Staff Guidance – Information Regarding Foreign Regulatory 

Requirements for Substituted Compliance Applications

This guidance represents the views of staff of the Division of Trading and Markets (“Staff”). 

This guidance is not a rule, regulation, or statement of the Securities and Exchange Commission

(“Commission”). Furthermore, the Commission has neither approved nor disapproved the 

content of this guidance. This guidance, like all staff guidance, has no legal force or effect: it 

does not alter or amend applicable law, and it creates no new or additional obligations for any 

person. 

The information set forth below is not intended to be exhaustive, and the necessary contents of 

applications for substituted compliance may vary depending on the applicable facts and 

circumstances. 

For further information contact: Carol McGee, Assistant Director, or Joshua Kans, Senior 

Special Counsel, Office of Derivatives Policy, at (202) 551-5870, Division of Trading and 

Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

Background

Rule 3a71-6 under the Securities Exchange Act of 1934 (“Exchange Act”) provides that a 

registered non-U.S. security-based swap dealer or major security-based swap participant may 

satisfy certain requirements under Exchange Act section 15F by complying with comparable

regulatory requirements of a foreign jurisdiction.1 The rule particularly provides that substituted 

compliance potentially is available in connection with the requirements related to business 

conduct and supervision, chief compliance officers, trade acknowledgment and verification, 

capital, margin, recordkeeping and reporting, and risk mitigation.

2

 

Rule 3a71-6 conditions substituted compliance in part on the Commission determining that the 

foreign requirements are comparable to the otherwise applicable requirements, after taking into 

account “such factors as the Commission determines are appropriate,” such as “the scope and 

objectives of the relevant foreign regulatory requirements” and “the effectiveness of the 

supervisory compliance program administered, and the enforcement authority exercised, by the 

foreign financial regulatory authority.”3

 1 At times this guidance will refer to security-based swap dealers as “dealers,” and refer to major 

security-based swap participants as “major participants.” 

2

 Exchange Act rule 3a71-6(d) [17 CFR 240.3a71-6(d)]. 

Separately, substituted compliance potentially is available in connection with regulatory reporting 

and public dissemination requirements. See Regulation SBSR rule 908(c) [17 CFR 242.908(c)]. 

This guidance does not address applications for substituted compliance in connection with those 

requirements. 

3

 Exchange Act rule 3a71-6(a)(2)(i) [17 CFR 240.3a71-6(a)(2)(i)]. 

Rule 3a71-6 also conditions substituted compliance on the Commission entering into a 

supervisory and enforcement memorandum of understanding and/or other arrangement with the 

relevant foreign financial regulatory authority or authorities addressing supervisory and 
2

Exchange Act rule 0-13 governs applications for substituted compliance. Among other things, 

rule 0–13 provides that applications must include supporting documents necessary to make the 

application complete, “including information regarding applicable requirements established by 

the foreign financial regulatory authority or authorities, as well as the methods used by the 

foreign financial regulatory authority or authorities to monitor and enforce compliance with such 

rules.”4 Rule 0–13 further provides that Commission staff will review the application after the 

filing is complete, and that the Commission shall publish a notice that a completed application

has been submitted.

5

Holistic focus on regulatory outcomes

The Commission has explained that substituted compliance does not constitute exemptive relief 

or excuse registered entities from having to comply with Exchange Act requirements, but instead 

provides an alternative method of satisfying those requirements.6 To implement substituted 

compliance, the Commission will “endeavor to take a holistic approach in considering whether 

regulatory requirements are comparable for purposes of substituted compliance, and will focus 

on the comparability of regulatory outcomes rather than predicating substituted compliance on 

requirement-by-requirement similarity.”7

The Commission further recognizes that “different regulatory systems may be able to achieve 

some or all of those regulatory outcomes by using more or fewer specific requirements than the 

Commission, and that in assessing comparability the Commission may need to take into account 

the manner in which other regulatory systems are informed by business and market practices in 

those jurisdictions.”8 Because the comparability assessments will focus on regulatory outcomes 

rather than requirement-by-requirement similarity, the assessments “will require inquiry 

regarding whether foreign regulatory requirements adequately reflect [the relevant] interests and 

protections.”9 

 

enforcement cooperation and other matters arising under the substituted compliance 

determination. See Rule 3a71-6(a)(2)(ii) [17 CFR 240.3a71-6(a)(2)(ii)]. 

4

 Exchange Act rule 0-13(e) [17 CFR 240.0-13(e)].

5

 Exchange Act rule 0-13(g), (h) [17 CFR 240.0-13(g), (h)].

6

 See Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30074 (May 13, 2016) 

(“Business Conduct Adopting Release”). 

7

 See id. at 30078.

8

 See id.

9

 See id. This inquiry potentially will account for whether the Exchange Act sets forth relevant 

requirements with specificity, or whether the requirements at issue are the product of less specific 

Exchange Act provisions or of general statutory grants of authority to the Commission. In doing 

so, the analysis may place special emphasis on the foreign regime’s comparability with 

requirements that are set forth by the Exchange Act with a heightened degree of specificity – e.g., 

required disclosure of certain risks, characteristics, incentives and conflicts (Exchange Act 

section 15F(h)(3)(B)(i), (ii) [15 U.S.C. 78o-10(h)(3)(B)(i), (ii)]); required disclosure of daily 

marks (Exchange Act section 15F(h)(3)(B)(iii) [15 U.S.C. 78o-10(h)(3)(B)(iii)]); fair and 

balanced communications requirements (Exchange Act section 15F(h)(3)(C) [15 U.S.C. 78o-
3

Information in substituted compliance applications

To facilitate complete applications that will permit informed assessments, this guidance poses 

questions for applicants to consider regarding the regulatory interests reflected in the relevant 

foreign requirements, and asks how those are comparable to the interests associated with the 

analogous requirements under the Exchange Act. This guidance also summarizes the relevant 

Exchange Act requirements to help applicants understand the contours of those requirements, 

and facilitate applications that adequately explain how relevant foreign requirements produce 

comparable outcomes to Exchange Act requirements.

To facilitate applications that analyze whether holistic regulatory outcomes are achieved, this 

guidance groups the relevant requirements by the following categories:

I. Risk control – encompassing capital, margin, risk management system, trade 

acknowledgment and verification, portfolio reconciliation, portfolio compression and 

trading relationship documentation requirements.

II. Recordkeeping and reporting – encompassing record creation, record maintenance,

reporting and notice requirements.

III. Internal supervision and compliance – encompassing supervision, conflict of interest and 

chief compliance officer requirements.

IV. Counterparty protection – encompassing requirements related to: fair and balanced 

communications; disclosure of certain risks, characteristics, incentives and conflicts; 

daily mark disclosure; “know your counterparty”; suitability of recommendations; and 

disclosure of clearing rights.

V. Additional requirements regarding eligible contract participant verification, special

entities and political contributions. 

Applications may request substituted compliance for any – or all – of the individual requirements 

within the above groupings. Applications may analyze foreign requirements’ consistency with 

outcomes related to individual Exchange Act requirements or, as appropriate, may account for 

the foreign requirements’ consistency with the broader outcomes associated with relevant 

categories of requirements (e.g., the foreign requirements’ consistency with the “counterparty 

protection” requirements as a whole). 

The guidance below is intended to serve as a starting point for applicants to provide information

regarding the requirements of the foreign regime that is relevant to determining whether those 

requirements produce regulatory outcomes that are comparable with the relevant Exchange Act 

requirements. The Staff may request additional information regarding applicable requirements. 

Note on the effectiveness of supervisory and enforcement regimes

As noted above, the Commission must also take into account the effectiveness of the foreign 

supervisory program and the effectiveness of the exercise of foreign enforcement authority when 

determining whether to grant substituted compliance. This guidance does not address those 

 

10(h)(3)(C)]); and chief compliance officer requirements (Exchange Act section 15F(k) [15 

U.S.C. 78o-10(k)]). 
4

issues. Instead, given the variety of supervisory and enforcement regulatory frameworks across 

jurisdictions, parties interested in seeking substituted compliance are encouraged to contact 

Commission staff to discuss the information they should provide to the Commission regarding 

their jurisdiction’s supervisory and enforcement framework. 
5

I. Risk control requirements

The risk control requirements of the Exchange Act promote market stability by requiring that 

registered entities have adequate financial resources and follow risk mitigation and 

documentation practices that are appropriate to manage the market, counterparty, operational and 

legal risks associated with their security-based swap business.

10 These entity-level requirements 

 10 In proposing requirements related to capital, margin and risk management systems, the 

Commission noted that the objective of the capital standards for nonbank dealers is to “protect 

customer assets and mitigate the consequences of a firm failure,” while allowing firms flexibility 

in conducting their security-based swap business. See Exchange Act Release No. 68071 (Oct. 

18, 2012), 77 FR 70214, 70218 (Nov. 23, 2012); see also id. at 70230 (adding that the objective 

of the proposed capital requirements is to require nonbank dealers to maintain sufficient liquidity 

such that if they fail they can “meet all unsubordinated obligations to customers and 

counterparties and have adequate resources to wind-down in an orderly manner without the need 

for a formal proceeding”). As part of that proposal, the Commission further recognized that the 

Dodd-Frank Act seeks to address the risk of uncollateralized credit risk exposure arising from 

over-the-counter derivatives in part by mandating margin requirements for non-cleared securitybased swaps and swaps. See id. at 70258.

The Commission also noted that “[p]rudent financial institutions establish and maintain integrated 

risk management systems that seek to have in place management policies and procedures 

designed to help ensure an awareness of, and accountability for, the risks taken throughout the 

firm and to develop tools to address those risks.” See id. at 70250. 

Separately, in adopting trade acknowledgement and verification requirements, the Commission 

noted that that the rule was intended to avoid recurrences of documentation backlogs, and address 

concerns regarding the documentation of credit derivatives. The Commission further stated that 

the rule “was intended to reduce the risk a court may have to supply contract terms upon which 

there was no previous agreement,” adding that unconfirmed trades could allow errors to go 

undetected that might subsequently lead to losses and other problems, such as firms inaccurately 

measuring and managing their risk exposures, which may contribute to broader market problems. 

The Commission added that if security-based swap transactions are not “reduced to writing, there 

is no definitive written record of the contract terms to which the counterparties have agreed, 

which can lead to legal and operational risk for market participants.” Exchange Act Release No. 

78011 (Jun. 8, 2016), 81 FR 39808, 39809 (Jun. 17, 2019) (“Trade Acknowledgment and 

Verification Adopting Release”).

In adopting the portfolio reconciliation, portfolio compression and trading relationship 

documentation requirements, the Commission noted that “portfolio reconciliation could help to 

mitigate the possibility of a discrepancy unexpectedly affecting performance under the securitybased swap transaction by increasing the likelihood that the parties are and remain in agreement 

with respect to all material terms,” and that “valuation discrepancies identified during

reconciliation could help to identify problems with one or both of the counterparties’ internal 

valuation systems and models, or possibly even with a firm’s internal controls.” See Exchange 

Act Release No. 87782 (Dec. 18, 2019) at 10-11 (“Risk Mitigation Adopting Release”). The 

Commission further stated that compression may reduce a market participant’s “gross exposure to 

its direct counterparties, including by eliminating all exposure to certain counterparties,” and may 

provide “important operational benefits and efficiencies for market participants in that there are 

fewer open contracts to manage, maintain, and settle, resulting in fewer opportunities for 

processing errors, failures, or other problems that could develop throughout the lifecycle of a 

transaction.” Id. at 12-13. In addition, the Commission expressed the view that requiring trading 
6

generally apply to the entirety of a firm’s business, regardless of the location of the business or 

counterparty.

These consist of the following requirements:11 

 Capital – as provided by Exchange Act section 15F(e) [15 U.S.C. 78o-10(e)] and Exchange 

Act rules 18a-1, 18a-1a, 18a-1b, 18a-1c, 18a-1d and 18a-2 [17 CFR 240.18a-1, 240.18a-1a, 

240.18a-1b, 240.18a-1c, 240.18a-1d and 240.18a-2].

12 

 Margin – as provided by Exchange Act section 15F(e) [15 U.S.C. 78o-10(e)] and Exchange 

Act rule 18a-3 [17 CFR 240.18a-3].

 Risk management systems – as provided by Exchange Act section 15F(j)(2) [15 U.S.C. 78o10(j)(2)] and Exchange Act rules 15Fh-3(h)(2)(iii)(I), 18a-1(f) and 18a-2(c) [17 CFR 

140.15Fh-3(h)(2)(iii)(I), 240.18a-1(f) and 240.18a-2(c)]. 

 Trade acknowledgment and verification – as provided by Exchange Act section 15F(i) [15 

U.S.C. 78o-10(i)] and Exchange Act rule 15Fi-2 [17 CFR 240.15Fi-2].

 Portfolio reconciliation, portfolio compression and trading relationship documentation – as 

provided by Exchange Act section 15F(i) [15 U.S.C. 78o-10(i)] and Exchange Act rules

15Fi-3, 4 and 5 [17 CFR 240.15Fi-3, 4 and 5].

13

Some entities subject to the Exchange Act’s capital, margin and risk management requirements 

(as well as certain books and records addressed below) may be able to comply with an alternative 

 

relationship documentation “should promote sound collateral and risk management practices by 

enhancing transparency and legal certainty regarding each party’s rights and obligations under the 

transaction,” which “should help to reduce counterparty credit risk and promote certainty 

regarding the agreed-upon valuation and other material terms of a security-based swap.” Id. at 

14. 

11 For further information regarding these requirements regarding capital, margin and risk 

management systems, see generally Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 

43872, 43949 (Aug. 22, 2019) (“Capital and Margin Adopting Release”). For further information 

regarding the trade acknowledgment and verification requirements, see generally Trade 

Acknowledgment and Verification Adopting Release and Risk Mitigation Adopting Release, note 

10, supra. 

12 The Commission’s capital and margin rules (including certain of the risk management system 

rules addressed below), apply only to security-based swap dealers and major security-based swap 

participants that do not have a prudential regulator. The prudential regulators are responsible for 

capital and margin rules applicable to dealers and major participants that are banks. See

Exchange Act section 15F(e) [15 U.S.C. 78o-10(e)]. 

13 In adopting substituted compliance rules related to capital and margin requirements (including 

risk management system rules), trade acknowledgment and verification requirements, and 

portfolio reconciliation, portfolio compression and trading relationship documentation 

requirements, the Commission noted that the comparability assessments related to those 

requirements may constitute part of a broader assessment of the foreign regulatory system’s risk 

mitigation requirements, and the applicable comparability assessments may be conducted at the 

level of those risk mitigation requirements as a whole. See Capital and Margin Adopting Release, 

84 FR at 43949; Trade Acknowledgment and Verification Adopting Release, 81 FR at 39828, 

Risk Mitigation Adopting Release at 88.
7

compliance mechanism based on compliance with certain requirements adopted pursuant to the 

Commodity Exchange Act.14 Foreign entities that may need to register with the Commission as 

security-based swap dealers may wish to evaluate whether they would qualify to operate under 

this alternative compliance mechanism. 

A. Criteria for assessing comparability 

Consistent with the holistic approach toward assessing the comparability of regulatory outcomes 

in connection with substituted compliance, the comparability assessment associated with these 

requirements may focus on the comparability of individual requirements or, alternatively, may 

focus on whether the analogous requirements of a foreign jurisdiction – taken as a whole –

produce similar outcomes as Exchange Act requirements with regard to the overall goal of 

providing that registered entities have financial resources and follow risk mitigation and 

documentation practices that are appropriate to the market, counterparty, operational and legal 

risks associated with their security-based swap business. This latter approach does not require 

that the foreign jurisdiction have analogues to every requirement under Commission rules as 

long as the overall requirements of a foreign jurisdiction provide similar regulatory outcomes.

Moreover, Exchange Act rule 3a71-6(d)(4)(i) [17 CFR 240.3a71-6(d)(4)(i)] provides that when 

making substituted compliance determinations in connection with security-based swap dealer 

capital requirements, the Commission intends to consider (in addition to any conditions imposed) 

“whether the capital requirements of the foreign financial regulatory system are designed to help 

ensure the safety and soundness of registrants in a manner that is comparable to the applicable 

provisions arising under the [Exchange Act] and its rules and regulations.”15 

Rule 3a71-6(d)(5)(i) [17 CFR 240.3a71-6(d)(5)(i)] provides that when considering substituted 

compliance in connection with security-based swap dealer margin requirements, the Commission 

 14 See Exchange Act rule 18a-10 [17 CFR 240.18a-10]. Under this alternative compliance 

mechanism, certain security-based swap dealers that also are registered with the Commodity 

Futures Trading Commission (“CFTC”) as swap dealers, and that predominantly engage in a 

swaps business, may elect to comply with the capital, margin, segregation, recordkeeping and 

reporting requirements of the Commodity Exchange Act (“CEA”) and the CFTC’s rules in lieu of 

complying with the SEC’s analogous security-based swap dealer requirements. To take 

advantage of the alternative compliance mechanism, the security-based swap dealer cannot be 

registered as a broker-dealer (including as an OTC derivatives dealer), and the aggregate gross 

notional amount of the firm’s security-based swap positions must not exceed the lesser of a 

maximum fixed-dollar amount or 10 percent of the combined aggregate gross notional amount of 

the firm’s security-based swap and swap positions. 

This alternative compliance mechanism does not apply to trade acknowledgment and verification 

requirements. 

15 For major security-based swap participants, the rule more generally states that the Commission 

intends to consider (in addition to any conditions imposed) whether the capital requirements of 

the foreign financial regulatory system are comparable to the applicable provisions arising under 

the Exchange Act and its rules and regulations. See Exchange Act rule 3a71-6(d)(4)(ii) [17 CFR 

240.3a71-6(d)(4)(ii)]. 

Certain of the risk management control system rules discussed below (see note 64, infra, and 

accompanying text), were adopted as part of the capital rules. 
8

intends to consider (in addition to any conditions imposed) “whether the foreign financial 

regulatory system requires registrants to adequately cover their current and potential future 

exposure to over-the-counter derivatives counterparties, and ensures registrants’ safety and 

soundness, in a manner comparable to the applicable provisions” arising under the Exchange Act 

and its underlying rules and regulations.16

Exchange Act rule 3a71-6(d)(3) [17 CFR 240.3a71-6(d)(3)] provides that when considering 

substituted compliance in connection with trade acknowledgment and verification requirements 

the Commission intends to consider whether “the information that is required to be provided 

pursuant to the requirements of the foreign financial regulatory system, and the manner by which 

that information must be provided,” are comparable to those required pursuant to the applicable 

Exchange Act provisions and underlying rules.

Finally, Exchange Act rule 3a71-6(d)(7) [17 CFR 240.3a71-6(d)(7)] provides that when 

considering substituted compliance in connection with portfolio reconciliation, portfolio 

compression and trading relationship documentation requirements the Commission intends to 

consider whether “the requirements of the foreign financial regulatory system for engaging in 

portfolio reconciliation and portfolio compression and for executing trading relationship 

documentation with counterparties, the duties imposed by the foreign financial regulatory 

system, and the information that is required to be provided to counterparties pursuant to the 

requirements of the foreign financial regulatory system” are comparable to those required 

pursuant to the applicable Exchange Act provisions and underlying rules. 

B. Capital requirements for nonbank firms

The risk control requirements in part address the required levels of capital that registered entities 

must maintain to help ensure that, in the event of firm failure, there are resources sufficient to 

wind down the business in an orderly manner that protects counterparties and avoids contributing 

to market disruptions.

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s capital requirements for 

applicable nonbank firms may include (along with other relevant factors): 

­ How does your jurisdiction establish minimum capital requirements? 

­ What are the legal consequences if a firm falls below the minimum capital requirements? 

Does your jurisdiction require that a firm cease conducting business if its capital falls below 

the required minimum?17

 16 For major participants, the rule states that the Commission intends to consider (in addition to any 

conditions imposed) current exposure (variation margin). The rule does not address potential 

future exposure (initial margin). See Exchange Act rule 3a71-6(d)(5)(ii) [17 CFR 240.3a71-

6(d)(5)(ii)]. 

17 As context, Exchange Act rule 18a-1 provides that every registered security-based swap dealer at 

all times must have and maintain net capital in excess of the applicable minimum requirements. 

Otherwise, the firm must immediately cease conducting business as a security-based swap dealer. 
9

­ How effective is the level of capital required of applicable nonbank firms under your 

jurisdiction’s approach with respect to helping ensure that the liquidation of a firm will not 

result in excessive delay in repayment of the firm’s obligations to security-based swap 

customers and creditors, therefore assuring the continued market liquidity?

­ To what extent do the required capital levels for nonbank firms in your jurisdiction reflect 

regulatory concerns that differ from the concerns that underpin Exchange Act rule 18a-1?18 

Do any differences in the regulatory concerns that underpin your jurisdiction’s required 

capital levels lead to different regulatory outcomes from those attained under the Exchange 

Act? If so, are there any conditions that could be applied to substituted compliance to 

promote comparable regulatory outcomes, notwithstanding differences in the underlying 

concerns? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements. 

Exchange Act requirements

The Exchange Act, in part, provides that to “offset the greater risk” to security-based swap 

dealers, major security-based swap participants and the financial system arising from the use of 

uncleared security-based swaps, the applicable capital and margin requirements shall: (i) “help 

ensure the safety and soundness” of the security-based swap dealer or major security-based swap 

participant; and (ii) “be appropriate for the risk associated with” uncleared security-based swaps 

held by the security-based swap dealer or major security-based swap participant.19

Under Commission rules applicable to nonbank security-based swap dealers that are not also 

registered broker-dealers:

20

 18 As background, the Exchange Act rule 18a-1 capital requirement (applicable to security-based 

swap dealers that are not also registered broker-dealers) is grounded in the net liquid asset test 

applicable to registered-broker dealers. The net liquid asset test seeks to promote liquidity by 

requiring that firms maintain sufficient liquid assets to meet their liabilities, and, in the event of 

firm failure, to have adequate additional resources to wind-down the business in an orderly 

manner without the need for a formal proceeding. See Capital and Margin Adopting Release, 84 

FR at 43879.

19 Exchange Act section 15F(e)(3)(A) [15 U.S.C. 78o-10(e)(3)(A)]. 

20 Exchange Act rule 18a-1 [17 CFR 240.18a-1] sets forth net capital rules applicable to securitybased swap dealers, including security-based swap dealers that are OTC derivatives dealers (as 

defined in Exchange Act rule 3b-12 [17 CFR 240.3b-12]), that are not also broker-dealers. 

Security-based swap dealers that also are broker-dealers are subject to the broker-dealer net 

capital requirements of Exchange Act rule 15c3-1 [17 CFR 240.15c3-1] and its appendices. 

Substituted compliance is not available in connection with broker-dealer requirements. 
10

 Nonbank security-based swap dealers that do not use models to compute market and credit 

risk deductions must at all times have and maintain net capital of not less than the greater of 

$20 million or two percent of the risk margin amount.21 

 Nonbank security-based swap dealers that are permitted to use models to compute market 

and credit risk deductions must at all times maintain tentative net capital of not less than 

$100 million, along with net capital of not less than the greater of $20 million or two percent 

of the risk margin amount.22

 Nonbank security-based swap dealers must maintain additional net capital, over the above 

amounts, in connection with certain instruments subject to reverse repurchase agreements.23 

To calculate “tentative net capital,” a firm’s net worth (under U.S. generally accepted accounting 

principles) is subject to a number of adjustments.

24 That amount then is subject to further 

adjustments to calculate “net capital.”25 

Calculation of “tentative net capital” particularly requires adjustments to a firm’s net worth

related to: unrealized profits/losses and deferred tax liabilities,

26 subordinated liabilities,27 assets 

 21 Exchange Act rule 18a-1(a)(1) [17 CFR 240.18a-1(a)(1)]. That risk margin amount percentage is 

subject to future increases by Commission order. See Exchange Act rule 18a-1(a)(1)(i)(B), (C) 

and (a)(1)(ii) [17 CFR 240.18a-1(a)(1)(i)(B), (C) and (a)(1)(ii)]. 

For these purposes, “risk margin amount” means the sum of: (i) the total initial margin the dealer 

is required to maintain at each clearing agency with respect to security-based swap transactions 

cleared for security-based swap customers; plus (ii) the total initial margin associated with noncleared security-based swaps, as calculated pursuant to Exchange Act 18a-3. Exchange Act rule 

18a-1(c)(6) [17 CFR 240.18a-1(c)(6)]. 

22 Exchange Act rule 18a-1(a)(2) [17 CFR 240.18a-1(a)(2)]. That risk margin amount percentage 

similarly is subject to future increases by Commission order. See Exchange Act rule 18a1(a)(2)(i)(B), (C) and (a)(1)(ii) [17 CFR 240.18a-1(a)(2)(i)(B), (C) and (a)(1)(ii)].

23 Exchange Act rule 18a-1(b) [17 CFR 240.18a-1(b)]. 

24 Exchange Act rule 18a-1(c)(5) [17 CFR 240.18a-1(c)(5)].

25 Exchange Act rule 18a-1(c)(1) [17 CFR 240.18a-1(c)(1)]. 

26 Exchange Act rule 18a-1(c)(1)(i) [17 CFR 240.18a-1(c)(1)(i)]. This provision requires 

adjustments to reflect unrealized profits and losses in the dealer’s account, and to add certain 

amounts related to deferred income tax liability. The provision also addresses the valuation of 

options positions for purposes of calculating net worth. 

27 Exchange Act rule 18a-1(c)(1)(ii) [17 CFR 240.18a-1(c)(1)(ii)]. This provision requires the 

exclusion of certain subordinated liabilities.
11

not readily convertible into cash,

28 non-marketable securities,29 “failed to deliver” contracts,30

undermargined accounts,

31 and deductions in lieu of collecting collateral for non-cleared 

transactions.

32 

Calculation of “net capital” requires further adjustments (to “tentative net capital”) related to:

standardized haircuts on security-based swaps and swaps,

33 standardized haircuts on other 

 28 Exchange Act rule 18a-1(c)(1)(iii) [17 CFR 240.18a-1(c)(1)(iii)]. This provision requires the 

deduction of assets that cannot readily be converted into cash.

Those assets include, inter alia: (A) fixed assets; (B) certain unsecured and partially secured 

receivables (e.g., deficits in customer and non-customer secured and partly secured accounts after 

application of calls for margin); (C) insurance claims; (D) other deductions such as other 

unsecured receivables, and all assets doubtful of collection (less associated reserves); (E) certain 

deductions associated with repurchase and reverse repurchase agreements; (F) certain securities 

borrowed (where the deduction equals one percent of market value of securities borrowed 

collateralized by an irrevocable letter of credit); and (G) certain receivables from an affiliate and 

collateral given to an affiliate (other than affiliates registered in certain capacities).

29 Exchange Act rule 18a-1(c)(1)(iv) [17 CFR 240.18a-1(c)(1)(iv)]. In general, this provision 

requires the deduction of 100 percent of the carrying value of certain instruments for which there 

is no ready market, and of securities that cannot be publicly offered or sold due to statutory, 

regulatory or contractual arrangements or other restrictions. Per Exchange Act rule 18a-1(c)(5) 

[17 CFR 240.18a-1(c)(5)], however, securities for which there is no ready market do not have to 

be deducted when calculating tentative net capital if the firm has been approved to use models to 

calculate market risk. 

30 Exchange Act rule 18a-1(c)(1)(v) [17 CFR 240.18a-1(c)(1)(v)]. This provision requires the 

deduction of certain amounts in connection with “failed to deliver” contracts. 

31 Exchange Act rule 18a-1(c)(1)(viii) [17 CFR 240.18a-1(c)(1)(viii)]. This provision requires the 

deduction of amounts required in swap and security-based swap customer accounts to meet 

applicable margin requirements.

32 Exchange Act rule 18a-1(c)(1)(ix) [17 CFR 240.18a-1(c)(1)(ix)]. This provision requires the 

deduction of certain amounts when the dealer elects not to collect margin from swap and securitybased swap counterparties in connection with non-cleared transactions that are subject to an 

exception in applicable margin rules. The provision further provides that collateral held at a third 

party custodian may be considered to be held in the counterparty’s account at the dealer under 

certain conditions. See Exchange Act rule 18a-1(c)(1)(ix)(C) [17 CFR 240.18a-1(c)(1)(ix)(C)]. 

33 Exchange Act rules 18a-1(c)(1)(vi) and 18a-1b [17 CFR 240.18a-1(c)(1)(vi), 240.18a-1b]. This 

provision requires the deduction of certain amounts in connection with security-based swaps and 

swaps held in a dealer’s proprietary account.

For cleared security-based swaps held in the dealer’s proprietary account, the deduction would 

equal the clearing agency’s margin requirement, except that if the security-based swap references 

an equity security, the dealer may take a deduction using the method specified in Exchange Act 

rule 18a-1a. See Exchange Act rule 18a-1(c)(1)(vi)(A) [17 CFR 240.18a-1(c)(1)(vi)(A)]. 

For non-cleared security-based swaps, the amount of the deduction is addressed via a number of 

circumstance-specific rules. See Exchange Act rule 18a-1(c)(1)(vi)(B) [17 CFR 240.18a1(c)(1)(vi)(B)] (prescribing haircuts that address various circumstances involving non-cleared 

credit defaults swap and other security-based swaps). 
12

securities, money market instruments and options,

34 and model-based market risk and credit risk 

deductions.

35

Nonbank security-based swap dealers may apply to the Commission for authorization to use 

models to compute deductions for market risk and credit risk in lieu of applying certain of the 

deductions above.36 

Nonbank major security-based swap participants (that are not also broker-dealers) are required to 

have and maintain positive tangible net worth.37 

C. Margin requirements for nonbank firms

The risk control requirements in part address the margin practices that registered entities must 

follow to help ensure that counterparty default does not impair the registered entity, and more 

generally to help ensure that default does not result in wider issues within the market.38 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s margin requirements for 

applicable nonbank firms may include (along with other relevant factors): 

­ To what extent are models permitted for calculating calculate initial margin? What are the 

minimum standards required of acceptable models (e.g., required confidence levels and 

restrictions on the use of models in connection with equity security-based swaps)?

 34 Exchange Act rule 18a-1(c)(1)(vii) [17 CFR 240.18a-1(c)(1)(vii)]. For securities, money market 

instruments and options in the dealer’s proprietary account, this addresses the deduction of certain 

percentages specified in the broker-dealer net capital rule.

35 For firms that are permitted to use models to calculate market risk and credit risk deductions (as 

discussed below), these adjustments address model-based alternatives to the standardized haircuts 

and credit risk amounts that would apply otherwise. Per Exchange Act rule 18a-1(c)(5) [17 CFR 

240.18a-1(c)(5)], those model-based market risk and credit risk amounts do not have to be 

deducted to calculate tentative net capital.

36 Exchange Act rule 18a-1(d)(1) [17 CFR 240.18a-1(d)(1)]. 

The rules specify the application process for authorization to use a model. Exchange Act rule 

18a-1(d) [17 CFR 240.18a-1(d)]. The rules also set forth requirements related to acceptable 

models. Exchange Act rule 18a-1(e) [17 CFR 240.18a-1(e)]. 

37 Exchange Act rule 18a-2 [17 CFR 240.18a-2]. For these purposes, the term “tangible net worth” 

means the major participant’s net worth (as determined in accordance with generally accepted 

accounting principles in the United States), excluding goodwill and other intangible assets.

38 In adopting margin rules, the Commission recognized the importance of providing for adequate 

liquidity, particularly at times of financial strain: 

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.

See Capital and Margin Adopting Release, 84 FR at 43949.
13

­ What are the prerequisites for netting agreements in connection with calculating margin?

­ What is the required frequency for calculating and collecting/delivering margin?

­ How much time is allowed to liquidate accounts in the event of margin shortfalls?

­ What collateral haircuts are required in connection with the exchange of margin?

­ To what extent are third-party custodians permitted to hold counterparty collateral? 

­ To what extent are there exceptions to the margin requirement? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

As noted above, the Exchange Act provides in part that applicable capital and margin 

requirements shall “help ensure the safety and soundness” of security-based swap dealers and 

major security-based swap participants, and be appropriate for the risks associated with the 

uncleared security-based swaps they hold.39

Under Commission rules, nonbank security-based swap dealers generally are required to 

calculate initial margin (or “potential future exposure”) and variation margin (or “current 

exposure”) as of the close of each business day for each counterparty account.40 Absent 

applicable exceptions, by the close of the first business day following the calculation41 the 

security-based swap dealer must do the following: 

 Variation margin collection – The security-based swap dealer must collect collateral in an 

amount equal to the security-based swap dealer’s current exposure to the counterparty.42 

 Variation margin delivery – The security-based swap dealer must deliver collateral in an 

amount equal to the counterparty’s current exposure to the dealer, other than initial margin 

that the security-based swap dealer collected.43 

 Initial margin collection – The security-based swap dealer must collect collateral in an 

amount equal to the initial margin amount.44

 39 See note 19, supra, and accompanying text (addressing Exchange Act section 15F(e)(3)(A)). 

40 Exchange Act rule 18a-3(c)(1)(i) [17 CFR 240.18a-3(c)(1)(i)]. 

The security-based swap dealer must make the calculations more frequently “during periods of 

extreme volatility and for accounts with concentrated positions.” Exchange Act rule 18a-3(c)(6) 

[17 CFR 240.18a-3(c)(6)]. 

41 This can be completed on the second business day if the counterparty is located in another 

country and more than four time zones away.

42 Exchange Act rule 18a-3(c)(1)(ii)(A)(1) [17 CFR 240.18a-3(c)(1)(ii)(A)(1)].

43 Exchange Act rule 18a-3(c)(1)(ii)(A)(2) [17 CFR 240.18a-3(c)(1)(ii)(A)(2)].

44 Exchange Act rule 18a-3(c)(1)(ii)(B) [17 CFR 240.18a-3(c)(1)(ii)(B)].
14

The rule does not require security-based swap dealers to deliver initial margin, but does not 

prohibit the practice.

The security-based swap dealer must take prompt steps to liquidate positions in an account that 

does not meet the margin requirements to the extent necessary to eliminate the margin 

deficiency.45 The dealer may account for netting agreements when calculating collection and 

delivery amounts under specified circumstances.46 

The rule sets forth a standardized approach to calculating initial margin, for firms that do not use 

models to perform the calculation.

47 Alternatively, firms may apply for authorization to use 

models (including an industry standard model) to calculate initial margin, subject to conditions 

addressing, inter alia, the associated confidence level, risk factors considered, and the use of 

empirical correlations.48

 45 Exchange Act rule 18a-3(c)(7) [17 CFR 240.18a-3(c)(7)].

46 The use of netting agreements to calculate the collection and delivery amounts is permissible so 

long as: (i) the netting agreement must be enforceable in each relevant jurisdiction, including in 

insolvency proceedings; (ii) the gross receivables and gross payables under the netting agreement 

can be determined at any time; and (iii) for internal risk management purposes, the dealer 

monitors and controls its exposure to the counterparty on a net basis. Exchange Act rule 18a3(c)(5) [17 CFR 240.18a-3(c)(5)].

47 Under the standardized approach, if the dealer is not also registered as a broker-dealer, it must 

calculate initial margin using standardized haircuts specified as part of the capital provisions of 

rule 18a-1. Exchange Act rule 18a-3(d)(1) [17 CFR 240.18a-3(d)(1)]. For credit default swaps, 

the stand-alone dealer must use the calculation method specified in Exchange Act rule 18a1(c)(1)(vi)(B)(1) [17 CFR 240.18a-1(c)(1)(vi)(B)(1)]; for other security-based swaps, the 

standalone dealer must use the calculation method specified in Exchange Act rule 18a1(c)(1)(vi)(B)(2) [17 CFR 240.18a-1(c)(1)(vi)(B)(2)]. 

If the security-based swap dealer also is registered as a broker-dealer, it must calculate initial 

margin using standardized haircuts specified as part of the broker-dealer capital provisions of rule 

15c3-1. Exchange Act rule 18a-3(d)(1) [17 CFR 240.18a-3(d)(1)]. For credit default swaps, the 

security-based swap dealer/broker-dealer must use the calculation method specified in Exchange 

Act rule 15c-3(c)(1)(vi)(P)(1) [17 CFR 240.15c-3(c)(1)(vi)(P)(1)]; for other security-based 

swaps, the security-based swap dealer/broker-dealer must use the calculation method specified in 

Exchange Act rule 15c-3(c)(1)(vi)(P)(2) [17 CFR 240.15c-3(c)(1)(vi)(P)(2)].

48 For security-based swaps other than equity security-based swaps, a security-based swap dealer, an 

acceptable model must use a 99 percent, one-tailed confidence level with price changes 

equivalent to a ten business-day movement in rates and prices. The model further must use risk 

factors sufficient to cover all the material price risks inherent in the positions for which the initial 

margin amount is being calculated, including foreign exchange or interest rate risk, credit risk, 

equity risk, and commodity risk, as appropriate. Empirical correlations may be recognized by the 

model within each broad risk category, but not across broad risk categories. See Exchange Act 

rule 18a-3(d)(2)(i) [17 CFR 240.18a-3(d)(2)(i)].

For equity security-based swaps, a security-based swap dealer that is not registered as a brokerdealer (other than as an OTC derivatives dealer) may apply for authorization to use models to 

calculate initial margin, subject to the above requirements, provided the counterparty’s account 

does not hold equity security positions other than equity security-based swaps and equity swaps. 

See Exchange Act rule 18a-3(d)(2)(ii) [17 CFR 240.18a-3(d)(2)(ii)]. A security-based swap 
15

The value of collateral delivered pursuant to the rule is subject to standardized haircuts set forth 

in the applicable capital rules,49 but a security-based swap dealer can elect to apply the 

standardized haircuts set forth in CFTC rules if the security-based swap dealer applies those 

deductions consistently with respect to a particular counterparty.50 Margin collateral must have a 

ready market and be readily transferrable.

51 The rule also sets forth possession and control 

requirements for collateral.52

The margin rule further requires that security-based swap dealers must monitor the risk of each 

account and establish, maintain and document procedures and guidelines for monitoring the risk 

of accounts as part of their required risk management and control systems.

53

Major security-based swap participants generally are required to post and collect variation 

margin, but are not required to collect or deliver initial margin.54 

The rule sets forth a number of targeted exceptions to the margin collection and delivery 

requirements, addressing the following: commercial end user accounts55; the Bank for 

 

dealer that is also registered as a broker-dealer (other than an OTC derivatives dealer) must use 

the standardized haircuts to compute initial margin for non-cleared equity security-based swaps.

49 Exchange Act rule 18a-3(c)(3)(i) [17 CFR 240.18a-3(c)(3)(i)].

50 Exchange Act rule 18a-3(c)(3)(ii) [17 CFR 240.18a-3(c)(3)(ii)] (cross-referencing 17 CFR 

23.156).

51 Acceptable collateral consists of cash, securities, money market instruments, a major foreign 

currency, the settlement currency of the non-cleared security-based swap, or gold. The collateral 

cannot consist of securities and/or money market instruments issued by the counterparty, or by a 

party related to the dealer, or the counterparty. The collateral must be subject to an agreement 

that is legally enforceable by the dealer against counterparty and any other parties to the 

agreement. Exchange Act rule 18a-3(c)(4)(i) [17 CFR 240.18a-3(c)(4)(i)].

52 In particular, collateral must be either: (A) subject to the dealer’s physical possession or control, 

and able to be liquidated promptly by the dealer without intervention by any other party; or (B) 

carried by an independent third-party custodian that is a bank or a registered U.S. clearing 

organization or depository that is not affiliated with the counterparty or, if the collateral consists 

of foreign securities or currencies, a supervised foreign bank, clearing organization, or depository 

that is not affiliated with the counterparty and that customarily maintains custody of such foreign 

securities or currencies. Exchange Act rule 18a-3(c)(4)(ii) [17 CFR 240.18a-3(c)(4)(ii)]. There is 

a corresponding exception from the initial margin collection requirement for dealers when a 

counterparty delivers margin to an independent third-party custodian. See Exchange Act rule 

18a-3(c)(1)(iii)(C) [17 CFR 240.18a-3(c)(1)(iii)(C)]. 

53 The rule specifies minimum requirements for associated policies and procedures including, inter 

alia, requirements related to the review or monitoring of financial information, counterparty 

credit limits and credit risk exposure, the use of stress tests, determinations regarding the need to 

collect collateral, and the maintenance of sufficient equity in each counterparty account. 

Exchange Act rule 18a-3(e) [17 CFR 240.18a-3(e)].

54 Exchange Act rule 18a-3(c)(2) [17 CFR 240.18a-3(c)(2)].

55 In particular, dealers need not collect initial margin, and need not collect or deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(A) [17 CFR 240.18a-3(c)(1)(iii)(A)]. This exception 
16

International Settlements, the European Stability Mechanism, and certain other multilateral 

development banks56; financial market intermediary accounts57; affiliate accounts58; accounts of 

sovereigns with minimal credit risk59; legacy accounts60; initial margin below a $50 million 

threshold61; and minimum transfer amounts.62 

D. Internal risk management requirements

The risk control requirements in part address the obligation of registered entities to follow 

policies and procedures reasonably designed to assist them in managing the risks associated with 

their business activities.

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements related to 

internal risk management control systems may include (along with other relevant factors):

­ To what extent are firms required to implement internal risk management controls?

­ What types of risks are those internal controls required to address? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

 

also applies to major participants. See Exchange Act rule 18a-3(c)(2)(iii)(A) [17 CFR 240.18a3(c)(2)(iii)(A)].

56 In particular, dealers need not collect initial margin, and need not collect or deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(E) [17 CFR 240.18a-3(c)(1)(iii)(E)]. This exception 

also applies to major participants. See Exchange Act rule 18a-3(c)(2)(iii)(C) [17 CFR 240.18a3(c)(2)(iii)(C)].

57 In particular, dealers need not collect initial margin, but still need to collect and deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(B) [17 CFR 240.18a-3(c)(1)(iii)(B)]. 

58 In particular, dealers need not collect initial margin, but still need to collect and deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(G) [17 CFR 240.18a-3(c)(1)(iii)(G)]. 

59 In particular, dealers need not collect initial margin, but still need to collect and deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(F) [17 CFR 240.18a-3(c)(1)(iii)(F)]. 

60 In particular, dealers need not collect initial margin, and need not collect or deliver variation 

margin. Exchange Act rule 18a-3(c)(1)(iii)(D) [17 CFR 240.18a-3(c)(1)(iii)(D)]. This exception 

also applies to major participants. See Exchange Act rule 18a-3(c)(2)(iii)(B) [17 CFR 240.18a3(c)(2)(iii)(B)]. 

61 This provision does not alter the obligation to collect and deliver variation margin. Exchange Act 

rule 18a-3(c)(1)(iii)(H) [17 CFR 240.18a-3(c)(1)(iii)(H)].

62 In particular, dealers need not collect initial margin, and need not collect or deliver variation 

margin until the total amount of collateral that needs to be collected with respect to the 

counterparty is greater than $500,000. Exchange Act rule 18a-3(c)(1)(iii)(I) [17 CFR 240.18a3(c)(1)(iii)(I)]. This exception also applies to major participants. See Exchange Act rule 18a3(c)(2)(iii)(D) [17 CFR 240.18a-3(c)(2)(iii)(D)]. 
17

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

Exchange Act section 15F(j)(2) [15 U.S.C. 78o-10(j)(2)] requires that security-based swap 

dealers and major security-based swap participants “establish robust and professional risk 

management systems adequate for managing [their] day-to-day business.”

Commission rules generally require that dealers and major participants, as part of their 

supervisory systems, establish, maintain and enforce written policies and procedures addressing 

that obligation (as well as various other obligations).63 

More specifically, the capital rule for nonbank dealers and major participants imposes a 

requirement that those firms comply with a separate rule related to internal risk management 

control systems.64 That latter rule requires firms to establish, document, and maintain a system 

of internal risk management controls to assist them in managing the risks associated with their 

business activities, including market, credit, leverage, liquidity, legal, and operational risks. 

E. Trade acknowledgment and verification requirements 

The risk control requirements in part address trade acknowledgment and verification rules that 

are intended to help avoid legal and operations risks by providing for definitive written records 

of transactions and procedures to avoid disagreements regarding the meaning of transaction 

terms.

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s trade acknowledgement and 

verification, confirmation, or similar requirements may include (along with other relevant 

factors): 

­ To what extent are transactions subject to trade acknowledgment, confirmation, or similar 

requirements that provide for the creation of definitive written records of the transaction? 

­ To what extent are transactions further subject to verification or similar requirements 

intended to identify disagreements regarding transaction terms? 

­ What requirements govern the persons responsible for providing trade acknowledgments, 

confirmations or equivalent records? What requirements govern their contents, delivery and 

timing?

 63 See Exchange Act rule 15Fh-3(h)(2)(iii)(I) [17 CFR 140.15Fh-3(h)(2)(iii)(I)]. 

64 Exchange Act rule 18a-1(f) [17 CFR 240.18a-1(f)] (for dealers); Exchange Act rule 18a-2(c) [17 

CFR 240.18a-2(c)] (for major participants). In particular, the firm must comply with Exchange 

Act rule 15c3-4 [17 CFR 240.15c3-4] as if the firm were an OTC derivatives dealer, with the 

exclusion of select provisions. Major participants must comply with rule 15c3-4 with respect to 

their swap and security-based swap activities, and security-based swap dealers must comply with 

rule 15c3-4 with respect to all of their business activities.
18

­ What requirements govern the substance, policies and procedures, and timing associated with 

trade verifications?

­ To what extent are those requirements subject to exceptions with regard to particular types of 

transactions? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Commission’s trade acknowledgment rule applies to any transaction in which a securitybased swap dealer or major security based swap participant “purchases from or sells to any 

counterparty a security-based swap.”65 The required trade acknowledgment comprises a written 

or electronic record of a security-based swap transaction sent by one counterparty to the other,66

that discloses all the terms of the transaction.67 The rule helps to ensure that an acknowledgment 

is provided for each transaction by prescribing the party that is responsible for providing trade 

acknowledgments.68 The rule further addresses means of delivery69 and required timing.70 

 65 Exchange Act rule 15Fi-2(a) [17 CFR 240.15Fi-2(a)]. This rule was adopted pursuant to 

Exchange Act section 15F(i) [15 U.S.C. 78o-10(i)], which directs the Commission to adopt rules 

governing documentation standards, including confirmations, applicable to dealers and major 

participants. 

66 Exchange Act rule 15Fi-1(h) [17 CFR 240.15Fi-1(h)].

67 Exchange Act rule 15Fi-2(c) [17 CFR 240.15Fi-2(c)].

68 For transactions between a security-based swap dealer and a major security-based swap 

participant, the security-based swap dealer will provide the trade acknowledgment. For 

transactions in which only one counterparty is a security-based swap dealer or major securitybased swap participant, the dealer or major participant will provide the trade acknowledgment. 

For all other transactions in which a security-based swap dealer or major security based swap 

participant purchases or sells a security-based swap, the counterparties will agree as to who 

provides the trade acknowledgment. Exchange Act rule 15Fi-2(a) [17 CFR 240.15Fi-2(a)].

69 Trade acknowledgments must be provided through electronic means that provide reasonable 

assurance of delivery and a record of transmittal. Exchange Act rule 15Fi-2(c) [17 CFR 

240.15Fi-2(c)].

70 Trade acknowledgments “must be provided promptly, but in any event by the end of the first 

business day following the day of execution.” Exchange Act rule 15Fi-2(b) [17 CFR 240.15Fi2(b)]. 

For those purposes: the term “business day” means any day other than a Saturday, Sunday or 

legal holiday; the term “execution” means the point at which the counterparties become 

irrevocably bound to a transaction under applicable law; and the term “day of execution” means 

the calendar day of the counterparty to the security-based swap transaction that ends the latest, 

with special accommodations for late-afternoon and non-business day transactions. See

Exchange Act rules 15Fi-1(a), (d) and (e) [17 C.F.R. 240.15Fi-1(a), (d) and (e)].
19

The trade verification requirement applies to security-based swap transactions for which a 

security-based swap dealer or major participant has received a trade acknowledgment.71 “Trade 

verification” means “the process by which a trade acknowledgment has been manually, 

electronically, or by some other legally equivalent means, signed by the receiving 

counterparty.”72 A dealer or major participant must verify the accuracy of, or dispute with the 

counterparty, the terms of the trade acknowledgment.73 The rule also addresses required policies 

and procedures,74 and timing.75 

The trade acknowledgment and verification requirements are subject to exceptions regarding 

transactions with a clearing agency as counterparty,

76 transactions on execution facilities,77

 71 Exchange Act rule 15Fi-2(d)(2) [17 CFR 240.15Fi-2(d)(2)]. The trade verification requirement 

accordingly applies to a dealer or major participant that has received a trade acknowledgment 

(subject to the exceptions addressed below). Exchange Act rule 15Fi-2(d)(2) [17 CFR 240.15Fi2(d)(2)].

72 Exchange Act rule 15Fi-1(i) [17 CFR 240.15Fi-1(i)]. 

73 Exchange Act rule 15Fi-2(d)(2) [17 CFR 240.15Fi-2(d)(2)].

74 Dealers and major participants are required to “establish, maintain, and enforce written policies 

and procedures that are reasonably designed to obtain prompt verification of the terms of a trade 

acknowledgment.” Exchange Act rule 15Fi-2(d)(1) [17 CFR 240.15Fi-2(d)(1)]. Those policies 

and procedures apply regardless of whether the counterparty also is subject to the trade 

acknowledgment requirement. 

The Commission has clarified that the policies and procedures may rely on a counterparty’s 

“negative affirmation” to the terms of a trade acknowledgment. See Trade Acknowledgment and 

Verification Adopting Release, 81 FR at 39820 (stating that the Commission generally would 

consider negative affirmation policies and procedures reasonable if they require the counterparty 

to agree to be bound by negative affirmation before or at the time of execution, and provide 

adequate time after the counterparty receives the trade acknowledgment to dispute its terms or 

otherwise respond, and adding that the policies and procedures generally should require the entity 

to document its counterparty’s agreement to rely on negative affirmation).

75 Dealers and major security-based swap participants must “promptly” verify or dispute the terms 

of trade acknowledgments they receive. Exchange Act rule 15Fi-2(d)(2) [17 CFR 240.15Fi2(d)(2)].

76 An exception applies to any “clearing transaction,” which is defined as a security-based swap 

“that has a clearing agency as a direct counterparty.” Exchange Act rules 15Fi-1(b), 15Fi-1(c), 

15Fi-2(e) [17 CFR 240.15Fi-1(b), 240.15Fi-1(c), 240.15Fi-2(e)].

77 An exception applies to transactions executed on a security-based swap execution facility or 

national securities exchange, provided that the facility’s rules, procedures or processes provide 

for the acknowledgment and verification of all terms of the transaction “no later than” the time 

otherwise required by the rule. Exchange Act rule 15Fi-2(f)(1) [17 CFR 240.15Fi-2(f)(1)]. 
20

transactions accepted for clearing,

78 and additional provisions for transactions that have not been 

acknowledged, verified or accepted for clearing.79 

F. Risk mitigation requirements

The risk control requirements in part address rules to mitigate market, credit, operational and 

legal risks by requiring that registered entities take steps to identify and resolve discrepancies in 

transaction terms and valuations, reduce offsetting or redundant security-based swaps, and 

document their trading relationships. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements related to risk 

mitigation may include (along with other relevant factors):

­ To what extent are parties to transactions required to reconcile transaction terms and 

valuation discrepancies?

­ To what extent are parties to transactions required to engage in bilateral offset, bilateral 

or multilateral compression, or similar exercises to reduce offsetting or redundant 

instruments?

­ To what extent are parties to transactions required to document the terms of their trading 

relationships? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Commission’s risk mitigation rules encompass requirements addressing portfolio 

reconciliation, portfolio compression and trading relationship documentation.80

 78 An exception applies to transactions that are submitted for clearing to a clearing agency, 

provided: (i) the transaction is submitted “as soon as technologically practicable, but in any event 

no later than the time established for providing a trade acknowledgment” under the rule; and (ii) 

the clearing agency’s rules, procedures or processes provide for acknowledgment and verification 

of all terms of the transaction “prior to or at the same time” the transaction is accepted for 

clearing. Exchange Act rule 15Fi-2(f)(2) [17 CFR 240.15Fi-2(f)(2)]. 

79 If a dealer or major swap participant receives notice that a transaction has not been acknowledged 

and verified pursuant to the rules, procedures or processes of an execution facility or exchange, or 

accepted for clearing by a clearing agency (per the above exceptions), the firm must comply with 

the applicable trade acknowledgment and verification requirements “as if” the transaction were 

executed at the time it receives the notice. Exchange Act rule 15Fi-2(f)(3) [17 CFR 240.15Fi2(f)(3)]. 

80 As with the trade acknowledgment and verification rule, the Commission adopted the risk 

mitigation requirements pursuant to Exchange Act section 15F(i). See note 65, supra. 
21

The portfolio reconciliation rule requires that security-based swap dealers and major securitybased swap participants take certain actions to engage in portfolio reconciliation with their 

counterparties.81 Dealers and major participants further must resolve discrepancies in the 

material terms82 or valuation of security-based swaps,83 and must promptly notify the 

Commission and any applicable prudential regulation regarding security-based swap valuation 

disputes in excess of $20 million (or its equivalent), at either the transaction or portfolio level, if 

 81 Paragraph (a) to rule 15Fi-3 [17 CFR 240.15Fi-3] addresses the portfolio reconciliation 

requirement for portfolios of security-based swap transactions with counterparties that also are 

security-based swap dealers or major security-based swap participants. That paragraph expressly 

requires the two counterparties to engage in portfolio reconciliation in the manner specified in the 

rule. Paragraph (b) to that rule requires dealers and major participants to establish, maintain, and 

follow written policies and procedures reasonably designed to ensure that it engages in portfolio 

reconciliation for transactions with all other counterparties in the manner set forth in the rule. 

Both paragraphs address the potential use of third-party service providers to perform the 

reconciliations, and require the security-based swap dealer or major security-based swap to agree 

in writing on the terms of the portfolio reconciliation with its counterparties. 

For counterparties that also are dealers or major participants, the rule requires that the portfolio 

reconciliation be performed no less frequently than once per business day for portfolios that 

include 500 or more security-based swaps, once each week for portfolios that include more than 

50 (but fewer than 500) security-based swaps, and once each calendar quarter for portfolios that 

include no more than 50 security-based swaps at any time during the quarter. Exchange Act rule 

15Fi-3(a)(3) [17 CFR 240.15Fi-3(a)(3)]. 

For other counterparties, the rule requires that the portfolio reconciliation be performed no less 

frequently than once each calendar quarter for portfolios that include no more than 100 securitybased swaps at any time during the quarter, and once annually for portfolios that include no more 

than 100 security-based swaps at any time during the calendar year. Exchange Act rule 15Fi3(b)(3) [17 CFR 240.15Fi-3(b)(3)]. 

82 In this context, a “material term” includes each term that is required to be reported to a securitybased swap data repository or the Commission pursuant to Regulation SBSR rule 901 [17 CFR 

242.901]. That definition excludes any term that is not relevant to the ongoing rights and 

obligations of the parties and the valuation of the security-based swap. See Exchange Act rule 

15Fi-1(i) [17 CFR 240.15Fi-1(i)]. 

83 Where the dealer or major participant’s counterparty also is a security-based swap dealer or major 

security-based swap participant, the rule requires that discrepancies in material terms be resolved 

immediately. Exchange Act rule 15Fi-3(a)(4) [17 CFR 240.15Fi-3(a)(4)]. For those 

counterparties, the rule further requires that the dealer or major participant establish, maintain and 

follow written policies and procedures reasonably designed to resolve valuation discrepancies of 

ten percent or more as soon as possible but in any event within five business days (provided that 

the dealer or major participant has procedures to identify how it will comply with applicable 

variation margin requirements pending resolution of the discrepancy). Exchange Act rule 15Fi3(a)(5) [17 CFR 240.15Fi-3(a)(5)].

For other counterparties, the rule more generally requires that the dealer or major participant 

establish, maintain and follow written procedures reasonably designed to resolve discrepancies in 

valuation (of ten percent or less) or in the material terms of security-based swaps in a timely 

fashion. Exchange Act rule 15Fi-3(b)(4) [17 CFR 240.15Fi-3(b)(4)]. 
22

not resolved within a specified period of time.84 The portfolio reconciliation requirement does 

not apply to cleared security-based swaps.85 

The Commission’s portfolio compression rule requires dealers and major participants to 

establish, maintain and follow written policies and procedures addressing bilateral offset, 

bilateral compression and multilateral compression.86 The portfolio compression rule does not 

apply to cleared security-based swaps.87 

The Commission’s trading relationship documentation rule requires that security-based swap 

dealers and major security-based swap participants establish, maintain and follow policies and 

procedures reasonably designed to ensure that they execute written security-based swap trading 

relationship documentation with each of their counterparties prior to, or contemporaneously 

with, executing a security-based swap. The rule further provides that the trading relationship 

documentation address, in part: payment obligations, netting, termination events, termination 

obligations, transfer of rights and obligations, governing law, valuation, dispute resolution, trade 

acknowledgments and verifications, and credit support arrangements.88 The rule also requires 

dealers and major participants to have an independent audit of their documentation policies and 

 84 Those disputes must be reported within three business days if the dispute is with a counterparty 

that also is a security-based swap dealer or major security-based swap participant, or within five 

business days for disputes with other counterparties. Exchange Act rule 15Fi-3(c)(1) [17 CFR 

240.15Fi-3(c)(1)]. Dealers and major participants must provide amended notices if the amount of 

any valuation dispute that was the subject of a previous notice increases or decreases by more 

than $20 million (or its equivalent) at the transaction or portfolio level. Exchange Act rule 15Fi3(c)(2) [17 CFR 240.15Fi-3(c)(2)]. 

85 Exchange Act rule 15Fi-3(d) [17 CFR 240.15Fi-3(d)]. 

86 In particular, for counterparties that also are security-based swap dealers or major security-based 

swap participants, the rule addresses bilateral offset, bilateral compression and multilateral 

compression. Exchange Act rule 15Fi-4(a) [17 CFR 240.15Fi-4(a)]. 

For other counterparties, the rule addresses bilateral or multilateral compression. Exchange Act 

rule 15Fi-4(b) [17 CFR 240.15Fi-4(b)]. 

87 Exchange Act rule 15Fi-4(c) [17 CFR 240.15Fi-4(c)]. 

88 Exchange Act rule 15Fi-5(a)(2), (b)(1)-(3) [17 CFR 240.15Fi-5(a)(2), (b)(1)-(3)]. 

In addition, in certain instances – where both counterparties are dealers, major participants or 

financial counterparties, or upon request by a counterparty – the trading relationship 

documentation must include written documentation regarding the process for determining the 

value of security-based swaps for purposes of complying with margin and risk management 

requirements. Exchange Act rule 15Fi-5(b)(4) [17 CFR 240.15Fi-5(b)(4)]. For those purposes, 

the term “financial counterparty” includes swap dealers, major swap participants, certain 

commodity pools, private funds and employee benefit plans, and persons predominately engaged 

in activities that are in the business of banking or that are financial in nature. Exchange Act rule 

15Fi-1(g) [17 CFR 240.15Fi-1(g)]. 

The required trading relationship documentation also must address information regarding the 

status of the dealer or major participant, or its counterparty, as an insured financial institution or 

financial company, as well as information regarding security-based swaps that have been 

accepted for clearing. Exchange Act rules 15Fi-5(b)(5)-(6) [17 CFR 240.15Fi-5(b)(5)-(6)]. 
23

procedures. The trading relationship documentation rule does not apply to pre-existing securitybased swaps, cleared security-based swaps, or to certain security-based swaps executed 

anonymously on a national securities exchange or security-based swap execution facility.89 

 89 Exchange Act rule 15Fi-5(a)(1) [17 CFR 240.15Fi-5(a)(1)]. 
24

II. Recordkeeping and reporting requirements 

The recordkeeping and reporting requirements provide for records, reports and notices to 

facilitate the Commission’s oversight of registrants, by enabling Commission access to key 

information in connection with the Commission’s obligation to protect the integrity of the 

security-based swap market and to protect market participants.90 These also include quarterly 

securities count practices intended to help guard against deficiencies in firms’ internal controls.91 

These entity-level requirements generally apply to the entirety of a firm’s business, regardless of 

the location of the business or counterparty.

These consist of the following requirements:92 

 Record creation – as provided by Exchange Act rule 18a-5 [17 CFR 240.18a-5].

 Record maintenance – as provided by Exchange Act rule 18a-6 [17 CFR 240.18a-6].

 Reports – as provided by Exchange Act rule 18a-7 [17 CFR 240.18a-7].

 Notifications – as provided by Exchange Act rule 18a-8 [17 CFR 240.18a-8].

 Quarterly security counts – as provided by Exchange Act rule 18a-9 [17 CFR 240.18a-9].93

As discussed above, those requirements (as well as certain capital, margin and segregation 

requirements addressed above) are subject to an alternative compliance mechanism based on 

compliance with certain requirements adopted pursuant to the Commodity Exchange Act.94 

 90 In proposing those requirements, the Commission generally addressed how the requirements were 

designed to provide transparency into the business activities of dealers and major participants, 

and assist the Commission in reviewing and monitoring compliance with proposed financial 

responsibility requirements. See Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25194, 

25197 (May 2, 2014). The Commission further explained that the proposed notification and 

requirements had its genesis in lessons learned from the securities industry “paperwork crisis” of 

1967-70. “The Commission would use the notifications to respond, when necessary, to financial 

or operational problems at a particular [firm] by, for example, heightening its supervision of the 

firm.” See id. at 25247. 

91 As part of that proposal, the Commission also noted that the “paperwork crisis” of 1967-70 led to 

required quarterly securities counts as part of efforts to eliminate deficiencies in internal controls 

and procedures for safeguarding securities. See id. at 25252-53.

92 For further information regarding these requirements, see generally Exchange Act Release No. 

87005 (Sep. 19, 2019), 84 FR 68550 (Dec. 16, 2019) (“Books and Records Adopting Release”). 

93 These requirements apply to security-based swap dealers and major security-based swap 

participants that are not also registered with the Commission as broker-dealers. Security-based 

swap dealers that also are registered as broker-dealers instead are subject to the Commission’s 

broker-dealer recordkeeping and reporting requirements. See, e.g., Exchange Act rules 17a-3, 

17a-4, 17a-5 and 17a-11. Substituted compliance is not available in connection with brokerdealer requirements. 

94 See note 14, supra, and accompanying text. 
25

A. Criteria for assessing comparability 

Consistent with the holistic approach toward assessing the comparability of regulatory outcomes 

in connection with substituted compliance, the comparability assessment associated with these 

requirements may focus on the comparability of individual requirements or, alternatively, may

focus on whether the analogous requirements of a foreign jurisdiction – taken as a whole –

produce similar outcomes as Exchange Act requirements with regard to the overall goal of 

supporting the Commission’s oversight of registrants. This latter approach does not require that 

the foreign jurisdiction have analogues to every requirement under Commission rules as long as 

the overall requirements of a foreign jurisdiction provide similar regulatory outcomes. 

Exchange Act rule 3a71-6(d)(6) [17 CFR 240.3a71-6(d)(6)] further provides in relevant part that 

in making substituted compliance determinations the Commission intends to consider whether 

“the foreign financial regulatory system’s required records and reports, the timeframes for 

recording or reporting information, the accounting standards governing the records and reports, 

and the required format of the records and reports” are comparable to applicable Exchange Act 

provisions and underlying rules, as well as whether the foreign regulatory system “would permit 

the Commission to examine and inspect regulated firms’ compliance with the applicable 

securities laws.”

B. Records required to be made

The recordkeeping and reporting requirements in part address records that firms must create –

regarding the firms’ financial status, positions, activities, and compliance with applicable 

requirements – to promote effective Commission oversight, as well as securities counts intended 

to help guard against deficiencies in firms’ internal controls. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements for records 

that firms are required to make may include (along with other relevant factors): 

­ What records are firms required to make with regard to their transactions and other activities? 

­ What records are firms required to make with regard to their positions and other potential 

financial liabilities?

­ What records are firms required to make with regard to their personnel, including records 

regarding the background of individuals? 

­ What records are firms required to make regarding the control of customer funds and 

securities? 

­ What records are firms required to make regarding business conduct practices? 

­ To what extent are firms required to make periodic securities counts or similar records to 

help ensure the proper care and protection of assets? 

­ Are there potential restrictions or prohibitions on the ability of firms to receive, create or 

maintain certain of those types of information, such as information regarding counterparties 

and associated persons? Are there potentially any restrictions on the ability of the 

Commission to access particular types of records?
26

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements95

The Exchange Act provides that registered security-based swap dealers and major security-based 

swap participants must keep applicable books and records in the form and manner, and for the 

period, prescribed by the Commission, and keep those books and records open to inspection and 

examination by any representative of the Commission.96 The Exchange Act further provides that 

those firms must maintain daily trading records of security-based swaps, and related records and 

recorded communications, for the period prescribed by the Commission.97 

Under Commission rules, security-based swap dealers and major security-based swap 

participants are required to make and keep current the following types of records: trade 

blotters,

98 ledgers,99 ledger accounts,100 securities records or ledgers,101 memoranda of brokerage 

 95 Certain of the requirements discussed below vary depending on whether the security-based swap 

dealer or major security-based swap participant at issue has a prudential regulator. The term 

“prudential regulator” is defined in Commodity Exchange Act section 1a(39) [7 U.S.C. 1a(39)] 

(which is incorporated by reference by Exchange Act section 3(a)(74) [15 U.S.C. 78c(a)(74)]).

96 Exchange Act section 15F(f)(1)(B), (C) [15 U.S.C. 78o-10(f)(1)(B), (C)]. For firms that have a 

prudential regulator, the recordkeeping requirements specifically apply to the firm’s business as a 

security-based swap dealer or major security-based swap participant. 

97 Exchange Act section 15F(g) [15 U.S.C. 78o-10(g)]. This provision also addresses the need to 

maintain the records for each counterparty in an identifiable manner and form, and that firms 

maintain a complete audit trail for trade reconstructions. 

98 Exchange Act rule 18a-5(a)(1) [17 CFR 240.18a-5(a)(1)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(1) [17 CFR 240.18a-5(b)(1)] (for 

dealers and major participants with a prudential regulator). These provisions require blotters or 

other records of original entry containing an itemized daily record of purchases and sales of 

securities, receipts and deliveries of securities, and receipts and disbursements of cash and other 

debits and credits, as well as additional information such as account-related information and 

information regarding security-based swaps (e.g., type, reference security, unique transaction 

identifier, and counterparty identifier).

99 Exchange Act rule 18a-5(a)(2) [17 CFR 240.18a-5(a)(2)]. This provision requires ledgers or 

other records reflecting assets and liabilities, income and expense and capital accounts. This 

provision applies only to dealers and major participants without a prudential regulator. 

100 Exchange Act rule 18a-5(a)(3) [17 CFR 240.18a-5(a)(3)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(2) [17 CFR 240.18a-5(b)(2)] (for 

dealers and major participants with a prudential regulator). These provisions require ledger 

accounts or other records to itemize separately, as to each account, information such as purchases 

and sales, receipts and deliveries of securities and commodities, and other debits and credits, 

along with additional information regarding security-based swaps.

101 Exchange Act rule 18a-5(a)(4) [17 CFR 240.18a-5(a)(4)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(3) [17 CFR 240.18a-5(b)(3)] (for 

dealers and major participants with a prudential regulator). For securities other than security-
27

orders or instructions,

102 memoranda of security-based swap transactions for the firm account,103

confirmations or trade acknowledgments/verifications,

104 security-based swap counterparty 

information,

105 records of options positions,106 trial balances,107 information regarding associated 

 

based swaps, this includes information regarding long or short positions, location-related 

information and account-related information. For security-based swaps, this includes information 

such as the reference security, transaction and counterparty identifiers, whether the position is 

bought or sold, and clearing-related information. For dealers and major participants with a 

prudential regulator, the requirement extends only to security-based swaps and securities 

positions related to the firm’s business as a security-based swap dealer or major security-based 

swap participant. 

102 Exchange Act rule 18a-5(b)(4) [17 CFR 240.18a-5(b)(4)]. This provision requires memoranda of 

brokerage orders and related instructions associated with the purchase or sale of security-based 

swaps, along with additional categories of information (e.g., information regarding terms and 

conditions, and regarding responsible associated persons), and designation of orders entered

pursuant to the exercise of discretionary authority. This requirement applies only to firms with a 

prudential regulator, because firms without a prudential regulator cannot engage in the business 

of effecting brokerage transactions without also being registered as a broker-dealer or a bank. See

Books and Records Adopting Release, 84 FR at 68555-56. 

103 Exchange Act rule 18a-5(a)(5) [17 CFR 240.18a-5(a)(5)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(5) [17 CFR 240.18a-5(b)(5)] (for 

dealers and major participants with a prudential regulator). These provisions require memoranda 

of each purchase or sale of a security-based swap for the firm’s account, showing price, other 

information related to the security-based swap, and transaction and counterparty identifiers, and 

designating orders that are entered pursuant to the exercise of discretionary authority.

104 Exchange Act rule 18a-5(a)(6) [17 CFR 240.18a-5(a)(6)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(6) [17 CFR 240.18a-5(b)(6)] (for 

dealers and major participants with a prudential regulator). These provisions require copies of 

purchase and sale confirmations for securities other than security-based swaps, and copies of 

trade acknowledgments and verifications for security-based swaps.

105 Exchange Act rule 18a-5(a)(7) [17 CFR 240.18a-5(a)(7)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(7) [17 CFR 240.18a-5(b)(7)] (for 

dealers and major participants with a prudential regulator). These provisions require, for each 

security-based swap account, a record of the counterparty’s unique identification code, name and 

address, and of the authorization for each person with authority to transact on behalf of the 

counterparty. 

106 Exchange Act rule 18a-5(a)(8) [17 CFR 240.18a-5(a)(8)]. This provision requires a record of all 

options in which the firm has a direct or indirect interest or that the firm has granted or 

guaranteed, containing at least the security identification and the number of units involved. This 

requirement applies only to dealers and major participants without a prudential regulator.

107 Exchange Act rule 18a-5(a)(9) [17 CFR 240.18a-5(a)(9)]. This provision requires a record of the 

proof of money balances of all ledger accounts in the form of trial balances and certain records 

relating to the computation of aggregate indebtedness and net capital under the net capital rule. 

This requirement applies only to dealers and major participants without a prudential regulator. 
28

persons,

108 current exposure calculation,109 segregation-related information,110 non-verified 

security-based swaps,

111 compliance with certain security-based swap business conduct 

standards,

112 and compliance with risk mitigation standards.113 

 108 Exchange Act rule 18a-5(a)(10) [17 CFR 240.18a-5(a)(10)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(8) [17 CFR 240.18a-5(b)(8)] (for 

dealers and major participants with a prudential regulator). These provisions require a 

questionnaire or employment application for each associated person who effects or is involved in 

effecting security-based swaps on the firm’s behalf, containing identifying and background 

information (e.g., information regarding disciplinary actions, and arrests and indictments). The 

firm must also make a record that lists the offices associated with each associated person of the 

firm. The Commission has clarified that those recordkeeping requirements apply only to natural 

persons, and not to legal entities that may be associated persons. See Books and Records 

Adopting Release, 84 FR at 68558.

Because the Commission recognizes that there may be situations in which firms are prohibited by 

applicable non-U.S. law from receiving, creating, or maintaining records with respect to certain 

of this information that needs to be recorded pursuant to the questionnaire requirement, the 

Commission has proposed additional provisions in Rule 18a-5 to address those situations. See 

Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206, 24242-44, 24294 (May 24, 

2019). 

109 Exchange Act rule 18a-5(a)(12) [17 CFR 240.18a-5(a)(12)]. This provision requires a record of 

daily calculations of current exposure and the initial margin amount for each account, consistent 

with the relevant capital rule. This provision applies only to dealers and major participants 

without a prudential regulator.

110 Exchange Act rule 18a-5(a)(13), (14) [17 CFR 240.18a-5(a)(13), (14)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-5(b)(9), (10) [17 CFR 

240.18a-5(b)(9), (10)] (for dealers and major participants with a prudential regulator). These 

provisions require records of compliance with the possession or control requirement under the 

applicable segregation rule, and of the reserve computation required under the segregation rule. 

111 Exchange Act rule 18a-5(a)(15) [17 CFR 240.18a-5(a)(15)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-5(b)(11) [17 CFR 240.18a-5(b)(11)] (for 

dealers and major participants with a prudential regulator). These provisions require records of 

each security-based swap that has not been verified, including transaction and counterparty 

identifiers.

112 Exchange Act rule 18a-5(a)(16), (17) [17 CFR 240.18a-5(a)(16), (17)] (for firms without a 

prudential regulator; (a)(16) applies only to dealers); Exchange Act rule 18a-5(b)(12), (13) [17 

CFR 240.18a-5(b)(12), (13)] (for firms with a prudential regulator; (b)(12) applies only to 

dealers). 

These provisions require records regarding compliance with business conduct standards that 

address, among other respects: verification related to counterparty status; certain disclosures 

related to the daily mark and its calculation; disclosures regarding material incentives, conflicts of 

interest, material risks, and characteristics of the security-based swap, and certain clearing rights; 

certain “know your counterparty” and suitability obligations; supervisory requirements, including 

written policies and procedures; certain requirements regarding interactions with special entities; 

provisions intended to prevent dealers from engaging in certain “pay to play” activities; and 

certain minimum requirements relating to chief compliance officers. 
29

Firms may comply with the above requirements related to trade blotters, ledger accounts and 

securities records/ledgers via compliance with certain CFTC requirements, so long as, inter alia, 

the firm is registered with the CFTC as a swap dealer or major swap participant, preserves all of 

the data elements necessary to create the records required by the Commission’s rule, and 

provides the required records to Commission staff upon request.114 

Commission rules further require security-based swap dealers without a prudential regulator to 

perform a securities count each quarter.

115 

C. Records required to be preserved 

The recordkeeping and reporting regulatory requirements in part address the preservation of 

records – regarding firms’ financial status, positions, activities and compliance with applicable 

requirements – to promote effective Commission oversight. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements for records 

that firms are required to preserve may include (along with other relevant factors): 

­ What are the general provisions regarding the preservation period and accessibility? 

­ To what extent are firms required to preserve the types of records that are the subject of the 

Exchange Act record preservation requirement (e.g., bank records, bills, communications, 

account documents, written agreements and risk management records)?

­ To what extent are firms required to preserve specific information regarding associated 

persons? 

­ What requirements address firms’ use of electronic storage systems and third party 

contractors in connection with record preservation? 

 113 Exchange Act rule 18a-5(a)(18) (for dealers and major participants without a prudential 

regulator); Exchange Act rule 18a-5(b)(14) (for dealers and major participants with a prudential 

regulator). These provisions require records regarding security-based swap portfolio 

reconciliations, notices of valuation disputes, and portfolio compression exercises. 

114 Exchange Act rule 18a-5(c) [17 CFR 240.18a-5(c)].

115 Exchange Act rule 18a-9 [17 CFR 240.18a-9]. The firm may perform this count as of a date 

certain or on a cyclical basis subject covering the entire list of securities, and the count must be 

made or supervised by persons whose regular duties do not require them to have direct 

responsibility for the proper care and protection of the securities or the making or preservation of 

the subject records.

In adopting this requirement the Commission acknowledged that security-based swaps are not 

held in depositories or at other types of custodians. The Commission further stated that to meet 

this requirement, a firm generally will need to account for or verify its open security-based swap 

transactions, and that the method to do this could involve steps to confirm open transactions 

reflected in the firm’s books and records with securities clearing agencies or counterparties. See

Books and Records Adopting Release, 84 FR at 68592.
30

­ Are there potentially any restrictions or prohibitions on the ability of firms to maintain 

certain of those types of information? Are there potentially any restrictions on the ability of 

the Commission to access particular types of records?

­ Are firms required to furnish records promptly to regulators upon request?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements 

As noted above, the Exchange Act includes provisions related to the creation and maintenance of 

certain records, including daily trading records.116 

Commission rules incorporate a number of elements regarding how long particular records must 

be preserved, and accessibility of records, and related matters. For example, security-based swap 

dealers and major security-based swap participants are required to maintain for at least six years, 

the first two years in an easily accessible place, the above records related to trade blotters, 

ledgers, ledger accounts and security records/ledgers.117 

Under Commission rules, dealers and major participants further are required to maintain the 

following types of records for at least three years, the first two years in an easily accessible 

place: certain information required to be made pursuant to rule 18a-5,

118 certain cash-related 

 116 See notes 96-97, supra, and accompanying text. 

117 Exchange Act rule 18a-6(a)(1) [17 CFR 240.18a-6(a)(1)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-6(a)(2) [17 CFR 240.18a-6(a)(2)] (for 

dealers and major participants with a prudential regulator). 

118 Exchange Act rule 18a-6(b)(1)(i) [17 CFR 240.18a-6(b)(1)(i)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-6(b)(2)(i) [17 CFR 240.18a-6(b)(2)(i)]. 

(for dealers and major participants with a prudential regulator). These provisions address the 

preservation of records related to the above information related to brokerage orders/instructions, 

security-based swap transactions for the firm account, confirmations and trade 

acknowledgments/verifications, security-based swap counterparty information, options positions, 

trial balances, current exposure calculations, segregation, non-verified security-based swaps, 

business conduct compliance, and risk mitigation compliance. This portion of the record 

preservation requirement does not address the recordmaking requirement related to associated 

persons. 
31

records and bills,

119 communications,120 net capital-related information,121 account documents,122

written agreements,

123 information supporting financial statements,124 risk management 

 119 In part, this encompasses check books, bank statements, cancelled checks and cash 

reconciliations. See Exchange Act rule 18a-6(b)(1)(ii) [17 CFR 240.18a-6(b)(1)(ii)]. This also 

encompasses information regarding bills receivable and payable, related to the business of the 

security-based swap dealer and major security-based swap participant as such. See Exchange Act 

rule 18a-6(b)(1)(iii) [17 CFR 240.18a-6(b)(1)(iii)]. These requirements apply only to dealers and 

major participants without a prudential regulator. 

120 Exchange Act rule 18a-6(b)(1)(iv) [17 CFR 240.18a-6(b)(1)(iv)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(ii) [17 CFR 240.18a6(b)(2)(ii)] (for dealers and major participants with a prudential regulator). These provisions 

require preservation of originals of communications received and copies of communications sent

(and approvals of communications sent), including inter-office memoranda and communications, 

as well as sales scripts and recordings of telephone calls required to be maintained pursuant to 

Exchange Act section 15F(g)(1) (related to daily trading records).

121 Exchange Act rule 18a-6(b)(1)(v) [17 CFR 240.18a-6(b)(1)(v)]. This provision requires 

preservation of trial balances, computations of net capital and tangible net worth (and related 

working papers), financial statements, branch office reconciliations, and internal audit working 

papers relating to the business of the security-based swap dealer and major security-based swap 

participant as such. This requirement applies only to dealers and major participants without a 

prudential regulator. 

122 Exchange Act rule 18a-6(b)(1)(vi) [17 CFR 240.18a-6(b)(1)(vi)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(iii) [17 CFR 240.18a6(b)(2)(iii)] (for dealers and major participants with a prudential regulator). These provisions 

require preservation of guarantees of accounts and powers of attorney and other evidence of the 

granting of any discretionary authority given in respect of any account, as well as copies of 

resolutions empowering an agent to act on behalf of a corporation. 

123 Exchange Act rule 18a-6(b)(1)(vii) [17 CFR 240.18a-6(b)(1)(vii)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(iv) [17 CFR 240.18a6(b)(2)(iv)] (for dealers and major participants with a prudential regulator). These provisions 

require preservation of written agreements (or copies) relating to the security-based swap dealer 

and major security-based swap participant’s business as such, including agreements with respect 

to any account. Written agreements with respect to a security-based swap customer or noncustomer – including governing documents or any document establishing the terms and 

conditions of the security-based swaps – must be maintained with the account records of the 

customer or non-customer. 

124 Exchange Act rule 18a-6(b)(1)(viii) [17 CFR 240.18a-6(b)(1)(viii)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(v) [17 CFR 240.18a6(b)(2)(v)] (for dealers and major participants with a prudential regulator). These provisions 

require preservation of records containing information supporting amounts included in FOCUS 

reports and in required financial statements, including money balances, positions in securities, 

futures, commodities and options, and records relating to margin and segregation. This 

requirement applies only to dealers and major participants without a prudential regulator, except 

for the segregation-related possession or control information.
32

records,

125 credit risk determinations,126 information related to Regulation SBSR,127 and 

information related to business conduct and special entity requirements.128 

Commission rules also require firms to maintain certain additional records for the life of the 

enterprise and any successor enterprise.

129 The rules further require firms to maintain and 

preserve certain types of records in an easily accessible place: information regarding associated 

persons,

130 records related to orders of settlement,131 compliance, supervisory and procedures 

 125 Exchange Act rule 18a-6(b)(1)(ix) [17 CFR 240.18a-6(b)(1)(ix)]. This provision requires 

preservation of records and results of periodic reviews associated with risk management 

requirements. This requirement applies only to dealers and major participants without a 

prudential regulator.

126 Exchange Act rule 18a-6(b)(1)(x) [17 CFR 240.18a-6(b)(1)(x)]. This provision requires 

preservation of records regarding the basis for the firm’s internal credit assessments of 

counterparties for purposes of the credit risk charges it must take as part of its net capital 

computation. This provision applies only to dealers and major participants without a prudential 

regulator.

127 Exchange Act rule 18a-6(b)(1)(xi) [17 CFR 240.18a-6(b)(1)(xi)] (for dealers and major 

participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(vi) [17 CFR 240.18a6(b)(2)(vi)] (for dealers and major participants with a prudential regulator). These provisions 

require preservation of information the firm is required to submit to a repository pursuant to 

Regulation SBSR.

128 Exchange Act rule 18a-6(b)(1)(xii), (xiii) [17 CFR 240.18a-6(b)(1)(xii), (xiii)] (for dealers and 

major participants without a prudential regulator); Exchange Act rule 18a-6(b)(2)(vii), (viii) [17 

CFR 240.18a-6(b)(2)(vii), (viii)] (for dealers and major participants with a prudential regulator). 

These provisions require preservation of documents related to applicable business conduct 

standards, and documents used to make certain determinations with respect to special entities.

129 Exchange Act rule 18a-6(c) [17 CFR 240.18a-6(c)]. This provision requires preservation of 

records such as partnership articles, articles of incorporation, minute books and stock certificate 

books (depending on the form of the legal entity); and copies of the applicable dealer and major 

participant registration forms (forms SBSE, SBSE-A, SBSE-C or SBSE-W), as well as 

amendments to those forms and other documentation showing the firm’s registration with 

securities regulatory authorities or the CFTC.

130 Exchange Act rule 18a-6(d)(1) [17 CFR 240.18a-6(d)(1)]. This provision requires preservation of 

the above information related to associated persons, until at least three years after the termination 

of the associated person’s employment or other connection with the firm.

131 Exchange Act rule 18a-6(d)(2)(i) [17 CFR 240.18a-6(d)(2)(i)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-6(d)(2)(ii) [17 CFR 240.18a-6(d)(2)(ii)] 

(for dealers and major participants with a prudential regulator). These provisions require 

preservation of reports that a securities regulatory authority or the CFTC (or a prudential 

regulator, if applicable) has required the firm to make and furnish pursuant to an order of 

settlement, and related examinations reports until three years after the date of the report.
33

manuals,

132 and records related to the risk mitigation requirements.133 The rules also include 

provisions relating to the use of electronic storage systems,134 third-party contractors,

135 and the 

prompt production of records.136 

D. Reports and notifications 

The recordkeeping and reporting regulatory requirements in part address the reports and notices 

that firms must provide regarding their financial condition and regarding operational issues and 

deficiencies, as necessary to provide for effective Commission oversight of registered entities. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements related to 

reports and notices that firms are required to make may include (along with other relevant 

factors): 

­ What reports are firms required to make regarding financial, operational and compliance 

matters? To what extent is the information associated with those requirements similar to, or 

 132 Exchange Act rule 18a-6(d)(3)(i) [17 CFR 240.18a-6(d)(3)(i)] (for dealers and major participants 

without a prudential regulator); Exchange Act rule 18a-6(d)(3)(ii) [17 CFR 240.18a-6(d)(3)(ii)] 

(for dealers and major participants with a prudential regulator). These provisions require 

preservation of compliance, supervisory and procedures manuals related to compliance with 

applicable requirements and the supervision of associated natural persons, until three years after 

termination of the use of the manual. For firms with a prudential regulator, this requirement 

relates to compliance with laws and rules relating to security-based swap activities.

133 Exchange Act rule 18a-6(d)(4), (5) [17 CFR 240.18a-6(d)(4), (5)]. These provisions require 

preservation of: written policies and procedures required under the risk mitigation requirements 

until three years after their termination; written portfolio reconciliation agreements until three 

years after the termination of the agreement and related transactions; trading relationship 

documentation until three years after the termination of the documentation and related 

transactions; and audit results related to trading relationship documentation until three years after 

the conclusion of the audit. 

134 The records required to be maintained and preserved may be produced by means of an electronic 

storage system, subject to a number of conditions including, inter alia, the capacity to readily 

download into the readable format the indexes and records preserved in the system, the use of 

duplicate records stored separately, an audit system, and undertakings by senior officers. See

Exchange Act rule 18a-6(e) [17 CFR 240.18a-6(e)].

135 If a security-based swap dealer or major security-based swap participant uses a third party to 

prepare or maintain records, the rule requires the third party to file an undertaking with the 

Commission stating, among other things, that the records are the property of the dealer or major 

participant and will be promptly furnished to the Commission or its designee. See Exchange Act 

rule 18a-6(f) [17 CFR 240.18a-6(f)].

136 Security-based swap dealers and major security-based swap participants must furnish promptly to 

a representative of the Commission legible, true, complete, and current copies of records that the 

firm is required to make or preserve, that are requested by the representative of the Commission. 

See Exchange Act rule 18a-6(g) [17 CFR 240.18a-6(g)].
34

different from, the information presented in FOCUS reports, and in annual reports required 

under the Exchange Act? 

­ To what extent does your jurisdiction require reports that address the use of internal models 

for purposes of calculating net capital? 

­ Does your jurisdiction require firms to make financial and capital information publicly 

available online? If so, what are the contents of the required disclosures? 

­ What notices are firms required to make regarding matters such as capital adequacy and 

deficiencies, failures to comply with books and records requirements, failures to comply with 

segregation requirements, and material weaknesses?

­ To what extent does your jurisdiction require financial reports or other information to be 

reviewed by an independent accountant?

­ Are there potentially any restrictions or prohibitions on the ability of the Commission to 

access reports or notices made pursuant to the requirements of your jurisdiction?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act provides that registered security-based swap dealers and major security-based 

swap participants must make reports that the Commission requires regarding transactions, 

positions and financial condition.137

 137 Exchange Act section 15F(f)(1)(A) [15 U.S.C. 78o-10(f)(1)(A)]. 
35

Commission rules require security-based swap dealers and major participants to make a number 

of reports: “FOCUS reports,”138 reports regarding the use of models to calculate net capital,

139

financial statements,

140 and annual reports.141 

 138 Security-based swap dealers and major security-based swap participants are required to file 

FOCUS reports to provide the Commission with unaudited reports about their financial and 

operational condition. Exchange Act rule 18a-7(a)(1) [17 CFR 240.18a-7(a)(1)] (for dealers and 

major participants without a prudential regulator); Exchange Act rule 18a-7(a)(2) [17 CFR 

240.18a-7(a)(2)] (for dealers and major participants with a prudential regulator). 

139 Dealers that have been authorized to use internal models to calculate net capital are required to 

file additional reports on a monthly or quarterly basis. Exchange Act rule 18a-7(a)(3) [17 CFR 

240.18a-7(a)(3)]. 

140 Dealers and major participants without a prudential regulator are required to disclose on their 

websites an audited statement of financial condition, and more recent unaudited statements. 

Exchange Act rule 18a-7(b)(1)(i), (2) [17 CFR 240.18a-7(b)(1)(i), (2)]. 

Dealers for which there is no prudential regulator also must disclose information regarding net 

capital, and if applicable, regarding material weaknesses identified by an accountant. Exchange 

Act rule 18a-7(b)(1)(ii), (iii) [17 CFR 240.18a-7(b)(1)(ii), (iii)].

141 Dealers and major participants without a prudential regulator annually must file a financial report 

with the Commission. Exchange Act rule 18a-7(c)(1)(i)(A) [17 CFR 240.18a-7(c)(1)(i)(A)]; see 

also Exchange Act rule 18a-7(c)(2) [17 CFR 240.18a-7(c)(2)] (addressing required contents of 

the financial report).

Dealers further are required to file, as applicable, a report addressing the firm’s compliance with

or exemption from segregation requirements. Exchange Act rule 18a-7(c)(1)(i)(B) [17 CFR 

240.18a-7(c)(1)(i)(B)]; see also Exchange Act rule 18a-7(c)(3), (4) [17 CFR 240.18a-7(c)(3), (4)] 

(addressing required contents of compliance and exemption reports). In addition, firms are 

required to file reports of an independent public accountant addressing the financial report and the 

segregation-related report. Exchange Act rule 18a-7(c)(1)(i)(C) [17 CFR 240.18a-7(c)(1)(i)(C)]. 

The rule contains additional provisions regarding, inter alia, the nature and form of reports, 

accountant qualifications and engagement, and notifications of non-compliance or material 

weakness. Exchange Act rule 18a-7(d)-(g) [17 CFR 240.18a-7(d)-(g)]
36

Commission rules further require firms to provide notices regarding: capital deficiencies,

142

bank dealers’ capital category adjustments,143 failures regarding books and records,

144 material 

weaknesses,

145 and failures to make required reserve account deposits.146 

 142 Security-based swap dealers without a prudential regulator must notify the Commission if the 

dealer’s net capital falls below the minimum amount required. Exchange Act rule 18a-8(a)(1) [17 

CFR 240.18a-8(a)(1)]. Major security-based swap participants without a prudential regulator 

must give notice if its tangible net worth falls below the applicable requirement. Exchange Act 

rule 18a-8(a)(2) [17 CFR 240.18a-8(a)(2)]. Notice must be provided promptly, but within 24 

hours, based on a number of triggering events. Exchange Act rule 18a-8(b) [17 CFR 240.18a8(b)].

143 Every security-based swap dealer with a prudential regulator is required to give notice to the 

Commission when the dealer files an adjustment of reported capital category with its prudential 

regulator. Exchange Act rule 18a-8(c) [17 CFR 240.18a-8(c)].

144 Every dealer or major participant that fails to make and keep current the required books and 

records must notify the Commission on the day that the failure arises, and, within forty-eight 

hours of the original notice, provide a report stating what the firm has done or is doing to correct 

the situation. Exchange Act rule 18a-8(d) [17 CFR 240.18a-8(d)].

145 Every dealer or major participant without a prudential regulator that discovers a material 

weakness, or is notified by an independent public accountant of a material weakness, must notify 

the Commission within twenty-four hours, and transmit a report within forty-eight hours of the 

notice stating what the firm has done or is doing to correct the situation. Exchange Act rule 18a8(e) [17 CFR 240.18a-8(e)].

146 Every dealer must give notice to the Commission if the dealer fails to make a deposit into its 

customer reserve account, as required by the segregation rule. Exchange Act rule 18a-8(g) [17 

CFR 240.18a-8(g)].
37

III. Supervision and chief compliance officer requirements 

The supervision and chief compliance officer requirements promote registered entities’ use of 

structures, processes and responsible personnel reasonably designed to promote compliance with 

applicable law and to identify and cure instances of non-compliance.147 These entity-level 

requirements generally apply to the entirety of a firm’s security-based swap business, regardless 

of the location of the business or counterparty.148 

Those consist of the following requirements:149 

 Diligent supervision – as provided by Exchange Act section 15F(h)(1)(B) [15 U.S.C. 78o10(h)(1)(B)] and Exchange Act rule 15Fh-3(h) [17 CFR 240.15Fh-3(h)].

 Chief compliance officers – as provided by Exchange Act section 15F(k) [15 U.S.C. 78o10(k)] and Exchange Act rule 15Fk-1 [17 CFR 240.15Fk-1].

A. Criteria for assessing comparability 

Consistent with the holistic approach toward assessing the comparability of regulatory outcomes 

in connection with substituted compliance, the comparability assessment associated with these 

requirements may focus on the comparability of individual requirements or, alternatively, may 

focus on whether the analogous requirements of a foreign jurisdiction – taken as a whole –

produce similar outcomes as Exchange Act requirements with regard to the overall goal of 

ensuring that registered entities have structures and processes reasonably designed to promote 

compliance with applicable law and to identify and cure instances of non-compliance, in part 

through the designation of an individual with responsibility and authority over compliance 

matters. This latter approach does not require that the foreign jurisdiction have analogues to 

 147 In proposing the supervisory rules, the Commission drew analogies to the fundamental 

importance of supervision in the broker-dealer context. “The Commission has long emphasized 

that the responsibility of broker-dealers to supervise their employees is a critical component of 

the federal regulatory scheme. * * * In large organizations it is especially imperative that those in 

authority exercise particular vigilance when indications of irregularity reach their attention. The 

supervisory obligations imposed by the federal securities laws require a vigorous response even 

to indications of wrongdoing.” See Exchange Act Release No. 64766 (Jun. 29, 2011), 76 FR 

42396, 42419 n.158 (Jul. 18, 2011) (citing John H. Gutfreund, Exchange Act Release No. 31554 

(Dec. 3, 1992) (report pursuant to Section 21(a) of the Exchange Act)). 

The Commission also noted that the proposed chief compliance officer requirements “underscore 

the central role that sound compliance programs play to ensure compliance with the Exchange 

Act and rules and regulations thereunder applicable to security-based swaps.” See id. at 42435.

148 “[I]t is appropriate to subject a registered [entity] to the diligent supervision requirements 

regardless of the status or location of its counterparties to ensure that the [entity] is adequately 

supervising its business and its associated persons to ensure compliance with the full range of its 

obligations under the federal securities laws.” Business Conduct Adopting Release, 81 FR at 

30064.

149 For further information regarding these requirements, see generally Business Conduct Adopting 

Release, note 6, supra.
38

every requirement under Commission rules, as long as the overall requirements of a foreign 

jurisdiction provide similar regulatory outcomes.

The comparability analysis, however, also should account for the fact that Exchange Act section 

15F sets forth certain requirements regarding chief compliance officer designation, duties and 

annual reports with a degree of specificity. 

Exchange Act rule 3a71-6(d)(1) [17 CFR 240.3a71-6(d)(1)] further provides in relevant part that 

in making substituted compliance determinations with regard to supervision requirements the 

Commission intends to consider whether “the mandates for supervisory systems under the 

requirements of the foreign financial regulatory system, and the duties imposed by the foreign 

financial regulatory system” are comparable to those associated with the applicable Exchange 

Act provisions and underlying rules.

In addition, Exchange Act rule 3a71-6(d)(2) [17 CFR 240.3a71-6(d)(2)] provides that in making 

substituted compliance determinations with regard to chief compliance officer requirements the 

Commission intends to consider whether “the requirements of the foreign financial regulatory 

system regarding chief compliance officer obligations” are comparable to those required 

pursuant to the applicable Exchange Act provisions and underlying rules.

B. Supervisory systems, responsible individuals and qualified 

supervisors 

The supervision and chief compliance officer requirements in part address the need for firms to 

have internal supervision systems with qualified supervisory personnel. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

establishment of supervisory or compliance systems, including requirements related to 

supervisory authority and the qualification of supervisors, may include (along with other relevant 

factors):

­ To what extent are firms required to have systems for the internal supervision of their 

security-based swap business and personnel? How are those systems required to be 

reasonably designed to prevent violations of the applicable laws? How is the effectiveness of 

those systems assessed?

­ What requirements govern firms’ designation of supervisory personnel, and the authority, 

responsibility and capacity of those personnel?

­ What requirements govern the qualification of supervisory personnel? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.
39

Exchange Act requirements

Exchange Act section 15F(h)(1)(B) [15 U.S.C. 78o-10(h)(1)(B)] requires that security-based 

swap dealers and major security-based swap participants conform with rules that the 

Commission prescribes with regard to diligent supervision of the firm’s business.

Under Commission rules, dealers and major participants must: establish and maintain 

supervisory systems,150 designate at least one person with authority to carry out supervisory 

responsibilities,151 and make use of supervisors that are qualified to carry out their 

responsibilities.152 

C. Supervisory system policies and procedures 

The supervision and chief compliance officer requirements in part address the need for firms to 

establish, maintain and enforce written supervisory policies and procedures that reasonably are 

designed to prevent violations of applicable law. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements related to 

supervisory policies and procedures may include (along with other relevant factors):

­ In what ways are firms required to establish, maintain and enforce written supervisory 

policies and procedures? 

­ In what ways are firms required to have supervisory policies and procedures for the review of 

transactions?

­ In what ways are firms required to have supervisory policies and procedures for the review of 

correspondence and internal communications? Are firms also required to have supervisory 

policies and procedures for the supervision of oral communications?

­ In what ways are firms required to have supervisory policies and procedures for annual or 

periodic review that are intended to prevent and detect violations of applicable law? 

­ In what ways are firms required to have supervisory policies and procedures for investigating 

the character, business repute, qualifications, and experience of associated persons? 

­ In what ways are firms required to have supervisory policies and procedures for approving 

and supervising the outside trading of associated persons?

 150 Under Commission rules, each dealer and major participant is required to “establish and maintain 

a system to supervise, and shall diligently supervise,” its business and the activities of its 

associated persons relating to security-based swaps. The system must “be reasonably designed to 

prevent violations of the provisions of applicable federal securities laws and the rules and 

regulations thereunder” relating to the firm’s business. Exchange Act rule 15Fh-3(h)(1) [17 CFR 

240.15Fh-3(h)(1)]. 

151 Exchange Act rule 15Fh-3(h)(2)(i) [17 CFR 240.15Fh-3(h)(2)(i)] (also stating that the designation 

requirement applies to each type of business for which registration is required). 

152 Exchange Act rule 15Fh-3(h)(2)(ii) [17 CFR 240.15Fh-3(h)(2)(ii)] (further providing that 

qualification may be established via experience or training).
40

­ Are firms required to have supervisory policies and procedures to generally prevent selfsupervision, and to address self-supervision when it is unavoidable? What factors must be 

met to conclude that self-supervision is unavoidable?

­ In what ways are firms required to have supervisory policies and procedures to prevent the 

supervisory system from being compromised due to conflicts of interest?

­ When are firms required to amend their policies and procedures? 

­ What is the potential liability that firms or their personnel may face for failing to supervise 

compliance with applicable requirements applicable to their security-based swap businesses? 

Does following policies and procedures provide a safe harbor from this potential liability or 

otherwise reduce the potential liability? If so, what are the prerequisites (e.g., no “red flags”) 

for that safe harbor or reduction of liability? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

Commission rules require that dealers and major participants establish, maintain and enforce 

written policies and procedures that address the firm’s security-based swap business, including 

associated persons. Those policies and procedures must be “reasonably designed to prevent 

violations” of applicable securities laws and regulations.

153 

Under Commission rules, those policies and procedures at a minimum154 must include elements 

regarding: transaction review,

155 correspondence and internal communication review,156

 153 Exchange Act rule 15Fh-3(h)(2)(iii) [17 CFR 240.15Fh-3(h)(2)(iii)].

154 In adopting these requirements, the Commission noted that the minimum requirements listed in 

the rule “are not an exhaustive list,” and that entities “should keep in mind their overarching 

obligation . . . to establish and maintain a supervisory system that is reasonably designed to 

prevent violations of applicable federal securities laws and the rules and regulations thereunder” 

relating to the firm’s security-based swap business. See Business Conduct Adopting Release, 81 

FR at 30005-06 (suggesting that entities “generally should consider” providing for the 

supervisory review of oral communications if those are recorded, and that entities should consider 

how to supervise certain disclosures that are made by oral communication). 

155 Exchange Act rule 15Fh-3(h)(2)(iii)(A) [17 CFR 240.15Fh-3(h)(2)(iii)(A)] (mandating 

procedures for supervisory review of transactions for which registration as a dealer or major 

participant is required).

156 Exchange Act rule 15Fh-3(h)(2)(iii)(B) [17 CFR 240.15Fh-3(h)(2)(iii)(B)] (requiring procedures 

for supervisory review of incoming and outgoing written – including electronic – correspondence 

with counterparties or potential counterparties, and of internal written communications relating to 

the firm’s security-based swap business). 
41

periodic business review,

157 the character and qualifications of personnel,158 outside trading by 

personnel,159 supervisory system descriptions,

160 prohibitions against self-supervision,161 and 

conflict of interest provisions.

162 Firms must amend their written supervisory procedures as 

appropriate based on material changes in applicable laws or regulations, or in the firm’s business 

or supervisory system.

163

Commission rules also provide that the supervisory system must encompass procedures for 

compliance with duties set forth in Exchange Act section 15F(j).164 Section 15F(j) contains selfexecuting requirements that, inter alia, impose on security-based dealers and major securitybased swap participants duties related to: establishing robust and professional risk management 

 157 Exchange Act rule 15Fh-3(h)(2)(iii)(C) [17 CFR 240.15Fh-3(h)(2)(iii)(C)] (requiring procedures 

for periodic review, at least annually, of the firm’s security-based swap business “that is 

reasonably designed to assist in detecting and preventing violations” of applicable requirements).

158 Exchange Act rule 15Fh-3(h)(2)(iii)(D) [17 CFR 240.15Fh-3(h)(2)(iii)(D)] (requiring procedures 

for investigation of “the good character, business repute, qualifications, and experience” of 

persons prior to their association with the firm).

159 Exchange Act rule 15Fh-3(h)(2)(iii)(E) [17 CFR 240.15Fh-3(h)(2)(iii)(E)] (requiring procedures 

to consider whether associated persons may establish or maintain securities or commodities 

accounts or trading relationships at other firms, and, if permitted, procedures for the supervision 

of that outside trading). 

160 Exchange Act rule 15Fh-3(h)(2)(iii)(F) [17 CFR 240.15Fh-3(h)(2)(iii)(F)] (requiring a description 

of the supervisory system, including the titles, qualifications, locations and responsibilities of 

supervisory persons). 

161 Exchange Act rule 15Fh-3(h)(2)(iii)(G) [17 CFR 240.15Fh-3(h)(2)(iii)(G)] requires procedures 

prohibiting an associated person who performs a supervisory function from supervising his or her 

own activities or reporting to, or having his or her compensation or continued employment 

determined by, a person or persons he or she is supervising. 

This prohibition does not apply if the firm determines compliance is not possible “because of the 

firm’s size or a supervisory person’s position within the firm.” In that case the firm must 

document the factors used to reach that determination, and how the supervisory arrangement with 

respect to that supervisory personnel otherwise complies with the diligent supervision 

requirement.

162 Exchange Act rule 15Fh-3(h)(2)(iii)(H) [17 CFR 240.15Fh-3(h)(2)(iii)(H)] (requiring procedures 

reasonably designed to prevent the supervisory system from being compromised due to the 

conflicts of interest that may be present with respect to associated persons, including their 

positions, the revenue they generate, or compensation that the supervisor may derive from the 

associated person being supervised).

163 Exchange Act rule 15Fh-3(h)(4) [17 CFR 240.15Fh-3(h)(4)] (also requiring that firms promptly 

communicate material amendments to relevant associated persons). 

164 See Exchange Act rule 15Fh-3(h)(2)(iii)(I) [17 CFR 240.15Fh-3(h)(2)(iii)(I)].
42

systems,

165 disclosing certain security-based swap information to regulators,166 obtaining 

necessary information,167 implementing conflict-of-interest systems and procedures,

168 and 

addressing antitrust considerations.169

In addition, Commission rules provide that a firm or its associated person will not be deemed to 

have failed to diligently supervise another person if the firm establishes, maintains and applies 

written policies and procedures that would reasonably be expected to prevent and detect

violations, so long as the firm and its associated persons reasonably have discharged the 

associated duties and did not have a reasonable basis to believe that the policies and procedures 

were not being followed.170

D. Chief compliance officer designation, reporting authority and 

job security 

The supervision and chief compliance officer requirements in part address the need for firms to

designate individuals with responsibility and adequate authority over compliance matters.

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

designation of individuals with responsibility and authority over compliance matters may include

(along with other relevant factors):

 165 Exchange Act section 15F(j)(2) [15 U.S.C. 78o-10(j)(2)]; see also note 63, supra, and 

accompanying text (regarding risk management system requirements for nonbank dealers and 

major participants). 

166 Exchange Act section 15F(j)(3) [15 U.S.C. 78o-10(j)(3)] requires firms to disclose, to the 

Commission and prudential regulators, information concerning: terms and conditions of its 

security-based swaps; security-based swap trading operations, mechanisms, and practices; 

financial integrity protections relating to security-based swaps; and other information relevant to 

the firm’s trading in security-based swaps. 

Substituted compliance is not available in connection with this disclosure duty. See Exchange 

Act rule 3a71-6(d)(1) [17 CFR 240.3a71-6(d)(1)] (generally making substituted compliance 

potentially available in connection with the business conduct and supervision requirements of 

Exchange Act sections 15F(h) and (j), but excluding, inter alia, section 15F(j)(3)). 

167 Exchange Act section 15F(j)(4) [15 U.S.C. 78o-10(j)(4)] requires firms to establish and enforce 

internal systems and procedures to obtain information needed to perform functions required by 

law or regulation, and to provide the information to the Commission and prudential regulators on 

request. Substituted compliance similarly is not available in connection with the information 

provision part of that duty. See Exchange Act rule 3a71-6(d)(1) [17 CFR 240.3a71-6(d)(1)] 

(further excluding section 15F(j)(4)(B) from the availability of substituted compliance). 

168 Exchange Act section 15F(j)(5) [15 U.S.C. 78o-10(j)(5)].

169 Exchange Act section 15F(j)(6) [15 U.S.C. 78o-10(j)(6)].

Although section 15F(j) also addresses the monitoring of trading to prevent violations of 

applicable position limits, the Commission has not adopted any position limit requirements. 

170 Exchange Act rule 15Fh-3(h)(3) [17 CFR 240.15Fh-3(h)(3)].
43

 Are firms required to establish a chief compliance officer or similar function?

 How do the requirements of your jurisdiction address lines of reporting for the chief 

compliance officer or similar function? How do those requirements otherwise help ensure 

that those persons have necessary authority and resources? 

 Do the requirements of your jurisdiction provide protections to the chief compliance officer 

or similar function with regard to removal, compensation or sanctioning? If so, what are 

those protections?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act requires security-based swap dealers and major security-based swap 

participants to designate an individual to serve as a chief compliance officer.171 The Exchange 

Act further provides that the chief compliance officer is required to report “directly to the board 

of directors or to the senior officer” of the firm.

172 

Under Commission rules, the compensation and removal of the chief compliance officer requires

the approval of a majority of the firm’s board of directors.173

E. Chief compliance officer policies and procedures 

The supervision and chief compliance officer requirements in part address the responsibility of 

chief compliance officers (or similar functions) to ensure that firms establish, follow and update 

appropriate compliance policies and procedures.

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

obligation of chief compliance officers (or similar functions) with regard to compliance policies 

and procedures may include (along with any other relevant factors):

­ Is the chief compliance officer or similar function required periodically to review the firm’s

compliance with applicable requirements? Is a written assessment required?

­ Is the chief compliance officer or similar function required to ensure that the firm implements

policies and procedures to remediate noncompliance? What methods are to be used to

identify noncompliance?

 171 Exchange Act section 15F(k)(1) [15 U.S.C. 78o-10(k)(1)]; see also Exchange Act rule 15Fk-1(a) 

[17 CFR 240.15Fk-1(a)].

172 Exchange Act section 15F(k)(2)(A) [15 U.S.C. 78o-10(k)(2)(A)]; see also Exchange Act rule 

15Fk-1(b)(1) [17 CFR 240.15Fk-1(b)(1)].

173 Exchange Act rule 15Fk-1(d) [17 CFR 240.15Fk-1(d)]. 
44

­ Is the chief compliance officer or similar function required to take steps to resolve conflicts 

of interest? To what extent are board members or senior personnel required to participate in 

the resolution of conflicts of interest?

­ Is the chief compliance officer or similar function required to administer all policies and 

procedures that are required by law? 

­ Are firms permitted to rely on another corporate officer to perform a similar function to a 

chief compliance officer? If so, to what extent is that job function similar the chief 

compliance officer job function described by Exchange Act requirements.

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act, as supplemented by Commission rules, sets forth requirements related to 

chief compliance officer duties with regard to firm policies and procedures. Those provisions 

address: a general requirement for written compliance policies and procedures,

174 required 

 174 Exchange Act rule 15Fk-1(b)(2) [17 CFR 240.15Fk-1(b)(2)] requires the chief compliance officer 

to take “reasonable steps” to ensure that the firm “establishes, maintains and reviews written 

policies and procedures reasonably designed to achieve compliance with” the Exchange Act and 

underlying rules and regulations relating to its business as a dealer or major participant.

This rule implements Exchange Act section 15F(k)(2)(E) [15 U.S.C. 78o-10(k)(2)(E)], which 

generally requires the chief compliance officer to “ensure compliance” with the statute. 
45

compliance reviews,

175 identifying and handling noncompliance,176 resolution of conflicts of 

interest,

177 and administration of required policies and procedures.178

F. Chief compliance officer reports 

Finally, the supervision and chief compliance officer requirements address the need for chief 

compliance officers (or similar functions) to be responsible for appropriate periodic reports 

addressing compliance matters. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding 

compliance reports may include (along with any other relevant factors):

 175 Exchange Act rule 15Fk-1(b)(2)(i) [17 CFR 240.15Fk-1(b)(2)(i)] requires the chief compliance 

officer to review the firm’s compliance with respect to requirements under Exchange Act section 

15F and underlying rules and regulations, “where the review shall involve preparing the 

registrant’s annual assessment of its written policies and procedures reasonably designed to 

achieve compliance with” the statute and the rules by the dealer or major participant.

This rule implements Exchange Act section 15F(k)(2)(B) [15 U.S.C. 78o-10(k)(2)(B)], which 

generally requires the chief compliance officer to “review the compliance” of the firm.

176 Exchange Act rule 15Fk-1(b)(2)(ii) [17 CFR 240.15Fk-1(b)(2)(ii)] requires the chief compliance 

officer to take reasonable steps to ensure that the firm “establishes, maintains and reviews” 

policies and procedures to remediate noncompliance issues that have been identified by means 

such as compliance office review, look-back, internal or external audit finding, self-reporting, and 

validated complaints. That rule implements Exchange Act section 15F(k)(2)(F) [15 U.S.C. 78o10(k)(2)(F)], which generally requires the chief compliance officer to “establish procedures for 

the remediation of non-compliance” of issues that the chief compliance officer identified by those 

means. 

In addition, Exchange Act rule 15Fk-1(b)(2)(iii) [17 CFR 240.15Fk-1(b)(2)(iii)] requires the chief 

compliance officer to take reasonable steps to ensure that the registrant establishes and follows 

procedures for the “handling, management response, remediation, retesting, and resolution” of 

non-compliance issues. That rule implements Exchange Act section 15F(k)(2)(G) [15 U.S.C. 

78o-10(k)(2)(G)], which generally requires the chief compliance officer to “establish and follow 

appropriate procedures for the handling, management response, remediation, retesting, and 

closing of non-compliance issues.”

177 Exchange Act rule 15Fk-1(b)(3) [17 CFR 240.15Fk-1(b)(3)] requires the chief compliance 

officer, in consultation with the board of directors or the senior officer of the firm, to “take 

reasonable steps to resolve any material conflicts of interest that may arise.”

This rule implements Exchange Act section 15F(k)(2)(C) [15 U.S.C. 78o-10(k)(2)(C)], which 

generally requires the chief compliance officer, in consultation with the board of directors or 

senior officers, to “resolve any conflicts of interest that may arise.” 

178 Exchange Act rule 15Fk-1(b)(4) [17 CFR 240.15Fk-1(b)(4)] mandates that the chief compliance 

officer administer each policy and procedure that is required to be established.

This rule implements Exchange Act section 15F(k)(2)(D) [15 U.S.C. 78o-10(k)(2)(D)], which 

makes the chief compliance officer responsible for administering required policies and 

procedures. 
46

­ Are firms required to produce annual or other periodic compliance reports? If so, who is 

required to prepare them and what are the required contents? Are such reports required to 

disclose material non-compliance matters identified and the resources devoted to compliance 

efforts?

­ Are compliance reports subject to certification and internal review requirements? If so, how?

­ Are the required reports required to be submitted to the regulator? Are reports with material 

errors or omissions required to be amended?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act requires the chief compliance officer annually to prepare and sign a 

compliance report that contains a description of the security-based swap dealer’s or major 

security-based swap participant’s written compliance policies and procedures, including the code 

of ethics and conflict of interest policies.179 The Exchange Act further requires that the 

compliance report accompany each appropriate financial report that the firm is required to 

furnish to the Commission, and include a certification that, under penalty of law, the report is 

accurate and complete.180 

Under Commission rules, the compliance report must describe elements related to: selfassessment of the effectiveness of the compliance policies and procedures,

181 material changes to 

firm’s policies and procedures,

182 areas for improvement,183 material non-compliance matters 

identified,

184 and compliance resources and deficiencies.185

 179 Exchange Act section 15F(k)(3)(A) [15 U.S.C. 78o-10(k)(3)(A)]. 

180 Exchange Act section 15F(k)(3)(B) [15 U.S.C. 78o-10(k)(3)(B)].

181 Exchange Act rule 15Fk-1(c)(2)(i)(A) [17 CFR 240.15Fk-1(c)(2)(i)(A)]. 

182 Exchange Act rule 15Fk-1(c)(2)(i)(B) [17 CFR 240.15Fk-1(c)(2)(i)(B)]. 

183 Exchange Act rule 15Fk-1(c)(2)(i)(C) [17 CFR 240.15Fk-1(c)(2)(i)(C)].

184 Exchange Act rule 15Fk-1(c)(2)(i)(D) [17 CFR 240.15Fk-1(c)(2)(i)(D)].

185 Exchange Act rule 15Fk-1(c)(2)(i)(E) [17 CFR 240.15Fk-1(c)(2)(i)(E)].
47

Commission rules further address the timing of submission,

186 internal distribution and 

discussion,187 certification,188 incorporation by reference,

189 and amendment of reports that have 

material errors or omissions.190

 186 Exchange Act rule 15Fk-1(c)(2)(ii)(A) [17 CFR 240.15Fk-1(c)(2)(ii)(A)] (stating that the 

compliance report must be submitted to the Commission within 30 days following the deadline 

for filing the firm’s annual financial report to the Commission). Exchange Act rule 15Fk1(c)(2)(iii) [17 CFR 240.15Fk-1(c)(2)(iii)] addresses extensions of time. 

187 Exchange Act rule 15Fk-1(c)(2)(ii)(B) [17 CFR 240.15Fk-1(c)(2)(ii)(B)] provides that the 

compliance report must be submitted to the firm’s directors and audit committee (or equivalent 

bodies) and senior officer prior to submission to the Commission.

Exchange Act rule 15Fk-1(c)(2)(ii)(C) [17 CFR 240.15Fk-1(c)(2)(ii)(C)] provides that the report 

also must be discussed in one or more meetings conducted by the senior officer with the chief 

compliance officer in the preceding 12 months, “the subject of which addresses” compliance 

obligations.

188 Exchange Act rule 15Fk-1(c)(2)(ii)(D) [17 CFR 240.15Fk-1(c)(2)(ii)(A)] provides that the 

compliance report 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.”

189 Exchange Act rule 15Fk-1(c)(2)(iv) [17 CFR 240.15Fk-1(c)(2)(iv)]. 

190 Exchange Act rule 15Fk-1(c)(2)(v) [17 CFR 240.15Fk-1(c)(2)(v)]. 
48

IV. Counterparty protection requirements 

The counterparty protection requirements are intended to “bring professional standards of 

conduct to, and increase transparency in, the security-based swap market and to require 

registered [entities] to treat parties to these transactions fairly.”191 These transaction-level

requirements generally apply only to a non-U.S. firm’s activities involving U.S. counterparties 

(unless the transaction is arranged, negotiated or executed in the United States).192

Those consist of the following requirements:

193 

 Fair and balanced communications – as provided by Exchange Act section 15F(h)(3)(C) [15 

U.S.C. 78o-10(h)(3)(C)] and Exchange Act rule 15Fh-3(g) [17 CFR 240.15Fh-3(g)].

 Disclosure of material risks and characteristics, and material incentives or conflicts of 

interest – as provided by Exchange Act section 15F(h)(3)(B)(i), (ii) [15 U.S.C. 78o10(h)(3)(B)(i), (ii)] and Exchange Act rule 15Fh-3(b) [17 CFR 240.15Fh-3(b)].

 Disclosure of daily marks – as provided by Exchange Act section 15F(h)(3)(B)(iii) [15 

U.S.C. 78o-10(h)(3)(B)(iii)] and Exchange Act rule 15Fh-3(c) [17 CFR 240.15Fh-3(c)].

 “Know your counterparty” – as provided by Exchange Act rule 15Fh-3(e) [17 CFR 

240.15Fh-3(e)].

 Suitability of recommendations – as provided by Exchange Act rule 15Fh-3(f) [17 CFR 

240.15Fh-3(f)].

 Disclosure of clearing rights – as provided by Exchange Act rule 15Fh-3(d) [17 CFR 

240.15Fh-3(d)]. 

 191 See Business Conduct Adopting Release, 81 FR at 30065; see also Exchange Act Release No. 

69490 (May 1, 2013), 78 FR 30968, 31010 (May 23, 2013) (proposed rules regarding crossborder application, stating that these requirements “primarily focus on protecting counterparties 

by requiring security-based swap dealers to, among other things, provide certain disclosures to 

counterparties, [and] adhere to certain standards of business conduct”). 

Those are distinct from entity-level requirements that “primarily address concerns related to the 

security-based swap dealer as a whole, with a particular focus on safety and soundness of the 

entity to reduce systemic risk in the U.S. financial system.” See id. at 31011.

192 For non-U.S. security-based swap dealers, the business conduct requirements under Exchange 

Act section 15F(h) (other than internal supervision requirements) apply only to the dealer's 

transactions with U.S. counterparties (apart from certain transactions conducted through a foreign 

branch of the U.S. counterparty), or to transactions arranged, negotiated or executed in the United 

States. See Exchange Act rule 3a71-3(c) [17 CFR 240.3a71-3(c)] (exception from business 

conduct requirements for a security-based swap dealer’s “foreign business”); see also Exchange 

Act rules 3a71-3(a)(3), (8) and (9) [17 CFR 240.3a71-3(a)(3), (8) and (9)] (definitions of 

“transaction conducted through a foreign branch,” “U.S. business” and “foreign business”).

193 For further information regarding these requirements, see generally Business Conduct Adopting 

Release, note 6, supra.
49

A. Criteria for assessing comparability 

Consistent with the holistic approach toward assessing the comparability of regulatory outcomes 

in connection with substituted compliance, the comparability assessment associated with these 

requirements may focus on the comparability of individual requirements or, alternatively, may 

focus on whether the analogous requirements of a foreign jurisdiction – taken as a whole –

produce similar outcomes as Exchange Act requirements with regard to the overall goals of

promoting professional standards of conduct, increasing transparency and requiring registered 

entities to treat parties fairly. This latter approach does not require that the foreign jurisdiction 

have analogues to every requirement under Commission rules as long as the overall requirements 

of a foreign jurisdiction provide similar regulatory outcomes. 

The comparability analysis for counterparty protection requirements, however, also must take 

into account that three relevant requirements under the Exchange Act – related to (1) fair and 

balanced communications, (2) disclosure of certain risks, characteristics, incentives and conflicts, 

and (3) disclosure of daily marks – specifically are mandated by Exchange Act section 15F. 

Exchange Act rule 3a71-6(d)(1) [17 CFR 240.3a71-6(d)(1)] further provides in relevant part that 

in making substituted compliance determinations related to business conduct, the Commission 

intends to consider whether “the information that is required to be provided to counterparties

pursuant to the requirements of the foreign financial regulatory system, the counterparty 

protections under the requirements of the foreign financial regulatory system, . . . and the duties

imposed by the foreign financial regulatory system” are comparable to those associated with the 

applicable Exchange Act provisions and underlying rules. 

B. Fair and balanced communications

The counterparty protection requirements in part address the need to promote complete and 

honest communications as part of firms’ security-based swap businesses.194 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

obligation of market participants to communicate in a complete and honest manner may include 

(along with other relevant factors): 

­ To what extent are firms prohibited from engaging in communications that are misleading in 

fact or by omission?

­ To what extent are firms required to provide counterparties with information that is sufficient 

to promote informed decisionmaking?

­ To what extent do relevant requirements address statements regarding past performance or 

predictions regarding future performance?

 194 In adopting the rules implementing this statutory requirement, the Commission expressed the 

view that the requirement promotes investor protection by prohibiting firms “from overstating the 

benefits or understating the risks to inappropriately influence counterparties’ investment 

decisions.” See Business Conduct Adopting Release, 81 FR at 30001-02.
50

­ To what extent do relevant requirements mandate that certain types of communications be 

balanced by disclaimers and/or by contextual information? 

­ Are the relevant requirements lessened or otherwise modified in connection with certain 

categories of counterparties? If so, how?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act requires the Commission to adopt rules providing that security-based swap 

dealers and major security-based swap participants communicate with counterparties “in a fair 

and balanced manner based on principles of fair dealing and good faith.”195 

The Commission rule implementing that statutory provision specifies that: those 

communications must “provide a sound basis for evaluating the facts” with regard to particular 

security-based swaps or trading strategies; those communications “may not imply that past 

performance will recur or make any exaggerated or unwarranted claim, opinion or forecast”; and 

any statement referring to potential opportunities or advantages presented by a security-based 

swap must be balanced by “an equally detailed statement of the corresponding risks.”196 

C. Disclosure of material risks and characteristics, and material 

incentives or conflicts of interest

The counterparty protection requirements in part address the need for security-based swap 

market participants to have information that is sufficient to make informed decisions regarding

potential transactions involving particular counterparties and particular financial instruments.197

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding

market participants’ obligation to provide counterparties with sufficient information concerning 

 195 Exchange Act section 15F(h)(3)(C) [15 U.S.C. 78o-10(h)(3)(C)], Exchange Act rule 15Fh-3(g)

[17 CFR 240.15Fh-3(g)].

196 Exchange Act rule 15Fh-3(g) [17 CFR 240.15Fh-3(g)]. 

In adopting the rule implementing the fair and balanced communications requirement, the 

Commission noted that security-based swap dealers and major security-based swap participants 

“should also keep in mind that all their communications with counterparties will be subject to the 

specific antifraud provisions added to the Exchange Act under Title VII of the Dodd-Frank Act, 

as well as general antifraud provisions under the federal securities laws.” See Business Conduct 

Adopting Release, 81 FR at 30001. Substituted compliance is not available in connection with 

those antifraud provisions. 

197 In adopting the rule implementing this statutory requirement, the Commission stated that the 

objective of the required disclosure of material risks and characteristics is “to provide information 

to a counterparty to help them assess whether, and under what terms, they want to enter into the 

transaction.” See id. at 29985. 
51

financial instruments, firm incentives and firm conflicts may include (along with other relevant 

factors):

­ To what extent are firms required to provide counterparties or potential counterparties with 

information regarding the features of financial instruments? Is there required disclosure 

regarding the risks of financial instruments? Is there required disclosure regarding the terms 

of financial instruments? 

­ To what extent are firms required to provide counterparties or potential counterparties with 

information regarding the incentives or conflicts of interest facing the firms? Are firms 

required to disclose the revenue they receive from third parties? 

­ What provisions govern the timing and manner of required disclosure? 

­ Is the disclosure requirement lessened or eliminated in connection with certain categories of 

counterparties? If so, how? 

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements. 

Exchange Act requirements

The Exchange Act requires the Commission to adopt rules providing that security-based swap 

dealers and major security-based swap participants must disclose to counterparties – other than

counterparties that are security-based swap dealers, major security-based swap participants, swap 

dealers or major swap participants – information regarding: the material risks and characteristics 

of the security-based swap; and any material incentives or conflicts of interest that the securitybased dealer or major security-based swap participant may have in connection with the securitybased swap.198 

The Commission rule implementing those statutory provisions further identifies the “material 

risks and characteristics” and “material incentives or conflicts of interest” to be disclosed.199 

 198 Exchange Act section 15F(h)(3)(B)(i), (ii) [15 U.S.C. 78o-10(h)(3)(B)(i), (ii)].

199 “Material risks and characteristics” may include: (i) market, credit, liquidity, foreign currency, 

legal, operational, and other applicable risks; and (ii) material economic terms of the securitybased swap, terms relating to the operation of the security-based swap, and the rights and 

obligations of the parties during the term of the security-based swap. Exchange Act rule 15Fh3(b)(1) [17 CFR 240.15Fh-3(b)(1)].

“Material incentives or conflicts of interest” may encompass “any compensation or other 

incentives from any source other than the counterparty in connection with the security-based 

swap to be entered into with the counterparty.” Exchange Act rule 15Fh-3(b)(2) [17 CFR 

240.15Fh-3(b)(2)].

In adopting the rule, the Commission noted that “incentives” does not refer “to any profit or 

return that the [entity] would expect to earn from the security-based swap itself, or from any 

related hedging or trading activities . . . but rather to any other financial arrangements pursuant to 

which [the entity] may have an incentive to encourage the counterparty to enter into the 

transaction.” See Business Conduct Adopting Release, 81 FR at 29986. 
52

The rule also requires disclosure at a “reasonably sufficient time prior” to entering into the 

security-based swap, and requires disclosure in a “manner reasonably designed to allow the 

counterparty to assess” those risks, characteristics, incentives and conflicts, but states that the 

obligation does not apply unless “the identity of the counterparty is known” to the dealer or 

major participant “at a reasonably sufficient time prior to execution” to permit the disclosure.200 

D. Daily mark disclosure

The counterparty protection requirements in part address the need for market participants to have 

effective access to daily mark information necessary to manage their security-based swap 

positions.

201

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

disclosure of daily mark information may include (along with other relevant factors):

­ To what extent are firms required to provide counterparties with daily mark information upon 

request or as a matter of course? How are daily marks calculated for those purposes?

­ To what extent do firms also have to disclose underlying assumptions, methodologies or 

information sources related to daily mark calculations?

­ Can firms restrict recipients’ use of this daily mark information, or charge recipients for the 

information? 

­ Is the disclosure requirement lessened or eliminated in connection with certain categories of 

counterparties? If so, how?

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

The Exchange Act requires the Commission to adopt rules providing that security-based swap 

dealers and major security-based swap participants must disclose to counterparties – other than 

certain types of dealers and major participants – daily mark information. For cleared security-

 200 Exchange Act rule 15Fh-3(b) [17 CFR 240.15Fh-3(b)].

201 In adopting the rule implementing that statutory requirement, the Commission noted that the daily 

mark disclosures “are relevant to a counterparty’s ongoing understanding and management of its 

security-based swap positions.” See Business Conduct Adopting Release, 81 FR at 29991. 

Morever, in rejecting the suggestion that certain counterparties be permitted to opt out of the 

receipt of daily mark disclosures, the Commission stated: “It is our understanding that 

counterparties have a range of sophistication and some are unlikely to have their own modeling 

capabilities or access to relevant data to calculate a daily mark themselves. We think it is 

appropriate to apply the rule so that counterparties receive the benefits of the daily mark and 

related disclosures, and do not think it appropriate to permit parties to ‘opt out’ of the benefits of 

those provisions.” See id. at 29990.
53

based swaps, this would encompass receipt of daily mark information from the clearing 

organization upon request of the counterparty. For uncleared security-based swaps, this would 

encompass receipt of the daily mark from the dealer or major participant.202 

The Commission rule implementing that statutory provision further addresses the specific 

information that must be provided,203 and states that the dealer or major participant must provide 

the daily mark to the counterparty without charge or restrictions on internal use.204

E. “Know your counterparty”

The counterparty protection requirements in part accounts for the need that security-based swap 

dealers obtain essential counterparty information necessary to promote effective compliance and 

risk management.205

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements regarding the 

need for market participants to obtain essential counterparty information necessary to promote 

compliance and risk management may include (along with other relevant factors):

­ To what extent are firms required to obtain counterparty information necessary to promote 

compliance with applicable laws and regulations?

­ To what extent are firms required to obtain counterparty information necessary for purposes 

of the firm’s credit and operational risk management policies? 

­ To what extent are firms required to obtain information regarding the authority of persons 

acting for the counterparty? 

­ Are such information gathering requirements lessened or eliminated in connection with 

certain categories of counterparties? If so, how?

 202 Exchange Act section 15F(h)(3)(B)(iii) [15 U.S.C. 78o-10(h)(3)(B)(iii)].

203 Under the rule, for cleared security-based swaps the security-based swap dealer or major securitybased swap participant must disclose the daily mark received from the clearing agency upon 

counterparty request. 

For uncleared security-based swaps, the dealer or major participant must disclose “the midpoint 

between the bid and offer, or the calculated equivalent thereof, as of the close of business, unless 

the parties agree in writing otherwise to a different time, on each business day during the term of 

the security-based swap.” That daily mark “may be based on market quotations for comparable 

security-based swaps, mathematical models or a combination thereof,” and the dealer or major 

participant must disclose its data sources and a description of the underlying methodology and 

assumptions, and promptly disclose any material changes to the data sources, methodology and 

assumptions during the term of the security-based swap.

204 Exchange Act rule 15Fh-3(c) [17 CFR 240.15Fh-3(c)]. 

205 In adopting this rule, the Commission expressed the view that the requirement “is consistent with 

basic principles of legal and regulatory compliance, and operational and credit risk management.” 

See Business Conduct Adopting Release, 81 FR at 29994. 
54

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

Under Commission rules, security-based swap dealers must establish, maintain and enforce 

written policies and procedures “reasonably designed to obtain and retain a record of the 

essential facts concerning each counterparty whose identity is known to the security-based swap 

dealer that are necessary for conducting business with such counterparty.” 

The rule further specifies that those “essential facts” are: facts required to “comply with 

applicable laws, regulations and rules”; facts required to implement the security-based swap 

dealer’s credit and operational risk management policies in connection with transactions 

involving the counterparty; and information regarding the authority of any person acting for the 

counterparty.206 

F. Suitability

The counterparty protection requirements in part accounts for the need to guard against securitybased swap dealers making unsuitable recommendations.207

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements addressing a 

security-based swap dealer’s suitability obligations for recommended transactions and trading 

strategies may include (along with other relevant factors): 

­ To what extent are market participants prohibited from making unsuitable recommendations?

­ What types of activities constitute “recommendations” or otherwise trigger the application of 

your jurisdiction’s suitability requirement? 

­ To what extent do firms and their personnel need to understand the risks and rewards of 

products subject to the suitability requirement?

­ To what extent do firms and their personnel need to have a reasonable basis to conclude that 

the recommendation is suitable for the counterparty? What information must they obtain 

about the counterparty to comply with this requirement?

­ Which counterparties are covered by your jurisdiction’s suitability requirement? To what 

extent is the suitability requirement excused or otherwise lessened in connection with certain 

types of counterparties, such as institutional counterparties?

­ To what extent does the suitability requirement apply – or not apply – in connection with 

cross-border activities? 

 206 Exchange Act rule 15Fh-3(e) [17 CFR 240.15Fh-3(e)].

207 The Commission has noted that “the obligation to make only suitable recommendations is a core

business conduct requirement for broker-dealers and other financial intermediaries.” See

Business Conduct Adopting Release, 81 FR at 29997.
55

The Staff suggests that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

Under Commission rules, a security-based swap dealer that recommends208 a security-based 

swap, or a trading strategy involving a security-based swap, to a counterparty (other than a 

counterparty that is a dealer or major participant) must: undertake “reasonable diligence” to 

understand the potential risks and rewards associated with the recommendation; and have a 

“reasonable basis” to believe that the recommendation is suitable for the counterparty, based on 

information such as the counterparty’s investment profile, trading objectives and ability to 

absorb potential losses.209

A security-based swap dealer may fulfill that “reasonable basis” requirement with respect to an 

“institutional counterparty”210 if: the dealer reasonably determines that the counterparty, or an 

agent with decision-making authority, is capable of independently evaluating investment risks;

the counterparty or agent affirms it is exercising independent judgment; and the dealer discloses 

that it is acting as counterparty and is not assessing suitability.211 

A security-based swap dealer may satisfy its “reasonable diligence” obligation if the dealer 

receives written representations that, for a counterparty that is not a special entity,212 the 

 208 The Commission has stated that determining whether a dealer has made a recommendation 

“should turn on the facts and circumstances of the particular situation.” In general, relevant 

factors include whether the communication “reasonably could be viewed as a ‘call to action’” and 

“reasonably would influence an investor to trade a particular security or group of securities.” See

Business Conduct Adopting Release, 81 FR at 29997. 

209 Exchange Act rule 15Fh-3(f)(1) [17 CFR 240.15Fh-3(f)(1)]

210 For those purposes, “institutional counterparty” in part means an “eligible contract participant” 

(or “ECP”) other than certain types of ECPs such as non-financial corporations, benefit plans, 

government entities and individuals. The term “institutional counterparty” also encompasses 

other persons (including natural persons, corporations, partnerships and trusts) with at least $50 

million in total assets. See Exchange Act rule 15Fh-3(f)(4) [17 CFR 240.15Fh-3(f)(4)]. 

The term “eligible contract participant” is defined by Commodity Exchange Act section 1a(18) 

[7 U.S.C. 1a(18)]. The ECP definition subsumes, among other elements: corporations and other 

entities with more than $10 million in assets; individuals with more than $10 million invested on 

a discretionary basis (or $5 million if hedging); entities with a net worth of at least $1 million that 

are hedging commercial risk; financial institutions; insurance companies; certain investment 

companies; commodity pools with more than $5 million in assets under management; certain 

employee benefit plans; governmental entities; certain brokers and dealers; and certain futures 

commission merchants.

211 Exchange Act rule 15Fh-3(f)(2) [17 CFR 240.15Fh-3(f)(2)]. 

212 The term “special entity” is defined to encompass: Federal agencies; certain state and local 

agencies and political subdivisions and instrumentalities; certain employee benefit plans and 

government plans; and endowments. See Exchange Act rule 15Fh-2(d) [17 CFR 240.15Fh-2(d)]. 
56

counterparty has complied with policies and procedures reasonably designed to ensure that the 

persons evaluating the recommendation and making trading decisions are capable of doing so.213 

G. Disclosure of clearing rights

Finally, the counterparty protection requirements address the information that market 

participants receive regarding their clearing rights under the Exchange Act. 

Your jurisdiction’s requirements

Relevant information for the discussion regarding your jurisdiction’s requirements pertaining to 

clearing rights and the disclosure of any such clearing rights may include (along with other 

relevant factors): 

­ To what extent does your jurisdiction mandate the clearing of relevant transactions? In the 

absence of mandatory clearing of all transactions of a particular type, does your jurisdiction 

permit counterparties to elect to require clearing? If so, does the counterparty have the right 

to select the clearing agency?

­ To what extent does your jurisdiction require disclosure of applicable clearing rights? 

The Staff recommends that you also address generally the comparability of your jurisdiction’s 

requirements and analogous requirements under the Exchange Act, including any general 

differences in the two sets of requirements, and the consistency of the objectives of the two sets 

of requirements.

Exchange Act requirements

Under Commission rules, security-based swap dealers and major security-based swap 

participants are required to disclose to a counterparty (other than a counterparty that is a dealer or 

major participant) certain information regarding clearing rights under the Exchange Act, so long 

as the identity of the counterparty is known to the dealer or major participant “at a reasonably 

sufficient time prior to execution of the transaction” to permit compliance.

 

Activities involving special entities are subject to heightened requirements under other rules. See 

generally Exchange Act rules 15Fh-4, 15Fh-5 [17 CFR 240.15Fh-4, 240.15Fh-5]. 

As discussed below, potential substituted compliance for the special entity requirements raises a 

number of additional issues. See Part V, infra. 

213 Rule 15Fh-3(f)(3) [17 CFR 240.15Fh-3(f)(3)].
57

The rule provides specific disclosure requirements for security-based swaps that are subject to 

mandatory clearing214 and for other security-based swaps.

215 The rule further addresses records 

of disclosure.216

 214 Exchange Act section 3C(a) [15 U.S.C. 78c-3(a)] requires the clearing of security-based swaps 

that are “required to be cleared,” contingent on the Commission designating which securitybased swaps are subject to mandatory clearing. See Exchange Act section 3C(b) [15 U.S.C. 78c3(b)]. The Commission has not made any such designations to date. 

For security-based swaps that are subject to mandatory clearing, the dealer or major participant 

would have to: (i) disclose the names of the clearing agencies that accept the security-based 

swap, and identify which clearing agencies the dealer or major participant is authorized to use; 

and (ii) notify the counterparty that it has the sole right to select which clearing agency shall be 

used for clearing. Exchange Act rule 15Fh-3(d)(1) [17 CFR 240.15Fh-3(d)(1)]. 

215 For security-based swaps that are not subject to mandatory clearing, the dealer or major 

participant must: (i) determine whether the security-based swap is accepted for clearing by one 

or more clearing agencies; (ii) disclose the names of the clearing agencies that accept the 

security-based swap, and identify which clearing agencies the dealer or major participant is 

authorized to use; and (iii) notify the counterparty that it may elect to require clearing and has the 

sole right to select the clearing agency (provided that the dealer or major participant is authorized 

to clear through that clearing agency). Exchange Act rule 15Fh-3(d)(2) [17 CFR 240.15Fh3(d)(2)].

Exchange Act section 3C(g)(5) [15 U.S.C. 78c-3(g)(5)] in part provides – for security-based 

swaps that are not subject to mandatory clearing and that a security-based swap dealer or major 

security-based swap participant has entered into with a counterparty that is not a swap dealer, 

major swap participant, security-based swap dealer, or major security-based swap participant –

that the counterparty may elect to require clearing of the security-based swap and shall have the 

sole right to select the clearing agency. Substituted compliance is not available in connection 

with this provision. 

216 Under the rule, the dealer or major participant must make a written record of non-written 

disclosures, and provide a written version of the disclosures “in a timely manner, but in any case 

no later than the delivery of the trade acknowledgement.” Exchange Act rule 15Fh-3(d)(3) [17 

CFR 240.15Fh-3(d)(3)].
58

V. Additional requirements regarding eligible contract 

participant verification, special entities and political 

contributions

Additional section 15F(h) requirements

Apart from the requirements addressed above, there are additional requirements under Exchange 

Act section 15F(h) that potentially are eligible for substituted compliance.217 As with other 

transaction-level requirements, those generally would apply only to a non-U.S. firm’s activities 

involving U.S. counterparties (unless the transaction is arranged, negotiated or executed in the 

United States).218

 ECP verification. 

Exchange Act section 15F(h)(3)(A) [15 U.S.C. 78o-10(h)(3)(A)] and Exchange Act rule 

15Fh-3(a)(1) [17 CFR 240.15Fh-3(a)(1)] require security-based swap dealers and major 

security-based swap participants to verify that their counterparties meet the standards to be 

eligible contract participants.219 

Compliance with this verification requirement reasonably may be expected to help inform 

firms when their potential counterparties are not ECPs, and hence promote compliance with 

statutory restrictions on entering into security-based swaps with non-ECP counterparties.220 

 Special entity provisions. 

Exchange Act sections 15F(h)(4) and (5) [15 U.S.C. 78o-10(h)(4) and (5)] and Exchange Act 

rules 15Fh-4 and 15Fh-5 [17 CFR 240.15Fh-4 and 240.15Fh-5] impose special requirements 

on security-based swap dealers in their capacity as advisors or counterparties to “special 

entities.”221 The term “special entity” is defined to encompass Federal agencies, certain state 

and local agencies and political subdivisions and instrumentalities, certain employee benefit 

plans and government plans, and endowments.222 

 217 Exchange Act rule 3a71-6(d)(1) [17 CFR 240.3a71-6(d)(1)] generally provides that substituted 

compliance may be available for business conduct requirements under Exchange Act section 

15F(h).

218 See note 192, supra. 

219 As noted above, the Commodity Exchange Act defines the term “eligible contract participant” to 

encompass a variety of types of persons. See note 210, supra. 

220 See Exchange Act Section 6(l) (requiring security-based swaps with non-ECPs to be effected on a 

national securities exchange); Securities Act Section 5(e) (requiring registration of the offer and 

sale of security-based swaps to non-ECPs). Those restrictions are not eligible for substituted 

compliance. 

221 Exchange Act section 15F(h)(4)(A) and Exchange act rule 15Fh-4(a) also contain antifraud 

provisions that are not eligible for substituted compliance. See Exchange Act rule 3a71-6(d)(1).

222 See Exchange Act rule 15Fh-2(d) [17 CFR 240.15Fh-2(d)]. The definition of “special entity” 

does not encompass non-U.S. persons. See Business Conduct Adopting Release, 81 FR at 30013. 
59

Those special entity provisions reflect a statutory determination that certain categories of 

U.S. persons reasonably require heightened protection in connection with security-based 

swap activities.223 

 Political contributions. 

Exchange Act rule 15Fh-6 [17 CFR 240.15Fh-6] generally prohibits a security-based swap 

dealer from engaging in security-based swap transactions with a “municipal entity” within 

two years after certain political contributions have been made to officials of the municipal 

entity. For these purposes, the term “municipal entity” means any state, or political 

subdivision or municipal corporate instrumentality of a state, including, inter alia, related 

agencies, authorities or instrumentalities, plans and programs.224

This rule reflects that Commission’s concern that, absent such a prohibition, “pay to play 

practices may result in municipal entities entering into transactions not because of hedging 

needs or other legitimate purposes, but rather because of campaign contributions given to an 

official with influence over the selection process.”225

Special issues associated with substituted compliance for those requirements

The Commission has recognized that the unique features of those requirements raise special 

issues regarding the potential availability of substituted compliance: 

The Commission further anticipates that certain categories of the requirements we are adopting today 

– related to ECP verification, special entities and political contributions – will raise special issues 

with regard to comparability, and with regard to whether adequate supervision and enforcement is 

available under the foreign regulatory regime. Such issues are likely to arise with regard to those 

particular requirements because each of those requirements [addresses] protections that may have no 

foreign law analogues, as those requirements reflect heightened concerns under U.S. law regarding 

potential abuses involving particular categories of persons. Indeed, those categories and the 

protections afforded to them under U.S. law may not correspond with any specified categories of 

persons or protections under relevant foreign law. As a result, substituted compliance assessments in 

connection with those categories will require inquiry regarding whether foreign regulatory 

requirements adequately reflect the same particular interests and protections.226

 223 For example, security-based swap dealers that act as advisers to special entities have statutory

duties to act in the special entity’s best interests, and to obtain information necessary to make a 

reasonable determination that recommendations are in the special entity’s best interest. See

Exchange Act section 15F(h)(4) [15 U.S.C. 78o-10(h)(4)]. Dealers and major participants that 

act as counterparties to special entities have a statutory duty to have a reasonable basis to believe 

that the special entity has a qualified independent representative. See Exchange Act section 

15F(h)(5) [15 U.S.C. 78o-10(h)(5)]. 

224 See Exchange Act section 15B(e)(8) [15 U.S.C. 78o-4(e)(8)] (incorporated by reference by 

Exchange Act rule 15Fh-6(a)(4)).

225 See Business Conduct Adopting Release, 81 FR at 30048. 

226 See Business Conduct Adopting Release, 81 FR at 30076. 
60

In light of these special issues, we recommend that any market participant or foreign financial 

regulatory authority that has an interest in pursuing substituted compliance in connection those 

requirements contact Commission staff to discuss the matter.227 

The Staff looks forward to receiving applications for substituted compliance, and to working 

with the staff of foreign regulators to promote the regulatory efficiencies that would be 

associated with substituted compliance. As noted above, the detailed discussions regarding 

Exchange Act requirements in this Guidance are intended to promote analysis of regulatory 

similarities and differences, and facilitate complete applications that demonstrate how foreign 

requirements may produce comparable regulatory outcomes as analogous requirements under the 

Exchange Act. While specific explanations of foreign requirements will be useful toward

achieving those goals, the analyses with regard to each applicable regulatory outcome “will focus 

on the comparability of regulatory outcomes rather than predicating substituted compliance on 

requirement-by-requirement similarity.”

December 23, 2019

 227 Such discussions would be expected to address, inter alia, whether there are foreign requirements 

that provide comparable safeguards as the Exchange Act analogues, notwithstanding differences 

in terminology used. For example, with regard to the ECP verification requirement, it would be 

helpful to know whether a foreign jurisdiction has counterparty verification rules that have the 

effect of capturing all non-ECPs, to help ensure that firms do not violate applicable statutory 

restrictions on entering into security-based swaps with non-ECP counterparties. 

Similarly, in connection with the provisions regard transactions with and advice to “special 

entities,” it would be helpful to know whether there are analogous requirements applicable to 

protected classes of counterparties and advisees that have the effect of providing that all U.S. 

counterparties or advisees that are “special entities” are afforded at least the degree of protection 

that is required under the Exchange Act.