value.\73\ The second category of liquid assets would
be collateralized agreements.\74\ These assets would consist of secured
financings where securities serve as collateral such as repurchase
agreements and securities loaned transactions.\75\ The third category
of liquid assets would be customer and other trading related
receivables.\76\ These assets would consist of customer margin loans,
receivables from broker-dealers, receivables related to fails to
deliver, and receivables from clearing organizations.\77\ The fourth
category of liquid assets would be trading and financial assets.\78\
These assets would consist of cash market securities positions and
listed and over-the-counter derivatives positions.\79\
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\72\ See para. (c)(1)(iii)(B)(1) of the proposed Amended Order.
\73\ See, e.g., International Financial Reporting Standards
Foundation (``IFRS''), IAS 7 Statement of Cash Flows (defining
``cash'' as comprising cash on hand and demand deposits and ``cash
equivalents'' as short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value). See also Books and
Records Adopting Release, 84 FR 68673-74 (the section of the amended
Part II of the FOCUS Report setting forth the assets side of the
balance sheet and identifying cash as an allowable asset in Box
200).
\74\ See para. (c)(1)(iii)(B)(2) of the proposed Amended Order.
\75\ See Books and Records Adopting Release, 84 FR 68673-74 (the
section of the amended Part II of the FOCUS Report setting forth the
assets side of the balance sheet and identifying securities borrowed
as an allowable asset in Boxes 240 and 250 and securities purchased
under agreements to resell as an allowable asset in Box 360).
\76\ See para. (c)(1)(iii)(B)(3) of the proposed Amended Order.
\77\ See Books and Records Adopting Release, 84 FR 68673-74 (the
section of the amended Part II of the FOCUS Report setting forth the
assets side of the balance sheet and identifying fails to deliver as
allowable assets in Boxes 220 and 230, receivables from clearing
organizations as allowable assets in Boxes 280 and 290, and
receivables from customers as allowable assets in Boxes 310, 320,
and 330).
\78\ See para. (c)(1)(iii)(B)(4) of the proposed Amended Order.
\79\ See Books and Records Adopting Release, 84 FR 68673-74 (the
section of the amended Part II of the FOCUS Report setting forth the
assets side of the balance sheet and identifying securities,
commodities, and swaps positions as allowable assets in Box 12019).
---------------------------------------------------------------------------
As discussed above, initial margin posted to a counterparty is
treated differently under Exchange Act rule 18a-1 and the Basel capital
standard. The fifth category of liquid assets would be initial margin
posted by the Covered Entity to a counterparty or a third-party
custodian, provided: (1) The initial margin requirement is funded by a
fully executed written loan agreement with an affiliate of the Covered
Entity; (2) the loan agreement provides that the lender waives re-
payment of the loan until the initial margin is returned to the Covered
Entity; and (3) the liability of the Covered Entity to the lender can
be fully satisfied by delivering the collateral serving as initial
margin to the lender.\80\ As discussed above, one critical difference
between Exchange Act rule 18a-1 and the Basel capital standard is that
an SBS Entity cannot count as capital the amount of initial margin
posted to a counterparty or third-party custodian unless it enters into
a special loan agreement with an affiliate.\81\ 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, to count initial margin posted away as a
liquid asset for purposes of this capital condition, the Covered Entity
would be required to enter into the same type of special agreement that
an SBS Entity must execute to count initial margin as an allowable
asset for purposes of Exchange Act rule 18a-1.\82\
---------------------------------------------------------------------------
\80\ See para. (c)(1)(iii)(B)(5) of the proposed Amended Order.
\81\ See Capital and Margin Adopting Release, 84 FR 43887-88.
\82\ Id.
---------------------------------------------------------------------------
If an asset does not fall within one of the five categories of
``liquid assets'' as defined in the proposed Amended Order,\83\ it
would be considered non-liquid, and could not be treated as a liquid
asset for purposes of this capital condition. For example, the
following categories of assets generally could not be treated as liquid
assets: (1) Investments; (2) loans; and (3) other assets. The non-
liquid ``investment'' category would include the Covered Entity's
ownership interests in subsidiaries or other affiliates. The non-liquid
``loans'' category would include unsecured loans and advances. The non-
liquid ``other'' assets category would refer to assets that do not fall
into any of the other categories of liquid or non-liquid assets. These
non-liquid ``other'' assets would include furniture, fixtures,
equipment, real estate, property, leasehold improvements, deferred tax
assets, prepayments, and intangible assets.
---------------------------------------------------------------------------
\83\ See para. (c)(1)(iii)(B) of the proposed Amended Order.
---------------------------------------------------------------------------
As discussed above, the first prong of this capital condition would
require the Covered Entity to subtract total liabilities from total
liquid assets and then apply a deduction (haircut) to the
difference.\84\ The amount remaining after the deduction would need to
equal or exceed $20 million. The method of calculating the amount of
the deduction would rely on the calculations Covered Entities must make
under the Basel capital standard.\85\ In particular, under the Basel
standard, Covered Entities must risk-weight their assets. This involves
adjusting the nominal value of each asset based on the inherent risk of
the asset. Less risky assets are adjusted to lower values (i.e., have
less weight) than more risky assets. As a result, Covered Entities must
hold lower levels of regulatory capital for less risky assets and
higher levels of capital for riskier assets. Similarly, under Exchange
Act rule 18a-1, less risky assets incur lower haircuts than riskier
assets and,
[[Page 46509]]
therefore, require less net capital to be held in relation to them.
Consequently, the process of risk-weighting assets under the Basel
capital standard provides a method to account for the inherent risk in
an asset held by a Covered Entity similar to how the haircuts under the
Exchange Act rule 18a-1 account for the risk of assets held by SBS
Entities. For these reasons, the Commission preliminarily believes it
would be appropriate to use the process of risk-weighting assets under
the Basel capital standard to determine the amount of the deduction
(haircuts) under the first prong of the third additional capital
condition.
---------------------------------------------------------------------------
\84\ See para. (c)(1)(iii)(A)(1) of the proposed Amended Order.
\85\ See BCBS, Risk-based capital requirements (RBC20),
available at: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20191215&published=20191215.
---------------------------------------------------------------------------
Under the Basel capital standard, Covered Entities must hold
regulatory capital equal to at least 8% of the amount of their risk-
weighted assets.\86\ Therefore, the deduction (haircut) required for
purposes of this capital condition would be determined by dividing the
amount of the Covered Entity's risk-weighted assets by 12.5 (i.e., the
reciprocal of 8%).\87\ In sum, the Covered Entity would be required to
maintain an excess of liquid assets over total liabilities that equals
or exceeds $100 million before the deduction (derived from the firm's
risk-weighted assets) and $20 million after the deduction.\88\
---------------------------------------------------------------------------
\86\ Id.
\87\ See para. (c)(1)(iii)(C) of the proposed Amended Order. The
Commission acknowledges that a Covered Entity's risk-weighted assets
will include components in addition to market and credit risk
charges (e.g., operational risk charges). However, the Commission
expects the combined market and credit risk charges would make up
the substantial majority of the risk-weighted assets. In addition,
the Commission believes that this method of calculating the
deduction in the first prong of the third additional capital
condition is a reasonable approach in that it addresses market and
credit risk similar to the process used by security-based swap
dealers authorized to use internal models to compute market and
credit risk deductions under Exchange Act rule 18a-1. See, e.g.,
Exchange Act rule 18a-1(e) (prescribing requirements to calculate
market and credit risk charges, including use of an 8%
multiplication factor for calculating the credit risk charges).
\88\ For example, assume a Covered Entity has total assets of
$600 million (of which $595 million are liquid and $5 million are
illiquid) and total liabilities of $450 million. In this case, the
Covered Entity's liquid assets would exceed total liabilities by
$145 million ($590 million minus $450 million) and, therefore, the
Covered Entity would have excess liquid assets greater than $100
million as required by the first prong of this capital condition.
Assume further that the Covered Entity's risk-weighted assets under
the Basel capital standard equal $400 million. In this case, the
Covered Entity's deduction would equal $32 million ($400 million
divided by 12.5). Subtracting $32 million from $145 million leaves
$113 million, which exceeds $20 million. Therefore, the Covered
Entity would meet the second requirement of the first prong of this
capital condition.
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The second prong of this capital condition would require the
Covered Entity to make and preserve for three years a quarterly record
that: (1) Identifies and values the liquid assets maintained pursuant
to the first prong; (2) compares the amount of the aggregate value the
liquid assets maintained pursuant to the first prong to the amount of
the Covered Entity's total liabilities and shows the excess liquid
assets amount; and (3) shows the amount of the deduction required under
the first prong and the amount that deduction reduces the excess liquid
assets amount.\89\ Consequently, the quarterly record would include
details showing whether the Covered Entity is meeting the $100 million
and $20 million requirements of the first prong.
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\89\ See para. (c)(1)(iii)(A)(2) of the proposed Amended Order.
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The third prong of this capital condition would require the Covered
Entity to notify the Commission in writing within 24 hours in the
manner specified on the Commission's website if the Covered Entity
fails to meet the requirements of the first prong and include in the
notice the contact information of an individual who can provide further
information about the failure to meet the requirements.\90\ As
discussed above, the first additional capital condition would require
the Covered Entity to apply substituted compliance with respect to
notification requirements of Exchange Act rule 18a-8 relating to
capital.\91\ A Covered Entity applying substituted compliance with
respect to Exchange Act rule 18a-8 under the proposed Amended Order
would need to simultaneously submit to the Commission any notifications
relating to capital that it must submit to the EU and German
authorities. However, EU and German notification requirements do not
address a failure to adhere to the simplified net liquid assets test
that would be required by the first prong of this capital condition.
Moreover, due to the differences between Exchange Act rule 18a-1 and
the Basel capital standard discussed above, a Covered Entity could fall
out of compliance with the requirements of the first prong but still
remain in compliance with the requirements of the Basel capital
standard. Accordingly, the third prong would require the Covered Entity
to notify the Commission if the firm fails to meet the requirements of
the first prong. This would alert the Commission of potential issues
with the Covered Entity's financial condition that could pose risks to
the firm's customers and counterparties.
---------------------------------------------------------------------------
\90\ See para. (c)(1)(iii)(A)(3) of the proposed Amended Order.
\91\ See para. (c)(1)(ii) of the proposed Amended Order.
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The fourth prong of this condition would require the Covered Entity
to 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.\92\ 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 would file with
the Commission to monitor the appropriateness of the capital condition
if it is included in an amended 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 or an
amended order providing substituted compliance for Exchange Act rule
18a-7.\93\
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\92\ See para. (c)(1)(iii)(A)(4) of the proposed Amended Order.
\93\ See part VII.B.4, infra (discussing proposed reporting
conditions with respect to applying substituted compliance for
Exchange Act rule 18a-7).
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C. Margin--Preliminary Views and Proposed Amended Order
In the Commission's preliminary view, based on the Amended
Application and the Commission's review of applicable provisions,
relevant EU and German margin requirements would produce regulatory
outcomes that are comparable to those associated with Exchange Act rule
18a-3, provided Covered Entities are subject to additional conditions
(discussed below) to address differences between the two margining
regimes with respect to counterparty exceptions.
In terms of producing comparable outcomes, in adopting Exchange Act
rule 18a-3, 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 BCBS and the Board of
the International
[[Page 46510]]
Organization of Securities Commissions (``IOSCO'') with respect to
margin requirements for non-centrally cleared derivatives.\94\ In this
regard, Exchange Act rule 18a-3 and the EU and German margin rules
require firms to collect liquid collateral from a counterparty to cover
variation and/or initial margin requirements.\95\ Both sets of rules
also require firms to deliver liquid collateral to a counterparty to
cover variation margin requirements. Under both sets of rules, the fair
market value of collateral used to meet a margin requirement must be
reduced by a haircut.\96\ Further, both sets of rules permit the use of
a model (including a third party model such as ISDA's SIMM\TM\ model)
to calculate initial margin.\97\ The initial margin model under both
sets of rules must meet certain minimum qualitative and quantitative
requirements, including that the model must use a 99 percent, one-
tailed confidence level with price changes equivalent to a 10-day
movement in rates and prices.\98\ Both sets of rules have common
exceptions to the requirements to collect and/or post initial or
variation margin, including exceptions for certain commercial end
users, the Bank for International Settlements, and certain multilateral
development banks.\99\ Both sets of rules also permit a threshold below
which initial margin is not required to be collected and incorporate a
minimum transfer amount.\100\ For these reasons, substituted compliance
with respect to Exchange Act rule 18a-3 would be conditioned on Covered
Entities being subject to and complying with these EU and German margin
requirements.\101\
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\94\ See Capital and Margin Adopting Release, 84 FR 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 EU and German margin
requirements also are based on the recommendation in the BCBS/IOSCO
Paper.
\95\ See 17 CFR 240.18a-3(c)(1)(ii) and the Amended Application
Annex A category 4 at 28-31.
\96\ See 17 CFR 240.18a-3(c)(1)(ii) and the Amended Application
Annex A category 4 at 38-39.
\97\ See 17 CFR 240.18a-3(d)(2)(i) and the Amended Application
Annex A category 4 at 12-18.
\98\ See 17 CFR 240.18a-3(d)(2)(i) and the Amended Application
Annex A category 4 at 12. The Commission must approve the use of an
initial margin model. 17 CFR 240.18a-3(d)(2)(i). EMIR article 11(15)
directs European supervisory authorities to develop regulatory
technical standards under which initial margin models have to be
approved (initial and ongoing approval). EU and German requirements
currently provide that, upon request, counterparties using an
initial margin model shall provide the regulators with any
documentation relating to the risk management procedures relating to
such model at any time. EMIR Margin RTS article 2(6).
\99\ See 17 CFR 240.18a-3(c)(1)(iii) and the Amended Application
Annex A category 4 at 54-63.
\100\ See 17 CFR 240.18a-3(c)(1)(iii) and the Amended
Application Annex A category 4 at 64-66.
\101\ See para. (c)(2)(i) of the proposed Amended Order. In
connection with margin requirements, Covered Entities would need to
comply with: EMIR article 11; EMIR Margin RTS; 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); MiFID Org Reg article 23(1); CRD
articles 74 and 79(b); and KWG section 25a(1). See para. (c)(2)(i)
of the proposed Amended Order.
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However, there would be additional conditions to address
differences in the exceptions to collecting variation and/or initial
margin between Exchange Act rule 18a-3 and the EU and German margin
rules. In this regard, the Commission stated when proposing Exchange
Act rule 18a-3 that the ``Dodd-Frank Act seeks to address the risk of
uncollateralized credit risk exposure arising from OTC derivatives by,
among other things, mandating margin requirements for non-cleared
security-based swaps and swaps.'' \102\ Further, the comparability
criteria for margin requirements under Exchange Act rule 3a71-6
provides that prior to making a substituted compliance determination,
the Commission intends to consider (in addition to any conditions
imposed) whether the foreign financial regulatory system requires
registrants to adequately cover their current and future exposure to
OTC derivatives counterparties, and ensures registrants' safety and
soundness, in a manner comparable to the applicable provisions arising
under the Exchange Act and its rules and regulations.\103\ In adopting
this comparability criteria for margin requirements, the Commission
stated that obtaining collateral is one of the ways OTC derivatives
dealers manage their credit risk exposure to OTC derivatives
counterparties.\104\
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\102\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers; Proposed
Rule, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214,
70258 (Nov. 23, 2012).
\103\ See 17 CFR 240.3a71-6(d)(5)(i) and (ii).
\104\ See Capital and Margin Adopting Release, 84 FR 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.). Id.
---------------------------------------------------------------------------
To address the risk of uncollateralized exposures, Exchange Act
rule 18a-3 requires SBS Entities without a prudential regulator to
collect variation margin from all counterparties, including affiliates,
unless an exception applies.\105\ Under the EU and German margin
requirements, there are exceptions from the variation margin
requirements for certain intragroup transactions (i.e., transactions
between affiliates).\106\ In addition, Exchange Act rule 18a-3 requires
firms to collect initial margin from all counterparties, unless an
exception applies.\107\ This initial margin requirement under Exchange
Act rule 18a-3 requires the firm to collect initial margin from a
financial counterparty such as a hedge fund without regard to whether
the counterparty has material exposures to non-cleared security-based
swaps and uncleared swaps. In contrast, EU and German margin
requirements do not require Covered Entities to collect initial margin
from financial counterparties, if their notional exposure to non-
centrally cleared derivatives does not exceed a certain threshold on a
group basis.\108\
---------------------------------------------------------------------------
\105\ See 17 CFR 240.18a-3(c)(ii)(A)(1) and (2).
\106\ See the Amended Application Annex A category 4 at 60-61.
\107\ See 17 CFR 240.18a-3(c)(ii)(B).
\108\ See the Amended Application Annex A category 4 at 7 and
63. These thresholds are being phased-in with the last initial
margin threshold set at EUR 8 billion.
---------------------------------------------------------------------------
In some cases these differences may result in a Covered Entity not
being adequately collateralized to cover its current or future exposure
to these counterparties with respect to its OTC derivatives
transactions. In addition, differences in the counterparty exceptions
could potentially incentivize market participants to engage in non-
cleared security-based swap transactions outside of the United
States.\109\ Consequently, the Commission preliminarily believes it
would be appropriate to propose additional margin conditions to produce
comparable regulatory outcomes in terms of counterparty exceptions
between Exchange Act rule 18a-3 and the EU and German requirements.
---------------------------------------------------------------------------
\109\ The Commission recognizes there are also cases where the
EU and German margin rules are more restrictive than Exchange Act
rule 18a-3. EU margin rules require Covered Entities to post initial
margin to covered counterparties, while the Exchange Act rule 18a-3
would permit posting but not require it. In addition, EU margin
rules also require a Covered Entity to collect (and post) initial
margin to financial and non-financial counterparties if their
notional exposure to non-centrally cleared derivatives exceeds a
certain threshold on a group basis. In contrast, Exchange Act rule
18a-3 does not require (but permits) a nonbank security-based swap
dealer to collect initial margin from counterparties that are
financial market intermediaries. 17 CFR 240.18a-3(c)(1)(iii)(B). The
comparability analysis, however, focuses on determining whether the
EU and German margin rules are comparable to Exchange Act rule 18a-
3.
---------------------------------------------------------------------------
The first additional condition is designed to address differences
in the counterparty exceptions with respect to
[[Page 46511]]
variation margin. It would require a Covered Entity to collect
variation margin, as defined in the EMIR Margin RTS, from a
counterparty with respect to a transaction in non-cleared security-
based swaps, unless the counterparty would qualify for an exception
under Exchange Act rule 18a-3 from the requirement to deliver variation
margin to the Covered Entity.\110\ This condition would define
variation margin by referencing EMIR Margin RTS to facilitate
implementation of the condition by Covered Entities. Under this
condition, for example, Covered Entities would be required to collect
variation margin from their affiliates, but would be permitted to
comply with all other EU and German margin requirements, including
calculation, collateral, documentation, and timing of collection
requirements. The first proposed additional condition would close the
gap between the counterparty exceptions of Exchange Act rule 18a-3 and
the EU and German margin rules with respect to variation margin.
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\110\ See para. (c)(2)(ii) of the proposed Amended Order. This
proposed additional condition is included in the French and UK
Orders. See French Order, 86 FR 41659; UK Order, 86 FR 43372.
---------------------------------------------------------------------------
The second proposed additional condition is designed to address the
counterparty exceptions with respect to initial margin. It would
require a Covered Entity to collect initial margin, as defined in the
EMIR Margin RTS, from a counterparty with respect to transactions in
non-cleared security-based swaps, unless the counterparty would qualify
for an exception under Exchange Act rule 18a-3 from the requirement to
deliver initial margin to a Covered Entity.\111\ The condition would
define initial margin by referencing EMIR Margin RTS to facilitate
implementation of the condition by Covered Entities. Under this
condition, for example, Covered Entities would be required to collect
initial margin from their certain counterparties, but would be
permitted to comply with all other EU and German margin requirements,
including calculation, collateral, documentation, and timing of
collection requirements. The second proposed additional condition would
close the gap between the counterparty exceptions of Exchange Act rule
18a-3 and the EU and German margin rules with respect to initial
margin.
---------------------------------------------------------------------------
\111\ See para. (c)(2)(iii) of the proposed Amended Order. This
proposed additional condition is included in the French and UK
Orders. See French Order, 86 FR 41659; UK Order, 86 FR 43372.
---------------------------------------------------------------------------
Finally, the proposed Amended Order also includes as a proposed
margin condition that the Covered Entity apply substituted compliance
with respect to Exchange Act rule 18a-5(a)(12) (a record making
requirement).\112\ This record making requirement is directly linked to
the margin requirements of Exchange Act rule 18a-3. The proposed
Amended Order conditions substituted compliance with respect to this
record making requirement on the Covered Entity applying substituted
compliance with respect to Exchange Act rule 18a-3.\113\ This condition
would do the reverse: Condition substituted compliance with respect to
Exchange Act rule 18a-3 on the Covered Entity applying substituted
compliance with respect to Exchange Act rule 18a-5(a)(12). This
condition is designed to provide clarity as to the Covered Entity's
obligations under this record making requirement when applying
substituted compliance with respect to Exchange Act rule 18a-3 pursuant
this proposed Amended Order.
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\112\ See para. (c)(2)(iv) of the proposed Amended Order. This
proposed additional condition is included in the French and UK
Orders. See French Order, 86 FR 41659; UK Order, 86 FR 43372.
\113\ See para. (f)(1)(i)(L) of the proposed Amended Order.
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V. Proposed Amendments Related to CCO Reports
A. Compliance Report Certifications
Rule 15Fk-1 states that the required reports must include ``a
certification by the chief compliance officer or senior officer that,
to the best of his or her knowledge and reasonable belief and under
penalty of law, the information contained in the compliance report is
accurate and complete in all material respects.'' \114\ The standard
applied in the Order required certification that ``under penalty of
law, the report is accurate and complete.'' \115\ The Commission
preliminarily believes that, consistent with the French Order,\116\
further alignment of the proposed Amended Order's certification
requirement with that of the applicable Exchange Act rule is
appropriate. Therefore, the proposed Amended Order would clarify that
the required reports should be certified by ``the chief compliance
officer or senior officer'' of the Covered Entity and that the same
certification standard contained in Exchange Act rule 15Fk-1 would
apply.\117\
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\114\ Exchange Act rule 15Fk-1(c)(2)(ii)(D); see also Exchange
Act rule 15Fk-1(e)(2) (defining ``senior officer'' as ``the chief
executive officer or other equivalent officer'').
\115\ See para. (d)(2) of the Order.
\116\ See French Order, 86 FR 41659.
\117\ See para. (d)(2)(ii)(B) of the proposed Amended Order. In
addition, for consistency with the French Order, the Commission is
proposing to incorporate CRR articles 286-88 and 293 and EMIR Margin
RTS article 2 as part of para. (d)(3) of the proposed Amended Order.
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B. Timing of Compliance Report Submission
Also consistent with the French Order,\118\ the Commission is
proposing to amend the Order to clarify the timing for Covered Entities
to submit compliance reports to the Commission. To promote timely
notice comparable to what the Exchange Act rule provides, the
Commission is proposing to incorporate a timing standard that accounts
for MiFID-required timing as well as the possibility that the relevant
reports may be submitted to the management body early. Under the
proposed Amended Order, the applicable compliance reports must be
provided to the Commission no later than 15 days following the earlier
of: (i) The submission of the report to the Covered Entity's management
body; or (ii) the time the report is required to be submitted to the
management body.\119\ The proposed Amended Order would also clarify
that together the reports must cover the entire period that the Covered
Entity's annual compliance report referenced in Exchange Act section
15F(k)(3) and Exchange Act rule 15Fk-1(c) would be required to
cover.\120\
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\118\ See French Order, 86 FR 41659.
\119\ See para. (d)(2)(D) of the proposed Amended Order.
\120\ See para. (d)(2)(E) of the proposed Amended Order.
---------------------------------------------------------------------------
VI. Proposed Amendments Counterparty Protection Requirements
A. Disclosure of Information Regarding Material Risks and
Characteristics
The Commission is proposing to add two requirements to the list of
German and EU disclosure of information regarding material incentives
or conflicts of interest requirements that the Covered Entity must be
subject to and comply with. The MAR Investment Recommendations
Regulation articles 5 and 6 enumerate specific obligations in relation
to disclosure of interests or of conflicts of interest. Article 5
requires that persons who produce recommendations disclose in their
recommendations all relationships and circumstances that may reasonably
be expected to impair the objectivity of the recommendation, including
interests or conflicts of interest. Article 6 imposes additional
obligations on certain entities, including the disclosure of
information on their interests and conflicts of interest concerning the
issuer to which a recommendation relates. The Commission preliminarily
believes that requiring Covered Entities
[[Page 46512]]
to be subject to and comply with MAR Investment Recommendations
Regulation articles 5 and 6 contributes to a determination that
relevant German and EU requirements produce regulatory outcomes that
are comparable to relevant requirements of Exchange Act rule 15Fh-3(b).
B. Fair and Balanced Communications
The Commission is also proposing to modify the fair and balanced
communications section of the proposed Amended Order.\121\ First, the
Commission believes that German and EU fair and balanced communications
requirements are more comparable to Exchange Act requirements when
considering three additional EU requirements: MAR article 20(1) would
require the Covered Entity to present recommendations in a manner that
ensures the information is objectively presented and to disclose
interests and conflicts of interest concerning the financial
instruments to which the information relates. MAR Investment
Recommendations Regulation article 3 would require a Covered Entity to
communicate only recommendations that present facts in a way that they
are clearly distinguished from interpretations, estimates, opinions and
other types of non-factual information; label clearly and prominently
projections, forecasts and price targets; indicate the relevant
material assumptions and substantial material sources of information;
and include only reliable information or a clear indication when there
is doubt about reliability. MAR Investment Recommendations Regulation
article 4 would require the Covered Entity to provide in its
recommendation additional information about the factual basis of its
recommendation. Accordingly, the Commission is adding these three
requirements to the Order's list of German and EU fair and balanced
communications requirements that the Covered Entity must be subject to
and comply with.\122\ Second, the Order required the Covered Entity to
be subject to and comply with MAR Investment Recommendations Regulation
article 5,\123\ which relates to obligations to disclose conflicts of
interest. As discussed above, the Commission is requiring Covered
Entities to comply with this requirement and with MAR Investment
Recommendations Regulation article 6 when using substituted compliance
for disclosure of material incentives and conflicts of interest
requirements. Accordingly, the Commission believes that MAR Investment
Recommendations Regulation article 5 is less relevant to comparability
of fair and balanced communications requirements and is proposing to
delete the reference to it in relation to substituted compliance for
fair and balanced communications.
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\121\ See para. (e)(2)(iii) of the proposed Amended Order.
\122\ See para. (e)(5) of the Order.
\123\ See para. (d)(2) of the Order.
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VII. Proposed Amendments Related to Recordkeeping, Reporting,
Notification, and Securities Count Requirements
A. BaFin Request and Associated Analytic Considerations
In its initial application (the ``BaFin Application''), in part,
requests substituted compliance for requirements applicable to SBS
Entities with and without a prudential regulator under the Exchange Act
relating to:
Recordmaking--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\124\
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\124\ See 17 CFR 240.18a-5. The BaFin Application discusses
German 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 BaFin Application Annex A category 2 at 4-34.
---------------------------------------------------------------------------
Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\125\
---------------------------------------------------------------------------
\125\ See 17 CFR 240.18a-6. The BaFin Application discusses
German 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
BaFin Application Annex A category 2 at 35-79.
---------------------------------------------------------------------------
Reporting--Exchange Act rule 18a-7 requires certain
reports.\126\
---------------------------------------------------------------------------
\126\ See 17 CFR 240.18a-7. The BaFin Application discusses
German requirements that address firms' obligations to make certain
reports. See BaFin Application Annex A category 2 at 80-91, 96-102.
---------------------------------------------------------------------------
Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\127\
---------------------------------------------------------------------------
\127\ See 17 CFR 240.18a-8. The BaFin Application discusses
German requirements that address firms' obligations to make certain
notifications. See BaFin Application Annex A category 2 at 92-96,
102.
---------------------------------------------------------------------------
Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a
quarterly securities count.\128\
---------------------------------------------------------------------------
\128\ See 17 CFR 240.18a-9. The BaFin Application discusses
German requirements that address firms' obligations to perform
securities counts. See BaFin Application Annex A category 2 at 27-
30.
---------------------------------------------------------------------------
Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\129\
---------------------------------------------------------------------------
\129\ See 15 U.S.C. 78o-10(g). The BaFin Application discusses
German 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
BaFin Application Annex A category 2 at 35-79.
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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.
B. Preliminary Views and Proposed Amended Order
1. General Considerations
In issuing the Order, the Commission found that relevant EU and
German requirements, subject to conditions and limitations, would
produce regulatory outcomes that are comparable to the outcomes
associated with the recordkeeping, reporting, and notification
requirements of Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8
applicable to SBS Entities with a prudential regulator. However, the
BaFin Application did not seek substituted compliance for the Exchange
Act capital and margin requirements applicable to SBS Entities without
a prudential regulator. Because of the close relationship between many
of the Exchange Act recordkeeping, reporting, and notification
requirements and the administration and oversight of Exchange Act
capital and margin requirements, the Order did not address substituted
compliance for recordkeeping, reporting, notification, and securities
count requirements applicable to SBS Entities without a prudential
regulator. The Commission is now considering substituted compliance for
these Exchange Act requirements because the Amended Application
requests substituted compliance for the Exchange Act capital and margin
requirements applicable to SBS Entities without a prudential regulator.
The Commission also is considering substituted compliance with respect
to the trading record preservation requirements of Exchange Act section
15F(g), which are applicable to SBS Entities with and without a
prudential regulator.
The Commission preliminarily concludes that the relevant EU and
German requirements, subject to conditions and limitations, would
produce regulatory outcomes that are comparable to the outcomes
associated with the requirements of Exchange Act rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9 applicable to SBS Entities without a prudential
regulator and to the outcomes associated with Exchange Act section
15F(g) applicable to all SBS
[[Page 46513]]
Entities. In reaching this preliminary conclusion, the Commission
recognizes that there are certain differences between the EU and German
requirements and the Exchange Act requirements. In the Commission's
preliminary view, on balance, those differences generally would not be
inconsistent with substituted compliance for these requirements.
Requirement-by-requirement similarity is not needed for substituted
compliance.
The Order makes substituted compliance available with respect to
the entirety of Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8 as
applicable to Covered Entities with a prudential regulator.
Consequently, under the Order, the Covered Entity can elect to apply
substituted compliance with respect to the entire rule (subject to
conditions and limitations) or, alternatively, comply with the Exchange
Act rule. The proposed Amended Order would modify this approach to
provide all Covered Entities with greater flexibility to select which
distinct requirements within the broader rule for which they would
apply substituted compliance. This would not preclude a Covered Entity
from applying substituted compliance for the entire rule (subject to
conditions and limitations). However, it would permit the Covered
Entity to apply substituted compliance with respect to certain
requirements of a given rule and to comply directly with the remaining
requirements. This more granular approach to making substituted
compliance determinations with respect to discrete requirements within
Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8 (collectively, the
``recordkeeping, reporting, and notification rules'') 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,
reporting, and notification 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, reporting, or notification rule (rather than apply
substituted compliance) because it can utilize systems that its
affiliated broker-dealer has implemented to comply with them. This
proposed approach is consistent with the approach taken by the
Commission in the French and UK Orders.\130\
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\130\ See French Order, 86 FR 41649; UK Order, 86 FR 43360.
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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 objective of these rules--taken as a whole--is to assist
the Commission in monitoring and examining for compliance with
substantive Exchange Act requirements applicable to SBS Entities (e.g.,
capital and margin requirements) as well as to promote the prudent
operation of these firms.\131\ The Commission preliminarily believes
the comparable EU and German recordkeeping rules achieve these outcomes
with respect to compliance with substantive EU and German requirements
for which preliminary positive substituted compliance determinations
are being made in this proposed Amended Order (e.g., the preliminary
positive substituted compliance determinations with respect to the
Exchange Act 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.
---------------------------------------------------------------------------
\131\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------
As discussed in more detail below, the Commission's preliminary
view is that substituted compliance is appropriate for most of the
requirements within the recordkeeping, reporting, and notification
rules. However, certain of the discrete requirements in these rules are
fully or partially linked to substantive Exchange Act requirements for
which substituted compliance is not available or for which a positive
substituted compliance determination would not be made under the
proposed Amended Order. In these cases, a preliminary positive
substituted compliance determination would not be made for the
requirement that is fully linked to the substantive requirement or to
the part of the requirement that is linked to the substantive
requirement. In particular, a preliminary positive substituted
compliance determination would not be made, in full or in part, for
recordkeeping, reporting, or notification requirements linked to the
following Exchange Act rules for which substituted compliance is not
available or a positive substituted compliance determination would not
be made: (1) Exchange Act rule 15Fh-4 (``Rule 15Fh-4 Exclusion''); (2)
Exchange Act rule 15Fh-5 (``Rule 15Fh-5 Exclusion''); (3) Exchange Act
rule 15Fh-6 (``Rule 15Fh-6 Exclusion''); (4) Exchange Act rule 18a-2
(``Rule 18a-2 Exclusion''); (5) Exchange Act rule 18a-4 (``Rule 18a-4
Exclusion''); (6) Regulation SBSR (``Regulation SBSR Exclusion''); and
(7) Form SBSE and its variations (``Form SBSE Exclusion''). This
proposed approach is consistent with the approach taken by the
Commission in the French and UK Orders.\132\
---------------------------------------------------------------------------
\132\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------
In addition, certain of the requirements in the recordkeeping,
reporting, and notification rules are expressly linked to substantive
Exchange Act requirements where a preliminary positive substituted
compliance determination would be made under the proposed Amended
Order. In these cases, substituted compliance with the linked
requirement in the recordkeeping, reporting, or notification rule would
be conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement. This would be 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. EU and German recordkeeping,
reporting, and notification requirements are designed to perform a
similar role with respect to the substantive EU and German requirements
to which they are linked. Consequently, this condition would be
designed to ensure that the records, reports, and notifications of a
Covered Entity align with the substantive Exchange Act or EU or German
requirement to which they are linked. For these reasons, under the
proposed Amended Order, substituted compliance for recordkeeping,
[[Page 46514]]
reporting, and notification requirements linked to the following
Exchange Act rules would be conditioned on the Covered 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''); (9) Exchange Act rule 18a-5
(``Rule 18a-5 Condition'') and (10) Exchange Act rule 18a-7 (``Rule
18a-7 Condition''). This proposed approach is consistent with the
approach taken by the Commission in the French and UK Orders.\133\
---------------------------------------------------------------------------
\133\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------
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 of this rule. The records also
would assist the firm in monitoring its net capital position and,
therefore, in complying with Exchange rule 18a-1. Therefore,
substituted compliance with respect to these recordkeeping and
reporting requirements would be subject to the condition that the
Covered Entity applies substituted compliance with respect to Exchange
Act rule 18a-1 (i.e., the ``Rule 18a-1 Condition''). This approach
would be 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 that the firm makes and preserves records to assist it in complying
with these rules.
Additionally, substituted compliance with respect to paragraphs
(a)(1), (b), and (c) through (h) of Exchange Act rule 18a-7 would be
subject to the additional condition that the Covered Entity applies
substituted compliance with respect to Exchange Act rule 18a-
6(b)(1)(viii) (the ``Rule 18a-6(b)(1)(viii) Condition''). This record
preservation requirement is directly linked to the financial and
operational reporting requirements of paragraphs (a)(1), (b), and (c)
through (h) of Exchange Act rule 18a-7 and this additional condition
would be designed to provide clarity as to the Covered Entity's
obligations under this record preservation requirement when applying
substituted compliance with respect to paragraphs (a)(1), (b), and (c)
through (h) of Exchange Act rule 18a-7 pursuant to this proposed
Amended Order. This proposed approach is consistent with the approach
taken by the Commission in the French and UK Orders.\134\
---------------------------------------------------------------------------
\134\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------
2. 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
without a prudential regulator are set forth in paragraph (a) of the
rule.\135\ The requirements for SBS Entities with a prudential
regulator are set forth in paragraph (b) of the rule.\136\ The Order
makes substituted compliance available for the requirements of
paragraph (b) of Exchange Act rule 18a-5 (subject to conditions and
limitations). The Commission is making a preliminary positive
substituted compliance determination for many of the requirements of
paragraph (a) of Exchange Act rule 18a-5 and making preliminary
positive substituted compliance determinations with respect to
paragraph (b) in a more granular manner than the Order.\137\
---------------------------------------------------------------------------
\135\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
\136\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
\137\ See para. (f)(1) of the proposed Amended Order.
---------------------------------------------------------------------------
However, certain of the requirements in these paragraphs are linked
to substantive Exchange Act requirements for which substituted
compliance is not available or a positive substituted compliance would
not be made under the proposed Amended Order. In these cases, a
positive substituted compliance determination would not be 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.\138\
---------------------------------------------------------------------------
\138\ A positive preliminary substituted compliance
determination would not be made for the following requirements of
Exchange Act rule 18a-5 because they are linked to a substantive
Exchange Act requirement for which the proposed Amended Order would
not provide substituted compliance: (1) The portion of Exchange Act
rule 18a-5(a)(9) that relates to Exchange Act rule 18a-2 would be
subject to the Rule 18a-2 Exclusion; (2) 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, would be subject to the Rule 18a-4
Exclusion; (3) the portions of Exchange Act rules 18a-5(a)(16) and
(b)(12) that relate to Exchange Act rule 15Fh-6 would be subject to
the Rule 15Fh-6 Exclusion; (4) the portions of Exchange Act rules
18a-5(a)(17) and (b)(13) that relate to Exchange Act rule 15Fh-4
would be subject to the Rule 15Fh-4 Exclusion; and (5) the portions
of Exchange Act rules 18a-5(a)(17) and (b)(13) that relate to
Exchange Act rule 15Fh-5 would be 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 preliminary positive substituted compliance determination would
be made under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-5 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\139\
---------------------------------------------------------------------------
\139\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 would be conditioned on the Covered 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,
would be 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,
would be 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,
would be 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, would be 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, would be subject to the Rule 15Fk-1
Condition; (6) Exchange Act rules 18a-5(a)(18)(i) and (ii) and
(b)(14)(i) and (ii) are linked to Exchange Act rule 15Fi-3 and,
therefore, would be 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, would be subject to the
Rule 15Fi-4 Condition.
---------------------------------------------------------------------------
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 would be
subject to the condition that the Covered Entity applies substituted
compliance for Exchange Act rule 18a-1 (i.e., the Rule 18a-1
Condition).\140\
---------------------------------------------------------------------------
\140\ Substituted compliance with the requirements of Exchange
Act rules 18a-5(a)(1), (2), (3), (4), (5), (7), (8), and (9) would
be conditioned on the Covered Entity applying substituted compliance
to Exchange Act rule 18a-1.
---------------------------------------------------------------------------
In addition, the proposed Amended Order would allow a Covered
Entity to apply substituted compliance on a transaction-by-transaction
basis to the Commission's recordkeeping
[[Page 46515]]
requirements that are linked with the counterparty protection
requirements of Exchange Act rule 15Fh-3.\141\ This approach would
align with the proposed Amended Order allowing Covered Entities to
apply substituted compliance on a transaction-by-transaction basis for
the Commission's counterparty protection requirements.
---------------------------------------------------------------------------
\141\ See para. (f)(1)(ii)(B) of the proposed Amended Order.
---------------------------------------------------------------------------
Under the proposed Amended Order, substituted compliance in
connection with the record making requirements of Exchange Act rule
18a-5 would be subject to the condition that the Covered 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'').\142\ This proposed
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 EU and
German 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 Exchange Act rule 18a-5 at the
request of Commission staff. The objective would be 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 would
assist the Commission staff in reviewing the information on the record.
---------------------------------------------------------------------------
\142\ See para. (f)(1)(ii)(A) of the proposed Amended Order. The
Order includes this condition for a Covered Entity with a prudential
regular to apply substituted compliance for Exchange Act rule 18a-5.
The proposed Amended Order would extend the scope of this condition
to address Covered Entities without a prudential regulator applying
substituted compliance for the requirements of Exchange Act rule
18a-5.
---------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
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 Amended Order that sets forth the preliminary
determination; (2) the paragraph(s) of Exchange Act rule 18a-5 to which
the preliminary determination applies; (3) a brief description of the
records required by the paragraph(s); 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 the proposed Amended Order would not provide substituted
compliance.\143\
---------------------------------------------------------------------------
\143\ The table does not include the proposed conditions for
applying substituted compliance to Exchange Act rule 18a-5; namely
that the Covered Entity: (1) Must be subject to and comply with
specified requirements of foreign law; and (2) as discussed below,
must promptly furnish to a representative of the Commission upon
request an English translation of a record. See para. (f)(8) of the
proposed Amended Order (setting forth the English translation
requirement).
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)............. (b)(6)............ Confirmations, Rule 15Fi-2 Condition.
(a)(15)............ (b)(11)........... trade
verification.
(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.
net capital and (2) Rule 18a-2
tangible net Exclusion.
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.
requirements. (2) Rule 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.
(f)(1)(i)(O).............. (a)(18)(iii)....... (b)(14)(iii)...... Portfolio Rule 15Fi-4 Condition.
compression.
----------------------------------------------------------------------------------------------------------------
[[Page 46516]]
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 would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraphs of Exchange Act rule 18a-5 to which the determination
applies; (3) a brief description of the records required by the
paragraphs; and (4) a brief description of why the requirement is
excluded from substituted compliance.
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(1)(ii)(C)............. (a)(13)............ (b)(9)............ Possession or Rule 18a-4 Exclusion.
control records.
(f)(1)(ii)(C)............. (a)(14)............ (b)(10)........... Reserve Rule 18a-4 Exclusion.
computations.
(f)(1)(ii)(C)............. (a)(16)............ (b)(12)........... Political Rule 15Fh-6 Exclusion.
contribution
records.
----------------------------------------------------------------------------------------------------------------
3. 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).\144\ 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.
---------------------------------------------------------------------------
\144\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------
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 without a prudential regulator and SBS
Entities with a prudential regulator.\145\ The Order makes substituted
compliance available for the requirements of these paragraphs
applicable to SBS Entities with a prudential regulator. As discussed
below, the Commission is making a preliminary positive substituted
compliance determination for many of the requirements of these
paragraphs applicable to SBS Entities without a prudential regulator.
Further, the Commission is making preliminary positive substituted
compliance determinations for many of the requirements of these
paragraphs applicable to SBS Entities with a prudential regulator in a
more granular manner than the Order.
---------------------------------------------------------------------------
\145\ Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a-6 apply to SBS Entities without a prudential
regulator. Paras. (a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of
Exchange Act rule 18a-6 apply to SBS Entities with a prudential
regulator. Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act
rule 18a-6 apply to SBS Entities irrespective of whether they have a
prudential regulator.
---------------------------------------------------------------------------
However, certain of these requirements are fully or partially
linked to substantive Exchange Act requirements for which a positive
substituted compliance determination would not be made under the
proposed Amended Order. In these cases, a positive substituted
compliance determination would not be made for the linked requirement
in Exchange Act rule 18a-6.\146\
---------------------------------------------------------------------------
\146\ A positive substituted compliance determination would not
be made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which the proposed Amended Order would not provide substituted
compliance: (1) The portion of Exchange Act rule 18a-6(b)(1)(v)
relating to Exchange Act rule 18a-2 would be 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, would be 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 would be
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, would be 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, would be subject
to the Rule 15Fh-4 Exclusion; (6) Exchange Act rules 18a-
6(b)(1)(xiii) and 18a-6(b)(2)(viii) are fully linked to Exchange Act
rule 15Fh-5 and, therefore, would be subject to the Rule 15Fh-5
Exclusion; (7) Exchange Act rule 18a-6(b)(2)(v) is fully linked to
Exchange Act rule 18a-4 and, therefore, would be subject to the Rule
18a-4 Exclusion; and (8) the portion of Exchange Act rule 18a-6(c)
relating to Form SBSE and its variations would be subject to the
Form SBSE 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 would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-6 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\147\
---------------------------------------------------------------------------
\147\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 would be conditioned on the Covered 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, would be 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,
would be 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, would be 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, would be 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, would be 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, would be 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,
would be 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, would be 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, would be 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, would be subject
to the Rule 15Fi-5 Condition.
---------------------------------------------------------------------------
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, under the proposed
Amended Order, substituted compliance for these requirements of
Exchange Act rule 18a-6 would be subject to the Rule 18a-1
Condition.\148\
---------------------------------------------------------------------------
\148\ 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) would be conditioned on the Covered Entity
applying substituted compliance to Exchange Act rule 18a-1.
---------------------------------------------------------------------------
Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for
[[Page 46517]]
preserving records electronically. Paragraph (f) sets forth
requirements for when records are prepared or maintained by a third
party. The Order makes substituted compliance available for the
requirements of paragraphs (e) and (f) of Exchange Act rule 18a-6 if
the Covered Entity has a prudential regulator. The proposed Amended
Order would extend this treatment to Covered Entities without a
prudential regulator.\149\
---------------------------------------------------------------------------
\149\ See paras. (f)(2)(i)(Q) and (R) of the proposed Amended
Order.
---------------------------------------------------------------------------
Paragraph (g) of Exchange Act rule 18a-6 requires an SBS Entity to
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 Order does not make substituted compliance available for the
requirements of paragraph (g) of Exchange Act rule 18a-6 because there
is no comparable requirement in the EU or Germany to produce these
records to a representative of the Commission. The proposed Amended
Order similarly would not make substituted compliance available for
paragraph (g) of Exchange Act rule 18a-6.
The following table summarizes the Commission's preliminary
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 Amended 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 the paragraph(s); 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 the proposed Amended Order would not provide substituted
compliance.\150\
---------------------------------------------------------------------------
\150\ The table does not include the proposed conditions for
applying substituted compliance to Exchange Act rule 18a-6; namely
that the Covered Entity: (1) Must be subject to and complies with
the requirements of foreign law; and (2) must promptly furnish to a
representative of the Commission upon request an English translation
of a record. See para. (f)(8) of the proposed Amended Order (setting
forth the English translation requirement).
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)....... .................. Information (1) Rule 18a-7
supporting Condition.
financial reports. (2) Rule 18a-4
Exclusion for ]
(b)(1)(viii)(L).
(3) Rule 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 Form SBSE Exclusion.
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) Portfolio (1) Rule 15Fi-3
reconciliation. Condition.
(d)(5) (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 a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-6 to which the
[[Page 46518]]
determination applies; (3) a brief description of the records required
by the paragraph(s); and (4) a brief description of why the requirement
is excluded from substituted compliance.
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).............. ................... (b)(2)(v)......... Information Rule 18a-4 Exclusion.
supporting
financial reports.
(f)(2)(ii)................ (b)(1)(xiii)....... (b)(2)(viii)...... Special entity (1) Rule 15Fh-4
documents. Exclusion.
(2) Rule 15Fh-5
Exclusion.
----------------------------------------------------------------------------------------------------------------
4. Exchange Act Rule 18a-7
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 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.
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.\151\
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.
---------------------------------------------------------------------------
\151\ 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 Act Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------
Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS Entities
with a prudential regulator to file the FOCUS Report Part IIC on a
quarterly basis. The Order provides substituted compliance for this
requirement 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
Germany (``German GAAP Condition'').\152\ The proposed Amended Order
would continue to provide Covered Entities with a prudential regulator
substituted compliance for paragraph (a)(2) of Exchange Act rule 18a-7,
subject to the Manner and Format and German GAAP Conditions.\153\ The
Commission continues to believe 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.\154\ 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 be the same information the SBS
Entity reports to EU and German authorities.
---------------------------------------------------------------------------
\152\ Under the Order, Covered Entities with a prudential
regulator must 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 Covered Entity in preparing publicly available or
available to be issued general purpose financial statements in
Germany.
\153\ See para. (f)(3)(i) of the proposed Amended Order.
\154\ In addition to the Order, the Manner and Format condition
is included in the French and UK Orders. See French Order, 86 FR
41651; UK Order, 86 FR 43361-62.
---------------------------------------------------------------------------
Paragraph (a)(1) of Exchange Act rule 18a-7 requires SBS Entities
without a prudential regulator to file the FOCUS Report Part II on a
monthly basis. The proposed Amended Order would provide Covered
Entities without a prudential regulator substituted compliance for
paragraph (a)(1) of Exchange Act rule 18a-7 subject to the Manner and
Format and German GAAP conditions.\155\ However, there would two
additional conditions. First, for the reasons discussed above, the
Covered Entity would need to apply substituted compliance for Exchange
Act Rule 18a-1 (i.e., substituted compliance would be subject to the
Rule 18a-1 Condition).\156\ Second, the Covered Entity would need to
apply substituted compliance with respect to Exchange Act rule 18a-
6(b)(1)(viii) (a record preservation requirement) (``Rule 18a-
6(b)(1)(viii) Condition'').\157\ This record preservation requirement
is directly linked to the financial and operational reporting
requirements of Exchange Act rule 18a-7(a)(1).
---------------------------------------------------------------------------
\155\ See para. (f)(3)(i) of the proposed Amended Order.
\156\ See para. (f)(3)(i)(C) of the proposed Amended Order. See
part VII.B.1, supra (discussing how certain recordkeeping and
reporting requirements are expressly linked to or important for
examining compliance with Rule 18a-1 condition).
\157\ See para. (f)(3)(i)(D) of the proposed Amended Order.
---------------------------------------------------------------------------
Paragraph (a)(3) of Exchange Act rule 18a-7 requires SBS Entities
without a prudential regulator that 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.\158\ Paragraph (b) of Exchange Act rule 18a-7
requires SBS Entities that are not prudentially regulated to make
certain financial information available on their
[[Page 46519]]
websites.\159\ 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.\160\ 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.\161\ 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.\162\
---------------------------------------------------------------------------
\158\ See 17 CFR 240.18a-7(a)(3).
\159\ See 17 CFR 240.18a-7(b).
\160\ See 17 CFR 240.18a-7(c) through (h).
\161\ See 17 CFR 240.18a-7(i).
\162\ See 17 CFR 240.18a-7(i).
---------------------------------------------------------------------------
The Commission preliminarily is making a positive substituted
compliance determination for paragraphs (b) through (j) of Exchange Act
rule 18a-7. As discussed below, substituted compliance with respect to
these paragraphs of Exchange Act rule 18a-7 would be subject to certain
conditions and limitations.
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 would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-7 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\163\
---------------------------------------------------------------------------
\163\ Substituted compliance with the following requirements of
Exchange Act rule 18a-7 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rule 18a-7(a)(1) is linked to
Exchange Act rules 18a-1 and 18a-6(b)(1)(viii) and, therefore, would
be subject to the Rule 18a-1 Condition and the Rule 18a-
6(b)(1)(viii) Condition; (2) Exchange Act rule 18a-7(a)(3) is linked
to Exchange Act rule 18a-1 and, therefore, would be subject to the
Rule 18a-1 Condition; (3) Exchange Act rule 18a-7(b) is linked to
Exchange Act rule 18a-6(b)(1)(viii) and, therefore, would be subject
to the Rule 18a-6(b)(1)(viii) Condition; and (4) Exchange Act rules
18a-7(c), (d), (e), (f), (g) and (h) taken as a whole are linked to
Exchange Act rules 18a-1 and 18a-6(b)(1)(viii) and, therefore, would
be subject to the Rule 18a-1 Condition and the Rule 18a-
6(b)(1)(viii) Condition.
---------------------------------------------------------------------------
Second, under the proposed Amended 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 would be subject to six conditions.\164\ The first condition
would be that the Covered Entity simultaneously sends a copy of the
financial statements the Covered Entity is required to file with EU or
German authorities, 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 EU and German 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 would be to provide the
Commission with the financial statements and report to more effectively
supervise and monitor Covered Entities.
---------------------------------------------------------------------------
\164\ See para. (f)(3)(iv)(B) to the proposed Amended Order.
---------------------------------------------------------------------------
The second condition would be that the Covered Entity include 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 Covered 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 would be that the Covered 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 EU and German 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 would provide that the report
of the independent public accountant may be prepared in accordance with
generally accepted auditing standards (``GAAS'') in Germany that are
used to perform audit and attestation services and the accountant
complies with German independence requirements. According to the BaFin
Application, German laws only require certain investment firms
(depending on their size) to have their financial statements audited,
so this condition would be designed to ensure 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 would be that a Covered Entity that is a
security-based swap dealer would need to 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'').\165\ These reports are designed to provide the Commission
with information about an SBS Entity's compliance with Rule 18a-4.
Substituted compliance is not available 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 would need to file a limited compliance report that includes
the statements relating to Rule 18a-4 \166\ or an exemption report if
the Covered Entity claims an exemption from Rule 18a-4. The Covered
Entity also would need to file the report of an independent public
accountant covering the limited compliance report or exemption report.
The fourth condition further would provide that the report of the
independent public accountant may be prepared in accordance with GAAS
in Germany that are used to perform audit and attestation services and
the accountant complies with German independence requirements.
---------------------------------------------------------------------------
\165\ The Commission views this as a limited exclusion from the
availability of substituted compliance for these requirements
because the proposed Amended Order would permit these reports
relating Exchange Act rule 18a-4 to be included with the German
regulatory reports the Covered Entities will file with the
Commission and because the reports could be prepared in accordance
with German GAAS (as discussed below).
\166\ 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 paras. (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 would be that a Covered Entity that is a major
security-based swap participant would need to file 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-2 for which
the proposed Amended Order would not provide substituted compliance.
These supporting schedules are the Computation of Tangible Net Worth.
The sixth condition would be that a Covered Entity that is a
security-based swap dealer would need to file the supporting schedules
required by Exchange Act rule 18a-7(c)(1)(i)(A) and (C) addressing the
statements identified
[[Page 46520]]
in Exchange Act rules 18a-7(c)(2)(ii) and (iii) that relate to Exchange
Act rule 18a-4 and 18a-4a if the Covered Entity is not exempt from
Exchange Act rule 18a-4 (i.e., the 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.
Substituted compliance for Exchange Act rule 18a-4 is not available.
The following table summarizes the Commission's proposed
preliminary 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 Amended 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 the paragraph(s); 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 the proposed Amended Order would not provide substituted
compliance.\167\
---------------------------------------------------------------------------
\167\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a report. See para. (f)(8) of the proposed
Amended Order (setting forth the English translation requirement).
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) German GAAP
Condition.
(3) Rule 18a-1
Condition for ]
(a)(1).
(4) Rule 18a-
6(b)(1)(viii)
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 (1) Rule 18a-
financial 6(b)(1)(viii)
information. Condition.
(f)(3)(iv)................ (c)................ .................. File annual (1) SEC Filing
(d)................ audited reports. Condition.
(e)................ (2) Contact Information
(f)................ Condition.
(g)................ (3) Accountant's Report
(h)................ Condition.
(4) Rule 18a-4 Limited
Exclusion.
(5) Supporting
Schedules Condition.
(6) Rule 18a-1
Condition.
(7) Rule 18a-
6(b)(1)(viii)
Condition.
----------------------------------------------------------------------------------------------------------------
5. Exchange Act Rule 18a-8
Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\168\ The Order
provides substituted compliance for the requirements of Exchange Act
rule 18a-8 applicable to SBS Entities with a prudential regulator
(subject to conditions and limitations). In particular, the
requirements of: (1) Paragraph (c) of Exchange Act rule 18a-8 that 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 must transmit a copy of the notice to the Commission; (2)
paragraph (d) of the rule that an SBS Entity 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
steps being taken to correct the situation; (3) and paragraph (h) of
the rule setting forth how to make the notifications required by
Exchange Act 18a-8.
---------------------------------------------------------------------------
\168\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------
Under the Order, substituted compliance in connection with the
notification requirements of Exchange Act rule 18a-8 are subject to the
conditions that the Covered Entity: (1) Simultaneously sends a copy of
any notice required to be sent by EU or German notification laws to the
Commission in the manner specified on the Commission's website (i.e.,
the ``SEC Filing Condition''); 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 these conditions
is to alert the Commission to financial or operational problems that
could adversely affect the firm--the objective of Exchange Act rule
18a-8. In addition, the Order does not provide substituted compliance
for paragraph (g) of Exchange Act rule 18a-8 that an SBS Entity that is
a security-based swap dealer 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.
Substituted compliance is not available for Exchange Act rule 18a-4.
The proposed Amended Order would continue to provide Covered
Entities with a prudential regulator substituted compliance for the
notification requirements of Exchange Act rule 18a-8 discussed above
subject to the conditions and limitations. However, the substituted
compliance determinations would be made on a more granular basis.
Further, the proposed Amended Order would provide Covered Entities
without a prudential regulator substituted compliance for these
notification requirements (also on a granular basis), subject to the
SEC Filing and Contact Information Conditions. The proposed Amended
Order also would apply the limitation with respect to the notification
requirements linked to Exchange Act rule 18a-4 to Covered Entities
without a prudential regulator.
[[Page 46521]]
Exchange Act rule 18a-8 has notification requirements that apply
exclusively to Covered Entities without a prudential regulator. In
particular, 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) of 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-2. 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 the steps being taken to correct the situation.
The Commission is preliminarily making a positive substituted
compliance determination for a number of the notification requirements
set forth in these paragraphs, subject to the SEC Filing and Contact
Information Conditions. However, certain of these requirements are
linked to substantive Exchange Act requirements for which the proposed
Amended Order would not provide substituted compliance. In these cases,
a positive substituted compliance determination would not be 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.\169\
---------------------------------------------------------------------------
\169\ A positive substituted compliance determination would not
be 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, would be 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 would be 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 would be 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, would be 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 would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-8 would be
conditioned on the SBS Entity applying substituted compliance to the
linked substantive Exchange Act requirement.\170\
---------------------------------------------------------------------------
\170\ Substituted compliance with the following requirements of
Exchange Act rule 18a-8 would be conditioned on the Covered 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, would be subject to the Rule 18a-1 Condition; and
(2) Exchange Act rule 18a-8(d) is linked to Exchange Act rule 18a-5
and, therefore, would be subject to the Rule 18a-5 Condition with
respect to any category of records required to made and kept current
by that rule. With respect to Exchange Act rule 18a-8(d), 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.
---------------------------------------------------------------------------
The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-8 by listing in each row: (1)
The paragraph of the proposed Amended 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 notifications
required by the paragraph(s); 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 the proposed Amended Order would not provide substituted
compliance.\171\
---------------------------------------------------------------------------
\171\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a notification. See para. (f)(8) of the
proposed Amended Order (setting forth the English translation
requirement).
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.
(b)(1)............. (2) SEC Filing
(b)(2)............. Condition.
(b)(4)............. (3) Contact Information
Condition.
(f)(4)(i)(B).............. (c)................ .................. Prudential (1) SEC Filing
regulator capital Condition.
category (2) Contact Information
adjustment Condition.
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 would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-8 to which the
[[Page 46522]]
determination applies; (3) a brief description of the records required
by the paragraph(s); 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.
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6. Exchange Act Rule 18a-9
Exchange Act rule 18a-9 requires SBS Entities that are security-
based swap dealers without 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.\172\ The Commission preliminarily believes EU and
German laws produce a comparable result in terms of securities count
requirements.\173\ Accordingly, the Commission preliminarily is making
a positive substituted compliance determination for this rule.\174\
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\172\ See 17 CFR 240.18a-9.
\173\ See EMIR article 11(1)(b); EMIR RTS articles 12 and 13;
WpHG section 84; HGB sections 316 and 325; and WpHG section 89 (1)
sentence 1 no. 1.
\174\ See para. (f)(5) to the proposed Amended Order.
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7. Exchange Act Section 15F(g)
Exchange Act Section 15F(g) requires SBS Entities to maintain daily
trading records.\175\ The Commission preliminarily believes EU and
German laws produce a comparable result in terms of daily trading
recordkeeping requirements.\176\ Accordingly, the Commission
preliminarily is making a positive substituted compliance determination
for the self-executing requirements in this statute.\177\
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\175\ See 15 U.S.C. 78o-10(g).
\176\ See WpHG section 83 para. 1; and MiFID Org Reg article
21(1)(f), 21(4), and 72(1)
\177\ See para. (f)(6) to the proposed Amended Order.
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8. Examination and Production of Records
The 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.\178\ The proposed Amended Order
similarly would not extend substituted compliance to these inspection
and production requirements.\179\
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\178\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g). The French and UK Orders do not extend substituted compliance
to these requirements. See French Order, 86 FR 41650; UK Order, 86
FR 43361.
\179\ See para. (f)(7) to the proposed Amended Order.
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Consequently, 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. Covered Entities may
make, keep, and preserve records, subject to the conditions described
above, in a manner prescribed by applicable EU and German requirements.
BaFin 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 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
operating under the proposed Amended Order would 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.
9. English Translations
The proposed Amended Order provides that to the extent documents
are not prepared in the English language, Covered Entities would need
to 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 or the
German Order.\180\ This proposed condition would be designed to
addresses difficulties that Commission examinations staff would have
examining Covered Entities that furnish documents in a foreign
language. The English translations would need to be provided promptly.
This condition is included in the French and UK Orders.\181\
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\180\ See para. (f)(8) to the proposed Amended Order.
\181\ See French Order, 86 FR 41651; UK Order, 86 FR 43361.
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VIII. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness Related to Capital and Margin
A. General Considerations
Exchange Act rule 3a71-6 provides that the Commission's assessment
of the comparability of the requirements of the foreign financial
regulatory system take into account ``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
[[Page 46523]]
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.\182\
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\182\ See generally Business Conduct Adopting Release, 81 FR
30079.
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In the substituted compliance Order for Germany the Commission
concluded that ``the relevant supervisory and enforcement
considerations in Germany are consistent with substituted compliance.''
\183\ In its amended application, BaFin provided the Commission with
additional information on the supervision and enforcement framework for
compliance with capital and margin requirements applicable to
significant credit institutions. For purposes of the supervision of
capital and margin by Germany, the Commission preliminary believes that
the relevant supervisory and enforcement considerations for capital and
margin in Germany are consistent with substituted compliance.
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\183\ Order, 85 FR 84697.
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In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission has considered the supervision and enforcement framework
described in the Order as well as the following factors:\184\
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\184\ The factors described in this section are in addition to
the factors described in the German Substituted Compliance Notice
and Proposed Order. See Exchange Act Release No. 90378 (Nov. 9,
2020), 85 FR 72726, 72739-40 (Nov. 13, 2020) (``German Substituted
Compliance Notice and Proposed Order'').
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B. Supervisory and Enforcement Framework in Germany
The ECB, through its single supervisory mechanism (``SSM'') and
executed by joint supervisory teams (``JSTs''), supervises firms for
compliance with the CRD and CRR, including all capital requirements.
The JSTs comprise of ECB staff, BaFin staff, and staff from other
countries in the EU where the significant institution has a subsidiary
or branch.\185\ For each firm, the JST conducts a Supervisory Review
and Evaluation Process (``SREP''), which measures the risks for each
bank. The SREP shows where a firm stands in terms of capital
requirements and the way it handles risks. To develop the SREP,
supervisors review the sustainability of each firm's business model,
governance and risk management by the firm, capital risks (credit,
market, operational, rate in the banking book and equity risks), and
liquidity and funding risks. Once the SREP is developed, the firm will
receive a letter setting forth specific measures that must be
implemented the following year based on the firm's individual profile.
For example, the SREP may ask the firm to hold additional capital or
set forth qualitative requirements related to the firm's governance
structure or management. After these supervisory measures are imposed,
the JST will monitor the credit institutions to ensure that it
establishes compliance with the regulatory framework and supervisory
measures taken. If a credit institution does not comply with such
measures, additional actions are considered. Available actions for the
JST range from informal communication with the supervised entity to
enforcement measures or sanctions.
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\185\ Information on the ECB supervision was obtained from the
SSM Supervisory Manual, March 2018, available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.supervisorymanual201803.en.pdf?42da4200dd38971a82c2d15b9ebc0e65.
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Misconduct detected by the JSTs is addressed primarily by the ECB.
The ECB has the power to enforce violations and to impose fines on
supervised entities for breaches of directly applicable European Union
law. The ECB can also ask national competent authorities (such as
BaFin) to open proceedings that may lead to the imposition of certain
pecuniary and non-pecuniary penalties.
IX. Request for Comment
A. Nonbank Capital and Margin
1. Capital
The Commission further requests comment regarding the comparability
analysis of EU and German capital requirements with Exchange Act
capital requirements for security-based swap dealers without a
prudential regulator. 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 EU and German 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, as a supplement
or alternative to those in the proposed Amended Order?
The Commission requests comment on the proposed capital condition
that is designed to bridge the gap between the Basel capital standard
and the net liquid assets test imposed by Exchange Act rule 18a-1.
Under this condition, a Covered Entity would need to: (1) Maintain
liquid assets (as defined in the proposed condition) that have an
aggregate market value that exceeds the amount of the Covered Entity's
total liabilities by at least $100 million before applying the
deduction specified in the proposed condition, and by at least $20
million after applying the deduction specified in the proposed
condition; (2) make and preserve for three years a quarterly record
that: (a) Identifies and values the liquid assets maintained as defined
in the proposed condition, (b) compares the amount of the aggregate
value the liquid assets maintained pursuant to the proposed condition
to the amount of the Covered Entity's total liabilities and shows the
amount of the difference between the two amounts (``the excess liquid
assets amount''), and (c) shows the amount of the deduction specified
in the proposed condition and the amount that deduction reduces the
excess liquid assets amount; (3) notify the Commission in writing
within 24 hours in the manner specified on the Commission's website if
the Covered Entity fails to meet the requirements of the proposed
condition and include in the notice the contact information of an
individual who can provide further information about the failure to
meet the requirements; and (4) include 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. The Commission requests
comment on each prong of this condition. Please identify any regulatory
or operational issues in connection with adhering to each prong of this
condition. The Commission requests comment on how this proposed
condition would compare to the liquidity requirements a Covered Entity
is subject to under the Basel capital standard.
For the purposes of this additional capital condition, ``liquid
assets'' would be defined as: (1) Cash and cash equivalents; (2)
collateralized agreements; (3) customer and other trading related
receivables; (4) trading and financial assets; and (5) initial margin
posted by the Covered Entity to a counterparty or third-party, subject
to certain conditions. Are these definitions of the categories of
liquid assets sufficiently clear? For example, should the definitions
provide more detail about the types of assets that could be included
within a category? If so, please explain. Should the condition use
different definitions? If so, please
[[Page 46524]]
explain why and suggest an alternative definition.
For the purposes of this additional capital condition, the
deduction (haircut) would be determined by dividing the amount of the
Covered Entity's risk-weighted assets by 12.5 (i.e., the reciprocal of
8%). Is this an appropriate method of calculating the deduction? If
not, explain why and suggest an alternative method. Would this
deduction be comparable to the haircuts under Exchange Act rule 18a-1?
If not, explain why. More generally, is the term ``risk-weighted
assets'' understood by market participants? If not, please explain why.
Under this proposed capital condition, the Covered Entity would be
required to maintain an excess of liquid assets over total liabilities
that equals or exceeds $100 million before the deduction (derived from
the firm's risk-weighted assets) and $20 million after the deduction.
Is ``total liabilities'' an appropriate metric for this condition? The
$100 million requirement is modeled on the minimum tentative net
capital requirement of Exchange Act rule 18a-1 and $20 million
requirement is modeled on the minimum fixed-dollar net capital
requirement of the rule. Are these appropriate requirements for the
proposed condition? If not, explain why and suggest alternative
requirements. For example, should the amount before applying the
proposed deduction be $50, $75, $125, or $150 million or some other
amount, or should the amount after the proposed deductions be $10, $30,
or $50 million or some other amount? If so, explain why.
The Commission requests comment on the proposed capital condition
that would require the Covered Entity to apply substituted compliance
with respect to Exchange Act rules 18a-5(a)(9) (a record making
requirement), 18a-6(b)(1)(x) (a record preservation requirement), and
18a-8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) (notification
requirements). Is this proposed capital condition appropriate? If not,
explain why. Would the proposed capital condition provide clarity as to
the Covered Entity's obligations under these recordkeeping and
notification requirements when applying substituted compliance with
respect to Exchange Act rule 18a-3? If not, please explain why.
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 Germany 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 compared to SBS
Entities complying with Exchange Act rule 18a-1? Please describe the
competitive advantages or disadvantages and explain their impact.
Please identify and describe any potential impacts the proposed
capital conditions would have on the way Covered Entities currently
conduct their business.
The first proposed capital condition for substituted compliance
with Exchange Act rule 18a-1 requires the Covered Entity to be subject
to and comply with specific EU and German capital and liquidity
requirements. Under Articles 7 and 8 of the CRR, supervisory
authorities can grant a Covered Entity a waiver from these EU and
German capital and/or liquidity requirements if its parent is subject
to them. The Bafin's Amended Application requests substituted
compliance for Covered Entities operating pursuant to these waivers.
The proposed Amended Order requires the Covered Entity (i.e., the
registrant itself) to be subject to the specified EU and German capital
and liquidity requirements. Accordingly, it would not provide
substituted compliance for Exchange Act rule 18a-1 to a Covered Entity
operating pursuant to these waivers.
However, the Commission requests comment on whether a positive
substituted compliance determination (subject to conditions and
limitations) could be made with respect to a Covered Entity operating
pursuant to a waiver from compliance with the Basel capital and
liquidity requirements when its immediate holding company is subject to
those requirements. Are there additional conditions that could be
imposed on a Covered Entity operating pursuant to these waivers that
could produce a comparable regulatory outcome to Exchange Act rule 18a-
1? If so, describe the conditions and explain how they would produce a
comparable regulatory outcome. For example, should the Commission
consider imposing additional conditions on either the Covered Entity
and/or its immediate holding company? In this regard, should the
Covered Entity and its immediate holding company be subject to the
proposed four-pronged capital condition that is designed to bridge the
gap between the Basel capital standard and the net liquid assets test
of Exchange Act rule 18a-1? Further, should substituted compliance be
conditioned on the Covered Entity maintaining a pool of liquid and
unencumbered assets to meet potential cash outflows over a 30-day (or
longer or shorter) stress period? Should the pool of unencumbered
liquid assets be sized based on an alternative metric? Should the
Commission further condition substituted compliance in this fact
pattern on the Covered Entity complying with paragraph (f) under
Exchange Act rule 18a-4 (i.e., the exemption from segregation
requirements) in order to limit its business activities? Are there
other limits that should be placed on the Covered Entity's activities
that would mitigate the risk of the firm not being directly subject to
EU and German capital and liquidity requirements? If so, please
describe them.
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 the new prudential rules for investment
firms in the EU and Germany. If so, should the Commission make a
positive substituted compliance determination with respect to these
capital requirements? If so, explain how they are comparable to the
[[Page 46525]]
capital requirements of Exchange Act rule 18a-1.
Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for capital in the French and UK Orders.\186\ Are there reasons to take
a different approach with respect to substituted compliance in a final
German amended order than was taken in the French and UK Orders with
respect to capital? If so, identify the differences and explain why
they should result in a different approach.
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\186\ See French Order, 86 FR 41658-59; UK Order, 86 FR 43371-
71.
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The Commission further requests comment on whether there would be
major security-based swap participants without a prudential regulator
in Germany that would seek 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 EU and German margin requirements are
comparable to Exchange Act rule 18a-3, subject to additional conditions
to address differences in counterparty exceptions. Commenters
particularly are invited to address the basis for substituted
compliance in connection with those requirements. Does EU and German
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, as a supplement
or alternative to those in the proposed Amended Order?
The Commission further requests comment on whether the haircuts
required under the 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 on whether the standardized grid
for computing initial margin under the EMIR Margin RTS is comparable to
the standardized approach for computing initial margin under paragraph
(d)(1) of Exchange Act rule 18a-3.
The Commission requests comment and supporting data on the proposed
margin conditions that are designed to address differences in the
counterparty exceptions between Exchange Act rule 18a-3 and German and
EU margin requirements. The first proposed additional margin condition
would require a Covered Entity to collect variation margin, as defined
in the EMIR Margin RTS, from a counterparty with respect to a
transaction in a non-cleared security-based swap, unless the
counterparty would qualify for an exception under Exchange Act rule
18a-3 from the requirement to deliver variation margin to the Covered
Entity. The second proposed additional margin condition would require a
Covered Entity to collect initial margin, as defined in the EMIR Margin
RTS, from a counterparty with respect to a transaction in a non-cleared
security-based swap, unless the counterparty would qualify for an
exception under Exchange Act rule 18a-3 from the requirement to deliver
initial margin to the Covered Entity. Do these proposed margin
conditions accomplish the goal of closing the gap between the
counterparty exceptions of Exchange Act rule 18a-3 and the EU and
German margin requirements? If so, please explain. If not, please
explain why. Would the proposed margin conditions impact any particular
type of counterparty more than another? If so, please explain. Does the
fact that the EU and German margin requirements have a final phase-in
date for implementation of initial margin requirements of September 1,
2022 impact the ability of Covered Entities to implement the proposed
margin conditions? If so, please explain.
The Commission also requests comment on the proposed margin
condition that a Covered Entity apply substituted compliance for the
requirements of Exchange Act rule 18a-5(a)(12) (a record making
requirement). Is this proposed margin condition appropriate? If not,
explain why. Would the proposed margin condition provide clarity as to
the Covered Entity's obligations under this record making requirement
when applying substituted compliance with respect to Exchange Act rule
18a-3? If not, please explain why.
The Commission requests comment on the potential benefits and costs
of the potential margin conditions. Would the conditions promote
comparable regulatory outcomes between the margin requirements applied
to Covered Entities in the EU and Germany and the margin requirements
of Exchange Act rule 18a-3? If so, explain why. If not, explain why
not. The Commission is mindful that compliance with the proposed margin
conditions would require Covered Entities applying substituted
compliance to Exchange Act rule 18a-3 to supplement their existing
margin processes and documentation, as well as to incur additional time
and cost burdens to implement the potential margin 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 margin conditions.
The Commission requests comment on the potential impacts the margin
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-3 and SBS Entities
that will comply with Exchange Act rule 18a-3? Would the conditions
eliminate or mitigate potential competitive advantages that Covered
Entities complying with EU and German margin requirements might have
over SBS Entities complying with the margin requirements of Exchange
Act rule 18a-3? Alternatively, would the proposed margin conditions
create competitive disadvantages for Covered Entities applying
substituted compliance with respect to Exchange Act rule 18a-3 compared
to SBS Entities complying with Exchange Act rule 18a-3? Please describe
the competitive advantages or disadvantages and explain their impact.
Please identify and describe any potential impacts on the way
Covered Entities currently conduct their business with respect to
implementing the proposed margin conditions.
Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for margin in the French and UK Orders.\187\ Are there reasons to take
a different approach with respect to substituted compliance in a final
German amended order than was taken in the French and UK Orders with
respect to margin? If so, identify the differences and explain why they
should result in a different approach.
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\187\ See French Order, 86 FR 41659; UK Order, 86 FR 43372.
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B. Trade Acknowledgment and Verification, and Trading Relationship
Documentation
Commenters are invited to address all aspects of the proposed
amendments related to trade acknowledgment and
[[Page 46526]]
verification, and trading relationship documentation. In this regard
commenters are invited to address the efficacy of the proposed EMIR-
related general conditions. Commenters also are invited to address the
proposed removal of MiFID conditions in connection with substituted
compliance for the trade acknowledgment and verification requirements
and trading relationship documentation requirements.
C. Recordkeeping, Reporting, Notification, and Securities Count
Requirements
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 applicable to SBS Entities without a prudential
regulator as well as the requirements of Exchange Act section 15F(g)
applicable to all SBS Entities. 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. Do EU and German
requirements 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 EU and German 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 EU and German laws cited for the determination result in a
comparable regulatory outcome; (2) are there additional or alternative
EU and German laws that should be cited to achieve a comparable
regulatory outcome; and (3) are any of the EU and German laws cited for
the determination 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 a Covered Entity
without a prudential regulator 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). Do the relevant EU and German laws
require Covered Entities without a prudential regulator 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 EU and German laws. Further, how burdensome would it be
for a Covered Entity without a prudential regulator 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 Covered Entities without a prudential
regulator in the Germany produce this information to EU and German
authorities? How do those formats differ from the formats required by
Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7)?
Is it appropriate to structure the Commission's substituted
compliance determinations in the proposed Amended Order with respect to
the recordkeeping, reporting and notification rules to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader recordkeeping, reporting, and notification 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 preliminary positive substituted
compliance determination would not be made under the proposed Amended
Order. In these cases, should the Commission not make a positive
substituted compliance determination for the fully linked requirement
in the recordkeeping, reporting, and notification rules or to the
portion of the requirement that is linked to a substantive Exchange Act
requirement? Explain why or why not.
Certain of the requirements in the Commission's recordkeeping,
reporting, and notification rules are linked to substantive Exchange
Act requirements where a preliminary positive substituted compliance
determination would be made under the proposed Amended 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.
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 would 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 without a prudential
regulator filing financial and operational information with the
Commission in the manner and format specified by the Commission by
order or rule. In addition to requesting comment about how Covered
Entities without a prudential regulator should meet the Manner and
Format Condition, the Commission continues to seek comment on the how
Covered Entities with a prudential regulator should meet this
condition. With respect to the FOCUS Report Part II, not all of the
line items on the report may be as pertinent to a Covered Entity
without a prudential regulator if a positive substituted compliance
determination is made with respect to capital or margin. With respect
to the FOCUS Report Part IIC, because the Commission does not have
responsibility to administer capital and margin requirements for
prudentially
[[Page 46527]]
regulated Covered Entities, the FOCUS Report Part IIC elicits much less
information than the FOCUS Report Part II or the financial reports
Covered Entities file with EU and/or German 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 Covered Entities file
with EU and/or German authorities? If so, do Covered 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 Covered Entities
with EU and/or German authorities; or (2) recorded in the books and
records required of Covered Entities. With respect to the 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 Covered 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
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 Covered 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 proposed conditions to
applying substituted compliance for the requirement of Exchange Act
rule 18a-7 that Covered Entities without a prudential regulator file
annual audited reports. For example, comment is sought on the first and
third conditions that the Covered Entity simultaneously transmit to the
Commission a copy of the financial statements the Covered Entity is
required to file annually with EU and/or German authorities, and, if
not already required, that the Covered Entity 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 EU or German
GAAP and audited by an independent public accountant in accordance with
EU or German GAAS? In addition, are there any concerns with the public
accountant being independent in accordance with EU or German
requirements? Further, the third proposed condition would require
Covered Entities that are not required under German law to file a
report of an independent public accountant covering their financial
statements to file such an accountant's report. This proposed condition
is based on the fact that German law only requires certain investment
firms (depending on their size) to have their financial statements
audited. Do the firms in Germany 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?
Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for recordkeeping, reporting, notification, and securities count
requirements in the French and UK Orders.\188\ Are there reasons to
take a different approach with respect to substituted compliance in a
final German amended order than was taken in the French and UK Orders
with respect to these requirements? If so, identify the differences and
explain why they should result in a different approach.
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\188\ See French Order, 86 FR 41648-57; UK Order, 86 FR 43359-
69.
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D. Additional Aspects of the Proposal
Commenters further are invited to address the proposed amendments
to the Order related to written notice of a Covered Entity's intent to
rely on substituted compliance, regarding the incorporation of
references to MiFIR into the general condition related to EU cross-
border issues, and the additional MOU condition. Commenters are also
invited to address the changes to the requirements for CCO reports, and
the provisions added and deleted from the sections on risk control,
internal supervision and counterparty protection requirements.
In addition, commenters are invited to address how the Commission
should weigh considerations related to supervisory and enforcement
effectiveness related to capital and margin, including considerations
regarding relevant EU and German supervisory and enforcement authority,
practices and tools related to capital and margin.
---------------------------------------------------------------------------
\189\ 17 CFR 200.30-3(a)(89).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority,\189\
J. Matthew DeLesDernier,
Assistant 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 Federal Republic of Germany and
the European Union and with the conditions of 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 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 MiFID, provisions of WpHG that implement MiFID,
and/or other EU and German requirements adopted pursuant to those
provisions, the Covered Entity's relevant security-based swap
activities constitute ``investment services'' or ``investment
activities,'' as defined in MiFID article 4(1)(2) and in WpHG
section 2(8), and fall within the scope of the Covered Entity's
authorization from BaFin to provide investment services and/or
perform investment activities in the Federal Republic of Germany.
(2) Counterparties as 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 MiFID, provisions of WpHG that implement MiFID and/or other EU
and German requirements adopted pursuant to those provisions, the
relevant counterparty (or potential counterparty) to the Covered
Entity is a ``client'' (or potential ``client''), as defined in
MiFID article 4(1)(9) and in WpHG section 67(1).
(3) Security-based swaps as 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
[[Page 46528]]
of MiFID, provisions of WpHG that implement MiFID and/or other EU
and German requirements adopted pursuant to those provisions, the
relevant security-based swap is a ``financial instrument,'' as
defined in MiFID article 4(1)(15) and in WpHG section 2(4).
(4) Covered Entity as CRD/CRR ``institution.'' For each
condition in paragraphs (b) through (f) of this Order that requires
the application of, and the Covered Entity's compliance with, the
provisions of CRD, provisions of KWG that implement CRD, CRR and/or
other EU and German requirements adopted pursuant to those
provisions, the Covered Entity is an ``institution,'' as defined in
CRD article 3(1)(3), in CRR article 4(1)(3) and in KWG section
1(1b).
(5) Counterparties as EMIR ``counterparties.'' 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 EMIR, EMIR RTS, EMIR Margin RTS and/or other EU
requirements adopted pursuant to those provisions, if the relevant
provision applies only to the Covered Entity's activities with
specified types of counterparties, and if the counterparty to the
Covered Entity is not any of the specified types of counterparty,
the Covered Entity complies with the applicable condition of this
Order:
(i) As if the counterparty were the specified type of
counterparty; in this regard, if the Covered Entity reasonably
determines that the counterparty would be a financial counterparty
if it were established in the EU and authorized by an appropriate EU
authority, it must treat the counterparty as if the counterparty
were a financial counterparty; and
(ii) Without regard to the application of EMIR article 13.
(6) Security-based swap status under EMIR. 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 EMIR and/or other EU requirements adopted pursuant to those
provisions, either:
(i) The relevant security-based swap is an ``OTC derivative'' or
``OTC derivative contract,'' as defined in EMIR article 2(7), that
has not been cleared by a central counterparty and otherwise is
subject to the provisions of EMIR article 11, EMIR RTS articles 11-
15, and EMIR Margin RTS article 2; or
(ii) The relevant security-based swap has been cleared by a
central counterparty that is authorized or recognized to clear
derivatives contracts by a relevant authority in the EU.
(7) Memorandum of Understanding with BaFin. The Commission and
BaFin have a supervisory and enforcement memorandum of understanding
and/or other arrangement 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.
(8) Memorandum of Understanding Regarding ECB-Owned Information.
The Commission and the ECB have a supervisory and enforcement
memorandum of understanding and/or other arrangement addressing
cooperation with respect to this Order as it pertains to information
owned by the ECB 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.
(9) 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 also 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.
(10) European Union Cross-Border Matters.
(i) If, in relation to a particular service provided by a
Covered Entity, responsibility for ensuring compliance with any
provision of MiFID or MiFIR or any other EU or German requirement
adopted pursuant to MiFID or MiFIR listed in paragraphs (b) through
(f) of this Order is allocated to an authority of the Member State
of the European Union in whose territory a Covered Entity provides
the service, BaFin must be the authority responsible for supervision
and enforcement of that provision or requirement in relation to the
particular service.
(ii) If responsibility for ensuring compliance with any
provision of MAR or any other EU requirement adopted pursuant to MAR
listed in paragraphs (b) through (f) of this Order is allocated to
one or more authorities of a Member State of the European Union, one
of such authorities must be BaFin.
(11) Notification Requirements Related to Changes in Capital. A
Covered Entity that is prudentially regulated relying on this Order
must apply substituted compliance with respect to the requirements
of Exchange Act rule 18a-8(c) and the requirements of Exchange Act
rule 18a-8(h) as applied to Exchange Act rule 18a-8(c).
(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: MiFID articles 16 and 23; WpHG
sections 63, 80, 83 and 84; MiFID Org Reg articles 21-37, 72-76 and
Annex IV; CRD articles 74, 76 and 79-87, 88(1), 91(1)-(2), 91(7)-(9)
and 92, 94 and 95; and KWG sections 25a, 25b, 25c (other than
25c(2)), 25d (other than 25d(3) and 25d(11)), 25e and 25f; CRR
articles 286-88 and 293; and EMIR Margin RTS article 2.
(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 EMIR article
11(1)(a) and 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 EMIR article 11(1)(b) and EMIR RTS articles 13 and
15; and
(ii) The Covered Entity provides the Commission with reports
regarding disputes between counterparties on the same basis as it
provides those reports to competent authorities pursuant to 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 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 EMIR
article 11(1)(a), EMIR RTS article 12, and 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: CRR,
Part One (General Provisions) Article 6(1), Part Two (Own Funds),
Part Three (Capital Requirements), Part Four (Large Exposures), Part
Five (Exposures to Transferred Credit Risk), Part Six (Liquidity),
and Part Seven (Leverage); MiFID Org Reg article 23; BRRD, articles
45(6) and 81(1); CRD, articles 73, 79, 86, 129, 129(1), 130, 130(1),
130(5), 131, 133, 133(1), 133(4), 141, 142(1) and (2); EMIR Margin
RTS, articles 2, 3(b), 7, and 19(1)(d) and (e), (3) and (8); KWG,
sections 10b-10h, 10i(2)-(9), 25a(1) sentence 3 no. 2 and no. 3 b),
33(1) sentence 1c); SAG, section 49(2), 49d, 62(1), 138(1); and
SolvV, section 37;
(ii) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rules 18a-5(a)(9), 18a-6(b)(1)(x), and
18a-8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) pursuant to
this Order; and
(iii)(A) The Covered Entity:
(1) Maintains liquid assets as defined in paragraph
(c)(1)(iii)(B) that have an aggregate market value that exceeds the
amount of the Covered Entity's total liabilities by at least $100
million before applying the deduction specified in paragraph
(c)(1)(iii)(C) and by at least $20 million after applying the
deduction specified in paragraph (c)(1)(iii)(C);
(2) Makes and preserves for three years a quarterly record that:
(a) Identifies and values the liquid assets maintained pursuant
to paragraph (c)(1)(iii)(A)(1);
(b) Compares the amount of the aggregate value the liquid assets
maintained pursuant to paragraph (c)(1)(iii)(A)(1) to the amount of
the Covered Entity's total liabilities and
[[Page 46529]]
shows the amount of the difference between the two amounts (``the
excess liquid assets amount''); and
(c) Shows the amount of the deduction specified in paragraph
(c)(1)(iii)(C) and the amount that deduction reduces the excess
liquid assets amount;
(3) The Covered Entity notifies the Commission in writing within
24 hours in the manner specified on the Commission's website if the
Covered Entity fails to meet the requirements of paragraph
(c)(iii)(A)(1) and includes in the notice the contact information of
an individual who can provide further information about the failure
to meet the requirements; and
(4) 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)(9) above.
(B) For the purposes of paragraph (c)(1)(iii)(A)(1), liquid
assets are:
(1) Cash and cash equivalents;
(2) Collateralized agreements;
(3) Customer and other trading related receivables;
(4) Trading and financial assets; and
(5) Initial margin posted by the Covered Entity to a
counterparty or a third-party custodian, provided:
(a) The initial margin requirement is funded by a fully executed
written loan agreement with an affiliate of the Covered Entity;
(b) The loan agreement provides that the lender waives re-
payment of the loan until the initial margin is returned to the
Covered Entity; and
(c) The liability of the Covered Entity to the lender can be
fully satisfied by delivering the collateral serving as initial
margin to the lender.
(C) The deduction required by paragraph (c)(1)(iii)(A) is the
amount of the Covered Entity's risk-weighted assets calculated for
the purposes of the capital requirements identified in paragraph
(c)(1)(i) divided by 12.5.
(2) Margin. The requirements of Exchange Act section 15F(e) and
Exchange Act rule 18a-3, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of: EMIR article 11; EMIR Margin RTS; 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); MiFID Org Reg article 23(1); CRD
articles 74 and 79(b); and KWG section 25a(1);
(ii) The Covered Entity collects variation margin, as defined in
EMIR Margin RTS, from a counterparty with respect to transactions in
non-cleared security-based swaps, unless the counterparty would
qualify for an exception from the collateral collection requirements
under paragraph (c)(1)(iii) or (c)(2)(iii) of Exchange Act 18a-3;
(iii) The Covered Entity collects initial margin, as defined in
the EMIR Margin RTS, from a counterparty with respect to
transactions in non-cleared security-based swaps, unless the
counterparty would qualify for an exception from the collateral
collection requirements under paragraph (c)(1)(iii) of Exchange Act
rule 18a-3; and
(iv) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 18a-5(a)(12) pursuant to this
Order.
(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) of this Order;
(ii) The Covered Entity complies with paragraph (d)(4) of 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 identified in paragraph (d)(3) of this Order;
(ii) All reports required pursuant to 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 signed by the chief compliance
officer or senior officer (as defined in Exchange Act rule 15Fk-
1(e)(2)) of the Covered Entity that, to the best of the certifier's
knowledge and reasonable belief and under penalty of law, the report
is accurate and complete in all material respects;
(C) Address the Covered Entity's compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions of this Order in connection
with requirements for which the Covered Entity is relying on this
Order;
(D) Be provided to the Commission no later than 15 days
following the earlier of:
(i) The submission of the report to the Covered Entity's
management body; or
(ii) The time the report is required to be submitted to the
management body; and
(E) Together cover the entire period that the Covered Entity's
annual compliance report referenced in Exchange Act section
15F(k)(3) and Exchange Act rule 15Fk-1(c) would be required to
cover.
(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:
MiFID articles 16 and 23; WpHG sections 63, 80, 83 and 84; MiFID Org
Reg articles 21-37, 72-76 and Annex IV; CRD articles 74, 76, 79-87,
88(1), 91(1)-(2), 91(7)-(9) and 92, 94 and 95; and KWG sections 25a,
25b, 25c (other than 25c(2)), 25d (other than 25d(3) and 25d(11)),
25e and 25f, and CRR articles 286-88 and 293; and EMIR Margin RTS
article 2.
(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 of 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 MiFID article 24(4), WpHG
sections 63(7) and 64(1) and MiFID Org Reg articles 48-50.
(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) MiFID article 23(2)-(3); WpHG section 63(2); and MiFID Org
Reg articles 33-35;
(ii) MiFID article 24(9); WpHG section 70; and MiFID Delegated
Directive article 11(5); or
(iii) MAR article 20(1) and 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 MiFID article
16(2); WpHG section 80(1); MiFID Org Reg articles 21-22, 25-26 and
applicable parts of Annex I; CRD articles 74(1) and 85(1); KWG
section 25a; MLD articles 11 and 13; GwG sections 10-11; MLD
articles 8(3) and 8(4)(a) as applied to internal policies, controls
and procedures regarding recordkeeping of customer due diligence
activities; and GwG section 6(1)-(2) as applied to vigilance
measures regarding recordkeeping of customer due diligence
activities.
(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
[[Page 46530]]
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
MiFID articles 24(2)-(3) and 25(1)-(2);; WpHG sections 63(5)-(6),
80(9)-(13) and 87(1)-(2); and 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 MiFID Annex
II section I and WpHG section 67(2) 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 MiFID articles 24(1), (3) and WpHG sections 63(1),
(6) or MiFID article 30(1) and WpHG section 68(1); and
(ii) MiFID articles 24(4)-(5); WpHG sections 63(7) and 64(1);
MiFID Org Reg articles 46-48; MAR articles 12(1)(c), 15 and 20(1);
and MAR Investment Recommendations Regulation articles 3 and 4.
(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 EMIR articles 11(1)(b)
and 11(2) and 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 MiFID Org Reg articles 74, 75, and Annex IV; and
MiFIR article 25(1); 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 CRD article 73; MiFID Delegated Directive article 2;
MiFID Org Reg articles 72, 74 and 75; EMIR article 39(4); KWG
section 10a; and WpHG section 84; 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 MiFID Delegated Directive article 2; MiFID Org Reg
articles 72, 74 and 75; EMIR article 39(4); and WpHG section 84; 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 CRR article 103; MiFID articles 16(6), 25(5), and
25(6); MiFID Org Reg articles 59, 74, 75 and Annex IV; MiFIR article
25(1); EMIR articles 9(2) and 11(1)(a); WpHG sections 63 and 64; 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 MiFID Org Reg article 59; EMIR articles 9(2) and
11(1)(a); MiFID articles 16(6), 25(5), and 25(6); and WpHG sections
63, 64, and 83 paragraphs 1 and 2;
(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 MiFID Org Reg articles 74, 75 and Annex IV; and
MiFIR article 25(1); 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 CRR articles 103, 105(3), and 105(10); CRD article
73; MiFID articles 16(6), 25(5), 25(6); MiFID Delegated Directive
article 2; MiFID Org Reg articles 59, 74, 75, and Annex IV; MiFIR
article 25(1); EMIR articles 9(2), 11(1)(a), and 39(4); KWG section
10a; and WpHG sections 63, 64, 83 paragraphs 1 through 2, and 84;
and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 15Fi-2 pursuant to this Order;
(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 MiFIR article 25(1); MLD4 articles 11 and 13; MiFID
article 25(2); WpHG section 64 paragraph 3; and GWG sections 10 and
11; 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 CRR articles 103, 105(3), and 105(10); MiFID Org Reg
articles 59, 74, 75 and Annex IV; MiFIR article 25(1); EMIR articles
9(2), 11(1)(a), and 39(4); MiFID articles 16(6), 25(5), and 25(6);
CRD article 73; MiFID Delegated Directive article 2; WpHG sections
63, 64, 83 paragraphs 1 through 2, and 84; and KWG section 10a; 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-5(a)(9), provided
that:
(1) The Covered Entity is subject to and complies with the
requirements of CRD article 73; MiFID Delegated Directive article 2;
EMIR article 39(4); MiFID Org Reg articles 72, 74, and 75; KWG
section 10a; and WpHG Section 84;
(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 MiFID Org Reg articles 21(1)(d), 35; CRD
articles 88, 91(1), 91(8); MiFID article 9(1) and 16(3); KWG
sections 15, 25a(1), 25c(1) through (3), 25c(4a), 25d(1) through
(3), 25d(7), 25d(11), and 36; and WpHG sections 81(1) and 84;
(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 CRR articles 103, 105(3) and 105(10); MiFID Org Reg.
articles 72, 74 and 75; CRD article 73; MiFID Delegated Directive
article 2; KWG section 10a; and WpHG section 84; and
(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 MiFID Org Reg articles 72, 73, and Annex I; MiFID
articles 16(6) and 25(2); MLD articles 11 and 13; EMIR article
39(5); WpHG sections 64 paragraph 3 and 83 paragraph 1; and GWG
sections 10 and 11, in each case with respect to the relevant
security-based swap or activity;
[[Page 46531]]
(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 EMIR article 11(1)(b); and EMIR RTS article
15(1)(a); 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 EMIR article 11(1)(b); and EMIR RTS article
15(1)(a), 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 MiFID Org Reg articles 72, 74, 75,
and Annex IV; CRR article 103; MiFIR article 25(1); EMIR article
9(2); MiFID articles 16(6) and 69(2); CRD article 73; MiFID
Delegated Directive article 2; WpHG sections 6, 7, 83 paragraph 1,
and 84; and KWG section 10a;
(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 MiFID Org Reg
articles 72, 74, 75, and Annex IV; CRR article 103; MiFIR article
25(1); EMIR article 9(2); MiFID articles 16(6) and 69(2); CRD
article 73; MiFID Delegated Directive article 2; WpHG sections 6, 7,
83 paragraph 1, and 84; and KWG section 10a;
(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 MiFID Org Reg articles 72, 74 and 75; EMIR article
9(2); CRD article 73; MiFID Delegated Directive article 2; MiFID
16(6); KWG section 10a; and WpHG sections 83 paragraph 1, and 84;
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 CRR article 103;
MiFID Org Reg articles 72, 73, 74, 75, 76, Annex I and Annex IV;
MiFIR article 25(1); EMIR article 9(2); CRD article 73; MiFID
articles 16(6), 16(7); MiFID Delegated Directive article 2; KWG
section 10a; and WpHG sections 83 paragraphs 1 and 3 through 8, and
84;
(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 EMIR article 9(2); CRR articles 99, 294, 394, 415,
430 and Part Six: Title II and Title III; CRR Reporting ITS article
14 and annexes I-V and VIII-XIII; and MiFID Org Reg article 72(1);
(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 EMIR article 9(2); MiFID Org Reg articles 72(1) and
73; MiFID article 16(6); and WpHG section 83 paragraph 1; 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 MiFID Org Reg articles 72(1) and 73; MiFIR article
25(1); EMIR article 9(2); MiFID article 16(6); and WpHG section 83
paragraph 1; 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),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of CRR articles 99, 294, 394, 415, 430 and Part Six:
Title II and Title III; CRR Reporting ITS article 14 and annexes I-V
and VIII-XIII, as applicable; and MiFID Org Reg article 72(1);
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 18a-7(a)(1), (b), (c) through (h),
and Exchange Act rule 18a-7(j) as applied to these requirements
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 MiFID Org Reg articles 22(3)(c), 23, 24, 25(2), 26,
29(2)(c), 35 and 72(1); CRR articles 176, 286 and 293(1)(d); EMIR
RTS; EMIR article 9(2); MiFID articles 16(2), 16(3), 16(5), 24(9);
MiFID Delegated Directive article 11; CRD article 73, 75-87; WpHG
sections 64 paragraph 3, 70, 80 paragraph 6, and 84; WpDVerOV
section 6; and KWG sections 10a, 25a, 25c(3)(3), 25c(3)(4), 25c(4a),
25d(6), 25(8); 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 EMIR article 9(2); MiFID Org Reg article 72(1); CRD
article 73; MiFID article 16(6); KWG section 10a; and WpHG section
83 paragraph 1; 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 EMIR article 9(2); MLD4 articles 11 and 13; MiFID
Org Reg article 72(1); MiFID article 16(6); GWG sections 10 and 11;
and WpHG section 83 paragraph 1, 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
[[Page 46532]]
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:
(1) The Covered Entity is subject to and complies with the
requirements of MiFID Org Reg articles 21(1)(f) and 72(1); MiFID
article 16(6); and WpHG section 83 paragraph 1; and
(2) This Order does not extend to the requirements of Exchange
act rule 18a-6(c) relating to Forms SBSE, SBSE-A, SBSE-C, SBSE-W,
all amendments to these forms, and all other licenses or other
documentation showing the registration of the Covered Entity with
any securities regulatory authority or the U.S. Commodity Futures
Trading Commission;
(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 MiFID Org Reg articles 35 and 72(1); CRD articles
88, 91(1), 91(8); MiFID article 9(1), 16(3), 16(6); KWG sections
25c(1) through (3), 25d(1) through (3), and 36; and WpHG sections
81(1), 83 paragraph 1, and 84;
(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 EMIR article 9(2); MiFID Org Reg articles 72(1) and
72(3); MiFID article 16(6); and WpHG section 83 paragraph 1; 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 MiFID Org Reg articles 21(1)(f), 72, 73, and Annex
I; MiFID article 16(6); and WpHG section 83 paragraph 1; 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 EMIR article 9(2); MiFID Org Reg articles 24, 25(2),
72(1) and 73; MiFID articles 16(2), 16(6), and 25(5); and WpHG
sections 64 paragraph 3 and 83 paragraphs 1 and 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 MiFID Org Reg articles 21(2), 58, 72(1) and 72(3);
MiFID articles 16(5), 16(6); and WpHG sections 80 paragraph 6, and
83 paragraph 1; 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 MiFID Org Reg article 31(1); MiFID article 16(5);
and WpHG section 80 paragraph 6.
(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 18a-6(b)(1)(xi), (b)(1)(xiii), (b)(2)(v), (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 the requirements of Exchange Act rule 18a-7(a)(1) or
(a)(2), as applicable, provided that:
(A) The Covered Entity is subject to and complies with the
requirements of CRR articles 99, 394, 430 and Part Six: Title II and
Title III; CRR Reporting ITS annexes I, II, III, IV, V, VIII, IX, X,
XI, XII and XIII, as applicable;
(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 Germany;
(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; and
(D) 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 rule 18a-6(b)(1)(viii) 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 the
requirements of Exchange Act rule 18a-7(a)(3), provided that:
(A) The Covered Entity is subject to and complies with the
requirements of CRR articles 99, 394, 431, 433, 452, 454, and 455;
CRR Reporting ITS annexes I, II, VIII and IX, as applicable; and
(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:
(A) The Covered Entity is subject to and complies with the
requirements of CRR articles 431 through 455; and HGB sections 316
and 325; and
(B) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 18a-6(b)(1)(viii) pursuant to this
Order.
(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 the requirements of paragraphs (c), (d), (e), (f), (g)
and (h) of Exchange Act rule 18a-7, provided that:
(A) The Covered Entity is subject to and complies with the
requirements of CRR articles 26(2), 132(5), 154, 191, 321, 325bi,
350, 353, 368, 418; HGB sections 316 and 325; WpHG section 24 and
84, and 89 (1) sentence 1 no. 1; and KWG section 26a(1);
(B) With respect to financial statements the Covered Entity is
required to file annually with the German BaFin, 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 German 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 Germany that the independent public
accountant uses to perform audit and attestation services and the
accountant complies with German 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 Germany
that the independent public accountant uses to perform audit and
attestation services and the accountant complies with German
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;
[[Page 46533]]
(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; and
(D) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 18a-6(b)(1)(viii) pursuant to this
Order.
(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 the
requirements of paragraphs (a)(1)(i), (a)(1)(ii), (b)(1), (b)(2),
and (b)(4) of Exchange Act rule 18a-8, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of CRR article 366(5); KWG section 25a (1) sentence 6
no. 3; and FinDAG section 4d; 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 the
requirements of Exchange Act rule 18a-8(c), provided that the
Covered Entity is subject to and complies with the requirements of
KWG section 25a(1) sentence 6 no. 3; and FinDAG section 4d;
(C) The requirements of Exchange Act rule 18a-8(d) and the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of Exchange Act rule 18a-8(d), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of KWG section 25a(1) sentence 6 no. 3; and FinDAG
section 4d; 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 the
requirements of Exchange Act rule 18a-8(e), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of KWG section 25a(1) sentence 6 no. 3; and FinDAG
section 4d;
(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 the
requirements of Exchange act rule 18a-8(e) relating to Exchange Act
rule 18a-2; 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 the
requirements of Exchange Act rule 18a-8(e) relating to Exchange Act
rule 18a-4;
(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 German 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 the requirements of Exchange Act rule 18a-8
relating to Exchange Act rule 18a-2;
(C) This Order does not extend to the requirements or to the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of paragraph (g) of rule 18a-8.
(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 EMIR article 11(1)(b); EMIR RTS articles 12 and 13;
WpHG section 84; HGB sections 316 and 325; and WpHG section 89 (1)
sentence 1 no. 1; 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 the Covered Entity is subject to and
complies with the requirements of WpHG section 83 paragraph 1; and
MiFID Org Reg article 21(1)(f), 21(4), and 72(1).
(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; and
(iii) Is an investment firm and/or credit institution that is
authorized by BaFin to provide investment services or perform
investment activities in Germany and is supervised by the ECB (or
has a licensing application pending with the ECB as of August 12,
2021) as a significant institution.
(2) ``MiFID'' means the ``Markets in Financial Instruments
Directive,'' Directive 2014/65/EU, as amended from time to time.
(3) ``WpHG'' means Germany's ``Wertpapierhandelsgesetz'', as
amended or superseded from time to time.
(4) ``MiFID Org Reg'' means Commission Delegated Regulation (EU)
2017/565, as amended from time to time.
(5) ``MiFID Delegated Directive'' means Commission Delegated
Directive (EU) 2017/593, as amended from time to time.
(6) ``MLD'' means Directive (EU) 2015/849, as amended from time
to time.
(7) ``GwG'' means Germany's ``Geldw[auml]schegesetz,'' as
amended from time to time.
(8) ``MiFIR'' means Regulation (EU) 600/2014, as amended from
time to time.
(9) ``EMIR'' means the ``European Market Infrastructure
Regulation,'' Regulation (EU) 648/2012, as amended from time to
time.
(10) ``EMIR RTS'' means Commission Delegated Regulation (EU)
149/2013, as amended from time to time.
(11) ``EMIR Margin RTS'' means Commission Delegated Regulation
(EU) 2016/2251, as amended from time to time.
(12) ``CRR Reporting ITS'' means Commission Implementing
Regulation (EU) 680/2014, as amended from time to time.
(13) ``CRD'' means Directive 2013/36/EU, as amended from time to
time.
(14) ``KWG'' means Germany's ``Kreditwesengesetz,'' as amended
from time to time.
(15) ``CRR'' means Regulation (EU) 575/2013, as amended from
time to time.
(16) ``MAR'' means the ``Market Abuse Regulation,'' Regulation
(EU) 596/2014, as amended from time to time.
(17) ``MAR Investment Recommendations Regulation'' means
Commission Delegated Regulation (EU) 2016/958, as amended from time
to time.
(18) ``FinDAG'' means Germany's
``Finanzdienstleistungsaufsichtsgesetz,'' as amended from time to
time.
(19) ``BaFin'' means the Bundesanstalt f[uuml]r
Finanzdienstleistungsaufsicht.
(20) ``ECB'' means the European Central Bank.
(21) ``WpDVerOV'' means Germany's ``Wertpapierdienstleistungs-
Verhaltens- und -Organisationsverordnung,'' as amended from time to
time.
(22) ``SAG'' means Germany's ``Sanierungs- und
Abwicklungsgesetz,'' as amended from time to time.
[[Page 46534]]
(23) ``SolvV'' means Germany's ``Solvabilit[auml]tsverordnung,''
as amended from time to time.
[FR Doc. 2021-17644 Filed 8-17-21; 8:45 am]
BILLING CODE 8011-01-P
