85686 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

1See Docket No. RM2018–3, Order Adopting 

Final Rules Relating to Non-Public Information, 

June 27, 2018, Attachment A at 19–22 (Order No. 

4679). 

1See Letter from Elisabeth Roegele, Chief 

Executive Director of Securities Supervision and 

Deputy President, BaFin, to Vanessa Countryman, 

Secretary, Commission, dated Nov. 6, 2020 (‘‘BaFin 

Application’’). The application is available on the 

Commission’s website at: https://www.sec.gov/files/ 

germany-BaFin-complete-application-substitutedcompliance-11062020.pdf. 

2Exchange Act Release No. 90378 (Nov. 9, 2020), 

85 FR 72726 (Nov. 13, 2020) (‘‘German Substituted 

Compliance Notice and Proposed Order’’). 

POSTAL REGULATORY COMMISSION 

[Docket Nos. MC2021–51 and CP2021–53; 

Docket Nos. MC2021–52 and CP2021–54; 

Docket Nos. MC2021–53 and CP2021–55] 

New Postal Products 

AGENCY: Postal Regulatory Commission. 

ACTION: Notice. 

SUMMARY: The Commission is noticing a 

recent Postal Service filing for the 

Commission’s consideration concerning 

a negotiated service agreement. This 

notice informs the public of the filing, 

invites public comment, and takes other 

administrative steps. 

DATES: Comments are due: December 

31, 2020. 

ADDRESSES: Submit comments 

electronically via the Commission’s 

Filing Online system at http://

www.prc.gov. Those who cannot submit 

comments electronically should contact 

the person identified in the FOR FURTHER

INFORMATION CONTACT section by 

telephone for advice on filing 

alternatives. 

FOR FURTHER INFORMATION CONTACT: 

David A. Trissell, General Counsel, at 

202–789–6820. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

II. Docketed Proceeding(s) 

I. Introduction 

The Commission gives notice that the 

Postal Service filed request(s) for the 

Commission to consider matters related 

to negotiated service agreement(s). The 

request(s) may propose the addition or 

removal of a negotiated service 

agreement from the market dominant or 

the competitive product list, or the 

modification of an existing product 

currently appearing on the market 

dominant or the competitive product 

list. 

Section II identifies the docket 

number(s) associated with each Postal 

Service request, the title of each Postal 

Service request, the request’s acceptance 

date, and the authority cited by the 

Postal Service for each request. For each 

request, the Commission appoints an 

officer of the Commission to represent 

the interests of the general public in the 

proceeding, pursuant to 39 U.S.C. 505 

(Public Representative). Section II also 

establishes comment deadline(s) 

pertaining to each request. 

The public portions of the Postal 

Service’s request(s) can be accessed via 

the Commission’s website (http://

www.prc.gov). Non-public portions of 

the Postal Service’s request(s), if any, 

can be accessed through compliance 

with the requirements of 39 CFR 

3011.301.1

The Commission invites comments on 

whether the Postal Service’s request(s) 

in the captioned docket(s) are consistent 

with the policies of title 39. For 

request(s) that the Postal Service states 

concern market dominant product(s), 

applicable statutory and regulatory 

requirements include 39 U.S.C. 3622, 39 

U.S.C. 3642, 39 CFR part 3030, and 39 

CFR part 3040, subpart B. For request(s) 

that the Postal Service states concern 

competitive product(s), applicable 

statutory and regulatory requirements 

include 39 U.S.C. 3632, 39 U.S.C. 3633, 

39 U.S.C. 3642, 39 CFR part 3035, and 

39 CFR part 3040, subpart B. Comment 

deadline(s) for each request appear in 

section II. 

II. Docketed Proceeding(s) 

1. Docket No(s).: MC2021–51 and 

CP2021–53; Filing Title: USPS Request 

to Add Parcel Select Contract 45 to 

Competitive Product List and Notice of 

Filing Materials Under Seal; Filing 

Acceptance Date: December 21, 2020; 

Filing Authority: 39 U.S.C. 3642, 39 CFR 

3040.130 through 3040.135, and 39 CFR 

3035.105; Public Representative: Curtis 

E. Kidd; Comments Due: December 31, 

2020. 

2. Docket No(s).: MC2021–52 and 

CP2021–54; Filing Title: USPS Request 

to Add Priority Mail & First-Class 

Package Service Contract 184 to 

Competitive Product List and Notice of 

Filing Materials Under Seal; Filing 

Acceptance Date: December 21, 2020; 

Filing Authority: 39 U.S.C. 3642, 39 CFR 

3040.130 through 3040.135, and 39 CFR 

3035.105; Public Representative: Curtis 

E. Kidd; Comments Due: December 31, 

2020. 

3. Docket No(s).: MC2021–53 and 

CP2021–55; Filing Title: USPS Request 

to Add Priority Mail & First-Class 

Package Service Contract 185 to 

Competitive Product List and Notice of 

Filing Materials Under Seal; Filing 

Acceptance Date: December 21, 2020; 

Filing Authority: 39 U.S.C. 3642, 39 CFR 

3040.130 through 3040.135, and 39 CFR 

3035.105; Public Representative: Curtis 

E. Kidd; Comments Due: December 31, 

2020. 

This Notice will be published in the 

Federal Register. 

Erica A. Barker, 

Secretary. 

[FR Doc. 2020–28721 Filed 12–28–20; 8:45 am] 

BILLING CODE 7710–FW–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90765; File No. S7–16–20] 

Order Granting Conditional 

Substituted Compliance in Connection 

With Certain Requirements Applicable 

to Non-U.S. Security-Based Swap 

Dealers and Major Security-Based 

Swap Participants Subject to 

Regulation in the Federal Republic of 

Germany 

December 22, 2020. 

I. Overview 

The Bundesanstalt fu ̈r 

Finanzdienstleistungsaufsicht 

(‘‘BaFin’’), the German financial 

authority, has submitted a ‘‘substituted 

compliance’’ application requesting that 

the Commission determine, pursuant to 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) rule 3a71–6, that 

security-based swap dealers and majorsecurity based swap participants (‘‘SBS 

Entities’’) subject to regulation in 

Germany conditionally may satisfy 

requirements under the Exchange Act 

by complying with comparable German 

and European Union (‘‘EU’’) 

requirements.1 BaFin’s request 

particularly sought substituted 

compliance in connection with certain 

Exchange Act requirements related to 

risk control (but not including nonbank 

capital and margin requirements), 

internal supervision and compliance, 

counterparty protection, and books and 

records. The application incorporated 

comparability analyses regarding 

applicable German and EU law, as well 

as information regarding German 

supervisory and enforcement 

frameworks. 

On November 13, 2020, the 

Commission published a notice of 

BaFin’s completed application, 

accompanied by a proposed Order to 

conditionally grant substituted 

compliance in connection with the 

application.2 The proposal incorporated 

a number of conditions to tailor the 

scope of substituted compliance 

consistent with the prerequisite that 

relevant German and EU requirements 

produce regulatory outcomes that are 


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3 Id. at 72727. 

4 Id. 

5 Id. (addressing unavailability of substituted 

compliance in connection with antifraud 

provisions, as well as provisions related to 

transactions with counterparties that are not eligible 

contract participants (‘‘ECPs’’), segregation of 

customer assets, required clearing upon 

counterparty election, regulatory reporting and 

public dissemination, and registration of offerings). 

6See generally Exchange Act Release No. 77617 

(Apr. 14, 2016), 81 FR 29960, 30073 (May 13, 2016) 

(‘‘Business Conduct Adopting Release’’) (noting that 

the cross-border nature of the security-based swap 

market poses special regulatory challenges, in that 

relevant U.S. requirements ‘‘have the potential to 

lead to requirements that are duplicative of or in 

conflict with applicable foreign business conduct 

requirements, even when the two sets of 

requirements implement similar goals and lead to 

similar results’’). 

7See ‘‘Key Dates for Registration of SecurityBased Swap Dealers and Major Security-Based 

Swap Participants,’’ available at https://

www.sec.gov/page/key-dates-registration-securitybased-swap-dealers-and-major-security-basedswap-participants. 

8See German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72727. In the German 

Substituted Compliance Notice and Proposed 

Order, the Commission preliminarily concluded 

that this comparability prerequisite was met in 

connection with a number of requirements under 

the Exchange Act, in some cases with the addition 

of conditions to help ensure the comparability of 

regulatory outcomes. 

9The Commission and BaFin have entered into a 

memorandum of understanding to address 

substituted compliance cooperation, a copy of 

which the Commission expects to publish on its 

website at www.sec.gov under the ‘‘Substituted 

Compliance’’ tab, which is located on the ‘‘SecurityBased Swap Markets’’ page in the Division of 

Trading and Markets section of the site. BaFin and 

the ECB share responsibility for supervising 

compliance with certain provisions of EU and 

German law. The MOU contemplates that there may 

be books and records and information related to 

Covered Entities that are in the possession of the 

ECB’s single supervisory mechanism (‘‘SSM’’) or 

otherwise cannot be shared by BaFin without the 

consent of the ECB/SSM (‘‘ECB Information’’). The 

MOU provides that upon the SEC’s request BaFin 

will use its best efforts to assist the SEC in obtaining 

ECB information in a prompt manner. This 

arrangement addresses BaFin’s cooperation with 

respect to ECB information in connection with the 

current application, which does not include capital 

and margin requirements. Compare with Exchange 

Act Release No. 34–90766 (December 22, 2020) 

(‘‘French Substituted Compliance Notice and 

Proposed Order’’). As discussed below, under the 

Order reliance on substituted compliance is 

conditioned in part on the applicable MOU 

remaining in force. See part III.B, infra. 

comparable to relevant requirements 

under the Exchange Act. 

This Order has been modified from 

the proposal in certain respects to 

address commenter concerns or to make 

clarifying changes, as discussed below. 

In making these substituted compliance 

determinations, the Commission 

continues to recognize that other 

regulatory regimes will have exclusions, 

exceptions and exemptions that may not 

align perfectly with the corresponding 

requirements under the Exchange Act. 

Where the German regime produces 

comparable outcomes notwithstanding 

those particular differences, the 

Commission has made a positive 

substituted compliance determination. 

Conversely, where those exclusions, 

exemptions and exceptions lead to 

outcomes that are not comparable, the 

Commission has not made a positive 

substituted compliance determination. 

Under the substituted compliance 

framework, failure to comply with the 

applicable foreign requirements and 

other conditions to the Order would 

lead to a violation of the applicable 

requirements under the Exchange Act 

and potential enforcement action by the 

Commission (as opposed to automatic 

revocation of the substituted 

compliance order). 

II. Substituted Compliance Framework 

and Prerequisites 

A. Substituted Compliance Availability 

and Purpose 

As discussed in the German 

Substituted Compliance Notice and 

Proposed Order, rule 3a71–6 provides a 

framework whereby non-U.S. SBS 

Entities may satisfy certain 

requirements under Exchange Act 

section 15F by complying with 

comparable regulatory requirements of a 

foreign jurisdiction. Because substituted 

compliance does not constitute 

exemptive relief, but instead provides 

an alternative method by which nonU.S. SBS Entities may comply with 

applicable Exchange Act requirements, 

the non-U.S. SBS Entities would remain 

subject to the relevant requirements 

under section 15F. The Commission 

accordingly will retain the authority to 

inspect, examine and supervise those 

SBS Entities’ compliance and take 

enforcement action as appropriate.3

Under rule 3a71–6, substituted 

compliance potentially is available in 

connection with section 15F 

requirements regarding: Business 

conduct and supervision; chief 

compliance officers; trade 

acknowledgment and verification; 

capital; margin; recordkeeping and 

reporting; and portfolio reconciliation, 

portfolio compression and trading 

relationship documentation.4

Substituted compliance is not 

available in connection with antifraud 

prohibitions and certain other 

requirements under the Federal 

securities laws, however.5 SBS Entities 

in Germany accordingly must comply 

directly with those requirements 

notwithstanding the availability of 

substituted compliance for other 

requirements. 

The substituted compliance 

framework reflects the cross-border 

nature of the security-based swap 

market, and is intended to promote 

efficiency and competition by helping to 

address potential duplication and 

inconsistency between relevant U.S. and 

foreign requirements.6 In practice, 

substituted compliance may be expected 

to help achieve those goals by making 

it possible for SBS Entities to leverage 

their existing systems and practices to 

comply with relevant Exchange Act 

requirements in conjunction with their 

compliance with relevant foreign 

requirements. The registration 

compliance date for SBS Entities is 

October 6, 2021,7 and substituted 

compliance should assist relevant nonU.S. security-based swap market 

participants in preparing for 

registration. 

B. Specific Prerequisites 

1. Comparability of Regulatory 

Outcomes 

As provided by rule 3a71–6, 

substituted compliance in part is 

conditioned on the Commission 

determining the analogous foreign 

requirements are ‘‘comparable’’ to 

applicable requirements under the 

Exchange Act, after accounting for 

factors such as ‘‘the scope and 

objectives of the relevant foreign 

regulatory requirements’’ and ‘‘the 

effectiveness of the supervisory 

compliance program administered, and 

the enforcement authority exercised’’ by 

the foreign authority. The comparability 

assessments are to be based on a 

‘‘holistic approach’’ that ‘‘will focus on 

the comparability of regulatory 

outcomes rather than predicating 

substituted compliance on requirementby-requirement similarity.’’ 8

2. Memorandum of Understanding 

Exchange Act rule 3a71–6(a)(2)(ii) 

further predicates the availability of 

substituted compliance on the 

Commission and the foreign financial 

regulatory authority having entered into 

a supervisory and enforcement 

memorandum of understanding and/or 

other arrangement with the relevant 

foreign financial regulatory authority 

‘‘addressing supervisory and 

enforcement cooperation and other 

matters arising under the substituted 

compliance determination.’’ The 

Commission and BaFin recently entered 

into the relevant memorandum of 

understanding, thus satisfying this 

prerequisite.9


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85688 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

10 German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72729. 

11See paragraph (f)(1) to the Order. 

12The Commission noted, as an example, that 

this proposed condition would not be satisfied 

when the comparable German or EU requirements 

would not apply to the security-based swap 

activities of a third-country branch of a German SBS 

Entity. German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72730. 

13Under this condition, a Covered Entity’s 

security-based swap activities must constitute 

‘‘investment services or activities’’ only to the 

extent that the relevant part of the Order requires 

the Covered Entity to be subject to and comply with 

a provision of MiFID, WpHG and related EU and 

German requirements. If the relevant part of the 

Order does not require the Covered Entity to be 

subject to and comply with one of those provisions, 

then the Covered Entity’s security-based swap 

activities do not have to constitute ‘‘investment 

services or activities’’ to be able to use substituted 

compliance under that part of the Order. 

14 German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72730. The EU’s Markets 

in Financial Instruments Directive (‘‘MiFID’’), 

Directive 2014/65/EU, has been implemented in 

Germany via amendments to the Securities Trading 

Act—Wertpapierhandelsgesetz (‘‘WpHG’’). MiFID 

and WgHG address, inter alia, organizational, 

compliance and conduct requirements applicable to 

nonbank ‘‘investment firms.’’ In significant part, 

those requirements also apply to credit institutions 

that provide investment services or perform 

investment activities. Commission Delegated 

Regulation (EU) 2017/565 (‘‘MiFID Org Reg’’) in 

part supplements MiFID with respect to 

organizational requirements for firms. The Markets 

in Financial Instruments Regulation (‘‘MiFIR’’), 

Regulation (EU) 648/2012, generally addresses 

trading venues and transparency. Commission 

Delegated Directive (EU) 2017/593 (‘‘MiFID 

Delegated Directive’’) in part supplements MiFID 

with regard to safeguarding client property, and in 

Germany is implemented in relevant part by the 

WpHG. Directive (EU) 2015/849 (‘‘MLD’’) addresses 

requirements on the prevention of the use of the 

financial system for the purposes of money 

laundering or terrorist financing, and in Germany 

has been implemented by the Money Laundering 

Act—Geldwa ̈schegesetz (‘‘GwG’’). 

15 German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72730. 

16 Id. 

17 Id. The EU’s Capital Requirements Directive IV 

(‘‘CRD’’), Directive 2013/36/EU has been adopted in 

Germany via amendments to the Banking Act— 

Kreditwesengesetz (‘‘KWG’’). CRD and KWG set 

forth prudential requirements and certain related 

requirements applicable to credit institutions and 

certain nonbank investment firms. Certain CRD 

requirements regarding reporting obligations have 

been incorporated into German law by the 

Finanzdienstleistungsaufsichtsgesetz (‘‘FinDAG’’). 

The Capital Requirements Regulation (‘‘CRR’’), 

Regulation (EU) 575/2013 further addresses 

prudential requirements and related recordkeeping 

requirements for credit institutions and certain 

investment firms. Commission Implementing 

Regulation (EU) 680/2014 (‘‘CRR Reporting ITS’’) 

sets forth implementing technical standard 

regarding supervisory reporting. 

18 Id. at 72730. The Commission and BaFin have 

entered into a memorandum of understanding to 

address substituted compliance cooperation. See 

note 9, supra. Consistent with the final Order, 

Covered Entities must ensure that this 

memorandum of understanding remains in place at 

the time the Covered Entity relies on substituted 

compliance. 

19 Id. 

20See paragraphs (a)(1) through (6) to the Order. 

21The introductory paragraph of the Order adds 

‘‘as may be amended or superseded from time to 

time’’ to clarify that the Order, including the 

Order’s conditions, may be amended or superseded 

from time to time. Similarly, the EU and German 

laws defined in the Order clarify that the EU and 

German laws referenced therein may be ‘‘amended 

or superseded from time to time.’’ 

III. General Availability of Substituted 

Compliance Under the Order 

A. Covered Entities 

1. Proposed Approach 

Under the proposal, the definition of 

‘‘Covered Entity’’ specified which 

entities could make use of substituted 

compliance. Consistent with the 

availability of substituted compliance 

under Exchange Act rule 3a71–6, the 

proposed definition in part would limit 

the availability of substituted 

compliance to SBS Entities that are not 

U.S. persons. In addition, to help ensure 

that firms that rely on substituted 

compliance are subject to relevant 

German and EU requirements and 

oversight, the proposed definition 

would require that Covered Entities be 

investment firms or credit institutions 

that BaFin has authorized to provide 

investment services or perform 

investment activities in Germany.10

2. Final Provisions 

Commenters did not address the 

proposed ‘‘Covered Entity’’ definition, 

and the Commission is issuing the 

definition as proposed.11 Substituted 

compliance accordingly is available 

only to non-U.S. firms, and requires 

relevant German and EU requirements 

and oversight. 

B. Additional General Conditions 

1. Proposed Approach 

The proposal also incorporated a 

number of additional general conditions 

intended to predicate a positive 

substituted compliance determination 

on the applicability of relevant German 

and EU requirements needed to 

establish comparability: 

• ‘‘Subject to and Complies with’’ 

applicability condition—For each 

relevant section of the proposed Order, 

a positive substituted compliance 

determination would be predicated on 

the entity being subject to and 

complying with the applicable German 

and EU requirements needed to 

establish comparability.12

• MiFID ‘‘investment services or 

activities’’—The Covered Entity’s 

security-based swap activities would 

have to constitute ‘‘investment services 

or activities’’ for purposes of applicable 

provisions 13 under MiFID, WpHG and 

related EU and German requirements, 

and must fall within the scope of the 

firm’s authorization from BaFin.14

• MiFID ‘‘clients’’—The Covered 

Entity’s counterparties (or potential 

counterparties) would have to be 

‘‘clients’’ (or potential ‘‘clients’’) for 

purposes of MiFID, WpHG and related 

EU and German requirements.15

• MiFID ‘‘financial instruments’’— 

The relevant security-based swaps 

would have to be ‘‘financial 

instruments’’ for purposes of [applicable 

provisions under] MiFID, WpHG and 

related EU and German requirements.16

• CRD ‘‘institutions’’—The Covered 

Entity would have to be an ‘‘institution’’ 

for purposes of applicable provisions 

under CRD, KWG and CRR and related 

EU and German requirements.17

In addition, consistent with the 

requirements of rule 3a71–6 and the 

Commission’s need for access to 

information regarding registered 

entities, substituted compliance under 

the proposal further would be 

conditioned on the Commission and 

BaFin having an applicable 

memorandum of understanding or other 

arrangement addressing cooperation 

with respect to the substituted 

compliance Order at the time the 

Covered Entity makes use of substituted 

compliance.18

Also, to assist the Commission’s 

oversight over firms that avail 

themselves of substituted compliance, a 

Covered Entity relying on the 

substituted compliance order must 

provide notice of its intent to rely on the 

order by notifying the Commission in 

writing.19

2. Final Provisions 

Commenters did not address the 

proposed general conditions, and the 

Commission is issuing those general 

conditions largely as proposed.20 The 

Commission is making two technical 

changes to the introductory paragraph 

and definitions section of the Order, 

however.21 In the Commission’s view, 

the conditions are structured 

appropriately to predicate a positive 

substituted compliance determination 

on the applicability of relevant German 

and EU requirements needed to 

establish comparability, as well as on 

the continued effectiveness of the 

requisite MOU, and the provision of 

notice to the Commission regarding the 

Covered Entity’s intent to rely on 

substituted compliance. 

C. European Union Cross-Border 

Matters 

1. Proposed Approach 

The proposal also included general 

conditions addressing the cross-border 


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22See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72730, 72743–44. 

23See paragraphs (a)(7)(i) and (ii) to the Order. 

24 German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72730–31. 

25 Id. at 72731. 

26 Id. at 72731 n.48. Those proposed conditions 

in part addressed compliance with certain 

requirements arising under the European Market 

Infrastructure Regulation (‘‘EMIR’’), Regulation (EU) 

648/2012. EMIR in part imposes certain riskmitigation requirements on counterparties in 

connection with uncleared OTC transactions. 

Delegated Regulation (EU) 149/2013 (‘‘EMIR RTS’’) 

supplements EMIR with various regulatory 

technical standards, including standards addressing 

confirmations, portfolio reconciliation, portfolio 

compression and dispute resolution. Delegated 

Regulation (EU) 2016/2251 (‘‘EMIR Margin RTS’’) 

further supplements EMIR with regulatory technical 

standards related to risk mitigation techniques. 

27 Id. at 72731. Certain relevant German and EU 

requirements that provide for this type of 

documentation do not apply to investment firms’ 

transactions with ‘‘eligible counterparties.’’ 

28 Id. The trading relationship documentation 

provisions of rule 15F(b)(5) requires certain 

disclosures regarding the status of the SBS Entity 

or its counterparty as an insured depository 

institution or financial counterparty, and regarding 

the possible application of the insolvency regime 

set forth under Title II of the Dodd-Frank Act or the 

Federal Deposit Insurance Act. Documentation 

requirements under applicable German and EU law 

would not be expected to address the disclosure of 

information related to insolvency procedures under 

U.S. law. 

29 Id. Under the Exchange Act requirement, SBS 

Entities must promptly report, to the Commission, 

valuation disputes in excess of $20 million that 

have been outstanding for three or five business 

days (depending on counterparty types). EU 

requirements provide that firms must report at least 

monthly, to competent authorities, disputes 

between counterparties in excess of Ö15 million and 

outstanding for at least 15 business days. 

30See Letter from Kyle Brandon, Managing 

Director, Head of Derivative Policy, SIFMA (Dec. 8, 

2020) (‘‘SIFMA Letter’’). The other comments 

expressed generally concurrence with the SIFMA 

Letter, but did not otherwise comment specifically 

on the risk control requirements. See Letter from 

Continued 

application of MiFID, MAR and EU and 

German requirements adopted pursuant 

to MiFID or MAR. For some 

requirements under MiFID (and other 

EU and Member State requirements 

adopted pursuant to MiFID), EU law 

allocates the responsibility for 

supervising and enforcing those 

requirements to authorities of the 

Member State where an entity provides 

certain services. Similarly, for some 

requirements under MAR (and other EU 

and Member State requirements adopted 

pursuant to MAR), EU law allocates the 

responsibility for supervising and 

enforcing those requirements to 

authorities of potentially multiple 

Member States. To help ensure that the 

prerequisites to substituted compliance 

with respect to supervision and 

enforcement are satisfied in fact, the 

proposal provided substituted 

compliance only if BaFin is responsible 

for supervision and enforcement of 

those requirements.22

2. Commenter Views and Final 

Provisions 

As noted above, commenters did not 

address the general conditions, 

including those related to EU crossborder matters. The Commission is 

issuing as proposed the general 

conditions related to EU cross-border 

matters.23 In the Commission’s view, 

these conditions are structured 

appropriately to permit the use of 

substituted compliance only when 

BaFin is the entity responsible for 

supervising a Covered Entity’s 

compliance with a relevant provision of 

MiFID, MAR or related EU or German 

requirements. 

IV. Substituted Compliance for Risk 

Control Requirements 

A. Proposed Approach 

BaFin’s application in part requested 

substituted compliance in connection 

with risk control requirements relating 

to: 

• Risk management systems—Internal 

risk management system requirements 

that address the obligation of registered 

entities to follow policies and 

procedures reasonably designed to help 

manage the risks associated with their 

business activities. 

• Trade acknowledgment and 

verification—Trade acknowledgment 

and verification requirements intended 

to help avoid legal and operational risks 

by requiring definitive written records 

of transactions and procedures to avoid 

disagreements regarding the meaning of 

transaction terms. 

• Portfolio reconciliation and dispute 

reporting—Portfolio reconciliation and 

dispute reporting provisions that require 

that counterparties engage in portfolio 

reconciliation and resolve discrepancies 

in connection with uncleared securitybased swaps, and to provide prompt 

notification to the Commission and 

applicable prudential regulators 

regarding certain valuation disputes. 

• Portfolio compression—Portfolio 

compression provisions that require that 

SBS Entities have procedures 

addressing bilateral offset, bilateral 

compression and multilateral 

compression in connection with 

uncleared security-based swaps. 

• Trading relationship 

documentation—Trading relationship 

documentation provisions that require 

SBS Entities to have procedures to 

execute written security-based swap 

trading relationship documentation 

with their counterparties prior to, or 

contemporaneously with, executing 

certain security-based swaps.24

Taken as a whole, these risk control 

requirements help to promote market 

stability by mandating that registered 

entities follow practices that are 

appropriate to manage the market, 

counterparty, operational and legal risks 

associated with their security-based 

swap businesses. 

In proposing to provide conditional 

substituted compliance in connection 

with this part of BaFin’s application, the 

Commission preliminarily concluded 

that the relevant German and EU 

requirements in general would produce 

regulatory outcomes that are comparable 

to those associated with those risk 

control requirements, by subjecting 

German entities to financial 

responsibility, risk mitigation and 

documentation practices that are 

appropriate to the risks associated with 

their security-based swap businesses.25

Substituted compliance under the 

proposal was to be conditioned in part 

on Covered Entities being subject to the 

specified German and EU provisions 

that in the aggregate produce regulatory 

outcomes that are comparable to those 

associated with the risk control 

requirements under the Exchange Act.26

Substituted compliance under the 

proposal further would be subject to 

certain additional conditions to help 

ensure the comparability of outcomes. 

First, substituted compliance in 

connection with the trading relationship 

documentation provisions would be 

conditioned on the requirement that the 

Covered Entity not treat its 

counterparties as ‘‘eligible 

counterparties’’ for purposes of relevant 

MiFID provisions.27 In addition, 

substituted compliance related to 

trading relationship documentation 

under the proposal would not extend to 

certain disclosures regarding legal and 

bankruptcy status.28 Finally, substituted 

compliance in connection with dispute 

reporting requirements would be 

conditioned on the Covered Entity 

having to provide the Commission with 

reports regarding disputes between 

counterparties on the same basis as they 

provide those reports to competent 

authorities pursuant to EU law.29

B. Commenter Views and Final 

Provisions 

Commenters expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions, but requested 

that the Commission modify aspects of 

the proposal related to risk management 

systems, trade acknowledgement and 

verification, and trading relationship 

documentation.30 After considering 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85690 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

Jan Ford, Head of Compliance, Americas and CoHead of SBS Council, Deutsche Bank, and Gary 

Kane, Co-Head Institutional Client Group, Americas 

and Co-Head of SBS Council, Deutsche Bank (Dec. 

8, 2020) (‘‘Deutsche Bank Letter’’) at 2 (‘‘strongly 

endorse the comments and recommendations’’ in 

the SIFMA Letter); Letter from Wim Mijs, Chief 

Executive Officer, European Banking Federation 

(Dec. 8, 2020) (‘‘EBF Letter’’) at 1 (‘‘strongly 

support’’ the SIFMA Letter). Comments may be 

found on the Commission’s website at: https://

www.sec.gov/comments/s7-16-20/s71620.htm. 

31Substituted compliance for the risk 

management system requirements particularly is 

conditioned on Covered Entities being subject to 

and complying with: MiFID art. 16(4)–(5) and 

WpHG sec. 80 (addressing administrative and 

accounting procedures, internal control 

mechanisms, risk assessment procedures and 

information processing system safeguards); MiFID 

Org Reg art. 21–24 (addressing risk management 

and internal audit); CRD art. 74, 76 and 79–87 and 

KWG sections 25a, 25b, 25c (other than 25c(2)), 25d 

(other than 25d(3) and 25d(11)) (addressing internal 

governance and the treatment of various categories 

of risk); and EMIR Margin RTS art. 2 (addressing 

required risk management procedures for the 

exchange of collateral for non-centrally cleared 

over-the-counter derivatives contracts); CRR art. 

286–88 and 293 (addressing counterparty credit risk 

management and risk management systems); EMIR 

Margin RTS art. 2 (addressing general provisions for 

risk management procedures). See paragraph (b)(1) 

to the Order. 

32SIFMA recommended that the predicates to 

substituted compliance not include MiFID Org Reg 

article 22 (related to compliance), or the CRD, KWG 

and CRR provisions noted above. In the 

Commission’s view, removal of those compliance, 

risk management, audit, governance and related 

conditional would fail to promote risk management 

consistent with the requisite regulatory outcome. 

SIFMA also recommended the addition of an ‘‘in 

each case relating to risk management’’ limitation 

to those prerequisites, on the grounds that not all 

of the applicable provisions are limited in scope to 

internal risk management. In the Commision’s view, 

however, this type of limitation would be expected 

to lead to ambiguity, resulting in uncertainty 

regarding the availability and application of 

substituted compliance. 

33Substituted compliance for the trade 

acknowledgement and verification requirements 

particularly is conditioned on the Covered Entity 

being subject to and complying with: MiFID art. 

25(6) and WpHG sec. 63(12) (addressing reports on 

services), MiFID Org Reg art. 59–61 (addressing 

essential information regarding executed orders and 

portfolio management), EMIR art. 11(1)(a) 

(addressing required bilateral confirmations for 

uncleared over-the-counter derivatives) and EMIR 

RTS art. 12 (addressing timeliness of 

confirmations). See para (b)(2) to the Order. 

34SIFMA recommended that substituted 

compliance for trade acknowledgement and 

verification need only be conditioned on 

compliance with EMIR confirmation requirements, 

consistent with the CFTC’s approach to substituted 

compliance. The MiFID confirmation requirement 

specifies data elements that are not directly 

addressed by the EMIR confirmation requirement, 

and in the Commission’s view the holistic approach 

for comparing regulatory outcomes should seek to 

reflect the whole of a jurisdiction’s relevant 

requirements, rather than select subsets of those 

requirements. 

35Substituted compliance in connection with 

trading relationship documentation requirements is 

conditioned on Covered Entities being subject to 

and complying with: MiFID art. 25(5) and WpHG 

sec. 83(2) (addressing required records of 

documents regarding parties’ rights and obligations 

and other terms on which the investment firm will 

provide services); MiFID Org Reg art. 24, 58, 73 and 

applicable parts of Annex I (addressing audit 

requirements, records related to appropriateness 

assessments, client agreements and parties’ rights 

and obligations); and EMIR Margin RTS art. 2 

(addressing general provisions for risk management 

procedures, including procedures providing for or 

specifying the terms of agreements). See para. 

(b)(5)(i) to the Order. Those EMIR requirements 

apply only to ‘‘OTC derivatives contracts,’’ which 

are defined as derivatives contracts not executed on 

certain ‘‘regulated markets’’ or equivalent ‘‘thirdcountry markets.’’ See EMIR art. 2(7). The EMIRrelated conditions accordingly will not impede 

substituted compliance in connection with 

exchange-traded or market-traded security-based 

swaps that do not constitute ‘‘OTC derivatives 

contracts.’’ 

36See paragraph (b)(5) to the Order. After 

considering commenter views, the Commission 

concludes that the absence of such disclosure 

would not preclude a comparable regulatory 

outcome when the counterparty is not a U.S. 

person, as the insolvency-related consequences that 

are the subject of the disclosure would not be 

applicable to non-U.S. counterparties in most cases. 

In this respect the Commission notes that the 

requirements of EMIR Margin art. 2 in part address 

procedures providing for or specifying the terms of 

agreements entered into by the counterparties, 

including applicable governing law for non-cleared 

derivatives. EMIR Margin RTS art. 2 further 

provides that counterparties which enter into a 

netting or collateral exchange agreement must 

perform an independent legal review regarding 

enforceability. 

37 In particular, the Order condition that does not 

allow for application of the MiFID ‘‘eligible 

counterparty’’ exception has been modified from 

the proposal by including ‘‘in relation to the MiFID 

and WpHG provisions specified in paragraph 

(b)(5)(i)’’ language. This technical change clarifies 

that the condition does not address a Covered 

Entity’s use of the ‘‘eligible counterparty’’ exception 

in unrelated circumstances (such as when the 

Covered Entity’s relies on the exception in 

connection with its non-SBS business, or in 

connection with activities and business for which 

the Covered Entity does not seek substituted 

compliance). 

commenter views, the Commission is 

providing for substituted compliance in 

connection with the risk control 

requirements largely as provided by the 

proposal, with certain discrete changes 

discussed below. 

The Commission continues to 

conclude that, taken as a whole, 

applicable requirements under German 

and EU law subject German entities to 

financial responsibility, risk mitigation 

and documentation practices that are 

appropriate to the risks associated with 

their security-based swap businesses, 

and thus produce regulatory outcomes 

that are comparable to the outcomes 

associated with the relevant risk control 

requirements under the Exchange Act. 

Although the Commission recognizes 

that there are differences between the 

approaches taken by the relevant risk 

control requirements under the 

Exchange Act and relevant German and 

EU requirements, the Commission 

continues to believe that those 

differences on balance should not 

preclude substituted compliance for 

these requirements, as the relevant 

German and EU requirements taken as 

a whole produce comparable regulatory 

outcomes. 

Substituted compliance for risk 

management system requirements is 

conditioned on Covered Entities 

complying with specified German and 

EU requirements that promote risk 

management within those entities, 

consistent with the proposal.31 The 

Commission has considered commenter 

views recommending that those 

underlying German and EU 

requirements be targeted in certain 

respects, but concludes that those 

requirements as a whole are crafted to 

produce a regulatory outcome 

comparable to requirements under the 

Exchange Act and to avoid ambiguity in 

application.32

For trade acknowledgment and 

verification requirements, substituted 

compliance is conditioned on Covered 

Entities complying with confirmation 

requirements pursuant to EMIR and 

MiFID, consistent with the proposal.33

The Commission has considered 

commenter views recommending that 

substituted compliance should only be 

conditioned on compliance with the 

EMIR confirmation requirements, but 

concludes that both sets of requirements 

contribute to the conclusion that 

German and EU law produces a 

comparable regulatory outcome to the 

trade acknowledgement and verification 

requirements under the Exchange Act.34

Substituted compliance for trading 

relationship documentation 

requirements has been modified from 

the proposal after taking into account 

issues raised by commenters.35 In 

contrast to the proposal—which would 

not have provided substituted 

compliance in connection with the rule 

15Fi–5(b)(5) disclosures regarding the 

status of the entity or its counterparty as 

an insured depository institution or 

financial counterparty (on the grounds 

that the relevant German and EU 

provisions do not address the disclosure 

of that type of information)—the Order 

will provide for substituted compliance 

in connection with that disclosure 

unless the counterparty to the Covered 

Entity is a U.S. person.36 Also, the 

portion of the Order that conditions 

substituted compliance on the Covered 

Entity not treating its counterparties as 

‘‘eligible counterparties’’ for purposes of 

relevant MiFID provisions has been 

modified from the proposal to better 

clarify the targeted nature of that 

condition.37 The Order also has been 

modified to better target the German and 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85691 

38 In particular, the Order has been modified from 

the proposal by removing MiFID Org Reg article 56, 

related to records of appropriateness assessments, 

as those records do not advance the purposes 

behind the trading relationship documentation 

requirement to the same extent as the other relevant 

provisions. The Order, however, does not 

incorporate the suggested addition of ‘‘in each case 

relating to written agreements with security-based 

swap counterparties’’ language that may be 

expected to be ambiguous in application. 

39See paragraph (b)(3) to the Order. Substituted 

compliance in connection with those requirements 

is conditioned in part on Covered Entities being 

subject to and complying with EMIR art. 11(1)(b) 

(addressing required portfolio reconciliation and 

dispute resolution for uncleared over-the-counter 

derivatives) and EMIR RTS art. 13 and 15 

(addressing further requirements related to portfolio 

reconciliation and dispute resolution). See para. 

(b)(3)(i) to the proposed Order. 

40See paragraph (b)(3)(ii) to the Order. The 

Commission recognizes the differences between the 

two sets of requirements—under which Exchange 

Act rule 15Fi–3 requires SBS Entities to report 

valuation disputes in excess of $20 million that 

have been outstanding for three or five business 

days (depending on counterparty types), while 

EMIR RTS art. 15(2) requires firms to report 

disputes between counterparties in excess of Ö15 

million and outstanding for at least 15 business 

days. In the Commission’s view, the two 

requirements produce comparable regulatory 

outcomes notwithstanding those differences. 

41See paragraph (b)(4) to the Order. Substituted 

compliance in connection with portfolio 

compression requirements is conditioned on 

Covered Entities being subject to and complying 

with EMIR RTS art. 14 (also addressing portfolio 

protection). 

42 German Substituted Compliance Notice and 

Proposed Order, 85 FR at 72732. 

43 Id. at 72733 n.62. 

44 Id. at 72733. The condition was intended to 

allow Covered Entities to use their existing internal 

supervision and compliance frameworks to comply 

with the relevant Exchange Act requirements and 

order conditions, rather than having to establish 

separate special-purpose supervision and 

compliance frameworks. 

45 Id. at 72733–34. 

46 Id. at 72734. 

47See paragraph (c) to the Order. 

EU law prerequisites to substituted 

compliance for those requirements.38

The Commission received no 

comments related to substituted 

compliance in connection with portfolio 

reconciliation and dispute reporting 

requirements, and the Commission is 

providing for substituted compliance in 

connection with those requirements as 

proposed.39 Substituted compliance in 

connection with the dispute reporting 

requirements is conditioned in part on 

the Covered Entities providing the 

Commission with reports regarding 

disputes between counterparties on the 

same basis as the entities provide those 

reports to competent authorities 

pursuant to EU law, to allow the 

Commission to obtain notice regarding 

key information in a manner that makes 

use of existing obligations under EU 

law.40

Finally, the Commission received no 

comments related to substituted 

compliance in connection with portfolio 

compression requirements, and the 

Commission is providing for substituted 

compliance in connection with those 

requirements as proposed.41

V. Substituted Compliance for Internal 

Supervision and Compliance 

Requirements 

A. Proposed Approach 

BaFin’s application further requested 

substituted compliance in connection 

with requirements relating to: 

• Internal supervision—Diligent 

supervision and conflict of interest 

provisions that generally require SBS 

Entities to establish, maintain and 

enforce supervisory policies and 

procedures that reasonably are designed 

to prevent violations of applicable law, 

and implement certain systems and 

interest. 

• Chief compliance officers—Chief 

compliance officer provisions that 

generally require SBS Entities to 

designate individuals with the 

responsibility and authority to establish, 

administer and review compliance 

policies and procedures, to resolve 

conflicts of interest, and to prepare and 

certify annual compliance reports to the 

Commission. 

• Additional Exchange Act section 

15F(j) requirements—Certain additional 

requirements related to informationgathering, and antitrust prohibitions.42

Taken as a whole, those requirements 

generally help to advance SBS Entities’ 

use of structures, processes and 

responsible personnel reasonably 

designed to promote compliance with 

applicable law, identify and cure 

instances of noncompliance, and 

manage conflicts of interest. 

In proposing to provide conditional 

substituted compliance in connection 

with this part of BaFin’s application, the 

Commission preliminarily concluded 

that the relevant German and EU 

requirements in general would produce 

comparable regulatory outcomes by 

providing that German SBS Entities 

have structures and processes that 

reasonably are designed to promote 

compliance with applicable law and to 

identify and cure instances of noncompliance and manage conflicts of 

interest. Substituted compliance under 

the proposal was to be conditioned in 

part on SBS Entities being subject to and 

complying with specified German and 

EU provisions that in the aggregate 

produce regulatory outcomes that are 

comparable to those associated with 

those internal supervision, compliance 

and related requirements under the 

Exchange Act.43

Under the proposal, substituted 

compliance would be subject to certain 

additional conditions to help ensure the 

comparability of outcomes. First, 

substituted compliance in connection 

with the internal supervision 

requirements would be conditioned on 

the SBS Entities complying with 

applicable German and EU supervisory 

and compliance provisions as if those 

provisions also require the entities to 

comply with applicable requirements 

under the Exchange Act and the other 

conditions to the Order. This condition 

was intended to reflect that, even with 

substituted compliance, SBS Entities 

still directly would be subject to a 

number of requirements under the 

Exchange Act and conditions to the 

final Order that fall outside the ambit of 

German and EU internal supervision 

and compliance requirements.44

For similar reasons, the proposal 

would condition substituted compliance 

in connection with compliance report 

requirements on the Covered Entity 

annually providing the Commission 

with certain compliance reports 

required pursuant to regulations under 

MiFID. Those reports must be in 

English, be accompanied by a 

certification under penalty of law that 

the report is accurate and complete, and 

would have to address the SBS Entity’s 

compliance with other conditions to the 

substituted compliance order.45 In 

addition, substituted compliance under 

the proposal would not extend to 

antitrust provisions under the Exchange 

Act, based on the preliminary 

conclusion that allowing an alternative 

means of compliance would not lead to 

comparable regulatory outcomes.46

B. Commenter Views and Final 

Provisions 

Commenters expressed general 

support for the proposed approach 

toward substituted compliance, but 

requested that the Commission modify 

aspects of the proposed order. After 

considering commenter views, the 

Commission is providing for substituted 

compliance that generally is consistent 

with the proposal, with certain 

clarifying changes discussed below.47

The Commission continues to 

conclude that, taken as a whole, 

applicable requirements under German 

and EU law require that SBS Entities 

have structures and processes that 

reasonably are designed to promote 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85692 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

48 In connection with the internal supervision, 

chief compliance officer and conflict of interest and 

information-gathering provisions, Covered Entities 

particularly must comply with: MiFID art. 16 and 

23 and WpHG sec. 63, 80 and 83–84 (addressing 

organizational requirements and conflicts of 

interest); MiFID Org Reg art. 21–37 (addressing 

organizational requirements, compliance, risk 

management, internal audit, senior management 

responsibility, complaints handling, remuneration 

policies and practices, personal transaction 

restrictions, outsourcing, conflicts of interest and 

investment research and marketing); MiFID Org Reg 

72–76 and Annex IV (addressing recordkeeping, 

including records of orders, transactions and 

communications); and CRD articles 74, 76, 79–87, 

88(1) and 91(1)–(2), 91(7)–(9), 92–95 and KWG 

sections 25a, 25b, 25c (other than 25c(2)), 25d 

(other than 25d(3) and 25d(11)), 25e and 25f 

(addressing internal governance, recovery and 

resolution plans, risk management policies, and 

management body and remuneration policies). See 

paragraph (c)(3). 

49SIFMA in part recommended removal of 

certain risk-related and record-related provisions 

from the conditions. The Commission, however, 

does not believe that excluding those provisions 

would promote supervisory and compliance goals 

consistent with the necessary regulatory outcome. 

The Commission also is not incorporating 

additional suggested language to focus the 

application of underlying German and EU 

provisions (by requiring compliance with German 

and EU requirements only to the extent they ‘‘relate 

to’’ oversight arrangements, compliance and 

conflict of interest management), as that type of 

limitation may cause ambiguity. 

50See paragraph (c)(4) to the Order. For clarity, 

the Order has been modified from the proposal to 

provide that the Covered Entity must comply with 

relevant German and EU provisions as if those 

provisions address ‘‘applicable’’ conditions to the 

Order connected to requirements for which the 

Covered Entity is relying on substituted 

compliance. That part of the condition does not 

apply to parts of the Order for which the Covered 

Entity does not rely on substituted compliance. 

51See paragraph (c)(3)(ii) to the Order. Here too, 

the Order has been modified from the proposal to 

clarify that the compliance report need only address 

other applicable conditions to the Order. This 

condition is not intended to create an independent 

requirement that the Covered Entity provide the 

relevant compliance reports to German or EU 

authorities, and does not address the ability of 

German or EU authorities to obtain and review such 

records. 

52See Business Conduct Adopting Release, 81 FR 

at 30065. 

compliance with applicable law and to 

identify and cure instances of noncompliance and manage conflicts of 

interest, and thus produce regulatory 

outcomes that are comparable to those 

associated with the above-described 

internal supervision, chief compliance 

officer, conflict of interest and 

information-related requirements. 

Although there are differences between 

the approaches taken by the relevant 

risk control requirements under the 

Exchange Act and relevant German and 

EU requirements, the Commission 

continues to believe that the relevant 

German and EU requirements taken as 

a whole produce comparable regulatory 

outcomes. 

Substituted compliance in connection 

with those requirements is conditioned 

in part on Covered Entities being subject 

to and complying with specified 

German and EU provisions that promote 

compliance and address conflicts of 

interest.48 The Commission has 

considered commenter views regarding 

those prerequisites, but concludes that 

those German and EU provisions as a 

whole are appropriate to produce 

comparable regulatory outcomes.49

The Order retains, with clarifications, 

proposed provisions to target 

substituted compliance as needed to 

promote the consistency of regulatory 

outcomes. Accordingly, substituted 

compliance in connection with internal 

supervision is conditioned on the 

Covered Entity complying with 

applicable German and EU supervisory 

and compliance provisions as if those 

provisions also require SBS Entities to 

comply with applicable requirements 

under the Exchange Act and the other 

applicable conditions to the Order.50

Similarly, substituted compliance in 

connection with the chief compliance 

officer requirements is conditioned on 

the Covered Entity annually providing 

certain compliance reports to the 

Commission, in English, with a 

certification under penalty of law that 

the report is accurate and complete, and 

with the report addressing the SBS 

Entity’s compliance with other 

applicable conditions to the order.51 For 

the reasons discussed in the proposal, 

moreover, the substituted compliance 

Order does not extend to antitrust 

provisions under the Exchange Act. 

VI. Substituted Compliance for 

Counterparty Protection Requirements 

A. Proposed Approach 

BaFin’s application in part requested 

substituted compliance in connection 

with counterparty protection 

requirements relating to: 

• Disclosure of material risks and 

characteristics and material incentives 

or conflicts of interest—Requirements 

that an SBS Entity disclose to certain 

security-based swap counterparties 

certain information about the material 

risks and characteristics of the securitybased swap, as well as material 

incentives or conflicts of interest that 

the SBS Entity may have in connection 

with the security-based swap. 

• Daily mark disclosure— 

Requirements that an SBS Entity 

provide daily mark information to 

certain security-based swap 

counterparties. 

• Fair and balanced 

communications—Requirements that an 

SBS Entity communicate with securitybased swap counterparties in a fair and 

balanced manner based on principles of 

fair dealing and good faith. 

• Clearing rights disclosure— 

Requirements that an SBS Entity 

provide certain counterparties with 

information regarding clearing rights 

under the Exchange Act. 

• ‘‘Know your counterparty’’— 

Requirements that an SBS Entity 

establish, maintain and enforce written 

policies and procedures to obtain and 

retain certain information regarding a 

security-based swap counterparty that is 

necessary for conducting business with 

that counterparty. 

• Suitability—Requirements for a 

security-based swap dealer to undertake 

reasonable diligence to understand the 

potential risks and rewards of any 

recommendation of a security-based 

swap or trading strategy involving a 

security-based swap that it makes to 

certain counterparties and to have a 

reasonable basis to believe that the 

recommendation is suitable for the 

counterparty. 

Taken as a whole, these counterparty 

protection requirements help 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.’’ 52

The proposal provided for substituted 

compliance in connection with fair and 

balanced communications, disclosure of 

material risks and characteristics, 

disclosure of material incentives or 

conflicts of interest, ‘‘know your 

counterparty,’’ suitability and daily 

mark disclosure requirements. In 

proposing to provide conditional 

substituted compliance for these 

requirements, the Commission 

preliminarily concluded that the 

relevant German and EU requirements 

in general would produce regulatory 

outcomes that are comparable to 

requirements under the Exchange Act, 

by subjecting German Covered Entities 

to obligations that promote standards of 

professional conduct, transparency and 

the fair treatment of parties. 

As proposed, substituted compliance 

for these requirements would be subject 

to certain conditions to help ensure the 

comparability of outcomes. First, under 

the proposal, substituted compliance for 

fair and balanced communications, 

disclosure of material risks and 

characteristics, disclosure of material 

incentives or conflicts of interest, 

‘‘know your counterparty’’ and 

suitability requirements would be 

conditioned on Covered Entities being 

subject to, and complying with, relevant 


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53See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735 n.81. 54Annex II of MiFID describes which clients are 

‘‘professional clients.’’ Section I of Annex II 

describes the types of clients considered to be 

professional clients unless the client elects nonprofessional treatment; these clients are per se 

professional clients. Section II of Annex II describes 

the types of clients who may be treated as 

professional clients on request; these clients are 

elective professional clients. See MiFID Annex II. 

Retail clients are those that are not professional 

clients. See MiFID article 4(1)(11). 55See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72736. 56See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735. 57See EMIR RTS article 13(3)(a)(i); EMIR article 

10. 

58See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735. 

59See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735. 

60See para. (d) to the Order. 

61 In connection with fair and balanced 

communications requirements, Covered Entities 

must be subject to and comply with: (i) Either 

MiFID art. 24(1), (3) and WpHG sections 63(1), (6) 

or MiFID art. 30(1) and WpHG section 68(1); and 

(ii) MiFID art. 24(4)–(5); WpHG sections 63(7) and 

64(1); MiFID Org Reg art. 46–48; Market Abuse 

Regulation art. 12(1)(c) and 15; and MAR 

Investment Recommendations Regulation art. 5, in 

each case in relation to the communication for 

which substituted compliance is applied. See para. 

(d)(5) to the Order. 

62 In connection with requirements related to 

disclosure of information regarding material risks 

and characteristics, Covered Entities must be 

subject to and comply with: MiFID art. 24(4); 

WpHG sections 63(7) and 64(1); and MiFID Org Reg 

art. 48–50, in each case in relation to the securitybased swap for which substituted compliance is 

applied. See para. (d)(1) to the Order. 

63 In connection with requirements related to 

disclosure of information regarding material 

incentives or conflicts of interest, Covered Entities 

must be subject to and comply with either: (i) 

MiFID art. 23(2)–(3); WpHG section 63(2); and 

MiFID Org Reg art. 33–35; (ii) MiFID art. 24(9); 

WpHG section 70; and MiFID Delegated Directive 

art. 11(5); or (iii) Market Abuse Regulation art. 

20(1), in each case in relation to the security-based 

swap for which substituted compliance is applied. 

See para. (d)(2) to the Order. 

64 In connection with ‘‘know your counterparty’’ 

requirements, Covered Entities must be subject to 

and comply with: MiFID art. 16(2); WpHG section 

80(1); MiFID Org Reg art. 21–22, 25–26 and 

applicable parts of Annex I; CRD art. 74(1) and 

85(1); KWG section 25a; MLD art. 11 and 13; GwG 

sections 10–11; MLD art. 8(3) and 8(4)(a) as applied 

to internal policies, controls and procedures 

regarding recordkeeping of customer due diligence 

activities; GwG section 6(1)–(2) as applied to 

principles, procedures and controls regarding 

recordkeeping of customer due diligence activities, 

in each case in relation to the security-based swap 

for which substituted compliance is applied. See 

para. (d)(3) to the Order. 

65 In connection with suitability requirements, 

Covered Entities must be subject to and comply 

with: MiFID art. 24(2)–(3) and 25(1)–(2); WpHG 

sections 63(5)–(6), 80(9)–(13) and 87(1)–(2); and 

MiFID Org Reg art. 21(1)(b) and (d), 54 and 55, in 

each case in relation to the recommendation of a 

security-based swap or trading strategy involving a 

security-based swap that is provided by or on behalf 

of the Covered Entity and for which substituted 

compliance is applied. See para. (d)(4)(i) to the 

Order. 

66See SIFMA Letter at 14; see also Deutsche Bank 

Letter at 2; EBF Letter at 1. 

67See MiFID art. 24(3) (all information addressed 

to clients or potential clients must be fair, clear and 

not misleading); MiFID art. 25(1) (partial suitability 

requirement applicable to investment firms); MiFID 

art. 1(3)(b) (when providing one or more investment 

services and/or performing investment activities, 

credit institutions are subject to MiFID arts. 24(3) 

and 25(1)). 

German and EU requirements.53

Second, the proposal would 

additionally condition substituted 

compliance for suitability requirements 

on the counterparty being a per se 

‘‘professional client’’ as defined in 

MiFID (rather than a ‘‘retail client’’ or an 

elective ‘‘professional client’’ 54) and not 

a ‘‘special entity’’ as defined in 

Exchange Act section 15F(h)(2)(C) and 

Exchange Act rule 15Fh–2(d).55 Finally, 

in the proposal the Commission 

preliminarily viewed EU daily portfolio 

reconciliation requirements as 

comparable to Exchange Act daily mark 

disclosure requirements.56 These daily 

portfolio reconciliation requirements 

apply to portfolios of a financial 

counterparty or a non-financial 

counterparty subject to the clearing 

obligation in EMIR in which the 

counterparties have 500 or more OTC 

derivatives contracts outstanding with 

each other.57 The Commission 

preliminarily viewed EU portfolio 

reconciliation requirements for other 

types of portfolios, which may be 

reconciled less frequently than each 

business day, as not comparable to 

Exchange Act daily mark 

requirements.58 Accordingly, the 

proposal would condition substituted 

compliance for daily mark requirements 

on the Covered Entity being required to 

reconcile, and in fact reconciling, the 

portfolio containing the relevant 

security-based swap on each business 

day pursuant to relevant EU 

requirements.59

The proposal would not provide 

substituted compliance in connection 

with Exchange Act requirements for 

SBS Entities to disclose a counterparty’s 

clearing rights under Exchange Act 

section 3C(g)(5). BaFin’s application 

argued that certain EU provisions 

related to a counterparty’s clearing 

rights in the European Union are 

comparable to requirements to disclose 

the counterparty’s Exchange Act-based 

clearing rights. Because these EU 

provisions do not require disclosure of 

these clearing rights, the Commission 

preliminarily viewed the EU clearing 

provisions as not comparable to 

Exchange Act clearing rights disclosure 

requirements. 

B. Commenter Views and Final 

Provisions 

After considering commenter views, 

the Commission is providing for 

substituted compliance in connection 

with fair and balanced communications, 

disclosure of material risks and 

characteristics, disclosure of material 

incentives or conflicts of interest, 

‘‘know your counterparty,’’ suitability 

and daily mark disclosure requirements, 

in each case consistent with the 

proposal except for one clarifying 

change regarding substituted 

compliance for suitability 

requirements.60 This action is grounded 

in the Commission’s conclusion that, 

taken as a whole, applicable 

requirements under German and EU law 

subject German Covered Entities to 

obligations that promote standards of 

professional conduct, transparency and 

the fair treatment of parties, and thus 

produce regulatory outcomes that are 

comparable to the outcomes associated 

with the relevant counterparty 

protection requirements under the 

Exchange Act. 

Consistent with the proposal, 

substituted compliance is conditioned 

on certain conditions to help ensure the 

comparability of outcomes. Substituted 

compliance for fair and balanced 

communications,61 disclosure of 

material risks and characteristics,62

disclosure of material incentives or 

conflicts of interest,63 ‘‘know your 

counterparty’’ 64 and suitability 65

requirements is conditioned on Covered 

Entities being subject to, and complying 

with, relevant German and EU 

requirements. A commenter requested 

that the Commission remove from the 

list of German and EU suitability 

requirements MiFID article 24(3), 

WpHG section 63(6) and MiFID Org Reg 

article 21(1)(b) and (d), stating that these 

provisions are unrelated to suitability 

requirements.66 The Commission notes 

that a portion of MiFID’s suitability 

requirements directs Member States to 

require investment firms and credit 

institutions to ensure that persons 

giving investment advice or information 

about financial instruments, investment 

services or ancillary services to clients 

on behalf of the firm possess the 

necessary knowledge and competence to 

fulfill certain obligations, including the 

obligation in MiFID article 24(3).67 In 

comparing EU and German suitability 

requirements to Exchange Act 

suitability requirements, BaFin’s 

application likewise states that firms 

must ensure persons giving this type of 

advice ‘‘possess the necessary 

knowledge and competence to comply 

with the requirement that all 

information provided to clients is fair, 

clear and not misleading [as required by 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85694 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

68See BaFin Application Annex A category 4 at 

75–76. 

69See BaFin Application Annex A category 4 at 

75. 

70See MiFID Org Reg art. 21(1)(b) (requirement 

for investment firm employees to be aware of 

procedures for the proper discharge of their 

responsibilities; requirement implements MiFID art. 

16(2)–(10)); MiFID Org Reg art. 1(2) (in portions of 

MiFID Org Reg that implement MiFID requirements 

to which credit institutions are subject, references 

to investment firms encompass credit institutions); 

MiFID art. 1(3)(a) (credit institutions are subject to 

MiFID art. 16). 

71See MiFID Org Reg art. 21(1)(d) (requirement 

for investment firms to employ personnel with the 

knowledge, skills and expertise necessary for the 

discharge of their responsibilities; requirement 

implements MiFID art. 16(2)–(10)); MiFID Org Reg 

art. 1(2) (in portions of MiFID Org Reg that 

implement MiFID requirements to which credit 

institutions are subject, references to investment 

firms encompass credit institutions); MiFID art. 

1(3)(a) (credit institutions are subject to MiFID art. 

16). 

72See SIFMA Letter at 14; see also Deutsche Bank 

Letter at 2; EBF Letter at 1. The proposed Order 

would have required a Covered Entity relying on 

substituted compliance to be subject to and comply 

with EU and German suitability requirements in 

relation to a recommendation that is provided by 

or on behalf of the Covered Entity. See German 

Substituted Compliance Notice and Proposed 

Order, 85 FR at 72745. 

73See para. (d)(4)(i) to the Order. 

74See para. (d)(4)(ii) to the Order. 

75Covered Entities must be required to reconcile, 

and in fact reconcile, the portfolio containing the 

security-based swap for which substituted 

compliance is applied, on each business day 

pursuant to EMIR articles 11(1)(b) and 11(2) and 

EMIR RTS article 13. See para. (d)(6) to the Order. 

76See SIFMA Letter at 6; see also Deutsche Bank 

Letter at 2; EBF Letter at 1. 

77See SIFMA Letter at 3–5. 

78See SIFMA Letter at 4. 

79See SIFMA Letter at 4; see also Exchange Act 

Release No. 87780 (Dec. 18, 2019), 85 FR 6270 (Feb. 

4, 2020) (‘‘Cross-Border Adopting Release’’). 

80See SIFMA Letter at 4 (citing Cross-Border 

Adopting Release, 85 FR at 6288). 

81See SIFMA Letter at 4. 

82See Business Conduct Adopting Release, 81 FR 

at 30065–69 (adoption of cross-border rules 

governing application of transaction-level 

requirements such as daily mark requirements to 

ANE Transactions); Business Conduct Adopting 

Release, 81 FR at 30065 (applying transaction-level 

requirements to ANE Transactions will ‘‘help 

maintain market integrity by subjecting the large 

number of transactions that involve relevant dealing 

activity in the United States to these requirements, 

even if both counterparties are non-U.S. persons’’). 

In response to the commenter’s previous statements 

that business conduct standards such as daily mark 

requirements should not apply to any transactions 

between two non-U.S. persons, the Commission 

concluded, ‘‘given the significant role registered 

[security-based swap dealers] play in the market, 

applying the business conduct requirements to their 

U.S. business should help protect the integrity of 

the U.S. market.’’ See Business Conduct Adopting 

Release, 81 FR at 30066 (considering comment 

letter from Timothy W. Cameron, Esq., Managing 

Director, and Laura Martin, Managing Director and 

Associate General Counsel, Asset Management 

Group, Securities Industry and Financial Markets 

Association, dated July 13, 2015, at 2, 5). 

MiFID article 24(3)].’’ 68 WpHG section 

63(6) is the German law transposition of 

MiFID article 24(3).69 MiFID Org Reg 

article 21(1)(b) requires investment 

firms and credit institutions to ensure 

that employees are aware of the 

procedures to be followed for the proper 

discharge of their responsibilities, 

which include the knowledge and 

competence requirements described 

above.70 MiFID Org Reg article 21(1)(d) 

requires investment firms and credit 

institutions to employ personnel with 

the skills, knowledge and expertise 

necessary for the discharge of their 

responsibilities, which also include the 

knowledge and competence 

requirements described above.71

Because these requirements contribute 

to the Commission’s conclusion that EU 

and German requirements are 

comparable to Exchange Act suitability 

requirements, the Commission is 

adopting the condition as proposed, and 

requiring a Covered Entity to be subject 

to and comply with those EU and 

German requirements if the Covered 

Entity wishes to make use of substituted 

compliance for Exchange Act suitability 

requirements. The commenter also 

requested that the Commission clarify 

Covered Entities relying on substituted 

compliance must be subject to and 

comply with these requirements in 

relation to the recommendation of a 

security-based swap or trading strategy 

involving a security-based swap that is 

provided by or on behalf of the Covered 

Entity.72 The Commission agrees that 

specifying the types of 

recommendations subject to this 

condition will provide useful clarity to 

market participants considering whether 

to make use of substituted compliance 

for Exchange Act suitability 

requirements, and is including this 

clarification in the Order.73 Substituted 

compliance for suitability requirements 

additionally is conditioned on the 

counterparty being a per se 

‘‘professional client’’ as defined in 

MiFID and not a ‘‘special entity’’ as 

defined in Exchange Act section 

15F(h)(2)(C) and Exchange Act rule 

15Fh–2(d).74

Substituted compliance for daily mark 

requirements also is conditioned on the 

Covered Entity being required to 

reconcile, and in fact reconciling, the 

portfolio containing the relevant 

security-based swap on each business 

day pursuant to relevant EU 

requirements.75 A commenter suggested 

that this condition should apply only to 

security-based swaps with U.S. 

counterparties; for all other transactions 

subject to Exchange Act daily mark 

requirements, the commenter proposed 

that the Commission grant substituted 

compliance if the Covered Entity 

complies with EU mark-to-market (or 

mark-to-model) and reporting 

requirements.76 The commenter 

provided three reasons in support of 

this bifurcated approach and, for the 

reasons explained below, the 

Commission declines to adopt it. 

First, the commenter stated that nonU.S. security-based swap dealers would 

face significant challenges and costs to 

identify which security-based swaps 

with non-U.S. counterparties were 

arranged, negotiated or executed by 

personnel of the security-based swap 

dealer or its agent located in a U.S. 

branch or office (‘‘ANE Transactions’’), 

and thus subject to Exchange Act daily 

mark requirements.77 According to the 

commenter, many non-U.S. securitybased swap dealers may choose to block 

U.S. personnel from taking part in 

security-based swaps with non-U.S. 

counterparties that are not subject to the 

EU’s daily portfolio reconciliation 

requirements, thereby avoiding creation 

of an ANE Transaction that is not 

eligible for substituted compliance and 

the attendant challenges and costs of 

identifying those transactions.78 The 

commenter asserted that daily mark 

requirements should not apply to a nonU.S. security-based swap dealer’s ANE 

Transactions because the Commission 

did not require compliance with daily 

mark requirements in connection with 

the exception provided in Exchange Act 

rule 3a71–3(d)(1) to counting certain 

ANE Transactions towards securitybased swap dealer registration 

thresholds.79 The commenter noted that 

daily mark requirements do not apply to 

certain ANE Transactions excepted from 

those thresholds because there is no 

‘‘ongoing relationship between . . . the 

entity whose personnel interact with the 

counterparty . . . and the 

counterparty.’’ 80 The commenter stated 

that a similar rationale applies to the 

application of daily mark requirements 

to a non-U.S. security-based swap 

dealer’s ANE Transactions.81

The Commission previously has 

addressed why ANE Transactions are 

subject to Exchange Act daily mark 

requirements, as well as the costs and 

challenges of identifying such 

transactions.82 As noted above, 

substituted compliance does not 

constitute exemptive relief, but instead 

provides an alternative method by 

which non-U.S. SBS Entities may 

comply with applicable Exchange Act 

requirements. The Commission is 

providing for substituted compliance for 

daily mark requirements based on 

comparability of outcomes with respect 

to ANE Transactions to the same extent 

as it is providing substituted 

compliance with respect to all other 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85695 

83See Exchange Act rule 3a71–3(d)(1). 84See SIFMA Letter at 5. 85See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735. 86See SIFMA Letter at 5 (citing EMIR Margin RTS 

art. 10). 87See EMIR Margin RTS art. 10. 88See EMIR Margin RTS art. 10. 

89See SIFMA Letter at 5. 90See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735; see also BaFin 

Application Annex A category 4 at 54–56. 91See SIFMA Letter at 5. 92See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72735. 93See SIFMA Letter at 5. 

transactions. Moreover, the commenters’ 

comparison to the exception from 

counting certain ANE Transactions 

towards security-based swap dealer 

registration thresholds is inapt. As the 

commenter notes, in connection with 

that exception, a registered entity whose 

U.S.-located personnel participates in 

an ANE Transaction that is eligible for 

the exception is not a counterparty to 

the resulting security-based swap.83

BaFin’s application, in contrast, relates 

to a registered SBS Entity’s obligation to 

provide daily mark disclosure to its 

counterparty. The security-based swap 

dealer whose U.S. personnel arranged, 

negotiated or executed the securitybased swap will be a counterparty to the 

security-based swap and will have an 

on-going relationship with its 

counterparty. 

Second, the commenter stated that EU 

mark-to-market (and mark-to-model) 

requirements are comparable to 

Exchange Act daily mark 

requirements.84 In the proposal, the 

Commission preliminarily concluded 

that mark-to-market (and mark-tomodel) requirements are not comparable 

to daily mark requirements because they 

do not require the Covered Entity to 

disclose the contract valuation to the 

counterparty.85 In reply, the commenter 

stated that EU variation margin 

requirements mandate that some 

counterparties exchange variation 

margin calculated in accordance with 

these mark-to-market (or mark-to-model) 

requirements, with adjustments to these 

valuations ‘‘generally not 

permissible.’’ 86 However, the variation 

margin requirements cited by the 

commenter require only that 

counterparties determine the amount of 

variation margin to be collected in 

respect of the aggregate valuations of all 

contracts in a netting set; counterparties 

are not required to disclose the 

valuations of individual contracts.87

Moreover, these EU requirements permit 

the amount of variation margin to be 

adjusted by the net value of each 

contract in the netting set at the point 

of entry into the contract, as well as by 

values of variation margin previously 

collected or posted.88 In determining 

whether EU variation margin 

requirements are comparable to 

Exchange Act daily mark requirements, 

the Commission is mindful that this 

comparability is essential to 

maintaining a level playing field among 

German SBS Entities, which are 

potentially eligible to use substituted 

compliance pursuant to the Order, other 

SBS Entities that are not U.S. persons, 

which may apply to use substituted 

compliance in respect of other 

applicable foreign requirements, and 

SBS Entities that are U.S. persons, 

which are not eligible to use substituted 

compliance. In the Commission’s view, 

the EU variation margin requirements 

cited by the commenter, which do not 

require disclosure of the unadjusted 

valuation of each contract in the netting 

set, do not produce outcomes that are 

comparable to Exchange Act 

requirements to disclose the 

individualized daily mark of a securitybased swap. Accordingly, the 

Commission does not view the EU 

variation margin requirements cited by 

the commenter as comparable to 

Exchange Act daily mark requirements. 

Third, the commenter stated that the 

EU reporting requirements cited by 

BaFin are comparable to Exchange Act 

daily mark requirements.89 In the 

proposal, the Commission preliminarily 

concluded that in practice U.S. 

counterparties may encounter 

challenges when attempting to access 

daily marks for different security-based 

swaps reported to multiple EU trade 

repositories with which they may not 

otherwise have business relationships.90

In reply, the commenter stated that 

these challenges should not be as 

relevant for EU and other non-U.S. 

counterparties if they are already subject 

to EU reporting obligations.91 The 

commenter’s position, however, 

highlights that U.S. counterparties, as 

well as non-U.S. counterparties without 

existing business relationships with 

multiple EU trade repositories, still may 

encounter challenges in receiving daily 

marks from these daily trade reports. 

Moreover, the Commission is mindful 

that allowing Covered Entities to treat 

U.S. person counterparties differently 

for purposes of Exchange Act daily mark 

requirements could lead to disparities in 

security-based swap market access 

between U.S. and non-U.S. 

counterparties. In the proposal, the 

Commission also expressed concern that 

daily mark information reported to trade 

repositories may be less current, given 

the time necessary for reporting and for 

the trade repository to make the 

information available.92 The commenter 

reported that in its experience data is 

available promptly from trade 

repositories.93 This report of the 

commenter’s experience lessens the 

Commission’s concern with respect to 

timing, but does not overcome the 

Commission’s concerns regarding 

barriers to U.S. counterparties’ access to 

EU trade repository data and the 

potential for disparities in the 

availability of substituted compliance 

for daily mark requirements to reduce 

U.S. counterparties’ access to securitybased swap markets. Accordingly, the 

Commission continues to view the EU 

trade reporting requirements cited by 

BaFin as not comparable to Exchange 

Act daily mark requirements. 

The Commission recognizes that there 

are differences between the approaches 

taken by fair and balanced 

communications, disclosure of material 

risks and characteristics, disclosure of 

material incentives or conflicts of 

interest, ‘‘know your counterparty,’’ 

suitability and daily mark disclosure 

requirements under the Exchange Act, 

on the one hand, and relevant German 

and EU requirements, on the other 

hand. The Commission continues to 

view those differences, when coupled 

with the conditions described above, as 

not so material as to be inconsistent 

with substituted compliance within the 

requisite outcomes-oriented context. 

With respect to clearing rights 

disclosure requirements, however, 

consistent with the proposal the 

Commission is not providing 

substituted compliance. Because EU 

clearing provisions do not require 

disclosure of a counterparty’s clearing 

rights under Exchange Act section 

3C(g)(5), the Commission views those 

provisions as not comparable to 

Exchange Act clearing rights disclosure 

requirements. 

VII. Substituted Compliance for 

Recordkeeping, Reporting and 

Notification Requirements 

A. Proposed Approach 

BaFin’s application in part requests 

substituted compliance for requirements 

applicable to SBS Entities under the 

Exchange Act relating to: 

• Recordmaking—Requirements that 

prescribed records be made and kept 

current. 

• Record Preservation—Requirements 

that address preservation of records. 

• Reporting—Requirements that 

address certain reports. 

• Notification—Requirements that 

address notification of the Commission 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85696 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

94See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72732 (citing 

Exchange Act rules 18a–5, 18a–6, 18a–7, and 18a– 

8). The Commission noted that it does not 

administer or oversee capital and margin 

requirements for prudentially regulated SBS 

Entities, and took the preliminary position that it 

would be appropriate to consider substituted 

compliance for recordkeeping, reporting and 

notification requirements applicable to nonbank 

SBS Entities in connection with a potential 

substituted compliance request for capital and 

margin requirements. 

95The Commission also recognized that the 

comparability assessment for certain of the 

recordkeeping and notification requirements also 

appropriately may consider the extent to which 

those requirements are linked to separate 

requirements in the Exchange Act that may be 

subject to a substituted compliance application. See 

id. at 72736 (noting that a number of recordkeeping 

requirements serve a primary purpose of promoting 

and/or documenting SBS Entities’ compliance with 

associated Exchange Act requirements; further 

stating that when substituted compliance is 

permitted for the associated Exchange Act 

requirements, substituted compliance also may be 

appropriate for the linked recordkeeping and 

notification requirements). 

96These included compliance with certain 

requirements associated with CRD, CRR, EMIR, 

MiFID, MiFID Org Reg, MiFIR, KWG, WpHG, GwG 

and certain EU guidelines. 

97See id. at 72737. 

98See id. at 72737–38. 

99See id. at 72738. 

100See id. at 72738–39. 

101See id. at 72739. 

102See SIFMA Letter. See also Deutsche Bank 

Letter; EBF Letter (supporting SIFMA’s comments). 

103See paragraph (e)(3)(ii) to the Order. 

104 In the German Substituted Compliance Notice 

and Proposed Order, the Commission stated that 

SBS Entities could be permitted to present the 

information reported in FOCUS Report Part IIC in 

accordance with GAAP that the SBS Entity uses to 

prepare publicly available general purpose financial 

statements in its home jurisdiction instead of U.S. 

GAAP if other GAAP, such as International 

Financial Reporting Standards (IFRS) as issued by 

the International Accounting Standards Board 

(IASB), is used by the SBS Entity in preparing 

general purpose financial statements. 

105See SIFMA Letter at 6. 

when certain financial or operational 

problems occur.94

Taken as a whole, the recordkeeping, 

reporting, and notification requirements 

that apply to prudentially regulated SBS 

Entities are designed to promote the 

prudent operation of the firm’s securitybased swap activities, assist the 

Commission in conducting compliance 

examinations of those activities, and 

alert the Commission to potential 

financial or operational problems that 

could impact the firm and its customers. 

In proposing to provide conditional 

substituted compliance in connection 

with this part of BaFin’s application, the 

Commission preliminarily concluded 

that the relevant German and EU 

requirements, subject to certain 

proposed conditions and limitations, 

would produce regulatory outcomes that 

are comparable to the outcomes 

associated with the recordkeeping, 

reporting, and notification requirements 

under the Exchange Act applicable to 

prudentially regulated SBS Entities 

pursuant to Exchange Act rules 18a–5, 

18a–6, 18a–7, and 18a–8.95

Substituted compliance under the 

proposal was to be conditioned in part 

on SBS Entities being subject to specific 

conditions necessary to promote 

consistency in regulatory outcomes, or 

to reflect the scope of substituted 

compliance that would be available in 

connection with associated Exchange 

Act rules.96 In addition, substituted 

compliance in connection with select 

areas under the proposal would be 

subject to specific conditions to promote 

consistency in regulatory outcomes, or 

to reflect the scope of substituted 

compliance for associated rules: 

• Recordmaking—Under the 

proposal, the SBS Entity would need to: 

(a) Preserve the data elements to create 

certain records required by the 

Commission’s rule and furnish the 

record in the format required by that 

rule; (b) make certain records related to 

the SBS Entity segregation rule if the 

firm is not exempt from that rule; and 

(c) make certain records related to 

business conduct requirements for 

which substituted compliance was 

proposed to not be available.97

• Record preservation—Under the 

proposal, the SBS Entity would need to: 

(a) Preserve records related to the SBS 

Entity segregation rule if the firm is not 

exempt from that rule; and (b) preserve 

certain records related to Regulation 

SBSR and business conduct 

requirements for which substituted 

compliance was proposed to not be 

available.98

• Reporting—Under the proposal, the 

SBS Entity would need to report 

financial and operational information in 

the manner and format specified by 

Commission order or rule.99

• Notification—Under the proposal, 

the SBS Entity would need to: (a) 

Simultaneously transmit to the 

Commission a copy of any notice 

required to be sent by comparable 

German and EU laws and include 

contact information of a person who can 

provide further details about the notice; 

and (b) comply with the requirement in 

the Commission’s rule to provide notice 

of failure to make a required deposit 

into the reserve account required by the 

SBS Entity segregation rule.100

In connection with the proposal, the 

Commission also addressed the 

application of inspection and 

production requirements imposed on 

SBS Entities under the Exchange Act, 

and noted that BaFin had provided the 

Commission with adequate assurances 

that no law or policy would impede the 

ability of any entity that is directly 

supervised by BaFin that may register 

with the Commission ‘‘to provide 

prompt access to the Commission to 

such entity’s books and records or to 

submit to onsite inspection or 

examination by the Commission.’’ 101

B. Commenter Views and Final 

Provisions 

Commenters supported the 

Commission’s preliminary view that 

substituted compliance be made 

available with respect to the 

recordkeeping, reporting, and 

notification requirements of Exchange 

Act rules 18a–5, 18a–6, 18a–7, and 18a– 

8 applicable to prudentially regulated 

SBS Entities.102 Commenters did not 

address the proposed conditions 

relating to Exchange rules 18a–5, 18a– 

6, and 18a–8. After considering 

commenter views, the Commission is 

providing for substituted compliance in 

connection with the recordkeeping, 

reporting, and notification requirements 

of Exchange Act rules 18a–5, 18a–6, 

18a–7, and 18a–8 applicable to 

prudentially regulated SBS Entities 

consistent with the proposal except for 

two modifications to the condition in 

paragraph (e)(3)(ii) of the Order relating 

to rule 18a–7.103 First, the Commission 

is modifying the condition to require 

that the financial information be 

presented in accordance with generally 

accepted accounting principles 

(‘‘GAAP’’) that the SBS Entity uses to 

prepare general purpose publicly 

available or available to be issued 

financial statements in Germany.104

Second, the Order clarifies that the 

prudentially regulated SBS Entity files 

‘‘periodic unaudited’’ financial and 

operational information because 

Exchange Act rule 18a–7 does not 

require that the FOCUS Report Part IIC 

be audited by an independent public 

accountant. 

In response to the Commission’s 

proposal regarding recordkeeping, 

reporting, and notification 

requirements, a commenter stated that 

the Commission should permit 

substituted compliance for both 

prudentially regulated and nonprudentially regulated SBS Entities.105

However, the recordkeeping, reporting, 

and notification requirements for nonprudentially regulated SBS Entities are 

broader than the requirements for 

prudentially regulated SBS Entities. 

These broader requirements address the 

fact that the Commission has capital and 

margin authority and oversight 

responsibility with respect to nonVerDate Sep<11>2014 00:55 Dec 29, 2020 Jkt 253001 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 E:\FR\FM\29DEN1.SGM 29DEN1

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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85697 

106See SIFMA Letter at 8; Deutsche Bank Letter 

at 2. 

107See SIFMA Letter at 8. 

108See SIFMA Letter at 8. 

109See SIFMA Letter at 8; Deutsche Bank Letter 

at 2. 

110See SIFMA Letter at 8–9; Deutsche Bank Letter 

at 2. 

111The Commission intends to issue an order 

sufficiently in advance of the compliance date for 

Exchange rule 18a–7 to provide SBS Entities time 

to configure their systems to comply with the filing 

requirement. When the order is issued, the 

Commission will consider whether it would be 

appropriate to provide additional time before the 

first filing is required if SBS Entities indicate that 

they will have trouble configuring their systems to 

comply with the filing requirement. 

112See German Substituted Compliance Notice 

and Proposed Order, 85 FR at 72739. 113See id. at 72739–40. 

prudentially regulated SBS Entities (but 

not with respect to prudentially 

regulated SBS Entities). The 

Commission continues to believe it is 

appropriate to defer consideration of 

requirements that apply to nonprudentially regulated SBS Entities 

until such time as it receives an 

application seeking substituted 

compliance for capital and margin 

requirements. This will allow the 

Commission to make a more complete 

decision that considers the substantive 

capital and margin requirements that are 

linked with the recordkeeping, 

reporting, notification, and securities 

count rules that apply to nonprudentially regulated SBS Entities. 

The Commission received comments 

regarding the Commission’s proposed 

condition that substituted compliance 

with respect to Exchange Act rule 18a– 

7’s FOCUS Report Part IIC filing 

requirement be conditioned on SBS 

Entities filing unaudited financial and 

operational information in the manner 

and format specified by Commission 

order or rule. The commenters made 

suggestions about the scope and 

requirements of such a Commission 

order or rule. First, commenters 

requested that SBS Entities be allowed 

to file other Commission or Federal 

Reserve Board (‘‘FRB’’) filings instead of 

or in combination with extracts from 

filings made with home country 

supervisors.106 Second, a commenter 

asked that the financial and operational 

information in the filings be permitted 

to be consolidated at the same 

consolidation level that is used in the 

relevant Commission, FRB, or home 

jurisdiction reports.107 Third, a 

commenter proposed that the 

Commission permit an SBS Entity to 

complete the capital line items in the 

filings, if the FOCUS Report Part IIC is 

used as the filing form, in a manner 

consistent with its home country capital 

standards and related reporting.108

Fourth, commenters sought additional 

time to furnish the filings to the 

Commission to align with local filing 

deadlines.109 Finally, commenters 

supported a potential approach 

identified by the Commission under 

which SBS Entities would be permitted 

to satisfy their Exchange Act rule 18a– 

7 obligations for a two-year period by 

filing the FOCUS Report Part IIC with 

only a limited number of the required 

line items completed.110

The Commission will consider these 

comments as it works towards 

completing a Commission order or rule 

pursuant to the provision in this Order 

that substituted compliance with 

respect to Exchange Act rule 18a–7’s 

FOCUS Report Part IIC filing 

requirement is conditioned on SBS 

Entities filing unaudited financial and 

operational information in the manner 

and format specified by Commission 

order or rule.111 In this regard, the 

Commission welcomes further comment 

and engagement from interested parties 

on: (1) A potential interim two-year 

order or rule that requires a limited 

number of the line items on the FOCUS 

Report Part IIC to be completed; and (2) 

the nature and scope of a more 

permanent order or rule for the filing of 

financial and operational information. 

VIII. Supervisory and Enforcement 

Considerations 

A. Preliminary Analysis 

Exchange Act rule 3a71–6(a)(2)(i) 

provides that the Commission’s 

assessments regarding the comparability 

of foreign requirements in part should 

take into account ‘‘the effectiveness of 

the supervisory program administered, 

and the enforcement authority 

exercised’’ by the foreign financial 

regulatory authority. This provision is 

intended to help ensure that substituted 

compliance is not predicated on rules 

that appear high-quality on paper if 

market participants in practice are 

allowed to fall short of their obligations, 

while also recognizing that differences 

among supervisory and enforcement 

regimes should not be assumed to 

reflect flaws in one regime or 

another.112 BaFin’s application 

accordingly included information 

regarding the supervisory and 

enforcement framework applicable to 

derivatives markets and market 

participants in Germany. 

In proposing to grant substituted 

compliance in connection with 

Germany, the Commission preliminarily 

concluded that the relevant supervisory 

and enforcement considerations were 

consistent with substituted compliance. 

That preliminary conclusion took into 

account information regarding BaFin’s 

and the ECB’s roles and practices in 

supervising credit institutions located in 

Germany, as well as their enforcementrelated authority and practices.113

B. Conclusions 

Commenters did not address the 

Commission’s preliminary conclusions 

regarding supervisory and enforcement 

considerations, and the Commission 

continues to conclude that the relevant 

supervisory and enforcement 

considerations in Germany are 

consistent with substituted compliance. 

In particular, based on the available 

information regarding BaFin’s and the 

ECB’s authority and practices to oversee 

market participants’ compliance with 

applicable requirements and to take 

action in the event of violations, the 

Commission remains of the view that, 

consistent with rule 3a71–6, 

comparability determinations reflect 

German and EU requirements as they 

apply in practice. 

To be clear, the supervisory and 

enforcement considerations addressed 

by rule 3a71–6 do not mandate that the 

Commission make judgments regarding 

the comparative merits of U.S. and 

foreign supervisory and enforcement 

frameworks, or to require specific 

findings regarding the supervisory and 

enforcement effectiveness of a foreign 

regime. The rule 3a71–6 considerations 

regarding supervisory and enforcement 

effectiveness instead address whether 

comparability analyses related to 

substituted compliance reflect 

requirements that market participants 

must follow, and for which market 

participants are subject to enforcement 

consequences in the event of violations. 

Those considerations are satisfied here. 

IX. Conclusion 

It is hereby determined and ordered, 

pursuant to rule 3a71–6 under the 

Exchange Act, that a Covered Entity (as 

defined in paragraph (f)(1) of this Order) 

may satisfy the requirements under the 

Exchange Act that are addressed in 

paragraphs (b) through (e) of this Order 

so long as the Covered Entity is subject 

to and complies with relevant 

requirements of the Federal Republic of 

Germany and the European Union and 

with the conditions to this Order, as 

may be amended or superseded from 

time to time. 

(a) General Conditions 

This Order is subject to the following 

general conditions, in addition to the 


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conditions specified in paragraphs (b) 

through (e): 

(1) Activities as ‘‘investment services 

or activities.’’ For each condition in 

paragraphs (b) through (e) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of MiFID, WpHG, and/or 

other EU and German requirements 

adopted pursuant to those provisions, 

the Covered Entity’s relevant securitybased swap activities constitute 

‘‘investment services’’ or ‘‘investment 

activities,’’ as defined in MiFID article 

4(1)(2) and in WpHG section 2(8), and 

fall within the scope of the Covered 

Entity’s authorization from BaFin to 

provide investment services and/or 

perform investment activities in the 

Federal Republic of Germany. 

(2) Counterparties as ‘‘clients.’’ For 

each condition in paragraphs (b) 

through (e) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

MiFID, WpHG and/or other EU and 

German requirements adopted pursuant 

to those provisions, the relevant 

counterparty (or potential counterparty) 

to the Covered Entity is a ‘‘client’’ (or 

potential ‘‘client’’), as defined in MiFID 

article 4(1)(9) and in WpHG section 

67(1). 

(3) Security-based swaps as ‘‘financial 

instruments.’’ For each condition in 

paragraphs (b) through (e) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of MiFID, WpHG and/or 

other EU and German requirements 

adopted pursuant to those provisions, 

the relevant security-based swap is a 

‘‘financial instrument,’’ as defined in 

MiFID article 4(1)(15) and in WpHG 

section 2(4). 

(4) Covered Entity as ‘‘institution.’’ 

For each condition in paragraph (b) 

through (e) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, the provisions 

of CRD, KWG, CRR and/or other EU and 

German requirements adopted pursuant 

to those provisions, the Covered Entity 

is an ‘‘institution,’’ as defined in CRD 

article 3(1)(3), in CRR article 4(1)(3) and 

in KWG section 1(1b). 

(5) Memorandum of Understanding 

with BaFin. The Commission and BaFin 

have a supervisory and enforcement 

memorandum of understanding and/or 

other arrangement addressing 

cooperation with respect to this Order at 

the time the Covered Entity complies 

with the relevant requirements under 

the Exchange Act via compliance with 

one or more provisions of this Order. 

(6) Notice to Commission. A Covered 

Entity relying on this Order must 

provide notice of its intent to rely on 

this Order by notifying the Commission 

in writing. Such notice must be sent to 

an email address provided on the 

Commission’s website. The notice must 

include the contact information of an 

individual who can provide further 

information about the matter that is the 

subject of the notice. 

(7) European Union Cross-Border 

Matters. 

(i) If, in relation to a particular service 

provided by a Covered Entity, 

responsibility for ensuring compliance 

with any provision of MiFID or any 

other EU or German requirement 

adopted pursuant to MiFID listed in 

paragraphs (b) through (e) of this Order 

is allocated to an authority of the 

Member State of the European Union in 

whose territory a Covered Entity 

provides the service, BaFin must be the 

authority responsible for supervision 

and enforcement of that provision or 

requirement in relation to the particular 

service. 

(ii) If responsibility for ensuring 

compliance with any provision of MAR 

or any other EU requirement adopted 

pursuant to MAR listed in paragraphs 

(b) through (e) of this Order is allocated 

to one or more authorities of a Member 

State of the European Union, one of 

such authorities must be BaFin. 

(b) Substituted Compliance in 

Connection With Risk Control 

Requirements 

This Order extends to the following 

provisions related to risk control: 

(1) Internal risk management. The 

requirements of Exchange Act section 

15F(j)(2) and related aspects of 

Exchange Act rule 15Fh–3(h)(2)(iii)(I), 

provided that the Covered Entity is 

subject to and complies with the 

requirements of: MiFID articles 16(4) 

and 16(5); WpHG section 80; MiFID Org 

Reg articles 21–24; CRD articles 74, 76 

and 79–87; KWG sections 25a, 25b, 25c 

(other than 25c(2)), 25d (other than 

25d(3) and 25d(11)), 25(e) and 25(f); 

CRR articles 286–88 and 293; and EMIR 

Margin RTS article 2. 

(2) Trade acknowledgement and 

verification. The requirements of 

Exchange Act rule 15Fi–2, provided that 

the Covered Entity is subject to and 

complies with the requirements of 

MiFID article 25(6), WpHG section 

63(12), MiFID Org Reg articles 59–61, 

EMIR article 11(1)(a) and EMIR RTS 

article 12. 

(3) Portfolio reconciliation and 

dispute reporting. The requirements of 

Exchange Act rule 15Fi–3, provided 

that: 

(i) The Covered Entity is subject to 

and complies with the requirements of 

EMIR article 11(1)(b) and EMIR RTS 

article 13 and 15; 

(ii) The Covered Entity provides the 

Commission with reports regarding 

disputes between counterparties on the 

same basis as it provides those reports 

to competent authorities pursuant to 

EMIR RTS article 15(2). 

(4) Portfolio compression. The 

requirements of Exchange Act rule 

15Fi–4, provided that the Covered 

Entity is subject to and complies with 

the requirements of EMIR RTS article 

14. 

(5) Trading relationship 

documentation. The requirements of 

Exchange Act rule 15Fi–5, other than 

paragraph (b)(5) to that rule when the 

counterparty is a U.S. person, provided 

that: 

(i) The Covered Entity is subject to 

and complies with the requirements of 

MiFID article 25(5), WpHG section 

83(2), MiFID Org Reg articles 24, 58, 73 

and applicable parts of Annex I, and 

EMIR Margin RTS article 2; and 

(ii) The Covered Entity does not treat 

the applicable counterparty as an 

‘‘eligible counterparty’’ for purposes of 

MiFID article 30 and WpHG section 68, 

in relation to the MiFID and WpHG 

provisions specified in paragraph 

(b)(5)(i). 

(c) Substituted Compliance in 

Connection With Internal Supervision 

and Compliance Requirements and 

Certain Exchange Act Section 15F(J) 

Requirements 

This Order extends to the following 

provisions related to internal 

supervision and compliance and 

Exchange Act section 15F(j) 

requirements: 

(1) Internal supervision. The 

requirements of Exchange Act rule 

15Fh–3(h) and Exchange Act sections 

15F(j)(4)(A) and (j)(5), provided that: 

(i) The Covered Entity is subject to 

and complies with the requirements 

identified in paragraph (c)(3); 

(ii) The Covered Entity complies with 

paragraph (c)(4) to this Order; and 

(iii) This paragraph (c) does not 

extend to the requirements of paragraph 

(h)(2)(iii)(I) to rule 15Fh–3 to the extent 

those requirements pertain to 

compliance with Exchange Act sections 

15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to 

the general and supporting provisions of 

paragraph (h) to rule 15Fh–3 in 

connection with those Exchange Act 

sections. 

(2) Chief compliance officers. The 

requirements of Exchange Act section 

15F(k) and Exchange Act rule 15Fk–1, 

provided that: 


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(i) The Covered Entity complies with 

the requirements identified in paragraph 

(c)(3) to this Order; 

(ii) All reports required pursuant to 

MiFID Org Reg article 22(2)(c) must 

also: 

(A) Be provided to the Commission at 

least annually, and in the English 

language; 

(B) Include a certification that, under 

penalty of law, the report is accurate 

and complete; and 

(C) Address the firm’s compliance 

with other applicable conditions to this 

Order in connection with requirements 

for which the Covered Entity is relying 

on this Order. 

(3) Applicable supervisory and 

compliance requirements. Paragraphs 

(c)(1) and (c)(2) are conditioned on the 

Covered Entity being subject to and 

complying with the following 

requirements: MiFID articles 16 and 23; 

WpHG sections 63, 80, 83 and 84; 

MiFID Org Reg articles 21–37, 72–76 

and Annex IV; CRD articles 74, 76, 79– 

87, 88(1), 91(1)–(2), 91(7)–(9) and 92–95; 

and KWG sections 25a, 25b, 25c (other 

than 25c(2)), 25d (other than 25d(3) and 

25d(11)), 25e and 25f. 

(4) Additional condition to paragraph 

(c)(1). Paragraph (c)(1) further is 

conditioned on the requirement that 

Covered Entities comply with the 

provisions specified in paragraph (c)(3) 

as if those provisions also require 

compliance with: 

(i) Applicable requirements under the 

Exchange Act; and 

(ii) The other applicable conditions to 

this Order in connection with 

requirements for which the Covered 

Entity is relying on this Order. 

(d) Substituted Compliance in 

Connection With Counterparty 

Protection Requirements 

This Order extends to the following 

provisions related to counterparty 

protection: 

(1) Disclosure of information 

regarding material risks and 

characteristics. The requirements of 

Exchange Act rule 15Fh–3(b) relating to 

disclosure of material risks and 

characteristics of a security-based swap, 

provided that the Covered Entity is 

subject to and complies with the 

requirements of MiFID article 24(4), 

WpHG sections 63(7) and 64(1) and 

MiFID Org Reg articles 48–50, in each 

case in relation to that security-based 

swap. 

(2) Disclosure of information 

regarding material incentives or 

conflicts of interest. The requirements of 

Exchange Act rule 15Fh–3(b) relating to 

disclosure of material incentives or 

conflicts of interest that a Covered 

Entity may have in connection with a 

security-based swap, provided that the 

Covered Entity, in relation to that 

security-based swap, is subject to and 

complies with the requirements of 

either: 

(i) MiFID article 23(2)–(3); WpHG 

section 63(2); and MiFID Org Reg 

articles 33–35; 

(ii) MiFID article 24(9); WpHG section 

70; and MiFID Delegated Directive 

article 11(5); or 

(iii) MAR article 20(1). 

(3) ‘‘Know your counterparty.’’ The 

requirements of Exchange Act rule 

15Fh–3(e), provided that the Covered 

Entity is subject to and complies with 

the requirements of MiFID article 16(2); 

WpHG section 80(1); MiFID Org Reg 

articles 21–22, 25–26 and applicable 

parts of Annex I; CRD articles 74(1) and 

85(1); KWG section 25a; MLD articles 11 

and 13; GwG sections 10–11; MLD 

articles 8(3) and 8(4)(a) as applied to 

internal policies, controls and 

procedures regarding recordkeeping of 

customer due diligence activities; and 

GwG section 6(1)–(2) as applied to 

principles, procedures and controls 

regarding recordkeeping of customer 

due diligence activities, in each case in 

relation to that security-based swap. 

(4) Suitability. The requirements of 

Exchange Act rule 15Fh–3(f), provided 

that: 

(i) The Covered Entity is subject to 

and complies with the requirements of 

MiFID articles 24(2)–(3) and 25(1)–(2); 

WpHG sections 63(5)–(6), 80(9)–(13) 

and 87(1)–(2); and MiFID Org Reg 

articles 21(1)(b) and (d), 54 and 55, in 

each case in relation to the 

recommendation of a security-based 

swap or trading strategy involving a 

security-based swap that is provided by 

or on behalf of the Covered Entity; and 

(ii) The counterparty to which the 

Covered Entity makes the 

recommendation is a ‘‘professional 

client’’ mentioned in MiFID Annex II 

section I and WpHG section 67(2) and 

is not a ‘‘special entity’’ as defined in 

Exchange Act section 15F(h)(2)(C) and 

Exchange Act rule 15Fh–2(d). 

(5) Fair and balanced 

communications. The requirements of 

Exchange Act rule 15Fh–3(g), provided 

that the Covered Entity, in relation to 

the relevant communication, is subject 

to and complies with the requirements 

of: 

(i) Either MiFID articles 24(1), (3) and 

WpHG sections 63(1), (6) or MiFID 

article 30(1) and WpHG section 68(1); 

and 

(ii) MiFID articles 24(4)–(5); WpHG 

sections 63(7) and 64(1); MiFID Org Reg 

articles 46–48; MAR articles 12(1)(c) 

and 15; and MAR Investment 

Recommendations Regulation article 5. 

(6) Daily mark disclosure. The 

requirements of Exchange Act rule 

15Fh–3(c), provided that the Covered 

Entity is required to reconcile, and does 

reconcile, the portfolio containing the 

relevant security-based swap on each 

business day pursuant to EMIR articles 

11(1)(b) and 11(2) and EMIR RTS article 

13. 

(e) Substituted Compliance in 

Connection With Recordkeeping, 

Reporting, and Notification 

Requirements 

This Order extends to the following 

provisions related to Commission 

requirements to: 

(1) Make and keep current certain 

records. The requirements to make and 

keep current records of Exchange Act 

rule 18a–5 applicable to prudentially 

regulated security-based swap dealers 

and major security-based swap 

participants; provided that: 

(i) The Covered Entity is subject to 

and complies with the following 

requirements: CRR articles 103 and 

103(b)(ii); EMIR articles 9(2), 11(1)(a), 

and 39(4); EMIR RTS 148/2013; MiFID 

articles 9(1), 16(3), 16(6)–16(9), 25(1), 

25(5), and 25(6); MiFID Delegated 

Directive article 2; MiFID Org Reg. 

articles 16(7), 21(1)(a), 35, 59, 72, 73, 74, 

75, 76, and applicable parts of Annex I; 

MiFID Org Reg. Annex IV; MiFIR article 

25; MLD4 articles 11 and 13; EBA/ 

ESMA Guidelines on Management 

Suitability guidelines 74, 75, and 172, 

and Annex III; CRD articles 88, 91(1), 

and 91(8); KWG sections 25c(1) and 

25d(1)–(3); WpHG section 63, section 

64, section 81 paragraph 1, section 83 

paragraphs 1 through 8, and section 84; 

and GwG section 10, paragraph 1, points 

1 through 3; 

(ii)(A) The Covered Entity preserves 

all of the data elements necessary to 

create the records required by Exchange 

Act rules 18a–5(b)(1), (2), (3), and (7); 

and 

(B) The Covered Entity upon request 

furnishes promptly to representatives of 

the Commission the records required by 

those rules; 

(iii) The Covered Entity makes and 

keeps current the records required by 

Exchange Act rules 18a–5(b)(9) and (10) 

if the Covered Entity is not exempt from 

the requirements of Exchange Act rule 

18a–4; 

(iv) The Covered Entity makes and 

keeps current the records required by 

Exchange Act rule 18a–5(b)(12); and 

(v) Except with respect to 

requirements of Exchange Act rules 

15Fh–3 and 15Fk–1 to which this Order 

extends pursuant paragraphs (c)(2) and 


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(d), the Covered Entity makes and keeps 

current the records required by 

Exchange Act rule 18a–5(b)(13). 

(2) Preserve records. The record 

preservation requirements of Exchange 

Act rule 18a–6 applicable to 

prudentially regulated security-based 

swap dealers and major security-based 

swap participants; provided that: 

(i) The Covered Entity is subject to 

and complies with the following 

requirements: CRD articles 88, 91(1), 

and 91(8); CRR articles 99, 104(1)(j), 

294, 394, 415–428, and 430; CRR 

Reporting ITS Article 14 and Annexes I– 

V, VIII–XIII; EMIR articles 9(1) and 9(2); 

MiFID articles 9(1), 16(3), and 69(2); 

MiFID Org Reg. articles 21(1)(a), 21(2), 

35, 58, 72(1), 72(3), 73, and 76; MiFIR 

articles 16(2), 16(5), 16(6), 16(7), 25(1), 

25(5), 31(1) and 72; MLD4 articles 11 

and 13; EBA/ESMA Guidelines on 

Management Suitability guidelines 74, 

75, and 172, and Annex III; EBA 

Guidelines on Outsourcing section 13.3; 

KWG 25c(1) and 25d(1)–(3); WpHG 

sections 6, 7, 63, 64, and 80 and section 

83 paragraphs 1, 2, 3, and 8; and GwG 

sections 10 and 11; 

(ii) The Covered Entity preserves the 

records required by Exchange Act rule 

18a–6(b)(2)(v) if the Covered Entity is 

not exempt from the requirements of 

Exchange Act rule 18a–4; 

(iii) Except with respect to 

requirements of Exchange Act rules 

15Fh–3 and 15Fk–1 to which this Order 

extends pursuant to paragraphs (c)(2) 

and (d), the Covered Entity preserves 

the records required by Exchange Act 

rule 18a–6(b)(2)(vii); and 

(iv) The Covered Entity preserves the 

records required by Exchange Act rule 

18a–6(b)(2)(vi) and (b)(2)(viii). 

(3) File Financial and Operational 

Information. The reporting requirements 

of Exchange Act rule 18a–7 applicable 

to prudentially regulated security-based 

swap dealers and major security-based 

swap participants; provided that: 

(i) The Covered Entity is subject to 

and complies with the following 

requirements: CRR articles 99, 104(1)(j), 

394, 415–428, and 430; CRR Reporting 

ITS chapter 2 and Annexes I–V and VII– 

XIII; and Commission Delegated 

Regulation (EU) 2017/1443, as amended 

or superseded from time to time; and 

(ii) The Covered Entity files periodic 

unaudited financial and operational 

information with the Commission or its 

designee in the manner and format 

required by Commission rule or order 

and presents the financial information 

in the filing in accordance with 

generally accepted accounting 

principles that the Covered Entity uses 

to prepare general purpose publicly 

available or available to be issued 

financial statements in Germany. 

(4) Provide Notification. The 

notification requirements of Exchange 

Act rule 18a–8 applicable to 

prudentially regulated security-based 

swap dealers and major security-based 

swap participants; provided that: 

(i) The Covered Entity is subject to 

and complies with the following 

requirements: CRD article 71; MiFID 

article 73; KWG section 24 paragraph 1; 

and FinDAG section 4d; and 

(ii) The Covered Entity: 

(A) Simultaneously transmits to the 

principal office of the Commission or to 

an email address provided on the 

Commission’s website a copy of any 

notice required to be sent by the German 

and EU laws referenced in paragraph 

(e)(3)(i) of this order; and 

(B) Includes with the transmission the 

contact information of an individual 

who can provide further information 

about the matter that is the subject of 

the notice; 

(iii) The Covered Entity complies with 

notification requirements of Exchange 

Act rule 18a–8(g) if the Covered Entity 

is not exempt from Exchange Act rule 

18a–4. 

(5) Examination and Production of 

Records. Notwithstanding the forgoing 

provisions of paragraph (e) of this 

Order, prudentially regulated securitybased swap dealers and major securitybased swap participants remains subject 

to the requirement of Exchange Act 

section 15F(f) to keep books and records 

open to inspection by any representative 

of the Commission and the requirement 

of Exchange Act rule 18a–6(g) to furnish 

promptly to a representative of the 

Commission legible, true, complete, and 

current copies of those records of the 

Covered Entity that are required to be 

preserved under Exchange Act rule 18a– 

6, or any other records of the Covered 

Entity that are subject to examination or 

required to be made or maintained 

pursuant to Exchange Act section 15F 

that are requested by a representative of 

the Commission. 

(f) Definitions 

(1) ‘‘Covered Entity’’ means an entity 

that: 

(i) Is a security-based swap dealer or 

major security-based swap participant 

registered with the Commission; 

(ii) Is not a ‘‘U.S. person,’’ as that term 

is defined in rule 3a71–3(a)(4) under the 

Exchange Act; and 

(iii) Is an investment firm or credit 

institution authorized by BaFin to 

provide investment services or perform 

investment activities in the Federal 

Republic of Germany. 

(2) ‘‘MiFID’’ means the ‘‘Markets in 

Financial Instruments Directive,’’ 

Directive 2014/65/EU, as amended or 

superseded from time to time. 

(3) ‘‘WpHG’’ means Germany’s 

‘‘Wertpapierhandelsgesetz’’, as amended 

or superseded from time to time. 

(4) ‘‘MiFID Org Reg’’ means 

Commission Delegated Regulation (EU) 

2017/565, as amended or superseded 

from time to time. 

(5) ‘‘MiFID Delegated Directive’’ 

means Commission Delegated Directive 

(EU) 2017/593, as amended or 

superseded from time to time. 

(6) ‘‘MLD’’ means Directive (EU) 

2015/849, as amended or superseded 

from time to time. 

(7) ‘‘GwG’’ means Germany’s 

‘‘Geldwa ̈schegesetz,’’ as amended or 

superseded from time to time. 

(8) ‘‘MiFIR’’ means Regulation (EU) 

600/2014, as amended or superseded 

from time to time. 

(9) ‘‘EMIR’’ means the ‘‘European 

Market Infrastructure Regulation,’’ 

Regulation (EU) 648/2012, as amended 

or superseded from time to time. 

(10) ‘‘EMIR RTS’’ means Commission 

Delegated Regulation (EU) 149/2013, as 

amended or superseded from time to 

time. 

(11) ‘‘EMIR Margin RTS’’ means 

Commission Delegated Regulation (EU) 

2016/2251, as amended or superseded 

from time to time. 

(12) ‘‘CRR Reporting ITS’’ means 

Commission Implementing Regulation 

(EU) 680/2014, as amended or 

superseded from time to time. 

(13) ‘‘CRD’’ means Directive 2013/36/ 

EU, as amended or superseded from 

time to time. 

(14) ‘‘KWG’’ means Germany’s 

‘‘Kreditwesengesetz,’’ as amended or 

superseded from time to time. 

(15) ‘‘CRR’’ means Regulation (EU) 

575/2013, as amended or superseded 

from time to time. 

(16) ‘‘MAR’’ means the ‘‘Market 

Abuse Regulation,’’ Regulation (EU) 

596/2014, as amended or superseded 

from time to time. 

(17) ‘‘MAR Investment 

Recommendations Regulation’’ means 

Commission Delegated Regulation (EU) 

2016/958, as amended or superseded 

from time to time. 

(18) ‘‘FinDAG’’ means Germany’s 

‘‘Finanzdienstleistungsaufsichtsgesetz,’’ 

as amended or superseded from time to 

time. 

(19) ‘‘BaFin’’ means the Bundesanstalt 

fu ̈r Finanzdienstleistungsaufsicht. 

By the Commission. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–28703 Filed 12–28–20; 8:45 am] 

BILLING CODE 8011–01–P 


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