43318 Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices 

1 17 CFR 240.3a71–6. 

2See Letter from Nausicaa Delfas, Executive 

Director of International, FCA, dated March 19, 

2021. The FCA Application is available on the 

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

uk-financial-conduct-authority-completeapplication-substituted-compliance-031921.pdf. 

3 ‘‘Risk control’’ includes requirements related to 

internal risk management, trade acknowledgment 

and verification, portfolio reconciliation and 

dispute resolution, portfolio compression, and 

trading relationship documentation; ‘‘capital and 

margin’’ includes requirements related to capital 

applicable to security-based swap dealers without 

a prudential regulator and to margin applicable to 

SBS Entities without a prudential regulator; 

‘‘internal supervision and compliance’’ includes 

requirements related to diligent supervision, 

conflicts of interest, information gathering under 

Exchange Act section 15F(j), 15 U.S.C. 78o–10(j), 

and chief compliance officers; ‘‘counterparty 

protection’’ includes requirements related to 

disclosure of material risks and characteristics and 

material incentives or conflicts of interest, ‘‘know 

your counterparty,’’ suitability of recommendations, 

fair and balanced communications, disclosure of 

daily marks, and disclosure of clearing rights; and 

‘‘record keeping, reporting, notification, and 

securities counts’’ includes requirements related to 

making and keeping current certain prescribed 

records, preservation of records, reporting, 

notification, and securities counts. 

4Though the UK ceased to be a member of the 

European Union (‘‘EU’’) on January 31, 2020, 

market participants in the UK remain subject to UK 

requirements implemented pursuant to EU 

directives, and to EU regulations that have been 

added to UK law. In adding EU regulations to UK 

law, the UK in some cases has adopted UK versions 

of these regulations that differ from the original EU 

versions ‘‘as necessary to account for the effects of 

Brexit.’’ See FCA Application Appendix A at 7. The 

Commission has reviewed the FCA Application in 

light of the UK versions of these regulations. 

5See Exchange Act Release No. 91476 (Apr. 5, 

2021), 86 FR 18378 (Apr. 8, 2021) (‘‘UK Substituted 

Compliance Notice and Proposed Order’’). 

6See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18378; see also Exchange 

Act Release No. 90378 (Nov. 9, 2020), 85 FR 72726, 

72727 (Nov. 13, 2020) (‘‘German Substituted 

Compliance Notice and Proposed Order’’); 

Exchange Act Release No. 90765 (Dec. 22, 2020), 85 

FR 85686 (Dec. 29, 2020) (‘‘German Substituted 

Compliance Order’’); Exchange Act Release No. 

90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020) 

(‘‘French Substituted Compliance Notice and 

Proposed Order’’); Exchange Act Release No. 91477 

(Apr. 5, 2021), 86 FR 18341 (Apr. 8, 2021) (‘‘French 

Substituted Compliance Re-Opening Release’’); 

Exchange Act Release No. 92484 (Jul. 23, 2021) 

(‘‘French Substituted Compliance Order’’). 

7See Exchange Act rule 3a71–6(d); see also UK 

Substituted Compliance Notice and Proposed 

Order, 86 FR at 18378. 

8See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18378 n.5 (addressing 

unavailability of substituted compliance in 

connection with certain information-related 

requirements under section 15F, as well as 

provisions related to anti-fraud, transactions with 

counterparties that are not eligible contract 

participants, segregation of customer assets, 

required clearing upon counterparty election, 

regulatory reporting and public dissemination, SBS 

Entity registration, and registration of offerings). 

9See generally Exchange Act Release No. 77617 

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

(‘‘Business Conduct Adopting Release’’) (stating 

that U.S. security-based swap regulation has ‘‘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’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–92529; File No. S7–04–21] 

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 United Kingdom 

July 30, 2021. 

I. Overview 

The United Kingdom Financial 

Conduct Authority (‘‘FCA’’) has 

submitted a ‘‘substituted compliance’’ 

application (‘‘FCA Application’’) 

requesting that the Securities and 

Exchange Commission determine, 

pursuant to the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’) rule 3a71–6,1

that security-based swap dealers and 

major-security based swap participants 

(‘‘SBS Entities’’) subject to regulation in 

the United Kingdom (‘‘UK’’) 

conditionally may satisfy requirements 

under the Exchange Act by complying 

with comparable UK requirements.2 The 

FCA Application sought substituted 

compliance in connection with certain 

Exchange Act requirements related to 

risk control; capital and margin; internal 

supervision and compliance; 

counterparty protection; and record 

keeping, reporting, notification, and 

securities counts.3 The FCA Application 

included comparability analyses 

between the relevant requirements in 

Exchange Act section 15F and the rules 

and regulations thereunder and 

applicable UK law,4 as well as 

information regarding UK supervisory 

and enforcement frameworks. 

On April 5, 2021, the Commission 

issued a notice of the FCA Application, 

accompanied by a proposed order to 

grant substituted compliance with 

conditions in connection with the FCA 

Application (‘‘proposed Order’’).5 The 

proposed Order incorporated a number 

of conditions to tailor the scope of 

substituted compliance consistent with 

the prerequisite that relevant UK 

requirements produce regulatory 

outcomes that are comparable to 

relevant requirements under the 

Exchange Act. 

As discussed below, the Commission 

is adopting a final order (‘‘Order’’) that 

has been modified from the proposed 

Order in certain respects to address 

commenter concerns and to make 

clarifying changes. 

II. Substituted Compliance Framework 

and Prerequisites 

A. Substituted Compliance Availability 

and Purpose 

As discussed in the UK Substituted 

Compliance Notice and Proposed Order, 

Exchange Act 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.6 Because 

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 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. Under the substituted 

compliance framework, failure to 

comply with the applicable foreign 

requirements and other conditions to a 

substituted compliance 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). 

Under rule 3a71–6, substituted 

compliance potentially is available in 

connection with certain section 15F 

requirements,7 but is not available in 

connection with antifraud prohibitions 

and certain other requirements under 

the Federal securities laws.8 SBS 

Entities in the UK 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.9 In practice, 

substituted compliance may be expected 

to help SBS Entities leverage their 

existing systems and practices to 

comply with relevant Exchange Act 

requirements in conjunction with their 

compliance with relevant foreign 

requirements. Market participants will 

begin to count security-based swap 

transactions toward the thresholds for 

registration with the Commission as an 

SBS Entity on August 6, 2021, and will 

be required to begin registering with the 


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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices 43319 

10See ‘‘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. 

11See Exchange Act rule 3a71–6(a)(2). 

12See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18380; see also Business 

Conduct Adopting Release, 81 FR at 30078–79 

(recognizing that ‘‘different regulatory systems may 

be able to achieve some or all of those regulatory 

outcomes by using more or fewer specific 

requirements than the Commission, and that in 

assessing comparability the Commission may need 

to take into account the manner in which other 

regulatory systems are informed by business and 

market practices in those jurisdictions’’). The 

Commission’s assessment of a foreign authority’s 

supervisory and enforcement effectiveness—as part 

of the broader comparability analysis—would be 

expected to consider not only overall oversight 

activities, but also oversight specifically directed at 

conduct and activity relevant to the substituted 

compliance determination. ‘‘For example, it would 

be difficult for the Commission to make a 

comparability determination in support of 

substituted compliance if oversight is directed 

solely at the local activities of foreign securitybased swap dealers, as opposed to the cross-border 

activities of such dealers.’’ Business Conduct 

Adopting Release, 81 FR at 30079 (footnote 

omitted). In the UK 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. 

13Exchange Act rule 3a71–6(a)(2)(ii). 14The Commission expects to publish a copy of 

the memorandum of understanding 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. 

15See Exchange Act rule 3a71–6(c)(3). 

16See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18379 n.8. 

17See Letter from Dennis M. Kelleher, President 

and CEO, Stephen Hall, Legal Director and 

Securities Specialist, and Jason Grimes, Senior 

Counsel, Better Markets, Inc. (May 3, 2021) (‘‘Better 

Markets Letter’’) at 3–4. Comments may be found 

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

www.sec.gov/comments/s7-04-21/s70421.htm. 

18See Better Markets Letter at 4. 

19See Exchange Act Release No. 72472 (June 25, 

2014), 79 FR 47278, 47286 (Aug. 12, 2014) (‘‘CrossBorder Entity Definitions Adopting Release’’) (citing 

Pub. L. 111–203, Preamble (stating that the DoddFrank Act was enacted ‘‘[t]o promote the financial 

stability of the United States by improving 

accountability and transparency in the financial 

system, to end ‘too big to fail’, to protect the 

American taxpayer by ending bailouts, to protect 

consumers from abusive financial services 

practices, and for other purposes’’); Public Law 

111–203, sections 701–774 (providing for, among 

other things, a comprehensive new regulatory 

framework for security-based swaps, including by: 

(i) Providing for the registration and comprehensive 

regulation of security-based swap dealers and major 

security-based swap participants; (ii) imposing 

clearing and trade execution requirements on 

security-based swaps, subject to certain exceptions; 

and (iii) creating real-time reporting and public 

dissemination regimes for security-based swaps)). 

20See Cross-Border Entity Definitions Adopting 

Release, 79 FR at 47292 (purposes of Title VII 

include consideration of risk to the U.S. financial 

system and promotion of transparency in the U.S. 

financial system); Exchange Act section 30(c), 15 

U.S.C. 78dd(c) (Commission rulemaking authority 

to prevent evasion of Title VII); Exchange Act 

section 3(f), 15 U.S.C. 78c(f) (requirement to 

consider whether certain Commission rulemaking 

Continued 

Commission on November 1, 2021.10

Substituted compliance should assist 

relevant non-U.S. security-based swap 

market participants in preparing for 

registration. 

B. Specific Prerequisites 

1. Comparability of Regulatory 

Outcomes 

Rule 3a71–6, adopted by the 

Commission in 2016, describes the 

requirements for the Commission to 

make a substituted compliance 

determination. Under that rule, the 

Commission must determine that the 

analogous foreign requirements are 

comparable to otherwise applicable 

requirements under the Exchange Act 

(i.e., the relevant requirements in the 

Exchange Act and the rules and 

regulations thereunder), 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.11 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 

requirement-by-requirement 

similarity.’’ 12

2. Memorandum of Understanding 

Exchange Act rule 3a71–6(a)(2)(ii) 

further predicates the availability of 

substituted compliance on the 

Commission having entered into a 

memorandum of understanding and/or 

other arrangement with the relevant 

foreign financial regulatory authority or 

authorities ‘‘addressing supervisory and 

enforcement cooperation and other 

matters arising under the substituted 

compliance determination.’’ 13 The FCA 

Application asked the Commission to 

permit certain entities regulated and 

supervised by both the FCA and the 

UK’s Prudential Regulation Authority 

(‘‘PRA’’) to use substituted compliance. 

Accordingly, the Commission recently 

entered into a memorandum of 

understanding with the FCA and the 

Bank of England (including in its 

capacity as the PRA), thus satisfying this 

prerequisite.14

3. ‘‘Adequate Assurances’’ 

A foreign financial regulatory 

authority may submit a substituted 

compliance application only if the 

authority provides ‘‘adequate 

assurances’’ that no law or policy would 

impede the ability of any entity that is 

directly supervised by the authority and 

that may register with the Commission 

‘‘to provide prompt access to the 

Commission to such entity’s books and 

records or to submit to onsite inspection 

or examination by the Commission.’’ 15

In the UK Substituted Compliance 

Notice and Proposed Order, the 

Commission stated that the FCA had 

satisfied this prerequisite in the 

Commission’s preliminary view, taking 

into account information and 

representations that the FCA provided 

regarding certain UK requirements that 

are relevant to the Commission’s ability 

to inspect, and access the books and 

records of, firms using substituted 

compliance pursuant to the Order.16

The Commission received no comments 

on this preliminary view and has not 

changed its view. 

C. Commenter Views 

1. Prerequisites to Substituted 

Compliance 

One commenter stated that the 

Commission should make a positive 

substituted compliance determination 

only when the Commission determines 

that granting substituted compliance 

promotes the protection of the U.S. 

financial system.17 The commenter also 

stated that grants of substituted 

compliance must be predicated on a 

‘‘well-supported, evidence-based 

determination’’ that the relevant foreign 

requirements will produce 

‘‘substantially similar’’ regulatory 

outcomes.18 Congress gave the 

Commission authority in Title VII to 

implement a security-based swap 

framework to address the potential 

effects of security-based swap activity 

on U.S. market participants, the 

financial stability of the United States, 

the transparency of the U.S. financial 

system and the protection of 

counterparties.19 When adopting rules 

regarding the application of Title VII’s 

definitions of ‘‘security-based swap 

dealer’’ and ‘‘major security-based swap 

participant’’ in the cross-border context, 

the Commission was guided by the 

purposes of Title VII and the applicable 

requirements of the Exchange Act, 

which include consideration of not only 

risk to the U.S. financial system but also 

other factors such as counterparty 

protection, transparency, prevention of 

evasion, economic impacts and 

consultation and coordination with 

other U.S. financial regulatory 

authorities and foreign financial 

regulatory authorities.20 In its 


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43320 Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices 

actions would promote efficiency, competition, and 

capital formation); Exchange Act section 23(a)(2), 

15 U.S.C. 78w(a)(2) (requirement to consider the 

impact of Exchange Act rules and regulations on 

competition and prohibition on adopting rules or 

regulations that would impose a burden on 

competition not necessary or appropriate in 

furtherance of the purposes of the Exchange Act); 

Dodd-Frank Act section 712(a)(2), 15 U.S.C. 8302 

(requirement to consult and coordinate with U.S. 

financial regulatory authorities on Title VII 

rulemaking); Dodd-Frank Act section 752(a), 15 

U.S.C. 8325 (requirement to consult and coordinate, 

as appropriate, with foreign regulatory authorities 

on the establishment of consistent international 

standards with respect to the regulation of securitybased swaps and security-based swap entities)); see 

also Exchange Act Release No. 77104 (Feb. 10, 

2016), 81 FR 8598, 8599 (Feb. 19, 2016) (‘‘ANE 

Adopting Release’’) (‘‘A key part of [the Title VII] 

framework is the regulation of security-based swap 

dealers, which may transact extensively with 

counterparties established or located in other 

jurisdictions and, in doing so, may conduct sales 

and trading activity in one jurisdiction and book the 

resulting transactions in another. These market 

realities and the potential impact that these 

activities may have on U.S. persons and potentially 

the U.S. financial system have informed our 

consideration of these rules.’’); Exchange Act 

Release No. 87780 (Dec. 18, 2019), 85 FR 6270, 6272 

and n.26 (Feb. 4, 2020) (‘‘Cross-Border Adopting 

Release’’) (‘‘[T]he Title VII SBS Entity requirements 

. . . serve a number of regulatory purposes apart 

from mitigating counterparty and operational risks, 

‘including enhancing counterparty protections and 

market integrity, increasing transparency, and 

mitigating risk to participants in the financial 

markets and the U.S. financial system more 

broadly.’ ’’ ‘‘The Commission’s actions to mitigate 

the negative consequences potentially associated 

with the various uses of [the ‘arranged, negotiated, 

or executed’ test] accordingly are designed to do so 

while preserving the important Title VII interests 

that the Commission advanced when it 

incorporated the test into the various cross-border 

rules.’’) (internal citations omitted). 21See Exchange Act Release No. 75611 (Aug. 5, 

2015), 80 FR 48964, 48972–73 (Aug. 14, 2015) 

(‘‘Registration Adopting Release’’). 

22See Registration Adopting Release, 80 FR at 

48972–73. 

23See Cross-Border Entity Definitions Adopting 

Release, 79 FR at 47286 n.65 (‘‘Future rulemakings 

that depend on [the definitions of ‘security-based 

swap dealer’ and ‘major security-based swap 

participant’] are intended to address the 

transparency, risk, and customer protection goals of 

Title VII.’’). 24See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18380; see also Business 

Conduct Adopting Release, 81 FR at 30076, 30078– 

79. 

25See Business Conduct Adopting Release, 81 FR 

at 30067. 

26See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18380; see also Business 

Conduct Adopting Release, 81 FR at 30076, 30078– 

79. 

27See Better Markets Letter at 4. 

28See Exchange Act rule 3a71–6(a)(1). 

29 17 CFR 240.15Fi–3(c). 

30See para. (b)(3)(ii) of the Order. 

registration rules for these SBS Entities, 

the Commission determined that a 

foreign market participant whose U.S.- 

nexus security-based swap activity 

qualifies it as an SBS Entity would be 

required to register as such, without 

substituted compliance available for 

registration requirements.21 The 

Commission concluded that obliging 

these foreign persons to register serves 

an important regulatory function that 

would be significantly impaired by 

permitting substituted compliance for 

registration requirements.22 This 

registration requirement thus puts into 

practice the Commission’s consideration 

of the purposes of Title VII and the 

applicable requirements of the Exchange 

Act in its adoption of the definitions of 

‘‘security-based swap dealer’’ and 

‘‘major security-based swap participant’’ 

in the cross-border context, and ensures 

that such firms will be subject to the 

jurisdiction of the Commission. 

Moreover, the rules applicable to these 

registered foreign SBS Entities reflect 

the Commission’s best judgment for 

how to achieve the purposes of Title VII 

and satisfy the requirements of the 

Exchange Act, including the 

Commission’s consideration of risk to 

the U.S. financial system.23 The 

Commission’s rules for registered 

foreign SBS Entities thus reflect the 

Commission’s consistent consideration 

of all of the purposes of Title VII and 

relevant parts of the Exchange Act, first 

in the context of its adoption of the 

definitions of ‘‘security-based swap 

dealer’’ and ‘‘major security-based swap 

participant,’’ then in its decision to 

require foreign SBS Entities to register 

and finally in its adoption of crossborder rules for SBS Entities pursuant to 

Title VII. 

When making a substituted 

compliance determination, the 

Commission’s task, as outlined in rule 

3a71–6, is to evaluate whether the 

relevant foreign requirements are 

comparable to Title VII-based 

requirements and relevant provisions of 

the Exchange Act. The comparability 

assessments are to be based on a 

‘‘holistic, outcomes-oriented 

framework,’’ 24 which in the 

Commission’s view—consistent with 

the commenter’s view—includes 

‘‘inquiry regarding whether foreign 

requirements adequately reflect the 

interests and protections associated 

with the particular Title VII 

requirement.’’ 25 Also consistent with 

the commenter’s view, the 

Commission’s comparability 

assessments reflect a close reading of 

the relevant UK requirements. In 

addition, the Commission recognizes 

that ‘‘other regulatory regimes will have 

exclusions, exceptions, and exemptions 

that may not align perfectly with the 

corresponding requirements under the 

Exchange Act.’’ 26 Accordingly, where 

UK requirements produce comparable 

outcomes—with or without conditions 

as discussed in part III.B below— 

notwithstanding those particular 

differences, and taking into account the 

scope and objectives and the 

effectiveness of supervision and 

enforcement of those requirements, the 

Commission has determined that the 

relevant UK requirements are 

comparable and has made a positive 

substituted compliance determination. 

Conversely, where those exclusions, 

exemptions, and exceptions lead to 

outcomes that are not comparable— 

taking into account potential 

conditions—the Commission has not 

made a positive substituted compliance 

determination. 

The Commission also is including 

certain conditions in the Order. The 

commenter stated that the inclusion of 

conditions should be viewed as an 

indication that the requirements of 

substituted compliance have not been 

met and as creating ‘‘ad hoc, custommade rules to supplement inadequate 

rules of other jurisdictions.’’ 27 Pursuant 

to rule 3a71–6, the Commission may 

make a conditional or unconditional 

substituted compliance determination.28

As described in greater detail in part 

III.B below, many of the conditions in 

the Order are designed to make 

substituted compliance available only 

when the relevant UK requirements in 

fact apply to the relevant security-based 

swap activity in a way that promotes 

comparable regulatory outcomes. The 

commenter correctly states that the 

Order also employs conditions to 

promote comparability. For example, 

substituted compliance in connection 

with Exchange Act rule 15Fi–3(c) 29

dispute reporting provisions is 

conditioned in part on the Covered 

Entity (as such term is defined in the 

Order) providing the Commission with 

the dispute reports required under UK 

law.30 Consistent with rule 3a71–6, 

conditioning substituted compliance on 

the Commission receiving those reports 

helps to promote timely notice of 

disputes to support a comparable 

regulatory outcome. 

2. Ensuring Ongoing Appropriateness of 

Substituted Compliance 

One commenter stated that the 

Commission ‘‘must ensure, on an 

ongoing basis, that each grant of 

substituted compliance remains 

appropriate over time.’’ The commenter 

added that substituted compliance 

orders and memoranda of 

understanding should incorporate the 

obligation that the Commission be 

apprised of the activities and results of 

the jurisdiction’s supervision and 

enforcement programs, and to 

immediately apprise the Commission of 


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31See Better Markets Letter at 5. 

32See Business Conduct Adopting Release, 81 FR 

at 30078–79 (stating that order conditions and 

memorandum of understanding were possible tools 

for providing that the Commission be notified of 

material changes). 

33The memorandum of understanding between 

the Commission and the FCA and the Bank of 

England in part provides that the FCA and the Bank 

of England will provide ‘‘ongoing information 

sharing’’ regarding Firm Information (incorporating 

supervisory and related information as to the 

Covered Entities using substituted compliance) and 

regarding Regulatory Change Information 

(incorporating information about any material 

publicly available draft, proposed, or final change 

in law, regulation, or order of the jurisdiction of the 

FCA or the Bank of England that may have a 

material impact on the firms at issue with respect 

to their relevant activities). See supra note 14 

(information on publication of memorandum of 

understanding with the FCA and the Bank of 

England). 

34Any such amendment or withdrawal may be at 

the Commission’s own initiative after appropriate 

notice and opportunity for comment. See Exchange 

Act rule 3a71–6(a)(3). 

35See supra part II.B.2; para. (a)(15) of the Order. 

36See supra note 14. 

37See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18380. 

38See para. (g)(1) of the Order. 

39The Commission stated, as an example, that 

this proposed condition would not be satisfied 

when the comparable UK requirements would not 

apply to the security-based swap activities of a nonUK branch of a MiFID investment firm or to a third 

country investment firm. See UK Substituted 

Compliance Notice and Proposed Order, 86 FR at 

18380. 

40See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

material changes to the foreign 

regulatory regime.31

The Commission concurs that the 

ongoing availability of substituted 

compliance should account for relevant 

changes in the foreign jurisdiction’s 

regulatory requirements and in the 

effectiveness of that jurisdiction’s 

supervisory and enforcement program.32

Accordingly, the Commission and the 

FCA and the Bank of England in its 

capacity as the PRA recently entered 

into a substituted compliance 

memorandum of understanding that 

addresses ongoing information 

regarding potential changes to 

substantive legal requirements and 

supervisory and enforcement 

effectiveness.33 The Commission 

believes that these arrangements will 

provide timely information to ensure 

that the Commission is aware of 

material developments that may affect 

the comparability of the relevant UK 

requirements, including the scope and 

objectives of those requirements and the 

effectiveness of the FCA and the Bank 

of England’s supervision and 

enforcement programs. In response to 

any such developments, the 

Commission may amend the Order as 

needed to ensure that it continues to 

require a Covered Entity to comply with 

comparable UK requirements, or may 

withdraw the Order if the relevant UK 

requirements are no longer 

comparable.34 Moreover, substituted 

compliance under the Order is 

conditioned on the Commission having 

this memorandum of understanding, or 

another arrangement with the FCA and 

the Bank of England addressing 

cooperation with respect to the Order, at 

the time the Covered Entity makes use 

of substituted compliance.35 If the 

arrangements in the memorandum of 

understanding prove in practice not to 

provide information about relevant 

developments, the Commission could 

terminate the memorandum of 

understanding in accordance with its 

terms and/or amend or withdraw the 

Order.36 If the Commission, the FCA, or 

the Bank of England terminates the 

memorandum of understanding, 

Covered Entities would not be able to 

rely on substituted compliance under 

the Order to satisfy Exchange Act 

compliance obligations that arise after 

the termination takes effect. For these 

reasons, in the Commission’s view, the 

Order’s memorandum of understanding 

condition, coupled with the ongoing 

information sharing provisions in the 

memorandum of understanding with the 

FCA and the Bank of England, 

establishes the commenter’s suggested 

mechanism to apprise the Commission 

of changes that may affect the ongoing 

appropriateness of substituted 

compliance. 

III. General Availability of Substituted 

Compliance Under the Order 

A. Covered Entities 

1. Proposed Approach 

Under the proposed Order, 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 registered 

SBS Entities that are not U.S. persons. 

In addition, to help ensure that firms 

that rely on substituted compliance are 

subject to relevant UK requirements and 

oversight, the proposed definition 

would require that a Covered Entity is 

a ‘‘MiFID investment firm’’ or ‘‘third 

country investment firm,’’ as such terms 

are defined in the FCA Handbook 

Glossary, that (a) has permission from 

the FCA or PRA under Part 4A of the 

UK’s Financial Services and Markets 

Act 2000 (‘‘FSMA’’) to carry on 

regulated activities relating to 

investment services and activities in the 

UK; (b) is supervised by the FCA under 

the fixed supervision model; and (c) if 

the firm is a PRA-authorized person, 

also is supervised by the PRA as a 

Category 1 firm.37

2. Final Provisions 

Commenters did not address the 

proposed ‘‘Covered Entity’’ definition, 

and the Commission is issuing the 

definition as proposed.38 Substituted 

compliance accordingly is available 

only to non-U.S. SBS Entities that have 

the relevant UK regulatory permission 

and are subject to UK oversight. 

B. Additional General Conditions and 

Other Prerequisites 

1. Proposed Approach 

The proposed Order incorporated a 

number of additional general conditions 

and other prerequisites, to help ensure 

that the relevant UK requirements that 

form the basis for substituted 

compliance in practice will apply to the 

Covered Entity’s security-based swap 

business and activities, and to promote 

the Commission’s oversight over entities 

that avail themselves of substituted 

compliance: 

• ‘‘Subject to and complies with’’ 

applicability condition—For each 

relevant section of the proposed Order, 

a positive substituted compliance 

determination would be subject to the 

condition that the Covered Entity be 

subject to and comply with the 

applicable UK requirements needed to 

establish comparability.39

• ‘‘Regulated activities’’—For each 

condition in the proposed Order that 

requires the application of, and 

compliance with, provisions of the 

Senior Management Arrangements, 

Systems and Controls Sourcebook of the 

FCA Handbook (‘‘FCA SYSC’’) 4, 5, 6, 

7, 9, and/or 10, certain parts of the PRA 

Rulebook and/or MLR 2017, the 

Covered Entity’s relevant security-based 

swap activities must constitute 

‘‘regulated activities’’ as defined for 

purposes of the relevant UK provisions, 

must be carried on by the Covered 

Entity from an establishment in the UK 

and must fall within the scope of the 

Covered Entity’s authorization from the 

FCA and/or PRA to conduct regulated 

activities in the UK.40

• UK MiFID ‘‘investment services or 

activities’’—For each condition in the 

proposed Order that requires the 

application of, and compliance with, 

provisions of the Product Intervention 

and Product Governance Sourcebook of 

the FCA Handbook (‘‘FCA PROD’’) 3 

and/or the UK version of Commission 

Delegated Regulation (EU) 2017/565 


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41See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

42See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. In the final Order, 

the Commission has corrected the typographical 

error in paragraph (a)(3) by changing FCA COBS 

14A to 16A. See para. (a)(3) of the Order. 

43See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

44See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

45See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

46See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. 

47See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381. In the final Order, 

the Commission has corrected the typographical 

error in paragraph (a)(7) by changing FCA COBS 

14A to 16A. See para. (a)(7) of the Order. 

48See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18381–82. In the final 

Order, the Commission has corrected the 

typographical error in paragraph (a)(8) by changing 

FCA COBS 14A to 16A. See para. (a)(8) of the 

Order. 

49See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

50See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

51See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

52See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

(‘‘UK MiFID Org Reg’’), the Covered 

Entity’s relevant security-based swap 

activities must constitute ‘‘investment 

services or activities,’’ as defined in the 

FCA Handbook Glossary, must be 

carried on by the Covered Entity from 

an establishment in the UK and must 

fall within the scope of the Covered 

Entity’s authorization from the FCA 

and/or PRA to conduct regulated 

activities in the UK.41

• UK ‘‘MiFID or equivalent third 

country business’’—For each condition 

in the proposed Order that requires the 

application of, and compliance with, 

provisions of the Conduct of Business 

Sourcebook of the FCA Handbook 

(‘‘FCA COBS’’) 2, 4, 6, 8A, 9A, 14, and/ 

or 14A, the Covered Entity’s relevant 

security-based swap activities must 

constitute ‘‘MiFID or equivalent third 

country business,’’ as defined in the 

FCA Handbook Glossary, must be 

carried on by the Covered Entity from 

an establishment in the UK and must 

fall within the scope of the Covered 

Entity’s authorization from the FCA 

and/or PRA to conduct regulated 

activities in the UK.42

• UK ‘‘designated investment 

business’’—For each condition in the 

proposed Order that requires the 

application of, and compliance with, 

provisions of FCA COBS 11, the 

Covered Entity’s relevant security-based 

swap activities must constitute ‘‘MiFID 

business’’ that is also ‘‘designated 

investment business,’’ each as defined 

in the FCA Handbook Glossary, must be 

carried on by the Covered Entity from 

an establishment in the UK and must 

fall within the scope of the Covered 

Entity’s authorization from the FCA 

and/or PRA to conduct regulated 

activities in the UK.43

• UK ‘‘MiFID business’’—For each 

condition in the proposed Order that 

requires the application of, and 

compliance with, provisions of the 

Client Asset Sourcebook of the FCA 

Handbook (‘‘FCA CASS’’) 6 and/or 7, 

the Covered Entity must not be an 

‘‘investment company with variable 

capital’’ as defined in the FCA 

Handbook Glossary,44 the Covered 

Entity’s relevant security-based swap 

activities must constitute ‘‘regulated 

activities’’ as defined for purposes of the 

relevant UK provisions and ‘‘MiFID 

business’’ as defined in the FCA 

Handbook Glossary, must be carried on 

by the Covered Entity from an 

establishment in the UK and must fall 

within the scope of the Covered Entity’s 

authorization from the FCA and/or PRA 

to conduct regulated activities in the 

UK.45

• Activities covered by FCA SYSC 

10A—For each condition in the 

proposed Order that requires the 

application of, and compliance with, 

provisions of FCA SYSC 10A, the 

Covered Entity’s relevant security-based 

swap activities must constitute activities 

described in FCA SYSC 10A.1.1(2)(a), 

(b) and/or (c), must be carried on by the 

Covered Entity from an establishment in 

the UK and must fall within the scope 

of the Covered Entity’s authorization 

from the FCA and/or PRA to conduct 

regulated activities in the UK.46

• UK MiFID ‘‘clients’’—For each 

condition in the proposed Order that 

requires the application of, and 

compliance with, provisions of FCA 

CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 

9A, 11, 14, and/or 14A, FCA PROD 3, 

FCA SYSC 10.1.8, FCA SYSC 10A, and/ 

or UK MiFID Org Reg, the Covered 

Entity’s relevant counterparties (or 

potential counterparties) must be 

‘‘clients’’ (or potential ‘‘clients’’) as 

defined in FCA COBS 3.2.1R.47

• UK MiFID ‘‘financial 

instruments’’—For each condition in the 

proposed Order that requires the 

application of, and compliance with, 

provisions of FCA CASS 6 and/or 7, 

FCA COBS 2, 4, 6, 8A, 9A, 11, 14, and/ 

or 14A, FCA PROD 3, FCA SYSC 10A, 

the UK version of Market Abuse 

Regulation (EU) 596/2014 (‘‘UK MAR’’), 

the UK version of Commission 

Delegated Regulation (EU) 2016/958 

(‘‘UK MAR Investment 

Recommendations Regulation’’), and/or 

UK MiFID Org Reg, the relevant 

security-based swap must be a 

‘‘financial instrument’’ as defined in 

Part 1 of Schedule 2 of the UK 

Regulated Activities Order.48

• UK CRD/CRR ‘‘institution’’—For 

each condition in the proposed Order 

that requires the application of, and 

compliance with, provisions of the UK 

version of the Capital Requirements 

Regulation, Regulation (EU) No 575/ 

2013 (‘‘UK CRR’’), the Covered Entity 

must be an ‘‘institution’’ as defined in 

UK CRR article 4(1)(3).49

• ‘‘Common platform firm’’ or ‘‘third 

country firm’’—For each condition in 

the proposed Order that requires the 

application of, and compliance with, 

provisions of FCA SYSC 4, 5, 6, 7, 9, 

and/or 10, the Covered Entity must be 

either a ‘‘common platform firm’’ (other 

than a ‘‘UCITS investment firm’’) or a 

‘‘third country firm,’’ each as defined in 

the FCA Handbook Glossary.50

• ‘‘IFPRU investment firm’’—For each 

condition in the proposed Order that 

requires the application of, and 

compliance with, provisions of FCA 

SYSC 19A, the Prudential Sourcebook 

for Investment Firms of the FCA 

Handbook (‘‘FCA IFPRU’’), and/or the 

Prudential Sourcebook for Banks, 

Building Societies and Investment 

Firms of the FCA Handbook (‘‘FCA 

BIPRU’’), the Covered Entity must be an 

‘‘IFPRU investment firm’’ as defined in 

the FCA Handbook Glossary.51

• ‘‘UK bank’’ or ‘‘UK designated 

investment firm’’—For each condition 

in the proposed Order that requires the 

application of, and compliance with, 

provisions of FCA SYSC 19D and/or 

certain parts of the PRA Rulebook, the 

Covered Entity must be a ‘‘UK bank’’ or 

‘‘UK designated investment firm,’’ each 

as defined in the FCA Handbook 

Glossary (in the case of chapter 19D of 

FCA SYSC) or in the PRA Rulebook 

Glossary (in the case of a part of the 

PRA Rulebook).52

• Covered Entity’s counterparties as 

UK EMIR ‘‘counterparties’’—For each 

condition in the proposed Order that 

requires the application of, and 

compliance with, provisions of the UK 

version of the European Market 

Infrastructure Regulation (‘‘EMIR’’), 

Regulation (EU) No 648/2012 (‘‘UK 

EMIR’’), the UK version of Commission 

Delegated Regulation (EU) No 149/2013 

(‘‘UK EMIR RTS’’), and/or the UK 

version of Commission Delegated 

Regulation (EU) 2016/2251 (‘‘UK EMIR 

Margin RTS’’), if the counterparty to the 

Covered Entity is not a ‘‘financial 

counterparty’’ or ‘‘non-financial 

counterparty’’ as defined in UK EMIR 

articles 2(8) or 2(9), respectively, the 


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53See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

54See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

55See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. The Commission 

has entered into a memorandum of understanding 

with the FCA and the PRA to address substituted 

compliance cooperation. See supra note 14. 

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. 

56See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

57See Letter from Kyle L. Brandon, Managing 

Director, Head of Derivatives Policy, SIFMA (May 

3, 2021) (‘‘SIFMA 5/3/2021 Letter’’) at 3–9. 

58See Better Markets Letter at 2. 

59See paras. (a)(1) through (16) of the Order. The 

Commission is correcting typographical errors in 

paragraphs (a)(3), (a)(7), and (a)(8) of the Order by 

replacing references to FCA COBS 14A with 

references to FCA COBS 16A. 

60See SIFMA 5/3/2021 Letter at 3–4. 

61See SIFMA 5/3/2021 Letter at 3. 

62See SIFMA 5/3/2021 Letter at 3–4 and 

Appendix A. Together with its request to amend the 

UK territorial condition in paragraphs (a)(1) through 

(a)(6) of the Order, the commenter requested that 

the Commission delete, where feasible, references 

to compliance with territorially limited UK laws as 

conditions to substituted compliance. See SIFMA 5/ 

3/2021 Letter at 4. The Commission addresses this 

additional request below in the relevant parts of 

this release. 

63See FCA SYSC 1 Annex 1 2.15R (The common 

platform requirements, which include FCA SYSC 4, 

5, 6, 7, and 10, apply in relation to activities carried 

on from an establishment in the UK.); FCA SYSC 

10A.1.1R(2) (FCA SYSC 10A applies only to 

activities carried on from an establishment in the 

UK.); Money Laundering, Terrorist Financing and 

Transfer of Funds (Information on the Payer) 

Regulations 2017 (‘‘MLR 2017’’) Regulation 8 (The 

relevant requirements of MLR 2017 apply to 

persons acting in the course of business carried on 

by them in the UK.); FCA CASS 1.3.2R (FCA CASS 

6 and 7 apply to regulated activities carried on from 

an establishment in the UK.). 

64See comments from FCA (May 20, 2021) (‘‘FCA 

Comments’’) (noting that common platform 

organizational requirements, including FCA SYSC 4 

to 9, and parallel PRA General Organisational 

Requirements, generally apply in a prudential 

context to activities wherever they are carried on). 

Covered Entity must comply with the 

applicable condition as if the 

counterparty were a financial 

counterparty or non-financial 

counterparty. If the Covered Entity 

reasonably determines that the 

counterparty conducts a financial 

business that would cause it to be a 

financial counterparty if it were UKestablished and UK-authorized, then the 

proposed Order would require the 

Covered Entity to treat the counterparty 

as a financial counterparty; otherwise, 

the proposed Order would require the 

Covered Entity to treat the counterparty 

as a non-financial counterparty. In 

addition, the proposed Order would 

provide that a Covered Entity complying 

with UK EMIR could not apply 

substituted compliance by complying 

with third country requirements that UK 

authorities may determine to be 

equivalent to UK EMIR.53

• Security-based swap status under 

UK EMIR—For each condition in the 

proposed Order that requires the 

application of, and compliance with, 

provisions of UK EMIR, UK EMIR RTS, 

and/or UK EMIR Margin RTS, either: (1) 

The relevant security-based swap must 

be an ‘‘OTC derivative’’ or ‘‘OTC 

derivative contract,’’ as defined in UK 

EMIR article 2(7), that has not been 

cleared by a central counterparty and 

otherwise is subject to the provisions of 

UK EMIR article 11, UK EMIR RTS 

articles 11 through 15, and UK EMIR 

Margin RTS article 2; or (2) the relevant 

security-based swap must have been 

cleared by a central counterparty that 

has been authorized or recognized to 

clear derivatives contracts in the UK.54

• Memorandum of understanding— 

Consistent with the requirements of rule 

3a71–6 and the Commission’s need for 

access to information regarding 

registered entities, substituted 

compliance under the proposed Order 

would be conditioned on the 

Commission having an applicable 

memorandum of understanding or other 

arrangement with the FCA and the PRA 

addressing cooperation with respect to 

the Order at the time the Covered Entity 

makes use of substituted compliance.55

• Notice of reliance on substituted 

compliance—To assist the 

Commission’s oversight of firms that 

avail themselves of substituted 

compliance, a Covered Entity relying on 

the Order would have to provide notice 

of its intent to rely on the Order by 

notifying the Commission in writing. In 

the notice, the Covered Entity would 

need to identify each specific 

substituted compliance determination 

in the Order for which the Covered 

Entity intends to apply substituted 

compliance. The Covered Entity would 

have to promptly update the notice if it 

intends to modify its reliance on 

substituted compliance.56

2. Commenter Views and Final 

Provisions 

One commenter expressed general 

support for several of the general 

conditions, subject to certain changes 

and clarifications.57 Another commenter 

stated that, if the Commission makes a 

positive substituted compliance 

determination, it must ensure that the 

conditions in the proposed Order are 

applied ‘‘with full force and without 

exception or dilution.58 The 

Commission is issuing the general 

conditions largely as proposed,59 and 

details its responses to the requested 

changes and clarifications below. In the 

Commission’s view, the conditions are 

structured appropriately to predicate a 

positive substituted compliance 

determination on the applicability of 

relevant UK requirements needed to 

establish comparability, as well as on 

the continued effectiveness of the 

requisite memorandum of 

understanding, and the provision of 

notice to the Commission regarding the 

Covered Entity’s intent to rely on 

substituted compliance. 

a. UK Territorial Condition 

A commenter stated that the 

Commission should delete the 

requirement in paragraphs (a)(1) 

through (a)(6) of the Order that, for 

purposes of certain UK requirements, a 

Covered Entity’s relevant security-based 

swap activities be ‘‘carried on . . . from 

an establishment in the United 

Kingdom.’’ 60 The commenter stated that 

this UK territorial aspect of the 

conditions was not necessary because 

some of the UK requirements listed in 

these conditions apply to a Covered 

Entity with respect to activities 

wherever they are carried on.61 The 

commenter suggested that the 

Commission instead add a new general 

condition that would require a Covered 

Entity, when relying on a part of the 

Order that requires it to be subject to 

and comply with the UK requirements 

listed in paragraphs (a)(1) through (a)(6) 

of the Order, to carry on the relevant 

security-based swap activities from a 

UK establishment, but only to the extent 

that those UK requirements ‘‘are limited 

in their applicability to activity carried 

on from [a UK establishment].’’ 62 The 

commenter did not identify any specific 

instances in which it believes that a 

Covered Entity would carry on a 

particular security-based swap activity 

outside the United Kingdom and that 

activity would be subject to the UK 

requirements listed in paragraphs (a)(1) 

through (a)(6) of the Order. 

Many, though not all, of these UK 

requirements contain clearly articulated 

scoping provisions that apply the 

requirements to Covered Entities only 

when the relevant activity is carried on 

from an establishment in the UK.63

Other requirements contain more 

complex scoping provisions, and the 

Commission is aware that in limited 

cases it is possible for these 

requirements to apply to some aspects 

of a Covered Entity’s activities carried 

on from an establishment outside the 

UK. For example, the FCA commented 

that certain organizational requirements 

generally apply in a prudential context 

to activities wherever they are carried 

on.64 In addition, PRA General 


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65See PRA General Organisational Requirements 

Rule 1.1(1); PRA Recordkeeping Rule 1.1(1); PRA 

Risk Control Rule 1.1(1); see also PRA 

Remuneration Rule 1.1(1)(a) (PRA Remuneration 

Rules apply to a CRR firm in relation to its ‘‘UK 

activities.’’). 

66See PRA General Organisational Requirements 

Rule 1.1(3); PRA Recordkeeping Rule 1.1(3); PRA 

Risk Control Rule 1.1(3); PRA Remuneration Rule 

1.1(c). 

67See PRA Rulebook Glossary. 

68The Commission also is retaining the same 

requirement in paragraphs (a)(5) and (a)(6) of the 

Order, as the UK requirements referenced in those 

paragraphs apply only to activities carried on from 

an establishment in the UK. 

69See General Provisions Sourcebook of the FCA 

Handbook (‘‘FCA GEN’’) 2.2.22AR. 

70See FCA PROD 1.3.4R. 

71See FCA PROD 1.3.5R(1) (general UK territorial 

rule for FCA PROD 3); FCA COBS 4.1.8R (general 

UK territorial rule for FCA COBS 4) (citing FCA 

COBS 1.1.1R); but see FCA PROD 1.3.5(2) 

(exclusions from FCA PROD 3 for activities from an 

establishment outside the UK); FCA COBS 1 Annex 

1 Part 2 2.1R (exclusions from FCA COBS 4 for 

activities from an establishment outside the UK). 

72See SIFMA 5/3/2021 Letter at 4. 

73See SIFMA 5/3/2021 Letter at 4. 

74See infra parts IV.B, V.B, VI.B, VII.B, and 

VIII.B. 

75See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18384 (risk control 

requirements), 18386–87 (capital and margin 

requirements), 18389–90 (internal supervision and 

chief compliance officer requirements), 18395–96 

(recordkeeping, reporting, notification, and 

securities count requirements other than those 

linked to counterparty protection requirements). 

76See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18392 (counterparty 

protection requirements), 18396 (recordkeeping and 

reporting requirements linked to counterparty 

protection requirements). 

77See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18413–20. 

Organisational Requirements, PRA 

Recordkeeping Rules, PRA Risk Control 

Rules, and PRA Remuneration Rules 

generally apply to a Covered Entity that 

is a ‘‘CRR firm’’ with respect to 

activities carried on from a UK 

establishment,65 but also apply to 

activities anywhere in the world ‘‘in a 

prudential context,’’ 66 which the PRA 

defines to mean when the Covered 

Entity’s activities have, or might 

reasonably be regarded as likely to have, 

a negative effect on the Covered Entity’s 

safety and soundness or its ability to 

continue to meet certain other UK 

regulatory tests.67 The Commission 

cannot, however, determine ex ante 

whether a Covered Entity’s particular 

activity outside the UK would fall 

within these limited wider scope 

provisions. The commenter also did not 

identify any circumstances that would 

trigger the limited wider scope of these 

provisions. Moreover, it is unclear 

whether any such wider scope even 

would be relevant in the context of the 

Order or, if so, how that wider scope 

would impact the operation of the Order 

in practice. For these reasons, the 

Commission is retaining the 

requirement in paragraph (a)(1) of the 

Order for the Covered Entity to carry on 

the relevant activities from an 

establishment in the UK.68

Other UK requirements listed in 

paragraphs (a)(2) through (a)(4) of the 

Order apply to limited activities outside 

the UK for which a Covered Entity 

might apply substituted compliance. UK 

MiFID Org Reg generally applies to a 

Covered Entity that is a third country 

investment firm only when it carries on 

the relevant security-based swap 

activity from an establishment in the 

UK,69 but provisions of UK MiFID Org 

Reg in some instances can apply to a 

broader range of activities if the Covered 

Entity is a MiFID investment firm. 

Similarly, FCA PROD 3 and FCA COBS 

generally apply to a Covered Entity with 

respect to activities carried on from an 

establishment in the UK,70 but also 

apply to a Covered Entity with respect 

to certain activities with a client in the 

UK that are carried on from an 

establishment outside the UK.71 The 

Commission is amending the general 

conditions in paragraphs (a)(2) through 

(a)(4) of the Order to provide that a 

Covered Entity’s relevant security-based 

swap activities must be either carried on 

by the Covered Entity from an 

establishment in the UK or from any 

other place that would cause UK MiFID 

Org Reg, FCA PROD 3, and/or the 

relevant provision(s) of FCA COBS, as 

applicable, to apply to those activities. 

In applying these amended general 

conditions, a Covered Entity still must 

satisfy all of the applicable general 

conditions, as well as the other 

applicable provisions of the Order, 

relating to a particular Exchange Act 

requirement for which it applies 

substituted compliance. A Covered 

Entity will satisfy the conditions of the 

Order only when it is subject to and 

complies with all of the comparable UK 

requirements listed in the relevant 

provision(s) of the Order. If any one of 

these comparable UK requirements is 

subject to a general condition with a 

territorial limitation, the relevant 

security-based swap activity for which 

the Covered Entity applies substituted 

compliance would have to satisfy that 

territorial limitation, even if another of 

the comparable UK requirements 

applies to a wider scope of activities. As 

a result, in these instances a Covered 

Entity would be able to use substituted 

compliance only for security-based 

swap activities that satisfy the territorial 

limitation. 

b. Scope of Substituted Compliance 

The same commenter requested that 

the Commission delete, where feasible, 

references in the Order to territorially 

limited UK requirements.72 Where these 

deletions are not feasible, the 

commenter requested that the 

Commission confirm that, in relation to 

entity-level Exchange Act requirements, 

a Covered Entity may (a) rely on 

substituted compliance for its relevant 

security-based swap activities carried on 

from an establishment in the UK and (b) 

comply with Exchange Act 

requirements or another applicable 

substituted compliance order for its 

relevant security-based swap activities 

carried on from an establishment 

outside the UK.73 The Commission is 

addressing here the commenter’s 

request for clarification of the 

availability of substituted compliance 

for entity-level Exchange Act 

requirements, and is addressing the 

commenter’s various requested 

deletions below in the relevant parts of 

this release.74

In the proposed Order, the 

Commission stated that a Covered Entity 

applying substituted compliance for one 

or more entity-level Exchange Act 

requirements (including risk control, 

capital, margin, internal supervision 

and chief compliance officer 

requirements, as well as recordkeeping 

and reporting requirements other than 

those linked to counterparty protection 

requirements) would have to apply 

substituted compliance at an entity 

level, i.e., to all of its activities subject 

to that particular Exchange Act 

requirement.75 By contrast, the 

Commission stated that a Covered Entity 

applying substituted compliance for one 

or more transaction-level Exchange Act 

requirements (including counterparty 

protection requirements, as well as 

recordkeeping and reporting 

requirements linked to them) could 

choose to apply substituted compliance 

under the proposed Order for some 

activities and comply directly with 

Exchange Act requirements for other 

activities.76 The proposed Order thus 

would provide substituted compliance 

for transaction-level Exchange Act 

requirements ‘‘in relation to [a specific 

security-based swap, counterparty, 

recommendation, or communication];’’ 

the proposed Order did not include this 

proviso in relation to substituted 

compliance for entity-level Exchange 

Act requirements.77 The Commission 

proposed this approach in the context of 

assisting Covered Entities in choosing 

between applying substituted 

compliance pursuant to the Order or 

complying directly with relevant 

Exchange Act requirements. This 

approach did not address, and does not 


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78For example, this approach did not address and 

would not apply to a Covered Entity’s securitybased swap business carried on from an 

establishment outside the UK, when the relevant 

part of the proposed Order would require the 

Covered Entity to comply with one or more UK 

requirements to which a UK territorial condition 

applies. 

79A Covered Entity may use substituted 

compliance consistent with the Order for any one 

or more sets of entity-level Exchange Act 

requirements specified in the Order. See supra note 

74 and accompanying text. For example, a Covered 

Entity could use substituted compliance for internal 

risk management, trade acknowledgment and 

verification, internal supervision, and chief 

compliance officer requirements, but comply 

directly with Exchange Act portfolio reconciliation 

and dispute reporting, portfolio compression, 

trading relationship documentation, recordkeeping, 

reporting, notification, and securities count 

requirements. 

80 In the context of the UK EMIR counterparties 

condition in paragraph (a)(13) of the Order, a 

Covered Entity must choose (1) to apply substituted 

compliance pursuant to the Order—including 

compliance with paragraph (a)(13) as applicable— 

for a particular set of entity-level requirements with 

respect to all of its business that would be subject 

to the relevant UK EMIR-based requirement if the 

counterparty were the relevant type of counterparty, 

or (2) to comply directly with the Exchange Act 

with respect to such business. See infra note 106 

and accompanying text. 

81A third country investment firm regulated in 

the UK might be able to satisfy the definitions of 

‘‘Covered Entity’’ in both this Order and the 

German Substituted Compliance Order, and thus 

may be eligible to apply substituted compliance 

under both orders. This Order defines Covered 

Entities to include both MiFID investment firms 

(i.e., firms with a UK head office) and third country 

investment firms (i.e., firms with a head office 

outside the UK). The German Substituted 

Compliance Order defines Covered Entities to 

include only investment firms and credit 

institutions ‘‘authorized by BaFin to provide 

investment services or perform investment 

activities in the Federal Republic of Germany.’’ See 

German Substituted Compliance Order, 85 FR at 

85700. A non-EU firm (such as a UK firm) registered 

by the European Securities and Markets Authority 

(‘‘ESMA’’) to provide investment services and/or 

perform investment activities to certain 

counterparties in the EU pursuant to articles 46 

through 48 of the Markets in Financial Instruments 

Regulation is not ‘‘authorized by BaFin’’ and thus 

does not satisfy the Covered Entity definition in the 

German Substituted Compliance Order. 

Accordingly, an investment firm or credit 

institution authorized by BaFin and regulated in the 

UK as a third country investment firm may, for 

example, be eligible for substituted compliance 

under both this Order and the German Substituted 

Compliance Order. If such a firm has security-based 

swap business that is not UK business, but is 

subject to the relevant German requirements under 

the German Substituted Compliance Order, it may 

choose to comply directly with the relevant 

Exchange Act requirements or to use substituted 

compliance pursuant to the terms of the German 

Substituted Compliance Order. If such a firm has 

security-based swap business that is both UK 

business and subject to the relevant German 

requirements under the German Substituted 

Compliance Order, it may choose to comply with 

the conditions to both orders or, alternatively, it 

may choose one order that it will comply with in 

respect of that business. For each set of entity-level 

Exchange Act requirements, such a firm must apply 

this choice to all such dually regulated securitybased swap business. Such a firm must specify this 

choice in its notice to the Commission pursuant to 

para. (a)(16) of the Order. A firm’s choice to comply 

with only one applicable substituted compliance 

order in respect of security-based swap business 

that is subject to the relevant foreign requirements 

listed in multiple substituted compliance orders 

will not affect the firm’s ability to apply substituted 

compliance for Exchange Act entity-level 

requirements in respect of other, non–dually 

regulated security-based swap business under the 

other substituted compliance order(s). 

82For example, a Covered Entity may use 

substituted compliance consistent with the Order 

for fair and balanced communications requirements 

in respect of communications with UK 

counterparties that are subject to the Exchange Act 

and comply directly with Exchange Act fair and 

balanced communications requirements in respect 

of U.S. person counterparties. A Covered Entity also 

may use substituted compliance consistent with the 

Order for any one or more sets of transaction-level 

Exchange Act requirements specified in the Order. 

See supra note 76 and accompanying text. For 

example, a Covered Entity could use substituted 

compliance for fair and balanced communications 

requirements, but comply directly with Exchange 

Act requirements related to disclosure of 

information regarding material risks and 

characteristics, disclosure of information regarding 

material incentives or conflicts of interest, ‘‘know 

your counterparty,’’ suitability, and daily mark 

disclosure. 

83See, e.g., Exchange Act section 15F(f); 

Exchange Act rule 18a–6(g). 

apply to, security-based swap business 

for which a Covered Entity could not 

apply substituted compliance under the 

proposed Order because the Covered 

Entity is not subject to the relevant UK 

requirements listed in the Order with 

respect to that business.78

Consistent with the commenter’s 

request, for any particular set of entitylevel Exchange Act requirements,79 a 

Covered Entity must choose either (1) to 

apply substituted compliance pursuant 

to the Order with respect to all securitybased swap business that is subject to 

the relevant UK requirements listed in 

the Order and that can satisfy any 

general conditions related to those UK 

requirements (including any applicable 

UK territorial condition) (‘‘UK 

business’’), or (2) to comply directly 

with the Exchange Act with respect to 

all UK business. A Covered Entity may 

not choose to apply substituted 

compliance for those entity-level 

requirements in respect of some of its 

UK business and comply directly with 

the Exchange Act in respect of another 

part of its UK business. However, if the 

conditions in the relevant part of the 

Order require the Covered Entity to 

comply with UK requirements that are 

subject to a UK territorial condition, the 

Covered Entity’s UK business would not 

include business carried on from an 

establishment outside the UK, as that 

business would not be subject to the 

relevant UK requirements and would 

not satisfy the applicable UK territorial 

condition. Rather, the Covered Entity 

could apply substituted compliance for 

the Exchange Act requirements in that 

part of the Order so long as it applies 

substituted compliance for all of its 

business that is subject to the relevant 

UK requirements and can satisfy any 

general conditions related to those UK 

requirements, which in this example 

would include only business that is 

carried on from an establishment in the 

UK and that otherwise is both subject to 

the relevant UK requirements and able 

to satisfy any other general conditions 

related to those requirements. Also 

consistent with the commenter’s 

request, for any particular set of entitylevel Exchange Act requirements, if the 

Covered Entity also has security-based 

swap business that is not subject to the 

relevant UK requirements 80 or that 

cannot satisfy an applicable general 

condition related to those UK 

requirements (including business 

carried on from an establishment 

outside the UK where the Order 

imposes a UK territorial condition) the 

Covered Entity must either comply 

directly with the Exchange Act for that 

business or comply with the terms of 

another applicable substituted 

compliance order.81 Consistent with the 

proposed Order, for transaction-level 

Exchange Act requirements, a Covered 

Entity may decide to apply substituted 

compliance for some of its securitybased swap business and to comply 

directly with the Exchange Act (or 

comply with another applicable 

substituted compliance order) for other 

parts of its security-based swap 

business.82 The Commission believes 

that this scope of substituted 

compliance strikes the right balance to 

ensure that substituted compliance is 

consistent with Commission’s 

classification of Exchange Act 

requirements as either entity-level or 

transaction-level requirements. The 

Commission has made no changes to the 

text of the Order in connection with 

these issues. 

In the Covered Entity’s notice to the 

Commission pursuant to paragraph 

(a)(16) of the Order, the Covered Entity 

must specify the parts of its securitybased swap business for which it will 

apply substituted compliance consistent 

with the individual parts of the Order. 

Every SBS Entity registered with the 

Commission, whether complying 

directly with Exchange Act 

requirements or relying on substituted 

compliance as a means of complying 

with the Exchange Act, is required to 

satisfy the inspection and production 

requirements imposed on such entities 

under the Exchange Act,83 and 

specificity as to the scope of the entity’s 

reliance on substituted compliance is 


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84See SIFMA 5/3/2021 Letter Appendix A. 

85See para. (d)(3)(ii) of the Order. 

86See FCA Handbook Glossary, definition of 

‘‘designated investment business.’’ 

87See FCA Handbook Glossary, definitions of 

‘‘MiFID or equivalent third country business,’’ 

‘‘MiFID business,’’ ‘‘equivalent third country 

business,’’ and ‘‘investment services and/or 

activities.’’ 

88See SIFMA 5/3/2021 Letter Appendix A. 89See SIFMA 5/3/2021 Letter Appendix A. 90See infra part VI.B.1. 91See SIFMA 5/3/2021 Letter Appendix A. 92See SIFMA 5/3/2021 Letter Appendix A parts 

(a), (b), (d), and (e). 

93See SIFMA 5/3/2021 Letter at 4–6. 

94See FCA COBS 2.4.3R. 

95See FCA COBS 2.4.3R(2). 

necessary to facilitate the Commission’s 

oversight under the Order. 

c. Activities as UK ‘‘Designated 

Investment Business’’ 

One commenter recommended 

deleting paragraph (a)(4) of the 

proposed Order because ‘‘MiFID 

business’’ is a subset of ‘‘designated 

investment business.’’ 84 The 

commenter instead suggested adding 

FCA COBS 11 to the general condition 

in paragraph (a)(3) of the proposed 

Order, which is identical to paragraph 

(a)(4) except for the reference to 

‘‘designated investment business’’ in 

paragraph (a)(4). 

The only provision of FCA COBS 11 

included in the Order is FCA COBS 

11.7A.3R.85 By its terms, FCA COBS 

11.7A.3R applies to a firm’s ‘‘designated 

investment business.’’ FCA COBS 

11.7A.1R further states that FCA COBS 

11.7A.3R applies, in relevant part, to a 

firm in relation to its ‘‘MiFID or 

equivalent third country business.’’ The 

condition as proposed thus accurately 

reflects the activities that FCA COBS 

describes as subject to FCA COBS 

11.7A.3R. The Commission believes that 

deleting the reference to ‘‘designated 

investment business’’ would be 

inconsistent with the terms of the 

relevant provisions of FCA COBS 11. 

Moreover, the definitions of ‘‘designated 

investment business’’ and ‘‘MiFID or 

equivalent third country business’’ vary 

substantially. ‘‘Designated investment 

business’’ includes, among other things, 

dealing in investments as principal or 

agent, arranging deals in investments, 

making arrangements with a view to 

transactions in investments, managing 

investments, and advising on 

investments.86 By contrast, ‘‘MiFID or 

equivalent third country business’’ 

includes, among other things, reception 

and transmission of orders in relation to 

one or more financial instruments, 

execution of orders on behalf of clients, 

dealing on own account, portfolio 

management, and the making of a 

personal recommendation.87 Given the 

lack of overlap in terminology used in 

these two definitions, the Commission 

believes that deleting the reference to 

‘‘designated investment business’’ could 

cause confusion among Covered 

Entities, while keeping the reference 

would not restrict a Covered Entity from 

being able to comply with the condition 

in respect of MiFID or equivalent third 

country business that is a subset of 

designated investment business. 

Accordingly the Commission has 

determined not to delete this paragraph. 

d. Activities as UK ‘‘MiFID Business’’ 

One commenter recommended 

deleting paragraph (a)(5) of the 

proposed Order to reflect its 

recommendations to delete any FCA 

CASS provisions elsewhere in the Order 

as conditions to substituted 

compliance.88 The commenter believes 

that the FCA CASS rules, which address 

client asset requirements, expand the 

scope of applicable Exchange Act 

requirements and are inappropriate as 

conditions to substituted compliance.89

As discussed below in the relevant parts 

of this release,90 the Commission has 

determined to retain the citations to 

FCA CASS as conditions to substituted 

compliance and, accordingly, has not 

deleted this paragraph. 

e. Covered Entity as UK ‘‘IFPRU 

Investment Firm’’ 

One commenter recommended 

deleting paragraph (a)(11) of the 

proposed Order because the UK 

requirements listed in that paragraph do 

not apply to UK banks or UK designated 

investment firms and the commenter 

expects only ‘‘banks and PRAdesignated investment firms’’ to apply 

substituted compliance pursuant to the 

Order.91 These requirements apply to 

IFPRU investment firms—that is, certain 

investment firms regulated by the FCA 

but not the PRA—and are nearly 

identical to requirements that apply to 

UK banks and UK designated 

investment firms. For the same reason, 

the commenter also recommended 

deleting the references to firms 

regulated only by the FCA from the 

general conditions in paragraphs (a)(1) 

through (a)(3) and (a)(6) of the proposed 

Order and the UK requirements in 

paragraphs (b), (d), and (e) of the 

proposed Order that apply only to 

IFPRU investment firms.92 The 

proposed Order would not require a 

Covered Entity that is a UK bank or UK 

designated investment firm to be subject 

to and comply with these requirements. 

Rather, in each place that the proposed 

Order refers to these requirements that 

are unique to IFPRU investment firms, 

the proposed Order would require the 

Covered Entity to be subject to and 

comply with either the provisions that 

apply to IFPRU investment firms (in 

which case paragraph (a)(11) of the 

proposed Order would require the 

Covered Entity to be an IFPRU 

investment firm) or analogous 

provisions of the FCA Handbook and 

PRA Rulebook that apply to UK banks 

and UK designated investment firms (in 

which case paragraph (a)(12) of the 

proposed Order would require the 

Covered Entity to be a UK bank or UK 

designated investment firm). Moreover, 

the FCA Application requested 

substituted compliance for all 

investment firms, and was not limited to 

the entities described by the commenter. 

Accordingly, the Commission is 

retaining the references to these 

requirements in paragraph (a)(11) and in 

paragraphs (b), (d), and (e) of the Order 

and the references to firms regulated 

only by the FCA in paragraphs (a)(1) 

through (a)(6) of the Order. 

f. Counterparties as UK MiFID ‘‘Clients’’ 

A commenter requested that the 

Commission modify paragraph (a)(7) of 

the proposed Order to permit a Covered 

Entity to treat an agent, rather than the 

agent’s principal, as the Covered 

Entity’s client for purposes of the 

MiFID-based requirements listed in the 

Order.93 The commenter stated that this 

modification would be consistent with 

the FCA’s ‘‘agent as client’’ rule, which 

provides that a firm, if it is aware that 

a person with or for whom it is 

providing services is acting as agent for 

another person and satisfies certain 

other conditions, must treat the agent, 

and not the agent’s principal, as the 

firm’s client in respect of that 

business.94 The firm may override the 

‘‘agent as client’’ rule by agreeing in 

writing with the agent to treat the 

agent’s principal as the firm’s client 

instead.95

The proposed Order would require a 

Covered Entity to be ‘‘subject to and 

comply with’’ relevant MiFID-based 

requirements. The Commission 

proposed that requirement of the 

proposed Order to ensure that 

comparable MiFID-based requirements 

in practice would apply to a Covered 

Entity using substituted compliance. 

The condition in paragraph (a)(7) to the 

proposed Order would ensure that the 

Covered Entity’s counterparty—i.e., the 

entity to whom it owes its various 

duties under the Exchange Act—is the 

‘‘client’’ to whom the Covered Entity 

owes its performance of the duties to 

which it is subject under the 


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96Some provisions of the MiFID-based 

requirements cited in the condition, such as certain 

organizational requirements, do not pertain to 

counterparties or clients. In those cases, there is no 

‘‘relevant counterparty (or potential counterparty)’’ 

for purposes of the condition, and the condition 

would have no effect. 97FCA COBS 2.4.4R permits firms to rely upon 

information about a client received from another 

UK-regulated firm. Under this provision, the other 

firm is legally responsible for the completeness and 

accuracy of any information about the client that 

the other firm receives from the first firm. The 

Commission believes that it is appropriate to permit 

a Covered Entity to rely on information about its 

client communicated by another UK-regulated firm 

on behalf of the client. Accordingly, the application 

of this provision would not cause the Covered 

Entity to be not ‘‘subject to’’ the relevant UK 

requirements listed in the Order, and thus would 

not impact the Covered Entity’s ability to use 

substituted compliance in relation to those 

communications. On the other hand, FCA COBS 

2.4.4R also provides that the other firm is legally 

responsible for the suitability of advice and 

recommendations provided to the client. The other 

firm, however, may not be a Covered Entity 

applying substituted compliance pursuant to the 

Order. Accordingly, the Commission believes that 

a Covered Entity relying on the suitability 

assessment of another firm pursuant to FCA COBS 

2.4.4R is not ‘‘subject to’’ the relevant UK suitability 

requirements listed in the Order, and thus may not 

apply substituted compliance for those 

recommendations. 

98See SIFMA 5/3/2021 Letter at 6 and Appendix 

A part (a) (recommending that the order text of 

paragraph (a)(13) of the Order require application 

of the condition ‘‘if the counterparty to the Covered 

Entity is not a ‘‘financial counterparty’’ or ‘‘nonfinancial counterparty’’ as defined in UK EMIR 

articles 2(8) or 2(9) respectively, solely because the 

counterparty is not established in the United 

Kingdom’’). 

99See, e.g., UK EMIR RTS article 12 (timely 

confirmation requirements for OTC derivatives 

contracts concluded between financial 

counterparties and non-financial counterparties). 

100See UK EMIR article 2(8) (financial 

counterparties include specified UK financial firms 

and generally exclude non-UK entities); UK EMIR 

article 2(9) (non-financial counterparties include 

UK undertakings that are not financial 

counterparties and generally exclude natural 

persons, central counterparties, and non-UK 

entities). 

101See UK EMIR articles 1(4) and 1(5) (UK EMIR 

does not apply to certain public sector and 

multilateral entities). Several of the multilateral 

development banks that the commenter mentioned 

are exempt from the definition of ‘‘U.S. person’’ in 

Exchange Act rule 3a71–3, 17 CFR 240.3a71–3, and, 

as a result, transactions between a foreign SBS 

Entity and one of those banks (without being 

arranged, negotiated, or executed by U.S. personnel) 

are not subject to most Exchange Act business 

conduct requirements. See UK EMIR article 1(5)(a) 

(exempting from UK EMIR multilateral 

development banks listed in UK CRR article 117); 

UK CRR article 117 (listed multilateral development 

banks include, among others, the International Bank 

for Reconstruction and Development, the InterAmerican Development Bank, the Asian 

Development Bank, and the African Development 

Bank); Exchange Act rules 3a71–3(a)(4)(iii), (a)(7), 

(a)(8)(i), (a)(9) and (c); Exchange Act rules 3a67– 

10(a)(4), (a)(6) and (d)(1), 17 CFR 240.3a67–10(a)(4), 

(a)(6) and (d)(1). 

102UK EMIR article 2(8) defines ‘‘financial 

counterparty’’ to encompass investment firms, 

credit institutions, insurers, and certain other types 

of businesses that have been authorized in 

accordance with UK law. Under UK EMIR, the 

distinction between financial counterparties and 

other types of counterparties such as non-financial 

counterparties is manifested, inter alia, in 

connection with confirmation timing standards. See 

UK EMIR RTS article 12. 

103See para. (a)(13) of the Order. The condition 

will help clarify that the Covered Entity would be 

subject to the relevant UK EMIR-based requirements 

even if the counterparty is not an ‘‘undertaking’’ 

(such as by virtue of being a natural person), is not 

established in the EU (by virtue of being a U.S. 

person or otherwise being established outside the 

UK), or is excluded from the application of UK 

EMIR to its transactions (by virtue of being one of 

the public sector or multilateral entities identified 

in UK EMIR articles 1(4) and (5)). 

104See para. (a)(13) of the Order. To correct a 

typographical error in the UK Substituted 

Compliance Notice and Proposed Order, in 

paragraph (a)(13) of the Order the Commission is 

changing the phrase ‘‘paragraphs (b) through (e) of 

this Order’’ to ‘‘paragraphs (b) through (f) of this 

Order.’’ This correction is consistent with the 

description of the proposed condition in the UK 

Substituted Compliance Notice and Proposed 

Order. See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

comparable MiFID-based 

requirements.96 The Commission 

believes that, in the case of an agent 

acting on behalf of a principal, if the 

principal is the counterparty for 

purposes of the relevant Exchange Act 

requirement, then this condition should 

require the principal, as the 

counterparty, to be the ‘‘client’’ for 

purposes of the relevant MiFID-based 

requirements. If the Covered Entity 

instead treats the agent as the ‘‘client,’’ 

then the Covered Entity would not be 

‘‘subject to’’ UK requirements that are 

comparable to Exchange Act 

requirements related to counterparties. 

Accordingly, the Commission is not 

amending the condition in paragraph 

(a)(7) to permit a Covered Entity to treat 

an agent, rather than the agent’s 

principal, as its client with regard to the 

relevant MiFID-based requirements. In 

taking this position, the Commission 

does not prohibit Covered Entities from 

working with agents or others acting on 

behalf of a counterparty. Rather, the 

Covered Entity must ensure that, in 

working with the agent, it fulfills any 

duties owed to a ‘‘client’’ (or potential 

‘‘client’’) in relation to the 

counterparty.97

g. UK EMIR Counterparties 

A commenter requested that the 

Commission clarify that the condition in 

paragraph (a)(13) of the proposed Order 

would not require a Covered Entity to 

treat as financial counterparties or nonfinancial counterparties certain public 

sector counterparties, such as 

multilateral development banks, that are 

exempt from UK EMIR or counterparties 

that are not ‘‘undertakings’’ for purposes 

of UK EMIR’s definitions of ‘‘financial 

counterparty’’ and ‘‘non-financial 

counterparty.’’ 98

This condition addresses the fact that 

some of the UK EMIR-based 

requirements 99 are expressed to apply 

only to transactions between specified 

types of counterparties, such as 

transactions between financial 

counterparties and non-financial 

counterparties, between financial 

counterparties and non-financial 

counterparties above the clearing 

threshold, and/or between 

counterparties that are not excluded 

from the application of UK EMIR. The 

definitions of ‘‘financial counterparty’’ 

and ‘‘non-financial counterparty’’ are 

predicated on the counterparty being an 

‘‘undertaking’’ established in the UK.100

In addition, UK EMIR does not apply to 

transactions with certain excluded 

counterparties.101 The condition is not 

based upon the concern that some 

industry participants may not be able to 

take advantage of substituted 

compliance, but, rather, the condition is 

intended to help ensure that the 

relevant UK EMIR-based requirements 

will apply in practice regardless of the 

counterparty’s location or status as ‘‘an 

undertaking.’’ The condition provides 

that the Covered Entity must comply 

with the applicable condition of this 

Order as if the counterparty were the 

type of counterparty that would trigger 

the application of the relevant UK 

EMIR-based requirements. If the 

Covered Entity reasonably determines 

that its counterparty would be a 

financial counterparty102 if not for the 

counterparty’s location and/or lack of 

regulatory authorization in the UK, the 

condition further requires the Covered 

Entity to treat the counterparty as if the 

counterparty were a financial 

counterparty, rather than as another 

type of counterparty to which the 

relevant UK EMIR-based requirements 

may apply.103 By requiring a Covered 

Entity to treat its counterparty as a type 

of counterparty that would trigger the 

application of the relevant UK EMIRbased requirements, the condition will 

require the Covered Entity to perform 

the relevant obligations pursuant to 

those UK EMIR-based requirements and 

thus to act in a way that is comparable 

to Exchange Act requirements. 

Accordingly, the Commission is 

retaining this condition to ensure that a 

Covered Entity can apply substituted 

compliance only when it treats its 

counterparty as a type of counterparty 

that will trigger the Covered Entity’s 

performance of obligations pursuant to 

those UK EMIR-based requirements.104

Because each UK EMIR-based 

requirement applies to different types of 

counterparties, the Commission is 

amending the condition to make clear 

that a Covered Entity must treat its 


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105See, e.g., UK EMIR articles 39(4) and (5). 

106A Covered Entity’s business that is not subject 

to other non-UK EMIR-based requirements listed in 

the Order or that does not satisfy any other 

applicable general condition would not form part of 

a Covered Entity’s UK business for which the 

Covered Entity must make a single choice between 

using substituted compliance or complying directly 

with the Exchange Act. For example, for purposes 

of its choice to apply substituted compliance or 

comply directly with Exchange Act internal risk 

management requirements, a Covered Entity need 

not treat as UK business a transaction that is not 

subject to FCA SYSC 4.1.1R(1) or that cannot satisfy 

the general conditions in paragraphs (a)(1) and 

(a)(10) of the Order, even if the sole reason the 

transaction is not subject to UK EMIR Margin RTS 

article 2 is that the counterparty is not the type of 

counterparty to which that requirement applies. 

107See SIFMA 5/3/2021 Letter at 6–7. 

108See, e.g., UK EMIR article 11. 

109See, e.g., Exchange Act rules 15Fi–2, 17 CFR 

240.15Fi–2 through 15Fi–4, 17 CFR 240.15Fi–4; 

Exchange Act rule 18a–3, 17 CFR 240.18a–3. 

110See para. (a)(14) of the Order. To correct a 

typographical error in the UK Substituted 

Compliance Notice and Proposed Order, in 

paragraph (a)(14) of the Order the Commission is 

changing the phrase ‘‘paragraphs (b) through (e) of 

this Order’’ to ‘‘paragraphs (b) through (f) of this 

Order.’’ This correction is consistent with the 

description of the proposed condition in the UK 

Substituted Compliance Notice and Proposed 

Order. See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18382. 

counterparty as if the counterparty were 

the type of counterparty specified in the 

relevant UK EMIR-based requirement. 

The Commission also is amending the 

Order to clarify that the condition 

applies only if the relevant UK EMIRbased requirement applies solely to the 

Covered Entity’s activities with 

specified types of counterparties. If the 

relevant UK EMIR-based requirement 

applies to a Covered Entity’s activities 

without regard to the status of its 

counterparty,105 the Covered Entity 

would not be required to treat its 

counterparty as any particular type of 

counterparty for purposes of that UK 

EMIR-based requirement. 

As discussed in part III.B.2.b above, 

for any particular set of entity-level 

Exchange Act requirements, a Covered 

Entity must choose either (1) to apply 

substituted compliance pursuant to the 

Order with respect to all UK business, 

i.e., security-based swap business that is 

subject to the relevant UK requirements 

listed in the Order and that can satisfy 

any general conditions related to those 

UK requirements; or (2) to comply 

directly with the Exchange Act with 

respect to all UK business. In the 

context of the UK EMIR counterparties 

condition in paragraph (a)(13), this 

scoping means that a Covered Entity’s 

UK business includes security-based 

swap business that, but for the 

counterparty’s failure to qualify as a 

type of counterparty specified in the 

relevant UK EMIR-based requirement, 

would be subject to the relevant UK 

EMIR-based requirement, and otherwise 

is subject to all other relevant UK 

requirements listed in the Order and can 

satisfy any other applicable general 

conditions.106 Accordingly, a Covered 

Entity must choose (1) to apply 

substituted compliance pursuant to the 

Order—including compliance with 

paragraph (a)(13) as applicable—for a 

particular set of entity-level 

requirements with respect to all UK 

business, including its business that 

would be subject to the relevant UK 

EMIR-based requirement if the 

counterparty were the relevant type of 

counterparty; or (2) to comply directly 

with the Exchange Act with respect to 

all UK business. 

H. Security-Based Swap Status Under 

UK EMIR 

A commenter asked the Commission 

to amend the condition in paragraph 

(a)(14) of the proposed Order to permit 

a Covered Entity to apply substituted 

compliance for transactions cleared by a 

non-UK-regulated central 

counterparty.107 As proposed, the 

condition helps to ensure that the 

relevant UK EMIR-based requirements 

will require the Covered Entity to treat 

its security-based swap in a manner 

comparable to Exchange Act 

requirements, while also clarifying that 

a Covered Entity still may apply 

substituted compliance in respect of 

transactions cleared by a UK-regulated 

central counterparty, even if the 

relevant UK EMIR-based requirements 

do not require the Covered Entity to take 

any action in respect of such a centrally 

cleared transaction. Many of the UK 

EMIR-based requirements cited in the 

Order relate to risk mitigation 

techniques for non-centrally cleared 

transactions and apply only to a noncentrally cleared OTC derivative,108

consistent with analogous Exchange Act 

risk mitigation and margin requirements 

for non-centrally cleared security-based 

swaps.109 However, transactions that 

have been cleared by any central 

counterparty, whether or not it is 

regulated by UK authorities, are exempt 

from these UK EMIR-based 

requirements, while only transactions 

that have been cleared by an SECregistered or exempt clearing agency are 

exempt from their Exchange Act 

analogues. With respect to non-centrally 

cleared security-based swaps, the 

Commission believes that these UK 

requirements produce comparable 

outcomes to the analogous Exchange 

Act requirements, as both sets of 

requirements impose similar obligations 

on the Covered Entity. In addition, to 

the extent that these UK EMIR-based 

requirements do not require the Covered 

Entity to apply risk mitigation 

techniques to a security-based swap 

cleared by a UK-regulated central 

counterparty, the Commission also 

believes that these UK requirements 

produce comparable outcomes to the 

analogous Exchange Act requirements. 

The Commission reached this 

conclusion because neither set of 

requirements imposes risk mitigation 

techniques on transactions that have 

been cleared by central counterparties 

subject to regulation in the jurisdiction 

of the authority that supervises 

compliance with the risk mitigation 

requirements. However, to the extent 

that these UK EMIR-based requirements 

do not require the Covered Entity to 

apply risk mitigation techniques to the 

relevant security-based swap because it 

has been cleared by a non-UK-regulated 

central counterparty, the Commission 

does not believe that these UK 

requirements produce comparable 

outcomes to Exchange Act trade 

acknowledgment and verification, 

portfolio reconciliation and dispute 

reporting, portfolio compression, and 

trading relationship documentation 

requirements for non-centrally cleared 

security-based swaps. The Commission 

reached this conclusion because these 

Exchange Act requirements exempt 

centrally cleared security-based swaps 

only if they have been cleared by an 

SEC-registered clearing agency (or, in 

the case of portfolio reconciliation and 

dispute reporting, portfolio 

compression, and trading relationship 

documentation requirements, a clearing 

agency that the Commission has 

exempted from registration). Securitybased swaps that have been cleared by 

a central counterparty that is not SECregistered or exempt or UK-regulated are 

subject to those Exchange Act 

requirements, but are not subject to the 

UK EMIR-based risk mitigation 

requirements. Accordingly, the 

Commission is issuing the condition as 

proposed to require that the relevant 

security-based swap is either (a) an OTC 

derivative or OTC derivative contract 

that has not been cleared by any central 

counterparty and is otherwise subject to 

the relevant UK EMIR-based 

requirements or (b) cleared by a UKregulated central counterparty.110

As an alternative to its suggested 

amendments to the condition, the 

commenter asked the Commission to 

permit the Covered Entity to comply 

directly with the Exchange Act (or with 

another applicable substituted 

compliance order) with respect to 

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111See SIFMA 5/3/2021 Letter at 7. 

112See supra note 80. 

113See SIFMA 5/3/2021 Letter at 7. 

114See SIFMA 5/3/2021 Letter at 7. 

115See UK EMIR article 25(1) (a third country 

central counterparty may provide clearing services 

to UK clearing members or trading venues only if 

it is recognized by the Bank of England); see also 

The Over the Counter Derivatives, Central 

Counterparties and Trade Repositories 

(Amendment, etc., and Transitional Provision) (EU 

Exit) Regulations 2020 (2020/646), regulation 20(2). 

116See The Central Counterparties (Amendment, 

etc., and Transitional Provision) (EU Exit) 

Regulations 2018 (2018/1184), part 6. 

117See para. (a)(14)(ii) of the Order. The 

Commission also is amending the condition so that 

it applies to conditions of the Order that require the 

application of, and the Covered Entity’s compliance 

with, UK EMIR, UK EMIR RTS, UK EMIR Margin 

RTS, and/or other UK requirements adopted 

pursuant to those requirements. 

118See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18412. 

119See para. (a)(16) of the Order. If the Covered 

Entity intends to rely on all the substituted 

compliance determinations in a given paragraph of 

the Order, it can cite that paragraph in the notice. 

For example, if the Covered Entity intends to rely 

on the capital and margin determinations in 

paragraph (c) of the Order, it can indicate in the 

notice that it is relying on the determinations in 

paragraph (c). However, if the Covered Entity 

intends to rely on the margin determination but not 

the capital determination, it will need to indicate 

in the notice that it is relying on paragraph (c)(2) 

of the Order (the margin determination). In this 

case, paragraph (c)(1) of the Order (the capital 

determination) will be excluded from the notice 

and the Covered Entity will need to comply with 

the Exchange Act capital requirements. Further, as 

discussed below in part VIII.B.1, the recordkeeping 

and reporting determinations in the Order have 

been structured to provide Covered Entities with a 

high level of flexibility in selecting specific 

requirements within those rules for which they 

want to rely on substituted compliance. For 

example, paragraph (f)(1)(i) of the Order sets forth 

the Commission’s substituted compliance 

determinations with respect to the requirements of 

Exchange Act rule 18a–5, 17 CFR 240.18a–5. These 

determinations are set forth in paragraphs 

(f)(1)(i)(A) through (O) of the Order. If a Covered 

Entity intends to rely on some but not all of the 

determinations, it will need to identify in the notice 

the specific determinations in this paragraph it 

intends to rely on (e.g., paragraphs (f)(1)(i)(A), (B), 

(C), (D), (G), (H), (I), and (O)). For any 

determinations excluded from the notice, the 

Covered Entity will need to comply with the 

Exchange Act rule 18a–5 requirement. Finally, a 

Covered Entity is able to apply substituted 

compliance at the transaction level (rather than the 

entity level) for certain counterparty protection 

requirements and the recordkeeping requirements 

that are linked to them. In this case, the notice will 

need to indicate the class of transactions (e.g., 

transactions with UK counterparties) for which the 

Covered Entity is applying substituted compliance 

with respect to the Exchange Act counterparty 

protection requirements and linked recordkeeping 

requirements. Similarly, as discussed above, a 

Covered Entity is able to apply substituted 

compliance for entity-level Exchange Act 

requirements to all of its security-based swap 

business that is eligible for substituted compliance 

under the Order, and may either comply directly 

with the Exchange Act or apply substituted 

compliance under another applicable order for its 

security-based swap business that is not eligible for 

substituted compliance under the Order. In this 

case, the notice will need to indicate the scope of 

security-based swap business (e.g., security-based 

swap business carried on from an establishment in 

the UK) for which the Covered Entity is applying 

substituted compliance with respect to the relevant 

Exchange Act entity-level requirements. A Covered 

Continued 

regulated central counterparty, and to 

do so without affecting the Covered 

Entity’s ability to apply substituted 

compliance for entity-level 

requirements with respect to other 

security-based swap business that does 

satisfy the condition.111 Consistent with 

the discussion of the scope of 

substituted compliance for entity-level 

requirements in part III.B.2.b above, for 

entity-level Exchange Act requirements, 

a Covered Entity must choose either (1) 

to apply substituted compliance 

pursuant to the Order with respect to all 

UK business (that is, security-based 

swap business that is both subject to the 

relevant UK requirements listed in the 

Order and that can satisfy any general 

conditions related to those UK 

requirements, including paragraph 

(a)(14)); or (2) to comply directly with 

the Exchange Act with respect to all UK 

business. A transaction cleared by a 

non-UK-regulated central counterparty 

does not satisfy the condition in 

paragraph (a)(14) of the Order. As a 

result, paragraph (a)(14) would not 

permit a Covered Entity to use 

substituted compliance for any 

Exchange Act requirements that apply 

to that transaction if the relevant 

conditions in parts (b) through (f) of the 

Order include a requirement for the 

Covered Entity to be subject to and 

comply with provisions of UK EMIR, 

UK EMIR RTS, UK EMIR Margin RTS, 

and/or other UK requirements adopted 

pursuant to those provisions. Instead, a 

Covered Entity must either comply 

directly with the Exchange Act for such 

a transaction or comply with the terms 

of another applicable substituted 

compliance order that the transaction is 

able to satisfy.112 Such a transaction 

would not be included in the UK 

business for which a Covered Entity 

must elect a single choice—use 

substituted compliance under the Order 

or comply directly with the Exchange 

Act—when complying with entity-level 

Exchange Act requirements. 

The commenter also requested that 

the Commission revise the condition’s 

description of UK-regulated central 

counterparties to clarify that it includes 

UK-regulated third country central 

counterparties, which may have a 

domicile outside the UK and thus may 

not be viewed as ‘‘recognized to clear 

derivatives contracts in the UK.’’ 113

Similarly, the commenter asked the 

Commission to further revise the 

description to encompass the UK’s 

temporary recognition regime for third 

country central counterparties 

implemented as a consequence of the 

UK’s exit from the European Union.114

The Commission intends the condition’s 

description of UK-regulated central 

counterparties to include third country 

central counterparties that relevant UK 

authorities allow to provide clearing 

services to UK clearing members or 

trading venues.115 These central 

counterparties include those ‘‘taken to 

be’’ recognized pursuant to the UK’s 

temporary recognition regime for third 

country central counterparties.116

Accordingly, the Commission is 

amending the condition’s description of 

UK-regulated central counterparties so 

that it describes ‘‘a central counterparty 

that is authorized, recognized, or taken 

to be recognized by a relevant UK 

authority to provide clearing services to 

clearing members or trading venues 

established in the UK.’’ 117

Finally, the Commission is amending 

the condition to clarify that the 

condition applies only if the relevant 

UK EMIR-based requirement applies to 

OTC derivatives that have not been 

cleared by a central counterparty, as 

some provisions of UK EMIR cited in 

the Order, such as UK EMIR articles 

39(4) and (5), are not limited in their 

application to non-centrally cleared 

OTC derivatives. Consistent with the 

condition in paragraph (a)(13) of the 

Order, the Commission also is adding 

references to UK EMIR RTS and UK 

EMIR Margin RTS. 

i. Memorandum of Understanding 

As proposed, the Commission would 

need to have a supervisory and 

enforcement memorandum of 

understanding and/or other arrangement 

with the FCA and the PRA addressing 

cooperation with respect to the Order at 

the time the Covered Entity makes use 

of substituted compliance.118 This 

condition has been modified from the 

proposed Order to reflect that the 

executed version of the memorandum of 

understanding is between the 

Commission, on the one hand, and the 

FCA and the Bank of England (including 

in its capacity as the PRA), on the other 

hand. 

j. Notice of Reliance on Substituted 

Compliance 

Commenters did not address the 

requirement in paragraph (a)(16) of the 

proposed Order for the Covered Entity 

to notify the Commission in writing of 

its intent to rely on substituted 

compliance, and the Commission is 

adopting this requirement as 

proposed.119


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Entity would modify its reliance on the positive 

substituted compliance determinations in the 

Order, and thereby trigger the requirement to 

update its notice, if it adds or subtracts 

determinations for which it is applying substituted 

compliance or completely discontinues its reliance 

on the Order. 

120See Letter from Kyle Brandon, Managing 

Director, Head of Derivative Policy, SIFMA (Jan. 25, 

2021) (‘‘SIFMA 1/25/2021 Letter’’) at 8. 

121SIFMA 1/25/2021 Letter at 8. 

122See UK Substituted Compliance Notice and 

Proposed Order, 86 FR 18394–403, 18415–420. 

123See UK Substituted Compliance Notice and 

Proposed Order, 86 FR 18394–403, 18415–420. 

124See 17 CFR 240.18a–8(c). 

125See 17 CFR 240.18a–8(h). 

126Better Markets Letter at 2–3. 

127These UK provisions include: (1) FCA PRIN 

2.1.1R (Principle 11) and PRA Fundamental Rule 7 

requiring firms to deal with regulators in an open 

and cooperative way, and to disclose to regulators 

anything relating to the firm of which the regulator 

would reasonably expect notice; (2) Supervision 

Sourcebook of the FCA Handbook (‘‘FCA SUP’’) 

15.3.1R and PRA Notification Rule 2.1, which 

require immediate notification if a firm becomes 

aware that certain events have occurred or may 

occur in the foreseeable future, including the failure 

of the firm to satisfy certain threshold conditions, 

any matter which could have a significant adverse 

impact on the firm’s reputation or that could affect 

the firm’s ability to continue to provide adequate 

services to its customers or result in serious 

detriment to its customers, or any matter which 

could result in serious financial consequences to 

the UK financial system or other firms; (3) FCA SUP 

15.3.11R and PRA Notification Rule 2.4, which 

generally require, among other things, notification 

of a significant breach of a rule or certain specified 

provisions or regulations, or the bringing of a 

prosecution related to certain offenses; (4) FCA SUP 

15.3.15R and PRA Notification Rule 2.6, which 

require a firm to provide immediate notification in 

the event that civil proceedings or other specified 

actions are brought against the firm, if disciplinary 

measures or sanctions are imposed on the firm, if 

the firm is prosecuted for, or convicted of, any 

offense involving fraud, or it is removed as a trustee 

of an occupational pension scheme by a court order; 

(5) FCA SUP 15.17R and PRA Notification Rule 2.8, 

which require a firm to provide notification in the 

event that, among other things, the firm becomes 

aware that an employee, or another person whether 

or not employed by the firm, may have committed 

a fraud against a customer, or the firm identifies 

irregularities in its accounting or other records; (6) 

FCA SUP 15.3.21R and PRA Notification Rule 2.9, 

which require a firm to provide immediate 

notification upon the calling of a meeting to 

consider a resolution, or the presentation of a 

petition, for winding up the firm, an application to 

dissolve the firm, or other similar matters; (7) FCA 

CASS 6.6.57R and 7.15.33R, which require, among 

other things, notification if a firm’s internal records 

and accounts related to client assets and money are 

materially out of date, inaccurate, or invalid, the 

firm fails or is unable to respond to shortfalls as 

required, or the firm fails or is unable to conduct 

an internal asset reconciliation, external custody 

reconciliation, or internal and external client 

money reconciliations; and (8) FCA SYSC 18.6.1R 

and PRA Organisational Requirements 2A.1(2), 

2A.2, and 2A.3 through 2A.6, which require firms 

k. Notification Requirements Related to 

Changes in Capital 

In response to the French Substituted 

Compliance Notice and Proposed Order, 

a commenter requested that the 

Commission make more granular 

substituted compliance determinations 

with respect to the Exchange Act 

recordkeeping requirements.120 The 

commenter stated that for ‘‘operational 

reasons’’ a Covered Entity may ‘‘prefer 

to comply directly with certain 

Exchange Act requirements (i.e., not to 

rely on substituted compliance with 

those requirements).’’ 121 The 

Commission took this approach in the 

proposed Order with respect to the 

Exchange Act recordkeeping, reporting, 

and notification requirements.122 As 

part of this approach, the Commission 

also conditioned substituted compliance 

with certain of the discrete 

recordkeeping, reporting, and 

notification requirements on the 

Covered Entity applying substituted 

compliance with respect to the 

substantive Exchange Act requirement 

to which they were linked.123 This 

linked condition was designed to ensure 

that a Covered Entity consistently 

applies substituted compliance with 

respect to the substantive Exchange Act 

requirement and the Exchange Act 

recordkeeping, reporting, or notification 

requirement that complements the 

substantive requirement. 

On further consideration and in light 

of the more granular approach requested 

by the commenter, the Commission 

believes it necessary to do the reverse 

with respect to certain substantive 

financial responsibility requirements: 

Condition substituted compliance with 

respect to the substantive requirement 

on the Covered Entity applying 

substituted compliance with respect to 

the linked recordkeeping, reporting, or 

notification requirement. The Exchange 

Act financial responsibility 

requirements addressed in this Order 

(capital, margin, recordkeeping, 

reporting, notification, and securities 

count requirements) are highly 

integrated. Therefore, implementing the 

reverse conditional link is designed to 

ensure that the granular approach 

requested by the commenter results in 

comparable regulatory outcomes in 

terms of obligations to make and 

preserve records, and to submit reports 

and notifications to the Commission 

concerning the Covered Entity’s 

compliance with the financial 

responsibility rules. It also is designed 

to provide clarity as to the obligations 

of a Covered Entity under this Order 

when using the granular approach to the 

Exchange Act recordkeeping, reporting, 

and notification requirements linked to 

the financial responsibility rules. 

For example, because of the granular 

approach, a Covered Entity could elect 

to apply substituted compliance with 

respect to a substantive Exchange Act 

requirement such as the capital 

requirements of Exchange Act rule 18a– 

1 but elect not to apply substituted 

compliance with respect to a linked 

requirement under Exchange Act rule 

18a–8 to provide the Commission notice 

of a capital deficiency under Exchange 

Act rule 18a–1. In this scenario, the 

Covered Entity would not be subject to 

the condition for applying substituted 

compliance with respect to Exchange 

Act rule 18a–8; namely, that the firm 

provide the Commission copies of 

notifications relating to UK capital 

requirements required under UK law. 

Consequently, as discussed below in 

this section and other sections of this 

release, the Commission is conditioning 

substituted compliance with respect to 

certain substantive Exchange Act 

requirements on the Covered Entity 

applying substituted compliance with 

respect to linked recordkeeping, 

reporting, or notification requirements. 

Exchange Act Rule 18a–8(c) 

Exchange Act rule 18a–8(c) generally 

requires every prudentially regulated 

security-based swap dealer that files a 

notice of adjustment of its reported 

capital category with the Federal 

Reserve Board, the Office of the 

Comptroller of the Currency, or the 

Federal Deposit Insurance Corporation 

to give notice of this fact that same day 

by transmitting a copy to the 

Commission of the notice of adjustment 

of reported capital category in 

accordance with Exchange Act rule 18a– 

8(h).124 Exchange Act rule 18a–8(h) sets 

forth the manner in which every notice 

or report required to be given or 

transmitted pursuant to Exchange Act 

rule 18a–8 must be made.125 While 

Exchange Act rule 18a–8(c) is not linked 

to a substantive Exchange Act 

requirement, it is linked to substantive 

capital requirements applicable to 

prudentially regulated SBS Entities in 

the U.S. (i.e., capital requirements of the 

Federal Reserve Board, the Office of the 

Comptroller of the Currency, or the 

Federal Deposit Insurance Corporation). 

Therefore, to implement the granular 

approach requested by the commenter, 

the Commission is adding a general 

condition that Covered Entities with a 

prudential regulator relying on the final 

Order for substituted compliance must 

apply substituted compliance with 

respect to the requirements of Exchange 

Act rule 18a–8(c) and the requirements 

of Exchange Act rule 18a–8(h) as 

applied to Exchange Act rule (c).126

In its application, the FCA cited 

several UK provisions as providing 

similar outcomes to the notification 

requirements of Exchange Act rule 18a– 

8.127 This general condition is necessary 


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to have arrangements or procedures in place for 

employees to report potential or actual breaches or 

reportable concerns. 

128Better Markets Letter at 2. 

129See Exchange Act Release No. 71958 

(September 19, 2019), 84 FR 68550, 68589–90 (Dec. 

16, 2019) (‘‘Recordkeeping and Reporting Adopting 

Release’’) (citing Exchange Act Release No. 71958 

(Aug. 17, 2014) 79 FR 25193 (May 2, 2014) at 

25249). 

130See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18383. 

131See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18383. 

132See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18383 and n.61. Each of 

the comparable UK requirements listed in the 

proposed Order applies to a uniquely defined set 

of UK-authorized firms. See UK Substituted 

Compliance Notice and Proposed Order, 86 FR at 

18384–85 and n.70. To assist UK firms in 

determining whether they are subject to these 

requirements, the Commission preliminarily 

determined that any Covered Entity that is an 

‘‘IFPRU investment firm,’’ ‘‘UK bank’’ or ‘‘UK 

designated investment firm,’’ each as defined for 

purposes of UK law, would be subject to all of the 

required UK requirements related to internal risk 

management requirements and thus eligible to 

apply substituted compliance for internal risk 

management requirements. The Commission also 

preliminarily determined that a Covered Entity that 

is a ‘‘financial counterparty’’ would be subject to 

the required UK requirements related to trade 

acknowledgment and verification, portfolio 

reconciliation and dispute reporting, portfolio 

compression, and trading relationship 

documentation and thus eligible to apply 

substituted compliance in these areas. See UK 

Substituted Compliance Notice and Proposed 

Order, 86 FR at 18384–85. 

133See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18383. The trading 

relationship documentation provisions of rule 

15Fi–5(b)(5), 17 CFR 240.15Fi–5(b)(5), require 

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 UK law would not 

be expected to address the disclosure of information 

related to insolvency procedures under U.S. law. 

134See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18383. 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). UK 

requirements provide that firms must report at least 

monthly, to the FCA, disputes between 

counterparties in excess of Ö15 million and 

outstanding for at least 15 business days. 

in order to clarify that a prudentially 

regulated Covered Entity must provide 

the Commission with copies of any 

notifications regarding changes in the 

Covered Entity’s capital situation 

required by UK law. In particular, a 

prudentially regulated Covered Entity 

could elect not to apply substituted 

compliance with respect to Exchange 

Act rule 18a–8(c). However, because the 

Covered Entity is not required to 

provide any notifications to the Federal 

Reserve Board, the Office of the 

Comptroller of the Currency, or the 

Federal Deposit Insurance Corporation, 

‘‘compliance’’ with the provisions of 

Exchange Act rule 18a–8(c) raises a 

question as to the Covered Entity’s 

obligations under this Order to provide 

the Commission with notification of 

changes in capital. 

Moreover, a commenter stated that 

foreign financial services firms were 

among the entities that used emergency 

lending facilities in the U.S. along with 

other U.S. measures to address the 2008 

financial crisis.128 The Commission 

adopted Exchange Act rule 18a–8(c) to 

require SBS Entities with a prudential 

regulator to give notice to the 

Commission when filing an adjustment 

of reported capital category because 

such notices may indicate that the entity 

is in or is approaching financial 

difficulty.129 The Commission has a 

regulatory interest in being notified of 

changes in the capital of a prudentially 

regulated Covered Entity, as it could 

signal the firm is in or approaching 

financial difficulty and presents a risk to 

U.S. security-based swap markets and 

participants. For the foregoing reasons, 

the Commission is conditioning 

applying substituted compliance 

pursuant to the Order on the general 

condition that a prudentially regulated 

Covered Entity apply substituted 

compliance with respect to Exchange 

Act rule 18a–8(c) and the requirements 

of Exchange Act rule 18a–8(h) as 

applied to Exchange Act rule 18a–8(c). 

IV. Substituted Compliance for Risk 

Control Requirements 

A. Proposed Approach 

The FCA Application in part 

requested substituted compliance in 

connection with risk control 

requirements relating to: 

• Internal risk management—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.130

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 securitybased swap businesses. 

In proposing to provide conditional 

substituted compliance in connection 

with this part of the FCA Application, 

the Commission preliminarily 

concluded that the relevant UK 

requirements in general would help to 

produce regulatory outcomes that are 

comparable to those associated with 

Exchange Act risk control requirements, 

by subjecting Covered Entities to risk 

mitigation and documentation practices 

that are appropriate to the risks 

associated with their security-based 

swap businesses.131 Substituted 

compliance under the proposed Order 

was to be conditioned in part on 

Covered Entities being subject to and 

complying with the specified UK 

provisions that in the aggregate help to 

produce outcomes that are comparable 

to those associated with the risk control 

requirements under the Exchange 

Act.132

Substituted compliance under the 

proposed Order further would be 

subject to certain additional conditions 

to help ensure the comparability of 

outcomes. First, substituted compliance 

for Exchange Act trading relationship 

documentation requirements would not 

extend to certain disclosures regarding 

legal and bankruptcy status.133 Second, 

substituted compliance for portfolio 

reconciliation and 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 the Covered Entity 

provides those reports to the FCA 

pursuant to UK law.134


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135See para. (b) of the Order. 

136See SIFMA 5/3/2021 Letter at 9. The 

commenter also requested that the Commission not 

require a Covered Entity to be subject to and 

comply with some of the UK risk control 

requirements listed in the proposed Order. See 

SIFMA 5/3/2021 Letter at 9 and Appendix A part 

(b). The Commission addresses those requests in the 

relevant sections of this part IV below. 

137See Better Markets Letter at 2. The commenter 

also stated that, if the Commission nevertheless 

makes a positive substituted compliance 

determination, it must at a minimum ensure that 

the conditions in the proposed Order ‘‘are applied 

with full force and without exceptions or dilution.’’ 

The Commission addresses that comment in the 

relevant sections of this part IV below. 

138See paras. (b)(1) through (b)(5) of the Order. 

139See paras. (b)(3)(ii) of the Order. This 

condition promotes comparability with the 

Exchange Act rule requiring reports to the 

Commission regarding significant valuation 

disputes, while leveraging UK reporting provisions 

to avoid the need for Covered Entities to create 

additional reporting frameworks. When it proposed 

the condition to report valuation disputes, the 

Commission recognized that valuation inaccuracies 

may lead to uncollateralized credit exposure and 

the potential for loss in the event of default. See 

Exchange Act Release No. 84861 (Dec. 19, 2018), 84 

FR 4614, 4621 (Feb. 15, 2019). It thus is important 

that the Commission be informed regarding 

valuation disputes affecting SBS Entities. The 

principal difference between the Exchange Act and 

UK valuation dispute reporting requirements 

concerns the timing of notices. Exchange Act rule 

15Fi–3 requires SBS Entities to report promptly to 

the Commission valuation disputes in excess of $20 

million that have been outstanding for three or five 

business days (depending on the counterparty 

type). UK EMIR RTS article 15(2) requires financial 

counterparties to report to the FCA at least monthly 

any disputes between counterparties in excess of 

Ö15 million and outstanding for at least 15 business 

days. The Commission is mindful that the UK 

provision does not provide for notice as quickly as 

rule 15Fi–3, but in the Commission’s view on 

balance this difference would not be inconsistent 

with the conclusion that the two sets of 

requirements, taken as a whole, promote 

comparable regulatory outcomes. 

140See para. (b)(5) of the Order. The Exchange 

Act rule 15Fi-5 disclosures address information 

regarding (1) the status of the SBS Entity or its 

counterparty as an insured depository institution or 

financial counterparty and (2) the possibility that in 

certain circumstances the SBS Entity or its 

counterparty may be subject to the insolvency 

regime set forth in Title II of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act or the 

Federal Deposit Insurance Act, which may affect 

rights to terminate, liquidate, or net security-based 

swaps. See Exchange Act Release No. 87782 (Dec. 

18, 2019), 85 FR 6359, 6374 (Feb. 4, 2020) (‘‘Risk 

Mitigation Adopting Release’’). Documentation 

requirements under applicable UK law do not 

address the disclosure of information related to 

insolvency procedures under U.S. law. However, 

the absence of such disclosures would not appear 

to 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 apply to nonU.S. counterparties in most cases. Moreover, UK 

EMIR Margin RTS article 2 requires counterparties 

to establish, apply, and document risk management 

procedures providing for or specifying the terms of 

agreements entered into by the counterparties, 

including applicable governing law for non– 

centrally cleared derivatives. When counterparties 

enter into a netting or collateral exchange 

agreement, they also must perform an independent 

legal review of the enforceability of those 

agreements. 

B. Commenter Views and Final 

Provisions 

After considering commenters’ 

recommendations regarding the risk 

control requirements, the Commission is 

making positive substituted compliance 

determinations in connection with 

internal risk management, trade 

acknowledgment and verification, 

portfolio reconciliation and dispute 

reporting, portfolio compression, and 

trading relationship documentation 

requirements. As discussed below, the 

final Order has been changed from the 

proposed Order in certain respects in 

response to comments.135

One commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions.136 Another 

commenter stated that UK requirements 

are not sufficiently comparable to 

Exchange Act requirements.137 The 

Commission continues to conclude that, 

taken as a whole, applicable 

requirements under UK law subject 

Covered Entities to risk mitigation and 

documentation practices that are 

appropriate to the risks associated with 

their security-based swap businesses, 

and thus help to 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 UK requirements, the 

Commission continues to believe that 

those differences on balance should not 

preclude substituted compliance for 

these requirements, as the relevant UK 

requirements taken as a whole help to 

produce comparable regulatory 

outcomes. 

To help ensure the comparability of 

outcomes, substituted compliance for 

risk control requirements is subject to 

certain conditions. Substituted 

compliance for internal risk 

management, trade acknowledgment 

and verification, portfolio reconciliation 

and dispute reporting, portfolio 

compression, and trading relationship 

documentation requirements is 

conditioned on the Covered Entity being 

subject to, and complying with, relevant 

UK requirements.138 In addition, 

consistent with the proposed Order, 

substituted compliance for portfolio 

reconciliation and dispute reporting 

requirements is conditioned on the 

Covered Entity providing the 

Commission with reports regarding 

disputes between counterparties on the 

same basis as the Covered Entity 

provides those reports to the FCA 

pursuant to UK law.139 Finally, 

consistent with the proposed Order, 

substituted compliance for trading 

relationship documentation does not 

extend to disclosures regarding legal 

and bankruptcy status that are required 

by Exchange Act rule 15Fi–5(b)(5) when 

the counterparty is a U.S. person.140 A 

Covered Entity that is unable to comply 

with an applicable condition—and thus 

is not eligible to use substituted 

compliance for the particular set of 

Exchange Act risk control requirements 

related to that condition—nevertheless 

may use substituted compliance for 

another set of Exchange Act 

requirements addressed in the Order if 

it complies with the conditions to the 

relevant parts of the Order. 

Under the Order, substituted 

compliance for risk control 

requirements (relating to internal risk 

management, trade acknowledgment 

and verification, portfolio reconciliation 

and dispute reporting, portfolio 

compression, and trading relationship 

documentation) is not subject to a 

condition that the Covered Entity apply 

substituted compliance for related 

recordkeeping requirements in 

Exchange Act rules 18a–5 and 18a–6. A 

Covered Entity that applies substituted 

compliance for one or more risk control 

requirements, but does not apply 

substituted compliance for the related 

recordkeeping requirements in 

Exchange Act rules 18a–5 and 18a–6, 

will remain subject to the relevant 

provisions of Exchange Act rules 18a–5 

and 18a–6. Those rules require the 

Covered Entity to make and preserve 

records of its compliance with Exchange 

Act risk control requirements and of its 

security-based swap activities required 

or governed by those requirements. A 

Covered Entity that applies substituted 

compliance for a risk control 

requirement, but complies directly with 

related recordkeeping requirements in 

rules 18a–5 and 18a–6, therefore must 

make and preserve records of its 

compliance with the relevant conditions 

to the Order and of its security-based 

swap activities required or governed by 

those conditions and/or referenced in 

the relevant parts of rules 18a–5 and 

18a–6. 

The Commission details below its 

consideration of comments on the 

proposed Order. 

1. Internal Risk Management 

Exchange Act section 15F(j)(2) 

requires a registered SBS Entity to 

establish robust and professional risk 


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141 17 CFR 240.15Fh–3(h)(2)(iii)(I). 

142See SIFMA 5/3/2021 Letter at 20–21 and 

Appendix A part (d)(3). 

143See Better Markets Letter at 2. 

144See SIFMA 5/3/2021 Letter Appendix A part 

(b)(1). 

145See SIFMA 5/3/2021 Letter Appendix A part 

(b)(1). 146See SIFMA 5/3/2021 Letter Appendix A part 

(b)(1) n.2. 147See SIFMA 5/3/2021 Letter Appendix A part 

(b)(1). 

148The FCA also recommended that the 

Commission delete from the Order the requirement 

for a Covered Entity to be subject to and comply 

with provisions of FCA SYSC 19D and PRA 

Remuneration Rule 6.2 (along with corollary 

provisions of FCA SYSC 19A applicable to IFPRU 

firms) as a condition to substituted compliance for 

internal risk management requirements. See FCA 

Comments (stating that ‘‘these provisions appear in 

excess of what is strictly required for substituted 

compliance with the US provision’’). 

management systems adequate for 

managing its day-to-day business. In 

addition, Exchange Act rule 15Fh– 

3(h)(2)(iii)(I) 141 requires an SBS Entity 

to establish and maintain a system to 

supervise, and to diligently supervise, 

its business and the activities of its 

associated persons. This system of 

internal supervision must include, in 

relevant part, the establishment, 

maintenance, and enforcement of 

written policies and procedures 

reasonably designed, taking into 

consideration the nature of the SBS 

Entity’s business, to comply with its 

duty under Exchange Act section 

15F(j)(2) to establish an internal risk 

management system. 

The Commission continues to believe 

that UK internal risk management 

requirements promote regulatory 

outcomes comparable to Exchange Act 

requirements, and is making a positive 

substituted compliance determination 

for internal risk management 

requirements that is consistent with the 

proposed Order except for the addition 

of certain risk management 

requirements. A commenter requested 

that the Commission not require a 

Covered Entity to be subject to and 

comply with certain of the UK 

requirements specified in the proposed 

Order.142 By contrast, another 

commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 143 The 

Commission details below its 

consideration of comments received. 

A commenter stated that the 

Commission should delete from the 

Order the provisions of FCA IFPRU, 

FCA BIPRU, and FCA SYSC 19A listed 

in paragraphs (b)(1)(i) and (b)(1)(iv) of 

the proposed Order. These provisions 

apply only to IFPRU investment firms, 

and the commenter stated that it expects 

only ‘‘banks and PRA-designated 

investment firms’’ will register as SBS 

Entities.144 For the reasons described in 

part III.B.2.e above, the Commission is 

retaining the references to these 

provisions. 

Similarly, the commenter stated that 

the Commission should delete from the 

Order the provisions of FSMA and FCA 

COND listed in paragraph (b)(1)(v) of 

the proposed Order that apply to firms 

regulated only by the FCA, rather than 

to firms dually regulated by both the 

FCA and the PRA.145 The commenter 

again stated that it expects only dually 

regulated ‘‘banks and PRA-designated 

investment firms’’ will register as SBS 

Entities.146 The proposed Order would 

not require a Covered Entity that is a 

dually regulated firm to be subject to 

and comply with these provisions. 

Rather, paragraph (b)(1)(v) of the 

proposed Order would require the 

Covered Entity to be subject to and 

comply with either the provisions of 

FSMA and FCA COND that apply to 

solo-regulated firms or analogous 

provisions that apply to dually 

regulated firms. Accordingly, the 

Commission is retaining the references 

to these provisions. 

The commenter also recommended 

that the Commission delete from the 

Order the following provisions because 

they do not correspond to and go 

beyond Exchange Act internal risk 

management requirements: 147

• PRA Internal Capital Adequacy 

Assessment Rules 4.1 through 4.4, 

which implement CRD article 79, 

address a Covered Entity’s management 

of credit and counterparty risk. PRA 

Internal Capital Adequacy Assessment 

Rule 5.1, which implements CRD article 

80, addresses a Covered Entity’s 

management of residual risk. PRA 

Internal Capital Adequacy Assessment 

Rule 6.1, which implements CRD article 

81, addresses a Covered Entity’s 

management of concentration risk. PRA 

Internal Capital Adequacy Assessment 

Rules 7.1 and 7.2, which implement 

CRD article 82, address a Covered 

Entity’s management of securitization 

risk. PRA Internal Capital Adequacy 

Assessment Rules 8.1 through 8.5, 

which implement CRD article 83, 

address a Covered Entity’s management 

of market risk. PRA Internal Capital 

Adequacy Assessment Rule 9.1, which 

implements CRD article 84, addresses a 

Covered Entity’s management of interest 

rate risk. PRA Internal Capital Adequacy 

Assessment Rules 10.1 and 10.2, which 

implement CRD article 85, address a 

Covered Entity’s management of 

operational risk. PRA Internal Liquidity 

Adequacy Assessment Rules 3.1 through 

3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2, 11.4, 

12.1, 12.3, and 12.4, which implement 

CRD article 86, address a Covered 

Entity’s management of liquidity risk 

and funding risk. PRA Internal Capital 

Adequacy Assessment Rules 11.1 

through 11.3, which implement CRD 

article 87, address a Covered Entity’s 

management of risk from excessive 

leverage. 

• FCA SYSC 4.1.1R, which 

implements a portion of CRD article 

74(1), requires a Covered Entity to have 

robust governance arrangements, 

including effective processes to identify, 

manage, monitor, and report the risks it 

is or might be exposed to. FCA SYSC 

4.1.2R and PRA General Organisational 

Requirement Rule 2.2, which implement 

CRD article 74(2), requires these 

arrangements and processes to be 

comprehensive and proportionate to the 

nature, scale, and complexity of the 

risks of the Covered Entity’s business 

and activities. FCA SYSC 7.1.4R, 

7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R, 

7.1.20R, 7.1.21R, and 7.1.22R and PRA 

Risk Control Rules 2.3, 2.7, and 3.1 

through 3.5, which implement CRD 

article 76, address the Covered Entity’s 

internal governance structures for risk 

management. 

• FCA SYSC 19D.2.1R and PRA 

Remuneration Rule 6.2 require a 

Covered Entity to establish and 

maintain a remuneration policy, 

practices, and procedures that are 

consistent with and that promote sound 

and effective risk management.148

• FSMA schedule 6 part 3C and FCA 

COND 2.4.1C, which address issues 

similar to MiFID articles 16(4) and (5), 

require the Covered Entity’s nonfinancial resources to be appropriate in 

relation to its regulated activities, taking 

into account factors such as the nature 

and scale of the business, the risks to 

the continuity of the Covered Entity’s 

services, the Covered Entity’s 

membership in a group or any effect that 

membership may have, the skills and 

experience of those managing the 

Covered Entity’s affairs, and whether 

the Covered Entity’s non-financial 

resources are sufficient to enable it to 

comply with applicable requirements of 

the FCA. FSMA schedule 6 part 5D, 

which also addresses issues similar to 

MiFID articles 16(4) and (5), requires the 

Covered Entity’s business to be 

conducted in a prudent manner, which 

requires the Covered Entity to have 

appropriate financial and non-financial 

resources, taking into account factors 

such as the nature and complexity of the 


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149The commenter stated that these requirements 

are more appropriately addressed in connection 

with substituted compliance for internal 

supervision and chief compliance officer 

requirements. As discussed below, the Commission 

believes that these UK requirements are relevant to 

substituted compliance for Exchange Act internal 

risk management requirements. 

150The Commission further believes that those 

conditions to substituted compliance do not expand 

the scope of Exchange Act requirements because 

substituted compliance is an option available to 

non-U.S. person SBS Entities—not a mandate. 

151See Better Markets Letter at 2. 

152See para. (b)(1) of the Order. 

Covered Entity’s regulated activities, the 

nature and scale of the business, and the 

risks to the continuity of the Covered 

Entity’s services. To have appropriate 

non-financial resources, the Covered 

Entity in particular must have resources 

to identify, monitor, measure, and take 

action to remove or reduce risks to the 

accuracy of the Covered Entity’s 

valuation of its assets and liabilities, be 

managed to a reasonable standard of 

effectiveness and have non-financial 

resources sufficient to enable it to 

comply with applicable requirements of 

the PRA. PRA Fundamental Rules 3 

through 6 similarly require the Covered 

Entity to act in a prudent manner, 

maintain adequate financial resources at 

all times, have effective risk strategies 

and risk management systems and 

organize and control its affairs 

responsibly and effectively. 

• UK CRR article 286 requires a 

Covered Entity to establish and 

maintain a counterparty credit risk 

management framework, including 

policies, processes, and systems to 

ensure the identification, measurement, 

approval, and internal reporting of 

counterparty credit risk and procedures 

for ensuring that those policies, 

processes, and systems are complied 

with. UK CRR article 287 addresses the 

internal governance of risk control and 

collateral management functions for 

Covered Entities that use internal 

models to calculate capital 

requirements. UK CRR article 288 

requires the Covered Entity to conduct 

regular, independent reviews of its 

counterparty credit risk management 

systems and any risk control and 

collateral management functions 

required by UK CRR article 287. UK 

CRR article 293 addresses internal 

governance of the Covered Entity’s 

internal risk management systems and 

validation of risk models that the 

Covered Entity uses. 

• UK EMIR Margin RTS article 2 

requires counterparties to non-centrally 

cleared OTC derivative contracts to 

establish, apply, and document risk 

management procedures for the 

exchange of collateral. 

• UK MiFID Org Reg article 21 149

addresses a Covered Entity’s systems, 

internal controls, and arrangements for 

management of a variety of risk areas, 

including internal decision-making, 

allocation, proper discharge of 

responsibilities, compliance with 

decisions and internal procedures, 

employment of personnel able to 

discharge their responsibilities, internal 

reporting and communication of 

information, adequate and orderly 

recordkeeping, safeguarding 

information, business continuity, and 

accounting policies and procedures, as 

well as regular evaluation of the 

adequacy and effectiveness of those 

systems, internal controls, and 

arrangements. UK MiFID Org Reg article 

22 addresses a Covered Entity’s policies 

and procedures for detecting and 

minimizing risk of failure to comply 

with its obligations under UK 

provisions that implement MiFID, as 

well as the Covered Entity’s 

independent compliance function that 

monitors and assesses the adequacy and 

effectiveness of those policies and 

procedures. UK MiFID Org Reg article 

24 addresses a Covered Entity’s internal 

audit function that evaluates the 

adequacy and effectiveness of the 

Covered Entity’s systems, internal 

controls, and arrangements. 

Taken as a whole, these UK 

requirements help to produce regulatory 

outcomes comparable to Exchange Act 

requirements to establish robust and 

professional internal risk management 

systems adequate for managing the 

Covered Entity’s day-to-day business. 

The comparability analysis requires 

consideration of Exchange Act 

requirements as a whole against 

analogous UK requirements as a whole, 

recognizing that U.S. and non-U.S. 

regimes may follow materially different 

approaches in terms of specificity and 

technical content. This ‘‘as a whole’’ 

approach—which the Commission is 

following in lieu of requiring 

requirement-by-requirement 

similarity—further means that the 

conditions to substituted compliance 

should encompass all UK requirements 

that establish comparability with the 

applicable regulatory outcome, and 

helps to avoid ambiguity in the 

application of substituted compliance. It 

would be inconsistent with the holistic 

approach to excise relevant 

requirements and leave only the 

residual UK provisions that most closely 

resemble the analogous Exchange Act 

requirements.150 Moreover, because 

Exchange Act internal risk management 

requirements serve the purpose of 

establishing internal systems to manage 

the Covered Entity’s risks, including 

risks of non-compliance with applicable 

laws, it would be paradoxical to 

conclude that an SBS Entity that fails to 

implement requisite internal 

supervision practices nonetheless may 

be considered to be following internal 

risk management standards that are 

sufficient to meet the regulatory 

outcomes required under the Exchange 

Act; an internal supervision-related 

failure necessarily also constitutes a risk 

management failure. For these reasons, 

the Commission concludes that these 

UK provisions appropriately constitute 

part of the substituted compliance 

conditions for internal risk management 

requirements and is retaining the 

references to these provisions. In 

reaching this conclusion, the 

Commission emphasizes the importance 

of ensuring that substituted compliance 

is grounded on the comparability of 

regulatory outcomes. Retaining the 

conditions of the Order related to these 

UK provisions also should address 

another commenter’s concern that any 

substituted compliance determination 

not weaken the internal risk 

management conditions in the proposed 

Order.151

In addition, the Commission is adding 

a requirement for a Covered Entity using 

substituted compliance for internal risk 

management requirements to be subject 

to and comply with provisions that 

implement MiFID articles 16 and 23, 

provisions of UK MiFID Org Reg related 

to MiFID articles 16 and 23, and 

provisions that implement CRD articles 

88(1), 91(1), (2), and (7) through (9), 92, 

94, and 95.152 These provisions address 

additional aspects of a Covered Entity’s 

management of the risks posed by 

internal governance and organization, 

business operations, conflicts of interest 

with and between clients, and senior 

staff remuneration policies. In deciding 

to make a positive substituted 

compliance determination for UK 

internal risk management requirements, 

the Commission considers that the 

Order’s condition requiring a Covered 

Entity to be subject to and comply with 

all of the UK internal risk management 

requirements listed in paragraph (b)(1) 

of the Order help to produce regulatory 

outcomes comparable to Exchange Act 

internal risk management requirements. 

In deciding to make a positive 

substituted compliance determination 

for UK internal risk management 

requirements, the Commission 

considers that the Order’s condition 

requiring a Covered Entity to be subject 

to and comply with all of the UK 

requirements listed in paragraph (b)(1) 


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153See Better Markets Letter at 5–6 (arguing that 

the Commission’s reliance ‘‘on multiple layers of 

non-binding guidance, one of which is issued by a 

jurisdiction the UK does not belong to, one of 

which is so vague as to border on useless, would 

be an abdication of the SEC’s responsibility to 

protect the U.S. financial system’’). 

154See Better Markets Letter at 2. 

155See UK EMIR article 11(1)(a). 

156See UK EMIR RTS articles 12(1) and (2). 

157See UK EMIR article 2(8) (definition of 

‘‘financial counterparty’’); UK EMIR article 2(9) 

(definition of ‘‘non-financial counterparty’’). 

158See UK EMIR RTS article 1(c). 

159The Order defines a Covered Entity to include 

a MiFID investment or a third country investment 

firm. A MiFID investment firm is included in the 

definition of ‘‘financial counterparty,’’ so a Covered 

Entity that is a MiFID investment firm is also a 

financial counterparty and thus is ‘‘subject to’’ UK 

EMIR article 11 and related provisions of UK EMIR 

RTS and UK EMIR Margin RTS for purposes of the 

Order. A third country investment firm is not 

included in the definitions of ‘‘financial 

counterparty’’ or ‘‘non-financial counterparty,’’ but 

may nevertheless be ‘‘subject to’’ UK EMIR article 

11 and related provisions of UK EMIR RTS and UK 

EMIR Margin RTS for purposes of the Order if its 

OTC derivative contract would be subject to those 

obligations if it were established in the UK and 

either the contract has a direct, substantial, and 

foreseeable effect within the UK or applying UK 

EMIR article 11 is necessary or appropriate to 

prevent evasion of UK EMIR. See UK EMIR article 

11(12). 

160See UK EMIR article 2(8) (definition of 

‘‘financial counterparty’’ limited to entities defined 

or authorized in a manner that in most instances is 

reserved for UK-established entities); UK EMIR 

article 2(9) (definition of ‘‘non-financial 

counterparty’’ limited to UK-established entities); 

UK EMIR article 11(1)(a), 11(12) (confirmation 

requirement applies to financial counterparties, 

non-financial counterparties, and third-country 

entities that would be subject to the confirmation 

requirement if established in the UK and either the 

relevant contract has a direct, substantial, and 

foreseeable effect in the UK or the obligation is 

necessary or appropriate to prevent the evasion of 

any provision of UK EMIR). 

161Paragraph (b)(2) of the Order requires the 

Covered Entity to be subject to and comply with UK 

EMIR-based trade acknowledgment and verification 

requirements. A Covered Entity will be subject to 

those requirements only if it is a financial 

counterparty, non-financial counterparty, or thirdcountry entity that would be subject to the 

confirmation requirement if established in the UK 

and either the relevant contract has a direct, 

substantial, and foreseeable effect in the UK or the 

obligation is necessary or appropriate to prevent the 

evasion of any provision of UK EMIR. See UK EMIR 

article 11(1)(a), 11(12). 

162See UK EMIR RTS article 1(c). 

163See European Securities and Markets 

Authority, Questions and Answers: Implementation 

of the Regulation (EU) No 648/2012 on OTC 

Derivatives, Central Counterparties and Trade 

Repositories (EMIR), available at: https://

www.esma.europa.eu/sites/default/files/library/ 

esma70-1861941480-52_qa_on_emir_

implementation.pdf (‘‘ESMA EMIR Q&A’’). 

164See ESMA EMIR Q&A, OTC Answer 12(b). 

165See ESMA EMIR Q&A, OTC Answer 5(a). 

166See Financial Conduct Authority, ‘‘Brexit: our 

approach to EU non-legislative materials,’’ para. 9, 

available at: https://www.fca.org.uk/publication/ 

corporate/brexit-our-approach-to-eu-nonlegislative-materials.pdf (‘‘FCA Brexit Guidance’’); 

see also FCA Brexit Guidance at para. 12 (‘‘We will 

continue to have regard to other EU non-legislative 

material where and if they are relevant, taking 

account of Brexit and ongoing domestic legislation. 

Firms, market participants and stakeholders should 

also continue to do so.’’). 

of the Order help to produce regulatory 

outcomes comparable to Exchange Act 

internal risk management requirements. 

The Commission recognizes that some 

of the UK requirements related to 

internal risk management follow a more 

granular approach than the high-level 

approach of Exchange Act internal risk 

management requirements, but these UK 

requirements, taken as a whole, are 

crafted to promote a Covered Entity’s 

risk management. Within the requisite 

outcomes-oriented approach for 

analyzing comparability, the 

Commission concludes that a Covered 

Entity’s failure to comply with any of 

those UK internal risk management 

requirements would be inconsistent 

with a Covered Entity’s obligations 

under Exchange Act internal risk 

management requirements and that 

compliance with the full set of UK 

internal risk management requirements 

listed in paragraph (b)(1) of the Order 

would promote comparable regulatory 

outcomes. 

2. Trade Acknowledgement and 

Verification 

The Commission continues to believe 

that UK trade acknowledgment and 

verification requirements promote 

regulatory outcomes comparable to 

Exchange Act requirements, and is 

making a positive substituted 

compliance determination for trade 

acknowledgment and verification 

requirements consistent with the 

proposed Order. The Commission 

details below its consideration of 

comments received. 

One commenter stated that the 

Commission inappropriately attempted 

to compensate for inadequate UK trade 

acknowledgment and verification 

requirements by relying on guidance.153

The same commenter stated that, if the 

Commission nevertheless makes a 

positive substituted compliance 

determination, it must at a minimum 

ensure that the conditions in the 

proposed Order ‘‘are applied with full 

force and without exceptions or 

dilution.’’ 154 The commenter 

misinterpreted the role of guidance in 

the Commission’s comparability 

analysis. 

UK EMIR article 11 requires 

‘‘financial counterparties’’ and ‘‘nonfinancial counterparties’’ to ensure 

appropriate procedures and 

arrangements are in place to achieve 

timely confirmation of the terms of an 

OTC derivative contract.155 Similarly, 

UK EMIR RTS article 12 requires noncentrally cleared OTC derivative 

contracts between ‘‘financial 

counterparties’’ and ‘‘non-financial 

counterparties’’ to be confirmed.156

These counterparty categories do not 

include entities organized outside the 

UK, such as U.S. persons.157

Confirmation means the documentation 

of the agreement of the counterparties to 

all the terms of the OTC derivative 

contract.158 The UK requirements as a 

whole thus require a Covered Entity 159

to provide a confirmation that serves as 

a trade acknowledgment, without regard 

to where its counterparty is organized, 

and also require the Covered Entity’s 

counterparty, when it is a financial 

counterparty or non-financial 

counterparty, to provide a confirmation 

that serves as the trade verification, and 

the Commission considers these 

requirements to promote regulatory 

outcomes comparable to Exchange Act 

trade acknowledgment and verification 

requirements for those counterparties. 

The UK requirements in most instances 

do not require a Covered Entity’s 

counterparty that is organized outside 

the UK to provide a confirmation that 

serves as the Exchange Act trade 

verification,160 though they do require 

the Covered Entity to confirm the 

transaction.161 Confirmation is defined 

as documenting the agreement of the 

Covered Entity and its counterparty to 

all the terms of the OTC derivative 

contract.162

To confirm that the Commission’s 

analysis of the UK requirements for OTC 

derivatives contracts with non-UKorganized counterparties is consistent 

with the FCA’s view of these 

requirements, the Commission 

considered the requirements together 

with guidance on this exact point from 

the FCA and ESMA.163 In interpreting 

EU confirmation requirements that are 

identical to the relevant UK 

requirements, ESMA’s guidance 

provides that ‘‘when an EU counterparty 

is transacting with a third country 

entity, the EU counterparty would be 

required to ensure that the requirements 

for . . . timely confirmation . . . are 

met for the relevant . . . transactions 

even though the third country entity 

would not itself be subject to EMIR.’’ 164

That guidance also provides that 

compliance with the EMIR confirmation 

requirements means ‘‘reach[ing] a 

legally binding agreement to all the 

terms of an OTC derivative contract.’’ 165

The FCA has published guidance 

indicating that ESMA’s guidance ‘‘will 

remain relevant [after the UK’s exit from 

the EU] to the FCA and market 

participants in their compliance with 

regulatory requirements.’’ 166 This 


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167See paras. (a)(13) and (a)(14) of the Order. 

168See SIFMA 5/3/2021 Letter at 9 and Appendix 

A part (b)(2). 

169See Better Markets Letter at 2. 

170See Better Markets Letter at 4 (requesting the 

Commission make a ‘‘well-supported, evidencebased determination’’). As discussed in part II.C.1 

above, the Commission believes that the present 

approach toward comparability analyses—which 

are based on a close reading of relevant foreign 

requirements and careful consideration of 

regulatory outcomes—appropriately reflects the 

holistic comparability approach and the rejection of 

requirement-by-requirement similarity. 

171See Better Markets Letter at 3–4 (stating that 

the Commission must provide analysis that the 

substituted compliance determination would 

protect the American financial system). As 

discussed in part II.C.1 above, the Commission 

believes that additional conditions related to 

protection of the American financial system would 

not be useful. 

172See SIFMA 5/3/2021 Letter at 9. 

173See Better Markets Letter at 2. 

174See para. (b)(3) of the Order. 

175See para. (b)(3)(ii) of 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 UK 

EMIR RTS article 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. 

176See SIFMA 5/3/2021 Letter at 9. 

177See Better Markets Letter at 2. 

guidance thus is consistent with the 

Commission’s analysis of the legally 

binding UK requirements discussed 

above, and provides the Commission 

additional comfort that its analysis of 

complex UK requirements is consistent 

with the FCA’s view of those 

requirements. For these reasons, the 

Commission disagrees with the 

commenter and believes that the UK 

trade acknowledgment and verification 

requirements promote regulatory 

outcomes comparable to Exchange Act 

requirements. 

The Commission agrees with the 

comments in the Better Markets Letter 

that the proposed conditions to 

substituted compliance for trade 

acknowledgment and verification 

requirements should be retained. To 

further ensure that a Covered Entity 

using substituted compliance for trade 

acknowledgment and verification 

requirements will be required to 

document the agreement of the 

counterparties to all the terms of the 

relevant transaction, the Commission is 

issuing the Order as proposed with 

general conditions that will require the 

Covered Entity to treat its counterparty 

as a counterparty with whom UK trade 

acknowledgment and verification 

requirements require the Covered Entity 

to reach an agreement to all the terms 

of the OTC derivative contract and to 

ensure that the relevant security-based 

swap is either non-centrally cleared and 

subject to UK EMIR or centrally cleared 

by a UK central counterparty.167

Another commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions, but requested 

that the Commission not require a 

Covered Entity to be subject to and 

comply with UK EMIR RTS article 12(4) 

because it does not relate to and goes 

beyond Exchange Act trade 

acknowledgment and verification 

requirements.168 As part of the UK’s 

framework for trade acknowledgment 

and verification, UK EMIR RTS article 

12(4) requires a Covered Entity to have 

the necessary procedure to report on a 

monthly basis to the FCA the number of 

unconfirmed, non-centrally cleared OTC 

derivative transactions that have been 

outstanding for more than five business 

days. Though Exchange Act rule 15Fi– 

2 does not have a similar requirement to 

report unconfirmed trades, the 

Commission considers that UK EMIR 

RTS article 12(4)’s requirement to report 

unconfirmed trades to the FCA is an 

inseparable part of the UK’s framework 

for trade acknowledgment and 

verification, as those reports support the 

UK framework’s mandate to confirm 

transactions. Requiring a Covered Entity 

to be subject to and comply with UK 

EMIR RTS article 12(4) thus is 

consistent with a holistic approach for 

comparing regulatory outcomes that 

reflects the whole of a jurisdiction’s 

relevant requirements. Accordingly, the 

Order retains as a condition to 

substituted compliance for trade 

acknowledgment and verification 

requirements the requirement that the 

Covered Entity be subject to and comply 

with the entirety of UK EMIR RTS 

article 12. 

In summary, the Commission 

continues to believe that UK 

requirements promote the goal of 

avoiding legal and operational risks 

through requirements for written 

records of transactions and procedures 

to avoid disagreements regarding the 

meaning of transaction terms, in a 

manner that is comparable to the 

purpose of Exchange Act rule 15Fi–2. 

The Commission is retaining the 

proposed conditions to substituted 

compliance for trade acknowledgment 

and verification, consistent with the 

approach advocated by a commenter.169

While the Commission recognizes the 

differences between UK requirements 

and Exchange Act trade 

acknowledgment and verification 

requirements, in the Commission’s view 

those differences on balance would not 

preclude substituted compliance, 

particularly as requirement-byrequirement similarity is not needed for 

substituted compliance. The 

commenter’s request for a ‘‘wellsupported, evidence-based 

determination’’ has been met here in the 

context of the requisite holistic 

analysis,170 and the commenter’s 

suggestion that there is a need for 

analysis regarding protection of the 

American financial system has been 

addressed above.171

3. Portfolio Reconciliation and Dispute 

Reporting 

One commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions.172 Another 

commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 173 The 

Commission continues to believes that 

UK portfolio reconciliation and dispute 

reporting requirements promote 

regulatory outcomes comparable to 

Exchange Act requirements, by 

subjecting Covered Entities to risk 

mitigation practices that are appropriate 

to the risks associated with their 

security-based swap businesses, and is 

making a positive substituted 

compliance determination for portfolio 

reconciliation and dispute reporting 

requirements consistent with the 

proposed Order.174 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 UK 

law, to allow the Commission to obtain 

notice regarding key information in a 

manner that makes use of existing 

obligations under UK law.175

4. Portfolio Compression 

One commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions.176 Another 

commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 177 The 


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178See para. (b)(4) of the Order. 

179See Better Markets Letter at 5–6. 

180See Better Markets Letter at 2. 

181See ESMA EMIR Q&A, OTC Answers 5(a), 

12(b); FCA Brexit Guidance at paras. 9, 12. 

182See para. (a)(13) of the Order. 

183See SIFMA 5/3/2021 Letter at 9 and Appendix 

A part (b)(5). 

184 17 CFR 240.18a–1 through 18a–1d. Exchange 

Act rule 18a–1 applies to security-based swap 

dealers that: (1) Do not have a prudential regulator 

and (2) are either: (a) Not dually registered with the 

Commission as a broker-dealer; or (b) are dually 

registered with the Commission as a special 

purpose broker-dealer known as an OTC derivatives 

dealer. Security-based swap dealers that are dually 

registered with the Commission as a full-service 

broker-dealer are subject to the capital requirements 

of Exchange Act rule 15c3–1 (17 CFR 240.15c3–1) 

for which substituted compliance is not available. 

See 17 CFR 240.3a71–6(d)(4)(i) (making substituted 

compliance available only with respect to the 

capital requirements of Exchange Act section 15F(e) 

and Exchange Act rule 18a–1). 

185See Exchange Act Release No. 86175 (June 21, 

2019), 84 FR 43872, 43879–83 (Aug. 22, 2019) 

(‘‘Capital and Margin Adopting Release’’). The 

capital standard of Exchange Act rule 18a–1 is 

based on the net liquid assets test of Exchange Act 

rule 15c3–1 applicable to broker-dealers. See 

Capital and Margin Adopting Release, 84 FR 43872, 

43879–83. The net liquid assets test seeks to 

promote liquidity by requiring that a firm maintain 

sufficient liquid assets to meet all liabilities, 

including obligations to customers, counterparties, 

and other creditors, and, in the event a firm fails 

financially, to have adequate additional resources to 

wind-down its business in an orderly manner 

without the need for a formal proceeding. See 

Capital and Margin Adopting Release, 84 FR at 

43879. See FCA Application Appendix B, Annex V 

(Side Letter Addressing Capital Requirements). 

Commission continues to believe that 

UK portfolio compression requirements 

promote regulatory outcomes 

comparable to Exchange Act 

requirements, by subjecting Covered 

Entities to risk mitigation practices that 

are appropriate to the risks associated 

with their security-based swap 

businesses, and is making a positive 

substituted compliance determination 

for portfolio compression requirements 

consistent with the proposed Order.178

5. Trading Relationship Documentation 

The Commission continues to believe 

that UK trading relationship 

documentation requirements promote 

regulatory outcomes comparable to 

Exchange Act requirements, and is 

making a positive substituted 

compliance determination for trading 

relationship documentation 

requirements consistent with the 

proposed Order. The Commission 

details below its consideration of 

comments received. 

One commenter stated that the 

Commission inappropriately attempted 

to compensate for inadequate UK 

trading relationship documentation 

requirements by relying on guidance.179

The same commenter stated that, if the 

Commission nevertheless makes a 

positive substituted compliance 

determination, it must at a minimum 

ensure that the conditions in the 

proposed Order ‘‘are applied with full 

force and without exceptions or 

dilution.’’ 180 The commenter 

misinterpreted the role of guidance in 

the Commission’s comparability 

analysis. The proposed Order would 

require a Covered Entity to be subject to 

and comply with UK EMIR article 

11(1)(a), UK EMIR RTS article 12, and 

UK EMIR Margin RTS article 2. The 

Commission highlights the special 

importance of UK EMIR Margin RTS 

article 2, which addresses risk 

management procedures related to the 

exchange of collateral, including 

procedures related to the terms of all 

necessary agreements to be entered into 

by counterparties (e.g., payment 

obligations, netting conditions, events of 

default, calculation methods, transfers 

of rights and obligations upon 

termination, and governing law). Those 

obligations are denoted as being 

connected to collateral exchange 

obligations, and the Commission 

believes that they are necessary to help 

produce a regulatory outcome that 

mitigates risk in a manner that is 

comparable to the outcome associated 

with the Exchange Act trading 

relationship documentation 

requirements. To bridge any gap left by 

UK EMIR Margin RTS article 2, the 

Commission is also requiring 

compliance with UK EMIR article 

11(1)(a) and UK EMIR RTS article 12, 

which, as discussed in part IV.B.2 

above, require the Covered Entity to 

confirm the transaction, with 

confirmation defined as documentation 

of the agreement of the counterparties to 

all the terms of the OTC derivative 

contract. Also as discussed in part 

IV.B.2 above, the Commission consulted 

guidance from the FCA and ESMA to 

confirm that the Commission’s analysis 

of those complex UK requirements was 

consistent with the FCA’s view of those 

requirements.181 The Commission thus 

agrees with the commenter that the 

proposed conditions to substituted 

compliance for trading relationship 

documentation requirements should be 

retained. To further ensure that a 

Covered Entity using substituted 

compliance for trading relationship 

documentation requirements will be 

required to document the agreement of 

the counterparties to all the terms of the 

relevant transaction, the Commission is 

issuing the Order as proposed with two 

general conditions that will require the 

Covered Entity to treat its counterparty 

as a financial counterparty or nonfinancial counterparty when complying 

UK trade acknowledgment and 

verification requirements.182

Another commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions, but requested 

that the Commission not require a 

Covered Entity to be subject to and 

comply with UK EMIR RTS article 12(4) 

because it does not relate to and goes 

beyond Exchange Act trading 

relationship documentation 

requirements.183 For the reasons 

described in part IV.B.2 above, the 

Commission is retaining the reference to 

this provision. 

Accordingly, the Commission 

continues to believe that UK 

requirements promote regulatory 

outcomes comparable to Exchange Act 

trading relationship documentation 

requirements. While the Commission 

recognizes that these and certain other 

differences between UK requirements 

and Exchange Act trading relationship 

documentation requirements, in the 

Commission’s view those differences on 

balance would not preclude substituted 

compliance, particularly as 

requirement-by-requirement similarity 

is not needed for substituted 

compliance. 

V. Substituted Compliance for Capital 

and Margin Requirements 

A. Proposed Approach 

The FCA Application in part 

requested substituted compliance in 

connection with capital and margin 

requirements relating to: 

• Capital—Capital requirements 

pursuant to Exchange Act section 15F(e) 

and Exchange Act rule 18a–1 and its 

appendices (collectively ‘‘Exchange Act 

rule 18a–1’’) applicable to certain SBS 

Entities.184 Exchange Act rule 18a–1 

helps to ensure the SBS Entity 

maintains at all times sufficient liquid 

assets to promptly satisfy its liabilities, 

and to provide a cushion of liquid assets 

in excess of liabilities to cover potential 

market, credit, and other risks. The 

rule’s net liquid assets test standard 

protects customers and counterparties 

and mitigates the consequences of an 

SBS Entity’s failure by promoting the 

ability of the firm to absorb financial 

shocks and, if necessary, to selfliquidate in an orderly manner.185 As 

part of the capital requirements, 

security-based swap dealers without a 

prudential regulator also must comply 

with the internal risk management 

control requirements of Exchange Act 


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186See 17 CFR 240.15c3–4 and 18a–1(f). 

187 17 CFR 240.18a–3. 

188See Capital and Margin Adopting Release, 84 

FR at 43947, 43949 (‘‘Obtaining collateral is one of 

the ways OTC derivatives dealers manage their 

credit risk exposure to OTC derivatives 

counterparties. Prior to the financial crisis, in 

certain circumstances, counterparties were able to 

enter into OTC derivatives transactions without 

having to deliver collateral. When ‘‘trigger events’’ 

occurred during the financial crisis, those 

counterparties faced significant liquidity strains 

when they were required to deliver collateral’’). 

189See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18385–89, 18413. 

190See, e.g., Basel Committee on Banking 

Supervision (‘‘BCBS’’), The Basel Framework, 

available at: https://www.bis.org/basel_framework/. 

191See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386, 18413. 

192See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386–87. 

193See para. (c)(1)(i) of the Order. See also UK 

Substituted Compliance Notice and Proposed 

Order, 86 FR at 18386. 

194See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386, n.81. 

195See para. (c)(1)(ii) of the Order. 

196See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395–18403, 18416–17, 

19419. 

197See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18387–89 (discussing the 

additional conditions). 

198As used in this part V.B.1. of the release, the 

term ‘‘Covered Entity’’ refers to a security-based 

swap dealer located in the UK that does not have 

a prudential regulator. 

199See Better Markets Letter at 8. 

rule 15c3–4 with respect to certain 

activities.186

• Margin—Margin requirements 

pursuant to Exchange Act section 15F(e) 

and Exchange Act rule 18a–3 for nonprudentially regulated SBS Entities.187

The margin requirements are designed 

to protect SBS Entities from the 

consequences of a counterparty’s 

default.188

Taken as a whole, these capital and 

margin requirements help to promote 

market stability by mandating that SBS 

Entities follow practices to manage the 

market, credit, liquidity, solvency, 

counterparty, and operational risks 

associated with their security-based 

swap businesses. 

In proposing to provide conditional 

substituted compliance in connection 

with this part of the FCA Application, 

the Commission preliminarily 

concluded that substituted compliance 

with respect to the Exchange Act capital 

requirements would be subject to 

certain additional conditions.189 The 

conditions were designed to help ensure 

the comparability of regulatory 

outcomes between Exchange Act rule 

18a–1 (which imposes a net liquid 

assets test) and the capital requirements 

applicable to nonbank security-based 

swap dealers in the UK that are 

expected to register with the 

Commission. Those capital 

requirements are based on the 

international capital standard for banks 

(‘‘Basel capital standard’’).190

In proposing to provide conditional 

substituted compliance in connection 

with this part of the FCA Application, 

the Commission preliminarily 

concluded that relevant UK margin 

requirements would produce regulatory 

outcomes that are comparable to those 

associated with the Exchange Act 

margin requirements.191

Finally, the proposed Order would 

permit a Covered Entity to apply 

substituted compliance for the capital 

and/or margin requirements.192 Thus, a 

Covered Entity could apply substituted 

compliance for Exchange Act margin 

requirements by complying with UK 

margin requirements but comply with 

Exchange Act capital requirements 

(rather than applying substituted 

compliance to those requirements) and 

vice versa. However, as to the various 

requirements within the capital and 

margin rules, the Commission found the 

rules to be entity-level when adopting 

amendments to Exchange Act rule 

3a71–6 to make substituted compliance 

available with respect to them. 

Consequently, under the proposed 

Order, a Covered Entity must apply 

substituted compliance with respect to 

capital and margin requirements at an 

entity level. 

B. Commenter Views and Final 

Provisions 

1. Capital 

Consistent with the proposed Order, 

the first capital condition requires the 

covered entity to be subject to and 

comply with certain identified UK 

capital requirements.193 As discussed at 

the end of this section, the Commission 

made some modifications to the UK 

laws and regulations cited in this 

condition.194 For the reasons discussed 

below, there are two additional 

conditions to applying substituted 

compliance with respect to Exchange 

Act rule 18a–1. 

For the reasons discussed above in 

part III.B.2.k of this release, the first 

additional capital condition is that the 

Covered Entity applies substituted 

compliance with respect to Exchange 

Act rules 18a–5(a)(9) (a record making 

requirement), 18a–6(b)(1)(x) (a record 

preservation requirement), and 18a– 

8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and 

(b)(4) (notification requirements).195

These recordkeeping and notification 

requirements are directly linked to the 

capital requirements of Exchange Act 

rule 18a–1. The proposed Order 

conditioned substituted compliance 

with respect to these recordkeeping and 

notification requirements on the 

Covered Entity applying substituted 

compliance with respect to Exchange 

Act rule 18a–1.196 This additional 

capital condition is designed to provide 

clarity as to the Covered Entity’s 

obligations under these recordkeeping 

and notification requirements when 

applying substituted compliance with 

respect to Exchange Act rule 18a–1 

pursuant this Order. 

The second additional capital 

condition builds on and modifies the 

proposed capital condition that was 

designed to address potential different 

regulatory outcomes between Exchange 

Act rule 18a–1and the UK capital 

requirements. In particular, the 

Commission proposed a four pronged 

condition with respect to applying 

substituted compliance to the capital 

requirements of Exchange Act rule 

18a–1.197 The first prong would require 

a Covered Entity to maintain an amount 

of assets that are allowable under 

Exchange Act rule 18a–1, after applying 

applicable haircuts under the Basel 

capital standard, that equals or exceeds 

the Covered Entity’s current liabilities 

coming due in the next 365 days.198 The 

second prong was linked to the first 

prong as it would require that a Covered 

Entity make a quarterly record listing: 

(1) The assets maintained pursuant to 

the first prong, their value, and the 

amount of their applicable haircuts; and 

(2) the aggregate amount of the 

liabilities coming due in the next 365 

days. The third prong would require the 

Covered Entity to maintain at least $100 

million of equity capital composed of 

highly liquid assets as defined in the 

Basel capital standard. The fourth prong 

would require the Covered Entity to 

include its most recently filed statement 

of financial condition whether audited 

or unaudited with its initial notice to 

the Commission of its intent to rely on 

substituted compliance. 

One commenter recommended that 

the Commission consider denying 

substituted compliance for capital 

requirements on the basis that the UK’s 

capital requirements do not produce 

comparable regulatory outcomes.199

This commenter stated that ‘‘granting 

substituted compliance with multiple 

conditions intended to mimic the 

Commission’s capital requirements 

would seem to undermine the entire 

point of substituted compliance in the 

first place; namely, protecting the 

stability of the U.S. financial system by 

allowing substituted compliance only 


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200Better Markets Letter at 8 (emphasis in the 

original). 201Better Markets Letter at 7. 202Better Markets Letter at 7–8. 203Better Markets Letter at 7–8. 204See Letter from Americans for Financial 

Reform Education Fund (May 3, 2021) (‘‘Americans 

for Financial Reform Education Fund Letter’’) at 1. 205See Americans for Financial Reform Education 

Fund Letter at 1 (‘‘We support the Commission’s 

proposal to require foreign security-based swap 

dealers and participants (‘‘Covered Entities’’) to 

abide by capital and initial margin requirements 

that reflect Exchange Act rule 18a–1 standards 

appropriate for broker-dealers, as opposed to Basel 

capital requirements for banks that permit illiquid 

assets to count toward capital minimums.’’). 

206See Americans for Financial Reform Education 

Fund Letter at 1. 

207See Americans for Financial Reform Education 

Fund Letter at 2. 

208SIFMA 5/3/2021 Letter at 10. 

209SIFMA 5/3/2021 Letter at 10, 17. 

210SIFMA 5/3/2021 Letter at 10–15. 

211SIFMA 5/3/2021 Letter at 15. 

212SIFMA 5/3/2021 Letter at 15–17. 

213SIFMA 5/3/2021 Letter at 17. 

214SIFMA 5/3/2021 Letter at 17. 

215SIFMA 5/3/2021 Letter at 17–18. 

216SIFMA 5/3/2021 Letter at 18. 

217SIFMA 5/3/2021 Letter at 18. 

218SIFMA 5/3/2021 Letter at 19. 

when foreign regimes are 

comparable.’’ 200

In describing the differences in the 

capital frameworks between the net 

liquid assets test and the Basel capital 

standard, this commenter highlighted 

the treatment of initial margin posted to 

a counterparty.201 Specifically, the 

commenter stated that in the UK initial 

margin posted to a counterparty counts 

as capital for that entity, while in the 

U.S. initial margin only counts as 

capital if the security-based swap dealer 

has a special loan agreement with an 

affiliate. The commenter stated that the 

U.S. requirement is intended to mitigate 

counterparty credit risk with respect to 

the return of the initial margin. The 

commenter argued that the result is that, 

not only are the UK requirements 

different from the Commission’s in both 

form and substance, but the regulatory 

outcome is not comparable. 

This commenter also stated that if a 

positive substituted compliance 

determination is made regarding capital, 

the Commission should not weaken the 

proposed additional capital condition in 

response to industry commenters, 

because these market participants are 

primarily concerned with reducing their 

own operational costs, without any 

regard to the systemic risk that would 

doing so would pose.202 This 

commenter also stated that any 

determination to find the UK’s capital 

requirements comparable to and as 

comprehensive as the Commission’s 

capital framework without conditions at 

least as strong as proposed would not 

only contravene the Commission’s own 

conception of substituted compliance 

‘‘but expose the U.S. financial system to 

very risks Dodd-Frank instructed the 

SEC to contain.’’ 203

Another commenter supported the 

proposed additional capital 

condition.204 This commenter stated 

that the Commission should require 

Covered Entities to comply with the net 

liquid assets test under Exchange Act 

rule 18a–1, rather than the Basel capital 

standards.205 The commenter stated that 

the net liquid assets test ‘‘appropriately 

limits uncollateralized lending, fixed 

assets, and other illiquid assets such as 

real estate which have been proven 

repeatedly to be unreliable forms of 

capital but are currently counted’’ as 

allowable capital under the Basel capital 

standard.206 This commenter also 

agreed with the Commission that ‘‘the 

initial margin that is posted is not 

available for other purposes and 

therefore, under the Basel standard, 

could swiftly result in less balance sheet 

liquidity than the standards under the 

Exchange Act’s Rule 18a–1.’’ 207

A commenter supported the 

Commission’s proposed Order to grant 

substituted compliance in connection 

with the Exchange Act capital 

requirements.208 This commenter, 

however, opposed the proposed 

additional four pronged capital 

condition. The commenter stated that it 

was unnecessary, unduly rushed, and 

highly likely to be costly and disruptive 

to market participants and inconsistent 

with the Commission’s substituted 

compliance framework.209 More 

specifically, this commenter stated that 

the proposed capital condition was 

unnecessary because Covered Entities 

transact predominantly in securities and 

derivatives, do not extensively engage in 

unsecured lending or other activities 

more typical of banks, and are already 

subject to extensive liquidity 

requirements.210 The commenter also 

expressed concern that the proposed 

capital condition was inconsistent with 

the Commission’s substituted 

compliance framework in that it was 

duplicative of and would contradict the 

liquidity requirements established by 

the PRA.211 This commenter stated that 

the imposition of the proposed capital 

condition would effectively substitute 

the Commission’s judgment for the 

PRA’s in terms of the best way to 

address liquidity risk, and may lead 

other regulators to refuse to extend 

deference to the Commission’s 

regulatory determinations.212

With respect to the using the concept 

of ‘‘allowable’’ and ‘‘nonallowable’’ 

assets under Exchange Act rule 18a–1, 

the commenter stated that the first and 

second prongs of the capital condition 

do not define these terms and there is 

no analogous concept in the capital 

framework applicable in the UK.213 The 

commenter stated this would require 

firms to re-categorize every asset on 

their balance sheets, which would not 

be feasible in the near term.214 Further, 

this commenter asked the Commission 

to clarify what it means by ‘‘haircuts’’ 

with respect to the first and second 

prongs, since the Basel capital standard 

does not apply ‘‘haircuts’’ to assets, but 

instead applies a risk-weighted 

approach.215

This commenter also stated that the 

third prong of the proposed additional 

capital condition requiring ‘‘at least 

$100 million of equity capital composed 

of ‘highly liquid assets’ as defined in the 

Basel capital standard,’’ includes 

concepts that require clarification.216

For example, this commenter stated that 

is unclear how a firm would calculate 

the amount of its ‘‘equity capital’’ that 

is ‘‘composed of highly liquid assets,’’ 

since ‘‘equity’’ generally refers to a 

firm’s paid-in capital, retained earnings, 

and other items on the liabilities/ 

shareholders’ equity side of the balance 

sheet.217 Finally, this commenter 

asserted that because it is approximately 

three months until the August 6th 

counting date, and firms may encounter 

significant operational challenges to 

meet the proposed or revised capital 

condition, the proposed condition may 

cause firms to exit the U.S. securitybased swap market, or hope that the 

conditions are modified and delayed in 

a manner that will make it feasible to 

satisfy them.218

Overall, this commenter stated that 

the Commission should take a more 

incremental and deliberative approach 

to additional capital conditions, and 

specifically recommended that the 

Commission: (1) Delete the first prong of 

the capital condition; (2) replace the 

second prong with a requirement that a 

nonbank Covered Entity provide the 

same reports concerning liquidity 

metrics that the Covered Entity provides 

to the PRA; (3) modify the third prong 

to require a nonbank Covered Entity to 

maintain at least $100 million of high 

quality liquid assets, as defined in the 

Basel capital standard; and (4) issue an 

order on October 6, 2024, determining 

whether to maintain, delete, modify, or 

supplement the condition, based on 

consideration of the liquidity of 

nonbank Covered Entities, and after 

publishing a notice of any such changes 


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219SIFMA 5/3/2021 Letter at 19–20. 

220See Americans for Financial Reform Education 

Fund Letter at 1–2; Better Markets Letter at 7–8. 

221See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18387 (explaining the 

differences between Exchange Act rule 18a–1 and 

the Basel capital standard). 

222See, e.g., Exchange Act Release No. 8024 (Jan. 

18, 1967), 32 FR 856 (Jan. 25, 1967) (‘‘Rule 15c3– 

1 (17 CFR 240.15c3–1) was adopted to provide 

safeguards for public investors by setting standards 

of financial responsibility to be met by brokers and 

dealers. The basic concept of the rule is liquidity; 

its object being to require a broker-dealer to have 

at all times sufficient liquid assets to cover his 

current indebtedness.’’) (footnotes omitted); 

Exchange Act Release No. 10209 (June 8, 1973), 38 

FR 16774 (June 26, 1973) (Commission release of a 

letter from the Division of Market Regulation) (‘‘The 

purpose of the net capital rule is to require a broker 

or dealer to have at all times sufficient liquid assets 

to cover its current indebtedness. The need for 

liquidity has long been recognized as vital to the 

public interest and for the protection of investors 

and is predicated on the belief that accounts are not 

opened and maintained with broker-dealers in 

anticipation of relying upon suit, judgment and 

execution to collect claims but rather on a 

reasonable demand one can liquidate his cash or 

securities positions.’’); Exchange Act Release No. 

15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979) 

(‘‘The rule requires brokers or dealers to have 

sufficient cash or liquid assets to protect the cash 

or securities positions carried in their customers’ 

accounts. The thrust of the rule is to insure that a 

broker or dealer has sufficient liquid assets to cover 

current indebtedness.’’); Exchange Act Release No. 

26402 (Dec. 28, 1988), 54 FR 315 (Jan. 5, 1989) 

(‘‘The rule’s design is that broker-dealers maintain 

liquid assets in sufficient amounts to enable them 

to satisfy promptly their liabilities. The rule 

accomplishes this by requiring broker-dealers to 

maintain liquid assets in excess of their liabilities 

to protect against potential market and credit 

risks.’’) (footnote omitted). 

223See 17 CFR 240.15c3–1(c)(2). 224The highly liquid assets under Exchange Act 

rule 18a–1 are otherwise known as ‘‘allowable 

assets’’ because they are not deducted when 

computing net capital. See Exchange Act Release 

No. 87005 (Sept. 19, 2019), 84 FR 68673, 68673– 

74, 68677–80 (Dec. 19, 2019) (‘‘Books and Records 

Adopting Release’’)(the sections of the amended 

Part II of the FOCUS Report setting forth the assets 

side of the balance sheet and the net capital 

computation). Illiquid assets otherwise known as 

‘‘non-allowable assets’’ are deducted when 

computing net capital. See Books and Records 

Adopting Release, 84 FR at 68673–74, 68677–80. 

Allowable assets include cash, certain unsecured 

receivables from broker-dealers and clearing 

organizations, reverse repurchase agreements, 

securities borrowed, fully secured customer margin 

loans, and proprietary securities, commodities, and 

swaps positions. See Books and Records Adopting 

Release, 84 FR at 68673–74, 68677–80. The term 

‘‘high quality liquid assets’’ or ‘‘HQLA’’ are defined 

under the Basel capital standard’s liquidity 

coverage ratio (‘‘LCR’’) and generally consist of cash 

and specific classes of liquid securities. See BCBS, 

LCR30 under the Basel capital standards, available 

at: https://www.bis.org/basel_framework/chapter/ 

LCR/30.htm?tldate=20191231&inforce=2019121. 

Generally, cash and securities that qualify as HQLA 

under the LCR would be allowable assets under 

Exchange Act rule 18a–1. 

225Exchange Act rule 18a–3 does not require SBS 

Entities to post initial margin (though it does not 

prohibit the practice). 

226See Capital and Margin Adopting Release, 84 

FR at 43887–88. 

227See Capital and Margin Adopting Release, 84 

FR at 43887. 

for at least 90 days of public 

comment.219

The Commission agrees with the 

commenters who point out the 

differences between the capital standard 

of Exchange Act rule 18a–1 (i.e., the net 

liquid assets test) and the Basel capital 

standard applicable to Covered Entities, 

and who therefore believe that—at a 

minimum—additional conditions are 

necessary to achieve comparable 

regulatory outcomes.220 As the 

Commission explained when proposing 

the additional capital condition, the net 

liquid assets test is designed to promote 

liquidity.221 In particular, Exchange Act 

rule 18a–1 allows an SBS Entity to 

engage in activities that are part of 

conducting a securities business (e.g., 

taking securities into inventory) but in 

a manner that places the firm in the 

position of holding at all times more 

than one dollar of highly liquid assets 

for each dollar of unsubordinated 

liabilities (e.g., money owed to 

customers, counterparties, and 

creditors).222 For example, Exchange 

Act rule 18a–1 allows securities 

positions to count as allowable net 

capital, subject to standardized or 

internal model-based haircuts. The rule, 

however, does not permit most 

unsecured receivables to count as 

allowable net capital. This aspect of the 

rule limits the ability of SBS Entities to 

engage in activities, such as 

uncollateralized lending, that generate 

unsecured receivables. The rule also 

does not permit fixed assets or other 

illiquid assets to count as allowable net 

capital, which creates disincentives for 

SBS Entities to own real estate and other 

fixed assets that cannot be readily 

converted into cash. For these reasons, 

Exchange Act rule 18a–1 incentivizes 

SBS Entities to confine their business 

activities and devote capital to securitybased swap activities. 

The net liquid assets test is imposed 

through how an SBS Entity is required 

to compute net capital pursuant to 

Exchange Act rule 18a–1. The first step 

is to compute the SBS Entity’s net worth 

under U.S. generally accepted 

accounting principles (‘‘GAAP’’). Next, 

the SBS Entity must make certain 

adjustments to its net worth to calculate 

net capital, such as deducting illiquid 

assets and taking other capital charges 

and adding qualifying subordinated 

loans.223 The amount remaining after 

these deductions is defined as ‘‘tentative 

net capital.’’ Exchange Act rule 18a–1 

prescribes a minimum tentative net 

capital requirement of $100 million for 

SBS Entities approved to use models to 

calculate net capital. An SBS Entity that 

is meeting its minimum tentative net 

capital requirement will be in the 

position where each dollar of 

unsubordinated liabilities is matched by 

more than a dollar of highly liquid 

assets.224 The final step in computing 

net capital is to take prescribed 

percentage deductions (standardized 

haircuts) or model-based deductions 

from the mark-to-market value of the 

SBS Entity’s proprietary positions (e.g., 

securities, money market instruments, 

and commodities) that are included in 

its tentative net capital. The amount 

remaining is the firm’s net capital, 

which must exceed the greater of $20 

million or a ratio amount. 

In comparison, Covered Entities in the 

UK are subject to the Basel capital 

standard. The Basel capital standard 

counts as capital assets that Exchange 

Act rule 18a–1 would exclude (e.g., 

loans and most other types of 

uncollateralized receivables, furniture 

and fixtures, real estate). The Basel 

capital standard accommodates the 

business of banking: making loans 

(including extending unsecured credit) 

and taking deposits. While the Covered 

Entities that will apply substituted 

compliance with respect to Exchange 

Act rule 18a–1 will not be banks, the 

Basel capital standard allows them to 

count illiquid assets such as real estate 

and fixtures as capital. It also allows 

them to treat unsecured receivables 

related to activities beyond dealing in 

security-based swaps as capital 

notwithstanding the illiquidity of these 

assets. 

Further, one critical example of the 

difference between the requirements of 

Exchange Act rule 18a–1 and the Basel 

capital standard relates to the treatment 

of initial margin with respect to 

security-based swaps and swaps. Under 

the UK margin requirements, Covered 

Entities will be required to post initial 

margin to counterparties unless an 

exception applies.225 Under Exchange 

Act rule 18a–1, an SBS Entity cannot 

count as capital the amount of initial 

margin posted to a counterparty unless 

it enters into a special loan agreement 

with an affiliate.226 The special loan 

agreement requires the affiliate to fund 

the initial margin amount and the 

agreement must be structured so that the 

affiliate—rather than the SBS Entity— 

bears the risk that the counterparty may 

default on the obligation to return the 

initial margin. The reason for this 

restrictive approach to initial margin 

posted away is that it ‘‘would not be 

available [to the SBS Entity] for other 

purposes, and, therefore, the firm’s 

liquidity would be reduced.’’ 227 Under 

the Basel capital standard, a Covered 

Entity can count initial margin posted 


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228SIFMA 5/3/2021 Letter at 10. 229See Better Markets Letter at 6–7 (comparing 

the differences between Exchange Act rule 18a–1 

and the Basel capital standard and stating that ‘‘not 

only are the UK’s capital requirements different 

from the SEC’s in both form and substance, but the 

regulatory outcome is not comparable’’). 230As discussed above, highly liquid assets under 

Exchange Act rule 18a–1 are also known as 

‘‘allowable assets’’ and generally are consistent the 

LCR’s HQLA. 231The Basel capital standard does not preclude 

a firm from having more than a dollar of highly 

liquid assets for each dollar of unsubordinated 

liabilities. Thus, a firm operating pursuant to the 

standard may structure its assets and liabilities in 

a manner that achieves this result. However, the 

standard does not mandate this result. Rather, it 

will accommodate a firm that seeks to maintain this 

level of liquidity on its own accord. 

232See Liquidity Coverage Requirement—UK 

Designated Investment Firms part of PRA Rulebook. 

233See UK CRR, Article 413; see also PRA, 

Consultation Paper CP5/21, Implementation of 

Basel 

Standards (February 2021) (proposed to take 

effect on January 1, 2022). 

234See Internal Liquidity Adequacy Assessment 

part of the PRA Rulebook. 

235See SIFMA 5/3/2021 Letter at 12–15. 

236See Better Markets Letter at 8 (recommending 

that the Commission consider denying substituted 

compliance with respect to these Exchange Act 

capital requirements). 

237See Americans for Financial Reform Education 

Fund Letter at 1 (‘‘The Commission should require 

that SBS entities who want to operate in the U.S. 

comply with the Net Liquid Assets test under the 

Exchange Act rule 18a–1 rather than the Basel 

capital standards applicable under UK and EU 

regulations.’’). 

238See, e.g., CRR, Part 1 (Own Funds, including 

Tier 1 capital) and Part 2 (Capital Requirements). 

239See Americans for Financial Reform Education 

Fund Letter at 1 (‘‘The Commission should require 

that SBS entities who want to operate in the U.S. 

comply with the Net Liquid Assets test under the 

Exchange Act rule 18a–1 rather than the Basel 

capital standards’’); SIFMA 5/3/2021 Letter at 17 

(raising concerns that the use of the concept of 

‘‘allowable’’ assets under Exchange Act rule 18a–1 

in the first condition would require Covered 

Entities to re-categorize every asset on their balance 

sheets, which also pertains to the second condition, 

and seeking clarification on to how to calculate 

‘‘equity capital’’ and allocate it to highly liquid 

assets equal to or greater than $100 million). 

240The first prong of the proposed capital 

condition would have required a Covered Entity to 

maintain an amount of assets that are allowable 

under Exchange Act rule 18a–1, after applying 

applicable haircuts under the Basel capital 

standard, that equals or exceeds the Covered 

Entity’s current liabilities coming due in the next 

365 days. The second prong would have required 

the Covered Entity to make a quarterly record 

related to the first prong. The third prong would 

have required the Covered Entity to maintain at 

least $100 million of equity capital composed of 

highly liquid assets as defined in the Basel capital 

standard. See UK Substituted Compliance Notice 

and Proposed Order, 86 FR at 18387–88. 

241See para. (c)(1)(iii)(A)(1) of the Order. The 

definition of ‘‘liquid assets’’ and the method of 

calculating the deductions are discussed below. 

away as capital without the need to 

enter into a special loan arrangement 

with an affiliate. Consequently, because 

of the ability to include illiquid assets 

and margin posted away as capital, 

Covered Entities subject to the Basel 

capital standard may have less balance 

sheet liquidity than SBS Entities subject 

to Exchange Act rule 18a–1. 

For these reasons, the Commission 

disagrees with the commenter who 

stated that additional capital conditions 

were unnecessary and inconsistent with 

the Commission’s substituted 

compliance framework.228 As discussed 

above, there are key differences between 

the net liquid assets test of Exchange 

Act rule 18a–1 and the Basel capital 

standard applicable to Covered Entities. 

Those differences in terms of the types 

of assets that count as regulatory capital 

and how regulatory capital is calculated 

lead to different regulatory outcomes.229

In particular, the net liquid assets test 

produces a regulatory outcome in which 

the SBS Entity has more than one dollar 

of highly liquid assets for each dollar of 

unsubordinated liabilities.230 The Basel 

capital standard—while having 

measures designed to promote 

liquidity—does not produce this 

regulatory outcome.231 Therefore, an 

additional capital condition is needed to 

bridge the gap between these two capital 

standards and thereby achieve more 

comparable regulatory outcomes in 

terms of promoting liquid balance 

sheets for SBS Entities and Covered 

Entities. 

However, in seeking to bridge this 

regulatory gap, the additional condition 

should take into account that Covered 

Entities are or will be subject to UK laws 

and measures designed to promote 

liquidity. As a commenter stated, 

Covered Entities are or will be subject 

to: (1) Requirements to hold an amount 

of HQLA to meet expected payment 

obligations under stressed conditions 

for thirty days (‘‘LCR requirement’’); 232

(2) requirements to hold a diversity of 

stable funding instruments sufficient to 

meet long-term obligations under both 

normal and stressed conditions (‘‘NSFR 

requirements’’); 233 (3) requirements to 

perform liquidity stress tests and 

manage liquidity risk (‘‘internal 

liquidity assessment requirements’’); 234

and (4) regular PRA reviews of a 

Covered Entity’s liquidity risk 

management processes (‘‘PRA liquidity 

review process’’).235 These UK laws and 

measures will require Covered Entities 

to hold significant levels of liquid 

assets. However, the laws and measures 

on their own, do not impose a net liquid 

assets test. Therefore, an additional 

condition is necessary to supplement 

these requirements. 

The Commission has taken into 

account the UK liquidity laws and 

measures discussed above in making a 

substituted compliance determination 

with respect to Exchange Act rule 18a– 

1, and in tailoring additional capital 

conditions designed to achieve 

comparable regulatory outcomes. The 

LCR, NSFR, and internal liquidity 

assessment requirements collectively 

will require Covered Entities to 

maintain pools of unencumbered HQLA 

to cover potential cash outflows during 

a 30-day stress period, to fund long-term 

obligations with stable funding 

instruments, and to manage liquidity 

risk. These requirements—coupled with 

the PRA’s supervisory reviews of the 

liquidity risk management practices of 

Covered Entities—will require Covered 

Entities to hold significant levels of 

liquid assets. These requirements and 

measures in combination with the other 

capital requirements applicable to 

Covered Entities provide a starting 

foundation for making a positive 

substituted compliance determination 

with respect to the capital requirements 

of Exchange Act section 15F(e) and 

Exchange Act rule 18a–1.236 However, 

more is needed to achieve a comparable 

regulatory outcome to the net liquid 

assets test of Exchange Act rule 18a–1. 

For these reasons, the Order includes 

an additional capital condition that will 

impose a simplified net liquid assets 

test.237 This simplified test will require 

the Covered Entity to hold more than 

one dollar of liquid assets for each 

dollar of liabilities. The simplified net 

liquid assets test—when coupled with 

the PRA capital requirements,238 LCR 

requirements, NSFR requirements, 

internal liquidity assessment 

requirements, and PRA liquidity review 

process—is designed to produce a 

regulatory outcome that is comparable 

to the net liquid assets test of Exchange 

Act rule 18a–1 (i.e., sufficient liquidity 

to cover liabilities and to promote the 

maintenance of highly liquid balance 

sheets). 

In response to comments, the 

Commission has modified the first three 

prongs of the additional capital 

condition from the proposed Order.239

In particular, the first and third prongs 

are being combined into a single prong 

of the second additional capital 

condition.240 Under this prong, the 

Covered Entity must maintain liquid 

assets (as defined in the capital 

condition) that have an aggregate market 

value that exceeds the amount of the 

Covered Entity’s total liabilities by at 

least: (1) $100 million before applying a 

deduction (specified in the capital 

condition); and (2) $20 million after 

applying the deduction.241 Thus, the 

condition increases the scope of the 

liquid assets requirement so that it must 


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242See para. (c)(1)(iii)(B) of the Order. 

243See supra notes 224 and 230 (describing 

allowable assets under Exchange Act rule 18a–1). 

244The Bank of England publishes a list of the 

investment firms that have been designated to the 

PRA (‘‘PRA-designated investment firms’’). This list 

is available at: https://www.bankofengland.co.uk/ 

prudential-regulation/authorisations/which-firmsdoes-the-pra-regulate. As part of the application 

process, the FCA has stated that the only nonbank 

(i.e., non-prudentially regulated) UK dealers that 

will register with the Commission as security-based 

swap dealers are PRA-designated investment firms. 

The commenter that provided the table showing the 

balance sheets of six UK investment firms makes 

the same statement. See SIFMA 5/3/2021 Letter 

Appendix A (‘‘We expect all covered entities to be 

banks or PRA-designated investment firms’’). 

According to the Bank of England, the following 

dealers are PRA-designated investment firms (as of 

January 4, 2021): Barclays Capital Securities 

Limited, Citigroup Global Markets Limited, Credit 

Suisse Securities (Europe) Ltd, Goldman Sachs 

International, Merrill Lynch International, MUFG 

Securities EMEA plc, Morgan Stanley & Co. 

International Plc, and Nomura International Plc. 

These PRA-designated investment firms publish 

annual audited financial statements. See, e.g., 

Barclays Capital Securities Limited 2020 Annual 

Report, available at: https://find-andupdate.company-information.service.gov.uk/ 

company/01929333/filing-history; Citigroup Global 

Markets Limited 2019 Annual Report, available at: 

https://find-and-update.companyinformation.service.gov.uk/company/01763297/ 

filing-history; Credit Suisse Securities (Europe) 

Limited Annual Report 2020, available at: https:// 

www.credit-suisse.com/ch/en/investment-banking/ 

financial-regulatory/european-financials.html; 

Goldman Sachs International Annual Report 2020, 

available at: https://www.goldmansachs.com/ 

investor-relations/financials/current/subsidiaryfinancial-info/gsi/12–31–20-financialstatements.pdf; Merrill Lynch International 2020 

Annual Report, available at: https://

d1io3yog0oux5.cloudfront.net/_9d85f1cf3d21160d

5542784492310fed/bankofamerica/db/914/9397/ 

pdf/Merrill+Lynch+International+2020+

Financial+Statements.pdf; MUFG Securities EMEA 

plc 2020 Annual Report, available at: https://

www.mufgemea.com/images/mufg/MUS_EMEA_

Financial_Statement_2020.pdf; Morgan Stanley & 

Co. International Plc 2020 Annual Report, available 

at: https://www.morganstanley.com/about-us-ir/ 

pdf/MSIP_Group_Accounts_31_December_

2020.pdf; and Nomura International Plc 2020 

Annual Report, available at: https://find-andupdate.company-information.service.gov.uk/ 

company/01550505/filing-history. 

245See SIFMA 5/3/2021 Letter at 10–11, 

Appendix C. The categories of liquid assets 

identified in the Balance Sheet Table are: (1) ‘‘Cash/ 

Cash Equivalents; (2) ‘‘Collateralised Agreements;’’ 

(3) ‘‘Trade/Other Receivables; cash collateral 

pledged;’’ and (4) ‘‘Trading/Financial Assets.’’ 

SIFMA 5/3/2021 Letter Appendix C. 

246See para. (c)(1)(iii)(B)(1) of the Order. 

247See, e.g., International Financial Reporting 

Standards Foundation (‘‘IFRS’’), IAS 7 Statement of 

Cash Flows (defining ‘‘cash’’ as comprising cash on 

hand and demand deposits and ‘‘cash equivalents’’ 

as short-term, highly liquid investments that are 

readily convertible to known amounts of cash and 

which are subject to an insignificant risk of changes 

in value). See also Books and Records Adopting 

Release, 84 FR at 68673–74 (the section of the 

amended Part II of the FOCUS Report setting forth 

the assets side of the balance sheet and identifying 

cash as an allowable asset in Box 200). 

248See para. (c)(1)(iii)(B)(2) of the Order. 

249See Books and Records Adopting Release, 84 

FR at 68673–74 (the section of the amended Part II 

of the FOCUS Report setting forth the assets side 

of the balance sheet and identifying securities 

borrowed as an allowable asset in Boxes 240 and 

250 and securities purchased under agreements to 

resell as an allowable asset in Box 360). 

250See para. (c)(1)(iii)(B)(3) of the Order. 

251See Books and Records Adopting Release, 84 

FR at 68673–74 (the section of the amended Part II 

of the FOCUS Report setting forth the assets side 

of the balance sheet and identifying fails to deliver 

as allowable assets in Boxes 220 and 230, 

receivables from clearing organizations as allowable 

assets in Boxes 280 and 290, and receivables from 

customers as allowable assets in Boxes 310, 320, 

and 330). 

252See para. (c)(1)(iii)(B)(4) of the Order. 

253See Books and Records Adopting Release, 84 

FR at 68673–74 (the section of the amended Part II 

of the FOCUS Report setting forth the assets side 

of the balance sheet and identifying securities, 

commodities, and swaps positions as allowable 

assets in Box 12019). 

254See Better Markets Letter at 7; Americans for 

Financial Reform Education Fund Letter at 2. See 

also UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18387 (discussing the 

different treatment of initial margin posted to a 

counterparty). 

cover all liabilities (rather than those 

maturing in 365 days as was proposed). 

These modifications align the first 

prong more closely to the $100 million 

tentative net capital requirement of 

Exchange Act rule 18a–1 applicable to 

SBS Entities approved to use models. As 

discussed above, Exchange Act rule 

18a–1 requires SBS Entities that have 

been approved to use models to 

maintain at least $100 million in 

tentative net capital. And, tentative net 

capital is the amount that an SBS 

Entity’s liquid assets exceed its total 

unsubordinated liabilities before 

applying haircuts. The first prong will 

require the Covered Entity to subtract 

total liabilities from total liquid assets. 

The amount remaining will need to 

equal or exceed $100 million. The 

modifications also align the condition 

more closely to the $20 million fixeddollar minimum net capital requirement 

of Exchange Act rule 18a–1. As 

discussed above, net capital is 

calculated by applying haircuts 

(deductions) to tentative net capital and 

the fixed-dollar minimum requires that 

net capital must equal or exceed $20 

million. The first prong will require the 

Covered Entity to subtract total 

liabilities from total liquid assets and 

then apply the deduction to the 

difference. The amount remaining after 

the deduction will need to equal or 

exceed $20 million. 

For the purposes of the first prong of 

the second additional capital condition, 

‘‘liquid assets’’ are defined as: (1) Cash 

and cash equivalents; (2) collateralized 

agreements; (3) customer and other 

trading related receivables; (4) trading 

and financial assets; and (5) initial 

margin posted by the Covered Entity to 

a counterparty or third-party (subject to 

certain conditions discussed below).242

These categories of liquid assets are 

designed to align with assets that are 

considered allowable assets for 

purposes of calculating net capital 

under Exchange Act rule 18a–1.243

Further, the first four categories of 

liquid assets also are designed to align 

with how Covered Entities categorize 

liquid assets on their financial 

statements.244 In addition, a commenter 

submitted a table summarizing 

categories of liquid assets on the balance 

sheets of six UK dealers (‘‘Balance Sheet 

Table’’) that the commenter expects will 

register with the Commission as 

security-based swap dealers, and that do 

not have a prudential regulator and 

therefore would be subject to Exchange 

Act rule 18a–1.245

The first category of liquid assets is 

cash and cash equivalents.246 These 

assets consist of cash and demand 

deposits at banks (net of overdrafts) and 

highly liquid investments with original 

maturities of three months or less that 

are readily convertible into known 

amounts of cash and subject to 

insignificant risk of change in value.247

The second category of liquid assets is 

collateralized agreements.248 These 

assets consist of secured financings 

where securities serve as collateral such 

as repurchase agreements and securities 

loaned transactions.249 The third 

category of liquid assets is customer and 

other trading related receivables.250

These assets consist of customer margin 

loans, receivables from broker-dealers, 

receivables related to fails to deliver, 

and receivables from clearing 

organizations.251 The fourth category of 

liquid assets is trading and financial 

assets.252 These assets consist of cash 

market securities positions and listed 

and over-the-counter derivatives 

positions.253

As discussed above, initial margin 

posted to a counterparty is treated 

differently under Exchange Act rule 

18a–1 and the Basel capital standard, 

and commenters highlighted this 

difference.254 The fifth category of 

liquid assets is initial margin posted by 

the Covered Entity to a counterparty or 

a third-party custodian, provided: (1) 

The initial margin requirement is 

funded by a fully executed written loan 

agreement with an affiliate of the 

Covered Entity; (2) the loan agreement 

provides that the lender waives repayment of the loan until the initial 

margin is returned to the Covered 

Entity; and (3) the liability of the 

Covered Entity to the lender can be fully 

satisfied by delivering the collateral 

serving as initial margin to the 


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255See para. (c)(1)(iii)(B)(5) of the Order. 

256See Capital and Margin Adopting Release, 84 

FR at 43887–88. 

257See Capital and Margin Adopting Release, 84 

FR at 43887–88. 

258See para. (c)(1)(iii)(B) of the Order. 

259See SIFMA 5/3/2021 Letter Appendix C. 

260See para. (c)(1)(ii)(A)(1) of the Order. 

261See BCBS, Risk-based capital requirements 

(RBC20), available at: https://www.bis.org/basel_

framework/chapter/RBC/ 

20.htm?inforce=20191215&published=20191215. 

262See BCBS, Risk-based capital requirements 

(RBC20). 

263See para. (c)(1)(iii)(C) of the Order. The 

Commission acknowledges that a Covered Entity’s 

risk-weighted assets will include components in 

addition to market and credit risk charges (e.g., 

operational risk charges). However, the Commission 

expects the combined market and credit risk 

charges will make up the substantial majority of the 

risk-weighted assets. In addition, the Commission 

believes that this method of calculating the 

deduction in the first prong of the second 

additional capital condition is a reasonable 

approach in that it addresses market and credit risk 

similar to the process used by security-based swap 

dealers authorized to use internal models to 

compute market and credit risk deductions under 

Exchange Act rule 18a–1. See, e.g., Exchange Act 

rule 18a–1(e) (prescribing requirements to calculate 

market and credit risk charges, including use of an 

8% multiplication factor for calculating the credit 

risk charges). 

264For example, assume a Covered Entity has 

total assets of $600 million (of which $595 million 

are liquid and $5 million are illiquid) and total 

liabilities of $450 million. In this case, the Covered 

Entity’s liquid assets would exceed total liabilities 

by $145 million ($590 million minus $450 million) 

and, therefore, the Covered Entity would have 

excess liquid assets greater than $100 million as 

required by the first prong of the second additional 

capital condition. Assume further that the Covered 

Entity’s risk-weighted assets under the Basel capital 

standard equal $400 million. In this case, the 

Covered Entity’s deduction would equal $32 

million ($400 million divided by 12.5). Subtracting 

$32 million from $145 million leaves $113 million, 

which exceeds $20 million. Therefore, the Covered 

Entity would meet the second requirement of the 

first prong of the second additional capital 

condition. 

265See para. (c)(1)(iii)(A)(2) of the Order. 

266See para. (c)(1)(iii)(A)(3) of the Order. 

267See para. (c)(1)(ii) of the Order. 

lender.255 As discussed above, one 

critical difference between Exchange 

Act rule 18a–1 and the Basel capital 

standard is that an SBS Entity cannot 

count as capital the amount of initial 

margin posted to a counterparty or 

third-party custodian unless it enters 

into a special loan agreement with an 

affiliate.256 Under the Basel capital 

standard, a Covered Entity can count 

initial margin posted away as capital 

without the need to enter into a special 

loan arrangement with an affiliate. 

Consequently, to count initial margin 

posted away as a liquid asset for 

purposes of the second additional 

capital condition, the Covered Entity 

must enter into the same type of special 

agreement that an SBS Entity must 

execute to count initial margin as an 

allowable asset for purposes of 

Exchange Act rule 18a–1.257

If an asset does not fall within one of 

the five categories of ‘‘liquid assets’’ as 

defined in the Order,258 it will be 

considered non-liquid, and could not be 

treated as a liquid asset for purposes of 

the second additional capital condition 

in the Order. For example, one 

commenter listed the following 

categories of non-liquid assets on the 

Balance Sheet Table: (1) ‘‘Investments;’’ 

(2) ‘‘Loans;’’ and (3) ‘‘Other Assets.’’ 259

These categories of assets generally 

could not be treated as liquid asset. The 

non-liquid ‘‘investment’’ category 

would include the Covered Entity’s 

ownership interests in subsidiaries or 

other affiliates. The non-liquid ‘‘loans’’ 

category would include unsecured loans 

and advances. The non-liquid ‘‘other’’ 

assets category refers to assets that do 

not fall into any of the other categories 

of liquid or non-liquid assets. These 

non-liquid ‘‘other’’ assets would include 

furniture, fixtures, equipment, real 

estate, property, leasehold 

improvements, deferred tax assets, 

prepayments, and intangible assets. 

As discussed above, the first prong of 

the second additional capital condition 

will require the Covered Entity to 

subtract total liabilities from total liquid 

assets and then apply a deduction 

(haircut) to the difference.260 The 

amount remaining after the deduction 

will need to equal or exceed $20 

million. The method of calculating the 

amount of the deduction relies on the 

calculations Covered Entities must make 

under the Basel capital standard.261 In 

particular, under the Basel capital 

standard, Covered Entities must riskweight their assets. This involves 

adjusting the nominal value of each 

asset based on the inherent risk of the 

asset. Less risky assets are adjusted to 

lower values (i.e., have less weight) than 

more risky assets. As a result, Covered 

Entities must hold lower levels of 

regulatory capital for less risky assets 

and higher levels of capital for riskier 

assets. Similarly, under Exchange Act 

rule 18a–1, less risky assets incur lower 

haircuts than riskier assets and, 

therefore, require less net capital to be 

held in relation to them. Consequently, 

the process of risk-weighting assets 

under the Basel capital standard 

provides a method to account for the 

inherent risk in an asset held by a 

Covered Entity similar to how the 

haircuts under the Exchange Act rule 

18a–1 account for the risk of assets held 

by SBS Entities. For these reasons, it is 

appropriate to use the process of riskweighting assets under the Basel capital 

standard to determine the amount of the 

deduction (haircuts) under the first 

prong of the second additional capital 

condition. 

Under the Basel capital standard, 

Covered Entities must hold regulatory 

capital equal to at least 8% of the 

amount of their risk-weighted assets.262

Therefore, the deduction (haircut) 

required for purposes of the first prong 

of the second additional capital 

condition is determined by dividing the 

amount of the Covered Entity’s riskweighted assets by 12.5 (i.e., the 

reciprocal of 8%).263 In sum, the 

Covered Entity must maintain an excess 

of liquid assets over total liabilities that 

equals or exceeds $100 million before 

the deduction (derived from the firm’s 

risk-weighted assets) and $20 million 

after the deduction.264

The second prong of the second 

additional capital condition requires the 

Covered Entity to make and preserve for 

three years a quarterly record that: (1) 

Identifies and values the liquid assets 

maintained pursuant to the first prong; 

(2) compares the amount of the 

aggregate value the liquid assets 

maintained pursuant to the first prong 

to the amount of the Covered Entity’s 

total liabilities and shows the amount of 

the difference between the two amounts 

(‘‘the excess liquid assets amount’’); and 

(3) shows the amount of the deduction 

required under the first prong and the 

amount that deduction reduces the 

excess liquid assets amount.265 This 

prong has been modified from the 

proposed Order to conform to the 

modifications to the first and third 

prongs of the proposed capital condition 

discussed above (i.e., combining them 

into a single prong that imposes a 

simplified net liquid assets test). Under 

the Order, the quarterly record will 

include details showing whether the 

Covered Entity is meeting the $100 

million and $20 million requirements of 

the first prong. 

The third prong of the second 

additional capital condition requires the 

Covered Entity to notify the 

Commission in writing within 24 hours 

in the manner specified on the 

Commission’s website if the Covered 

Entity fails to meet the requirements of 

the first prong and include in the notice 

the contact information of an individual 

who can provide further information 

about the failure to meet the 

requirements.266 As discussed above, 

the first additional capital condition 

requires the Covered Entity to apply 

substituted compliance with respect to 

notification requirements of Exchange 

Act rule 18a–8 relating to capital.267 A 

Covered Entity applying substituted 

compliance with respect to Exchange 


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268See para. (c)(1)(iii)(A)(4) of the Order. As 

discussed above, a commenter objected to the 

capital conditions generally and provided specific 

comments with respect to the first three conditions, 

but not the fourth condition. See SIFMA 5/3/2021 

Letter at 9–20. This commenter did support the 

fourth condition as part of its recommended 

incremental approach to implementing the capital 

conditions. See SIFMA 5/3/2021 Letter at 19–20. 

269See SIFMA 5/3/2021 Letter at 19. 270SIFMA 5/3/2021 Letter at 10–11. 

271See SIFMA 5/3/2021 Letter at 10–11, 

Appendix C. 

272See SIFMA 5/3/2021 Letter at 10; UK 

Substituted Compliance Notice and Proposed 

Order, 86 FR at 18407. 

273UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18407. 

274See Better Markets Letter at 7; Americans for 

Financial Reform Education Fund Letter at 1–2. 

275See SIFMA 5/3/2021 Letter at 19–20. 

276See SIFMA 5/3/2021 Letter at 19–20. 

277See SIFMA 5/3/2021 Letter at Appendix C. 

Act rule 18a–8 must simultaneously 

submit to the Commission any 

notifications relating to capital that it 

must submit to the UK authorities. 

However, UK notification requirements 

do not address a failure to adhere to the 

simplified net liquid assets test required 

by the first prong of the second 

additional capital condition. Moreover, 

due to the differences between 

Exchange Act rule 18a–1 and the Basel 

capital standard discussed above, a 

Covered Entity could fall out of 

compliance with the requirements of the 

first prong but still remain in 

compliance with the requirements of the 

Basel capital standard. Accordingly, the 

third prong requires the Covered Entity 

to notify the Commission if the firm 

fails to meet the requirements of the first 

prong. This will alert the Commission of 

potential issues with the Covered 

Entity’s financial condition that could 

pose risks to the firm’s customers and 

counterparties. 

The fourth prong of the additional 

capital condition in the proposed Order 

would have required the Covered Entity 

to include its most recently filed 

statement of financial condition 

(whether audited or unaudited) with its 

initial notice to the Commission of its 

intent to rely on substituted compliance. 

No commenters raised specific concerns 

with this condition and the Order 

includes it as proposed, but now it is 

the fourth prong of the second 

additional capital condition.268

The commenter who opposed 

additional capital conditions stated that 

their burdens would be disruptive to 

market participants and could cause 

Covered Entities to exit the U.S. 

security-based swap market.269

However, as discussed below, based on 

other comments and staff analysis of the 

balance sheets of the PRA-designated 

firms, this may not be case. For 

example, the commenter stated that the 

Covered Entities expected to register 

with the Commission transact 

predominantly in securities and 

derivatives and do not extensively 

engage in unsecured lending or other 

activities more typical of banks.270 The 

commenter based this statement on a 

high-level review of public information 

about the balance sheets of six Covered 

Entities undertaken to create the 

Balance Sheet Table.271 Based on this 

review, the commenter stated that the 

‘‘vast majority of each firm’s total assets 

consists of cash and cash equivalents, 

collateralized agreements, trade and 

other receivables, and other trading and 

financial assets. The commenter 

characterized these assets as being 

‘‘liquid.’’ The commenter stated further 

that the amount of illiquid assets held 

by these firms as a proportion of their 

balance sheets is comparable to the 

proportion of illiquid assets held by 

U.S. broker-dealers. The commenter also 

stated that the long-term debt, 

subordinated debt, and equity of the 

Covered Entities, as a proportion of their 

total liabilities and equity, also was 

comparable to U.S. broker-dealers. 

Moreover, based on the Balance Sheet 

Table and the staff’s analysis of the 

public financial reports of the PRAdesignated investment firms, these firms 

report total liquid assets that exceed 

total liabilities and, in most cases, 

substantially in excess of $100 million. 

This information suggests that 

Covered Entities may be able to meet the 

second additional capital condition 

without having to significantly adjust 

their assets, liabilities, and equity. 

Moreover, the modifications to the 

second additional capital condition that 

incorporate how Covered Entities 

categorize liquid and illiquid assets and 

calculate risk-weighted assets, will 

allow them to use existing processes to 

derive the measures needed to adhere to 

the condition. Therefore, while the 

condition imposes a simplified net 

liquid assets test and associated 

recordkeeping requirement, it may not 

cause Covered Entities to withdraw 

from the U.S. security-based swap 

market. Nonetheless, it is possible that 

the simplified net liquid assets test and 

associated recordkeeping burden could 

cause a Covered Entity to withdraw 

from the U.S. security-based swap 

market. However, as discussed above, 

this additional capital condition is 

designed to produce a comparable 

regulatory outcome with respect to SBS 

Entities subject to Exchange Act rule 

18a–1 and Covered Entities applying 

substituted compliance with respect to 

that rule. 

In response to a specific request for 

comment in the proposed Order, a 

commenter stated that the capital 

conditions would not be necessary if the 

balance sheets of the Covered Entities 

seeking to apply substituted compliance 

with respect to Exchange Act rule 18a– 

1 were similar to the balance sheets of 

U.S. broker-dealers.272 However, the 

Commission also sought comment on 

whether the capital conditions would 

serve to ensure that these firms do not 

engage in non-securities business 

activities that could impair their 

liquidity.273 Two commenters expressed 

support for the capital conditions.274

The fact that today certain Covered 

Entities have liquid balance sheets does 

not mean this will hold true in the 

future or with respect to other potential 

registrants. For these reasons, it is 

appropriate to include the additional 

capital condition with respect to 

applying substituted compliance to 

Exchange Act rule 18a–1. 

It would not be appropriate to take a 

more incremental approach to the 

additional capital conditions as 

suggested by a commenter.275

Substituted compliance is premised on 

comparable regulatory outcomes. As 

discussed above, the additional capital 

condition is designed to supplement the 

UK capital laws in order to achieve a 

comparable regulatory outcome in terms 

of the net liquid assets test of Exchange 

Act rule 18a–1. Delaying the 

implementation of the additional capital 

condition would mean that Covered 

Entities are operating as registered 

security-based swap dealers under a 

capital standard that does impose the 

net liquid assets test. This would be 

inconsistent with the objective of 

substituted compliance and could 

increase risk to the U.S. security-based 

swap markets and participants in those 

markets. Moreover, the modifications to 

the capital condition discussed above 

may ease the implementation burdens. 

In addition, the Commission does not 

believe a commenter’s suggestion for an 

alternative capital condition requiring a 

Covered Entity to maintain $100 million 

of HQLA as defined in the LCR 

requirements would be adequate in 

terms of achieving comparable 

regulatory outcomes with Exchange Act 

rule 18a–1.276 The Balance Sheet Table 

indicates that Covered Entities have 

total liabilities of many billions of 

dollars.277 A condition requiring $100 

million in HQLA would not cover these 

liabilities and would not impose a net 

liquid assets test. 

Finally, the Commission has modified 

the citations to UK laws in the capital 


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278SIFMA 5/3/2021 Letter at 10–11, Appendix A. 

279See Better Markets Letter at 5–6. 

280SIFMA 5/3/2021 Letter at Appendix A. 

281See SIFMA 5/3/2021 Letter at Appendix A. 

282FCA Application Annex V (Side Letter for 

Capital Requirements) at 367 (‘‘For the purposes of 

this application, we address the currently 

applicable UK Capital Framework—i.e., based on 

CRR (as amended by the currently effective 

elements of CRR II) and CRD IV.4.’’). 

283See SIFMA 5/3/2021 Letter Appendix A. 

284 17 CFR 240.18a–4. 

285The Commission also is retaining the 

references to the UK EMIR Margin RTS in the final 

order as part of the capital condition. These 

standards require a Covered Entity to segregate 

initial margin from the firm’s assets by either 

placing it with a third-party holder or custodian or 

via other legally binding arrangements, making the 

initial margin remote in the case of the firm’s 

default or insolvency. FCA Application Annex V 

(Side Letter for Capital Requirements) at 369. 

286See Capital and Margin Adopting Release, 84 

FR at 43950–51. 

287FCA Application Annex V (Side Letter for 

Capital Requirements) at 378. 

288 17 CFR 240.18a–8. Therefore, the references to 

the PRA Notifications Rule will be modified in the 

final order to read PRA Notifications Rule 2.1, 2.4 

through 2.6, 2.8, 2.9. 

289More specifically, in the final order, the 

Commission is deleting references to the Banking 

Act of 2009, Capital Requirements Regulations 

2013, Capital Requirements (Capital Buffers and 

Macro-prudential Measures) Regulations 2014, Part 

8 of the Bank Recovery and Resolution (No 2) Order 

2014, Bank of England Act 1998 (Macro-prudential 

Measures) (No 2) Order 2015, and Parts 4A and 12A 

of FSMA. 

290See SIFMA 5/3/2021 Letter Appendix A. 

291See FCA Application Annex V (Side Letter for 

Capital Requirements) at 366, n.400. More 

specifically, in the final order, the Commission is 

including references to the UK CRR to read: UK 

CRR, Part One (General Provisions) Article 6(1), 

Part Two (Own Funds), Part Three (Capital 

Requirements), Part Four (Large Exposures), Part 

Five (Exposures to Transferred Credit Risk), Part Six 

(Liquidity), and Part Seven (Leverage). 

292See SIFMA 5/3/2021 Letter Appendix A. 

293See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386. 

294See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386, n.82. 

295See 17 CFR 240.18a–3(c)(1)(ii) and FCA 

Application at 32–35. 

296See 17 CFR 240.18a–3(c)(1)(ii) and FCA 

Application at 40–43. 

section of the Order in response to 

comment and further analysis.278 In 

response to comments, the capital 

section of the Order does not cite 

‘‘recitals’’ because they are not part of a 

legally binding regulation.279 A 

commenter recommended that citations 

to FCA IFPRU and BIPRU rules be 

deleted since it is likely that only PRAdesignated investment firms will rely on 

the substituted compliance 

determination for capital.280 The FCA 

similarly indicated that the only firms 

that will rely on a substituted 

compliance determination for capital 

are PRA-designated investment firms. 

PRA-designated firms are not subject to 

FCA IFPRU and BIPRU firm 

requirements.281 Further, investment 

firms that are not PRA-designated (i.e., 

that are MiFID investment firms 

prudentially regulated by the FCA in the 

UK) will be subject in the near term to 

a new capital regime that is not based 

on the Basel Capital Standard, and is 

not addressed by the FCA’s 

comparability analysis for capital in the 

FCA Application.282

A commenter recommended that the 

citations to FCA PRIN and CASS be 

deleted.283 The Commission agrees it is 

appropriate to delete references to FCA 

PRIN since the entities relying on 

substituted compliance for capital in the 

UK will be PRA-designated investment 

firms. These firms are subject to the 

PRA Fundamental Rules. Therefore the 

Commission is deleting the references to 

FCA PRIN in the Order and replacing 

them with references to PRA 

Fundamental Rules 2.3 and 2.4. These 

rules require that firms must at all times 

maintain adequate financial resources, 

and have effective risk strategies and 

risk management systems. Further, the 

Commission also agrees that it is 

appropriate to delete references to FCA 

CASS in the Order because they relate 

to customer protection requirements, 

and not capital requirements, and 

Covered Entities also are subject to the 

Commission’s segregation requirements 

under Exchange Act rule 18a–4,284 as 

well as the segregation provisions under 

the UK EMIR Margin RTS.285

Substituted compliance is not available 

for segregation requirements under 

Exchange Act rule 18a–4.286

In addition, in response to a 

recommendation to delete references to 

the UK EMIR margin requirements, the 

Commission is retaining the references 

to the UK Margin RTS requirements as 

the UK Application states ‘‘if 

liquidation did occur, UK regulations 

also protect counterparties and promote 

continued market liquidity through 

margin requirements.’’287 The 

Commission agrees with the commenter 

that the scope of the PRA Notifications 

Rule is overly broad and, in response, is 

narrowing the references to those 

citations included in the comparability 

analysis of Exchange Act rule 18a–8.288

Further, the Commission agrees with the 

commenter that some of the citations do 

not relate to requirements imposed on 

Covered Entities, but generally relate to 

the powers of relevant authorities. In 

these cases, citations in the ordering 

language have been deleted or modified 

to reference requirements that a Covered 

Entity is subject to and must comply 

with.289

The Commission agrees with the 

comments that the specific provisions to 

the UK CRR cited in the proposed Order 

are not comprehensive.290 In response, 

the Commission has modified the final 

ordering language to use more 

comprehensive citations to the UK CRR 

(including the specific UK CRR 

provisions cited in the proposed Order), 

as the capital analysis includes only 

discussion of entities that are fully 

subject to UK CRR and CRD IV.291 In 

addition, this commenter recommended 

that the Commission modify the final 

ordering language to qualify the 

citations to the UK CRR with a reference 

to waivers and permissions.292 In 

response, the specific provisions in the 

UK CRR referenced in the capital 

comparability analysis were analysed 

without reference to waivers or 

permissions, and the condition states 

that the Covered Entity must be subject 

to and comply with these specific 

capital requirements. Therefore, the 

more comprehensive references to the 

UK CRR in the final order are cited 

without reference to waivers or 

permissions. Finally, the references to 

the UK CRR and the final references in 

the capital ordering language contribute 

to the conclusion that UK law produces 

a comparable regulatory outcome to the 

capital requirements under the 

Exchange Act. 

2. Margin 

The Commission’s preliminary view, 

based on the FCA Application and the 

Commission’s review of applicable UK 

laws, was that relevant UK margin 

requirements would produce regulatory 

outcomes that are comparable to those 

associated with Exchange Act margin 

requirements without the need for 

additional conditions.293 For example, 

in adopting final margin requirements 

for non-cleared security-based swaps, 

the Commission modified the rule to 

more closely align it with the margin 

rules of the Commodity Futures Trading 

Commission and the U.S. prudential 

regulators and, in doing so, with the 

recommendations made by the BCBS 

and the Board of the International 

Organization of Securities Commissions 

(‘‘IOSCO’’) with respect to margin 

requirements for non–centrally cleared 

derivatives.294

Exchange Act rule 18a–3 and the UK 

margin rules require firms to collect 

liquid collateral from a counterparty to 

cover variation and/or initial margin 

requirements.295 Both sets of rules also 

require firms to deliver liquid collateral 

to a counterparty to cover variation 

margin requirements. Under both sets of 

rules, the fair market value of collateral 

used to meet a margin requirement must 

be reduced by a haircut.296 Further, both 


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297See 17 CFR 240.18a–3(d)(2)(i) and FCA 

Application at 21. 298See 17 CFR 240.18a–3(d)(2)(i) and FCA 

Application at 23–27. The Commission must 

approve the use of an initial margin model. 17 CFR 

240.18a–3(d)(2)(i). UK EMIR article 11(15) directs 

European supervisory authorities to develop 

regulatory technical standards under which initial 

margin models have to be approved (initial and 

ongoing approval). UK requirements currently 

provide that, upon request, counterparties using an 

initial margin model shall provide the regulators 

with any documentation relating to the risk 

management procedures relating to such model at 

any time. UK EMIR Margin RTS article 2(6). 

299See 17 CFR 240.18a–3(c)(1)(iii) and FCA 

Application at 52–60. 300See 17 CFR 240.18a–3(c)(1)(iii) and FCA 

Application at 52–60. 

301See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18386. 

302See SIFMA 5/3/2021 Letter at 10, Appendix A. 

303See SIFMA 5/3/2021 Letter Appendix A. 

304See PRA General Organisational Requirements 

Rule 2.1. 

305The references to the UK CRR and PRA 

Internal Capital Adequacy Assessment Rule 4.2 

were included in the comparability assessment for 

margin requirements, 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. 

306See para. (c)(2)(i) of the Order. The first 

margin condition requires that Covered Entities 

must be subject to and comply with UK EMIR 

article 11; UK EMIR Margin RTS; UK CRR articles 

103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7), 

290, 295, 296(2)(b), 297(1), 297(3), and 298(1); UK 

MiFID Org Reg article 23(1); PRA General 

Organisational Requirements Rule 2.1; and PRA 

Internal Capital Adequacy Assessment Rule 4.2. 

307French Substituted Compliance Notice and 

Proposed Order, 85 FR at 85737. 

308See paras. (c)(2)(ii) and (iii) of the Order. 

309See Better Markets Letter at 3. 

310See Better Markets Letter at 2. 

311See Better Markets Letter at 2–3. 

312See Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers; Proposed Rule, 

Exchange Act Release No. 68071 (Oct. 18, 2021), 77 

FR 70214, 70258 (Nov. 23, 2012). 

sets rules permit the use of a model 

(including a third party model such as 

ISDA’s SIMMTM model) to calculate 

initial margin.297 The initial margin 

model under both sets of rules must 

meet certain minimum qualitative and 

quantitative requirements, including 

that the model must use a 99 percent, 

one-tailed confidence level with price 

changes equivalent to a 10-day 

movement in rates and prices.298 Both 

sets of rules have common exceptions to 

the requirements to collect and/or post 

initial or variation margin, including 

exceptions for certain commercial end 

users, the Bank for International 

Settlements, and certain multilateral 

development banks.299 Both sets of rules 

also permit a threshold below which 

initial margin is not required to be 

collected and incorporate a minimum 

transfer amount.300

In the UK Substituted Compliance 

Notice and Proposed Order, the 

Commission stated substituted 

compliance with respect to the margin 

requirements accordingly would be 

conditioned on Covered Entities being 

subject to those UK provisions that, the 

Commission has determined, in the 

aggregate, establish a framework that 

produces outcomes comparable to those 

associated with the requirements under 

the Exchange Act rule 18a–3.301 A 

commenter supported the proposed 

Order to grant substituted compliance in 

connection with margin requirements 

for Covered Entities, subject to technical 

comments with respect to refining the 

UK laws cited in the UK Order.302 In 

particular, this commenter 

recommended that the citations to the 

UK CRR, FCA IFPRU 2.2.18R, FCA 

SYSC 4.1.1R, and PRA Internal Capital 

Adequacy Assessment Rule 4.2 be 

deleted from the final order, and that 

the Commission narrow the scope of the 

reference to UK EMIR article 11 to 

article 11(3).303

The Commission disagrees with the 

commenter that the scope of the citation 

to UK EMIR article 11 should be 

narrowed. Other provisions of UK EMIR 

article 11 relate to margin requirements, 

including the provisions regarding 

intragroup transactions. Therefore, the 

Commission is not modifying this 

citation in the final order. Further, the 

Commission agrees with the commenter 

that it is appropriate to delete the 

citations to FCA IFPRU 2.2.18R and 

FCA SYSC 4.1.1R from the final order 

since it is likely that only PRAdesignated investment firms will rely on 

the substituted compliance 

determination for margin. These firms 

are not subject to FCA IFPRU 

requirements, and are subject to general 

organizational requirements in the PRA 

rulebook that were already included in 

the proposed Order.304 With respect to 

the remaining suggestions by the 

commenter to delete references to the 

UK CRR requirements and PRA Internal 

Capital Adequacy Assessment Rule 4.2, 

the Commission concludes that these 

requirements which were set out in the 

proposed Order, contribute to the 

conclusion that UK law produces a 

comparable regulatory outcome to the 

margin requirements under the 

Exchange Act.305 For the foregoing 

reasons, the first margin condition 

requires the covered entity to be subject 

to and comply with certain identified 

UK margin requirements.306

The proposed Order did not contain 

any additional conditions for 

substituted compliance with respect to 

the margin requirements of Exchange 

Act section 15F(e) and Exchange Act 

rule 18a–3. The Commission, however, 

requested comment on whether there 

were any conditions that should be 

applied to substituted compliance for 

the margin requirements to promote 

comparable regulatory outcomes.307 As 

discussed below, in response to 

comments received, the Order includes 

two additional margin conditions 

designed to produce comparable 

regulatory outcomes with respect to 

collecting variation and initial margin 

from counterparties.308

In particular, a commenter raised 

general concerns with the Commission’s 

regulatory outcomes approach to 

substituted compliance, and suggested 

additional general principles that the 

Commission should consider in 

evaluating applications for substituted 

compliance.309 This commenter 

believed regulatory arbitrage within and 

outside the United States was one of the 

key factors that led to and exacerbated 

the 2008 financial crisis, and stated that 

the Dodd-Frank Act was enacted in 

response, which includes the 

Commission’s authority to promulgate 

capital, margin, and other rules for noncleared security-based swaps ‘‘to reduce 

the possibility and severity of another 

crisis related to excessive buildup of 

risk in the swaps markets.’’ 310

The Commission responds to the 

comments on the Commission’s 

approach to substituted compliance in 

part II.C.1 above. However, as stated 

above, the commenter raises concerns 

about regulatory arbitrage and the 

potential impacts of differences in 

requirements that merit re-consideration 

of whether additional margin conditions 

are needed to produce comparable 

regulatory outcomes.311 When 

proposing margin requirements for noncleared security-based swaps, the 

Commission stated that the ‘‘DoddFrank Act seeks to address the risk of 

uncollateralized credit risk exposure 

arising from OTC derivatives by, among 

other things, mandating margin 

requirements for non-cleared securitybased swaps and swaps.’’ 312 Further, 

the comparability criteria for margin 

requirements under Exchange Act rule 

3a71–6 provides that prior to making a 

substituted compliance determination, 

the Commission intends to consider (in 

addition to any conditions imposed) 

whether the foreign financial regulatory 

system requires registrants to adequately 

cover their current and future exposure 

to OTC derivatives counterparties, and 

ensures registrants’ safety and 

soundness, in a manner comparable to 

the applicable provisions arising under 

the Exchange Act and its rules and 


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313See 17 CFR 240.3a71–6(d)(5)(i) and (ii). 

314See Capital and Margin Adopting Release, 84 

FR at 43949 (‘‘Obtaining collateral is one of the 

ways OTC derivatives dealers manage their credit 

risk exposure to OTC derivatives counterparties. 

Prior to the financial crisis, in certain 

circumstances, counterparties were able to enter 

into OTC derivatives transactions without having to 

deliver collateral. When ‘‘trigger events’’ occurred 

during the financial crisis, those counterparties 

faced significant liquidity strains when they were 

required to deliver collateral.). 

315See 17 CFR 240.18a–3(c)(ii)(A)(1) and (2). 

316See FCA Application at 57. 

317See 17 CFR 240.18a–3(c)(ii)(B). 

318See FCA Application at 20. These thresholds 

are being phased-in with the last initial margin 

threshold set at EUR 8 billion. 

319The Commission recognizes there are also 

cases where the UK margin rules are more 

restrictive than Exchange Act rule 18a–3. UK 

margin rules require Covered Entities to post initial 

margin to covered counterparties, while the 

Exchange Act rule 18a–3 would permit posting but 

not require it. In addition, UK margin rules also 

require a Covered Entity to collect (and post) initial 

margin to financial and non-financial 

counterparties if their notional exposure to noncentrally cleared derivatives exceeds a certain 

threshold on a group basis. In contrast, Exchange 

Act rule 18a–3 does not require (but permits) a 

nonbank security-based swap dealer to collect 

initial margin from counterparties that are financial 

market intermediaries. 17 CFR 240.18a– 

3(c)(1)(iii)(B). The comparability analysis, however, 

focuses on determining whether the UK margin 

rules are comparable to Exchange Act rule 18a–3. 

320See para. (c)(2)(ii) of the Order. 

321See para. (c)(2)(iii) of the Order. 

322See para. (c)(2)(iv) of the Order. 

323See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18396–98, 18416. 

regulations.313 In adopting this 

comparability criteria for margin 

requirements, the Commission stated 

that obtaining collateral is one of the 

ways OTC derivatives dealers manage 

their credit risk exposure to OTC 

derivatives counterparties.314

To address the risk of uncollateralized 

exposures, Exchange Act rule 18a–3 

requires SBS Entities without a 

prudential regulator to collect variation 

margin from all counterparties, 

including affiliates, unless an exception 

applies.315 Under the UK margin 

requirements, there are exceptions from 

the variation margin requirements for 

certain intragroup transactions (i.e., 

transactions between affiliates).316 In 

addition, Exchange Act rule 18a–3 

requires firms to collect initial margin 

from all counterparties, unless an 

exception applies.317 This initial margin 

requirement under Exchange Act rule 

18a–3 requires the firm to collect initial 

margin from a financial counterparty 

such as a hedge fund without regard to 

whether the counterparty has material 

exposures to non-cleared security-based 

swaps and uncleared swaps. In contrast, 

UK margin requirements do not require 

Covered Entities to collect initial margin 

from financial counterparties, if their 

notional exposure to non–centrally 

cleared derivatives does not exceed a 

certain threshold on a group basis.318

In some cases these differences may 

result in a Covered Entity not being 

adequately collateralized to cover its 

current or future exposure to these 

counterparties with respect to its OTC 

derivatives transactions. In addition, 

differences in the counterparty 

exceptions could potentially incentivize 

market participants to engage in noncleared security-based swap 

transactions outside of the United 

States.319 Consequently, it is 

appropriate to impose additional margin 

conditions to produce comparable 

regulatory outcomes in terms of 

counterparty exceptions between 

Exchange Act rule 18a–3 and the UK 

requirements. 

The first additional condition 

addresses differences in the 

counterparty exceptions with respect to 

variation margin. It requires a Covered 

Entity to collect variation margin, as 

defined in the UK EMIR Margin RTS, 

from a counterparty with respect to a 

transaction in non-cleared securitybased swaps, unless the counterparty 

would qualify for an exception under 

Exchange Act rule 18a–3 from the 

requirement to deliver variation margin 

to the Covered Entity.320 This condition 

defines variation margin by referencing 

UK EMIR Margin RTS to facilitate 

implementation of the condition by 

Covered Entities. Under this condition, 

for example, Covered Entities would be 

required to collect variation margin 

from their affiliates, but would be 

permitted to comply with all other UK 

margin requirements, including 

calculation, collateral, documentation, 

and timing of collection requirements. 

The first additional condition will close 

the gap between the counterparty 

exceptions of Exchange Act rule 18a–3 

and the UK margin rules with respect to 

variation margin. 

The second additional condition 

addresses differences in the 

counterparty exceptions with respect to 

initial margin. It requires a Covered 

Entity to collect initial margin, as 

defined in the UK EMIR Margin RTS, 

from a counterparty with respect to 

transactions in non-cleared securitybased swaps, unless the counterparty 

would qualify for an exception under 

Exchange Act rule 18a–3 from the 

requirement to deliver initial margin to 

Covered Entity.321 The condition 

defines initial margin by referencing UK 

EMIR Margin RTS to facilitate 

implementation of the condition by 

Covered Entities. Under this condition, 

for example, Covered Entities would be 

required to collect initial margin from 

their certain counterparties, but would 

be permitted to comply with all other 

UK margin requirements, including 

calculation, collateral, documentation, 

and timing of collection requirements. 

The second additional condition will 

close the gap between the counterparty 

exceptions of Exchange Act rule 18a–3 

and the UK margin rules with respect to 

initial margin. 

Finally, for the reasons discussed 

above in part III.B.2.k of this release, the 

third additional condition is that the 

Covered Entity applies substituted 

compliance with respect to Exchange 

Act rules 18a–5(a)(12) (a record making 

requirement).322 This record making 

requirement is directly linked to the 

margin requirements of Exchange Act 

rule 18a–3. The proposed Order 

conditioned substituted compliance 

with respect to this record making 

requirement on the Covered Entity 

applying substituted compliance with 

respect to Exchange Act rule 18a–3.323

This additional condition is designed to 

provide clarity as to the Covered 

Entity’s obligations under this record 

making requirement when applying 

substituted compliance with respect to 

Exchange Act rule 18a–3 pursuant this 

Order. 

VI. Substituted Compliance for Internal 

Supervision, Chief Compliance Officers 

and Additional Exchange Act Section 

15F(j) Requirements 

A. Proposed Approach 

The FCA 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 

procedures related to conflicts of 

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 


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324See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18389. Section 

15F(j)(4)(A) requires firms to have systems and 

procedures to obtain necessary information to 

perform functions required under section 15F. 

Section 15F(j)(6) prohibits firms from adopting any 

process or taking any action that results in any 

unreasonable restraint of trade, or to impose any 

material anticompetitive burden on trading or 

clearing. 

325See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18389 n.109. Each of the 

comparable UK internal supervision and chief 

compliance officer requirements listed in the 

proposed Order applies to a uniquely defined set 

of UK-authorized firms. See UK Substituted 

Compliance Notice and Proposed Order, 86 FR at 

18390 and n.112. To assist UK firms in determining 

whether they are subject to these requirements, the 

Commission preliminarily determined that any 

Covered Entity that is an ‘‘IFPRU investment firm,’’ 

‘‘UK bank’’ or ‘‘UK designated investment firm,’’ 

each as defined for purposes of UK law, would be 

subject to all of the required UK requirements 

related to internal supervision and chief 

compliance officer requirements and thus eligible to 

apply substituted compliance for internal 

supervision and chief compliance officer 

requirements. See UK Substituted Compliance 

Notice and Proposed Order, 86 FR at 18390. 

326See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18390. These residual 

Exchange Act requirements could, for example, 

relate to requirements for which substituted 

compliance is not available, requirements for which 

the Order does not make a positive substituted 

compliance determination, security-based swap 

business for which the Covered Entity is unable to 

satisfy the conditions of the Order, and/or 

requirements or security-based swap business for 

which the Covered Entity decides not to use 

substituted compliance. The condition was 

designed to allow a Covered Entity 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. 

327See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18389 and n.108. 

328See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18390. The condition was 

designed to allow a Covered Entity to leverage the 

compliance reports that it must produce pursuant 

to UK requirements, by extending those reports to 

address compliance with the conditions to the 

proposed Order. 

329See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18390. 

330See SIFMA 5/3/2021 Letter at 20–21. The 

commenter also requested that the Commission not 

require a Covered Entity to be subject to and 

comply with some of the UK internal supervision 

and chief compliance officer requirements listed in 

the proposed Order. In addition, the commenter 

requested that the Commission amend the 

conditions to substituted compliance for chief 

compliance officer requirements. See SIFMA 5/3/ 

2021 Letter at 20–21 and Appendix A part (d). The 

Commission addresses those requests in the 

relevant sections of this part VI below. 

331See Better Markets Letter at 2. The commenter 

also stated that, if the Commission nevertheless 

makes a positive substituted compliance 

determination, it must at a minimum ensure that 

the conditions in the proposed Order ‘‘are applied 

with full force and without exceptions or dilution.’’ 

The Commission addresses that comment in the 

relevant sections of this part VI below. 

332See para. (d) of the Order. 

requirements related to informationgathering and antitrust prohibitions.324

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 the FCA Application, 

the Commission preliminarily 

concluded that the relevant UK 

requirements in general would produce 

comparable regulatory outcomes by 

providing that UK SBS Entities have 

structures and processes that reasonably 

are designed to promote compliance 

with applicable law, to identify and 

cure instances of non-compliance, and 

to manage conflicts of interest. 

Substituted compliance under the 

proposed Order was to be conditioned 

in part on SBS Entities being subject to 

and complying with specified UK 

provisions that in the aggregate help to 

produce regulatory outcomes that are 

comparable to those associated with 

those internal supervision, chief 

compliance officer and related 

requirements under the Exchange 

Act.325

Under the proposed Order, 

substituted compliance would be 

subject to certain additional conditions 

to help ensure the comparability of 

outcomes. First, substituted compliance 

in connection with Exchange Act 

internal supervision requirements 

(including related information gathering 

requirements under Exchange Act 

section 15F(j)(4)(A) and related conflict 

of interest systems and procedures 

requirements under Exchange Act 

section 15F(j)(5)) would be conditioned 

on the Covered Entity complying with 

applicable UK supervisory and 

compliance provisions as if those 

provisions also require the Covered 

Entity to comply with applicable 

requirements under the Exchange Act 

and the other applicable conditions of 

the Order. This condition reflects that, 

even with substituted compliance, 

Covered Entities still directly would be 

subject to a number of requirements 

under the Exchange Act and conditions 

to the final Order.326 Under the 

proposed Order, substituted compliance 

for Exchange Act internal supervision 

requirements would not extend to 

internal supervision in connection with 

the internal risk management 

requirements, certain information 

reporting requirements or anti-trust 

requirements.327

For similar reasons, the proposed 

Order conditioned substituted 

compliance in connection with 

compliance report requirements on the 

Covered Entity at least annually 

providing the Commission with all 

compliance reports required pursuant to 

UK MiFID Org Reg article 22(2)(c). 

Those reports would be required to be 

in English and 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 applicable 

conditions to the substituted 

compliance order.328

The Commission preliminarily did 

not provide substituted compliance for 

Exchange Act antitrust provisions, 

based on the preliminary conclusion 

that allowing an alternative means of 

compliance would not lead to 

comparable regulatory outcomes.329

B. Commenter Views and Final 

Provisions 

After considering commenters’ 

recommendations regarding internal 

supervision, chief compliance officer 

and related requirements, the 

Commission is making positive 

substituted compliance determinations 

in connection with internal supervision 

(including related information gathering 

requirements under Exchange Act 

section 15F(j)(4)(A) and related conflict 

of interest systems and procedures 

requirements under Exchange Act 

section 15F(j)(5)) and chief compliance 

officer requirements. 

One commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

risk control provisions.330 Another 

commenter stated that UK requirements 

are not sufficiently comparable to 

Exchange Act requirements.331 As 

discussed below, the final Order has 

been changed from the proposed Order 

in certain respects in response to 

comments.332 The Commission 

continues to conclude that, taken as a 

whole, applicable requirements under 

UK law require that SBS Entities have 

structures and processes that reasonably 

are designed to promote compliance 

with applicable law, to identify and 

cure instances of non-compliance, and 

to manage conflicts of interest, and thus 

produce regulatory outcomes that are 

comparable to those associated with the 

above-described internal supervision 

and chief compliance officer 

requirements. Although there are 

differences between the approaches 

taken by the relevant internal 

supervision and chief compliance 

officer requirements under the Exchange 

Act and relevant UK requirements, the 

Commission continues to believe that 


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333See para. (d)(1)(iii) of the Order. In particular, 

the Order does not extend to internal supervision 

requirements under Exchange Act rule 15Fh–3(h) 

related to compliance with internal risk 

management requirements in Exchange Act rule 

15F(j)(2) (which are addressed by paragraph (b)(1) 

of the Order in connection with internal risk 

management), requirements to disclose or provide 

information to the Commission and any relevant 

U.S. prudential regulator pursuant to Exchange Act 

sections 15F(j)(3) and (j)(4)(B) (for which 

substituted compliance is not available), or the antitrust provisions of Exchange Act section 15F(j)(6) 

(for which the Commission is not making a positive 

substituted compliance determination). 

334 17 CFR 240.15Fk–1(c)(2)(ii)(D). 

335 15 U.S.C. 78o–10(k). 

336See SIFMA 5/3/2021 Letter at 20–21 and 

Appendix A part (d)(3). 

337See Better Markets Letter at 2. 

338See SIFMA 5/3/2021 Letter Appendix A part 

(d)(3). 

those differences on balance should not 

preclude substituted compliance for 

these requirements, as the relevant UK 

requirements taken as a whole help to 

produce comparable regulatory 

outcomes. 

To help ensure the comparability of 

outcomes, substituted compliance for 

internal supervision and chief 

compliance officer requirements is 

subject to certain conditions. 

Substituted compliance in connection 

with those requirements is conditioned 

on the Covered Entity being subject to, 

and complying with, relevant UK 

requirements. In addition, consistent 

with the proposed Order, substituted 

compliance for internal supervision 

requirements (1) is conditioned on the 

Covered Entity complying with the 

relevant UK requirements as if they also 

require compliance with applicable 

Exchange Act requirements and other 

applicable conditions under the Order 

and (2) does not extend to certain 

specified internal supervision 

requirements.333 Consistent with the 

proposed Order, substituted compliance 

in connection with chief compliance 

officer requirements is conditioned on 

the Covered Entity at least annually 

providing the Commission with an 

English-language copy of all compliance 

reports required pursuant to UK MiFID 

Org Reg article 22(2)(c). As described 

below, in response to comments the 

Commission is amending the 

certification of each report to better 

align with the certification in Exchange 

Act rule 15Fk–1(c)(2)(ii)(D),334 requiring 

each report to address the Covered 

Entity’s compliance with applicable 

Exchange Act requirements and other 

applicable conditions under the Order, 

amending the deadline by which such 

reports must be provided to the 

Commission and clarifying that all such 

reports together must cover the entire 

period that the Covered Entity’s 

Exchange Act annual compliance report 

would be required to cover. A Covered 

Entity that is unable to comply with an 

applicable condition—and thus is not 

eligible to use substituted compliance 

for the Exchange Act internal 

supervision and/or chief compliance 

officer requirements related to that 

condition—nevertheless may use 

substituted compliance for another set 

of Exchange Act requirements addressed 

in the Order if it complies with the 

conditions to the relevant parts of the 

Order. 

Under the Order, substituted 

compliance for internal supervision and 

chief compliance officer requirements is 

not subject to a condition that the 

Covered Entity apply substituted 

compliance for related recordkeeping 

requirements in Exchange Act rules 

18a–5 and 18a–6. A Covered Entity that 

applies substituted compliance for 

internal supervision and/or chief 

compliance officer requirements, but 

does not apply substituted compliance 

for the related recordkeeping 

requirements in Exchange Act rules 

18a–5 and 18a–6, will remain subject to 

the relevant provisions of Exchange Act 

rules 18a–5 and 18a–6. Those rules 

require the Covered Entity to make and 

preserve records of its compliance with 

Exchange Act internal supervision and 

chief compliance officer requirements 

and of its security-based swap activities 

required or governed by those 

requirements. A Covered Entity that 

applies substituted compliance for 

internal supervision and/or chief 

compliance officer requirements, but 

complies directly with related 

recordkeeping requirements in rules 

18a–5 and 18a–6, therefore must make 

and preserve records of its compliance 

with the relevant conditions to the 

Order and of its security-based swap 

activities required or governed by those 

conditions and/or referenced in the 

relevant parts of rules 18a–5 and 18a– 

6. 

The Commission details below its 

consideration of comments on the 

proposed Order. 

1. Applicable UK Internal Supervision 

and Chief Compliance Officer 

Requirements 

Exchange Act rule 15Fh–3(h) requires 

an SBS Entity to establish and maintain 

a system to supervise, and to diligently 

supervise, its business and the activities 

of its associated persons. This system 

must be reasonably designed to prevent 

violations of the provisions of 

applicable Federal securities laws 

relating to its business as an SBS Entity. 

The rule specifies detailed minimum 

requirements for this internal 

supervision system. Exchange Act 

sections 15F(j)(4)(A) and (j)(5) similarly 

require a registered SBS Entity to 

establish and enforce internal systems 

and procedures to obtain any necessary 

information to perform any regulated 

functions in its capacity as an SBS 

Entity and to implement conflict of 

interest systems and procedures, 

respectively. Exchange Act section 

15F(k) 335 and Exchange Act rule 15Fk– 

1 require an SBS Entity to designate a 

chief compliance officer with specified 

duties, including requirements to report 

directly to the SBS Entity’s board of 

directors or senior officer, review and 

ensure the SBS Entity’s compliance 

with applicable Exchange Act 

requirements, resolve conflicts of 

interest that may arise, administer the 

policies and procedures required by the 

Exchange Act, and establish and follow 

procedures for addressing 

noncompliance. In addition, the chief 

compliance officer must submit to the 

Commission an annual report of the SBS 

Entity’s assessment of the effectiveness 

of its policies and procedures, material 

changes to the policies and procedures, 

areas for improvement, potential 

changes to its compliance program, 

material noncompliance matters 

identified, and the resources for its 

compliance program. Exchange Act rule 

15Fk–1 further provides that the 

compensation and removal of the chief 

compliance officer must require the 

approval of a majority of the SBS 

Entity’s board of directors. 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

certain of the UK requirements specified 

in the proposed Order.336 By contrast, 

another commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 337 The 

Commission details below its 

consideration of each of these 

comments. 

The commenter stated that the 

Commission should delete from the 

Order the provisions of FCA IFPRU, 

FCA BIPRU, and FCA SYSC 19A listed 

in paragraphs (d)(3)(iii) and (d)(3)(vi) of 

the proposed Order. These provisions 

apply only to IFPRU investment firms, 

and the commenter stated that it expects 

only ‘‘banks and PRA-designated 

investment firms’’ will register as SBS 

Entities.338 For the reasons described in 

part III.B.2.e above, the Commission is 

retaining the references to these 

provisions. 


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339See SIFMA 5/3/2021 Letter Appendix A part 

(d)(3). 

340See SIFMA 5/3/2021 Letter Appendix A part 

(d)(3). 

341See SIFMA 5/3/2021 Letter Appendix A part 

(d)(3). 

342To ensure that Covered Entities regulated only 

by the FCA and not the PRA must be subject to and 

comply with a similar requirement, the Commission 

is adding FCA SYSC 4.3A.2R to the list of UK 

requirements in paragraph (d)(3) of the Order. 

343The commenter stated that these requirements 

are more appropriately addressed in connection 

with substituted compliance for internal risk 

management requirements. As discussed below, the 

Commission believes that these UK requirements 

are relevant to substituted compliance for Exchange 

Act internal supervision and chief compliance 

officer requirements. 

344The commenter also stated that these 

requirements are more appropriately addressed in 

connection with substituted compliance for capital 

and margin requirements. See SIFMA 5/3/2021 

Letter Appendix A part (d)(3). As discussed below, 

the Commission believes that these UK 

requirements are relevant to substituted compliance 

for Exchange Act internal supervision and chief 

compliance officer requirements. 

345See supra note 344. 

346See supra note 343. 

Similarly, the commenter stated that 

the Commission should delete from the 

Order the provisions of FSMA and FCA 

COND listed in paragraph (d)(3)(vii) of 

the proposed Order that apply to firms 

regulated only by the FCA, rather than 

to firms dually regulated by both the 

FCA and the PRA.339 The commenter 

again stated that it expects only dually 

regulated ‘‘banks and PRA-designated 

investment firms’’ will register as SBS 

Entities.340 The proposed Order would 

not require a Covered Entity that is a 

dually regulated firm to be subject to 

and comply with these provisions. 

Rather, paragraph (d)(3)(vii) of the 

proposed Order would require the 

Covered Entity to be subject to and 

comply with either the provisions of 

FSMA and FCA COND that apply to 

solo-regulated firms or analogous 

provisions that apply to dually 

regulated firms. Accordingly, the 

Commission is retaining the references 

to these provisions. 

The commenter also recommended 

that the Commission delete from the 

Order the following provisions because 

they do not correspond to and go 

beyond Exchange Act internal 

supervision and chief compliance 

officer requirements: 341

• FCA CASS 6.2.1R and 7.12.1R, 

which implement MiFID articles 16(8) 

and (9), require a Covered Entity to 

make adequate arrangements to 

safeguard client assets and client money 

held by the Covered Entity and to 

prevent the use of client assets or client 

money for the Covered Entity’s own 

account. FCA CASS 7.11.1R, which 

implements MiFID article 16(10), 

prohibits a Covered Entity from entering 

into, as part of its implementation of 

organizational arrangements, 

arrangements for a retail client to 

transfer full ownership of money to the 

Covered Entity as collateral for the 

client’s obligations to the Covered 

Entity. 

• PRA Internal Capital Adequacy 

Assessment Rules 4.1 through 4.4, 5.1, 

6.1, 7.1, 7.2, 8.1 through 8.5, 9.1, 10.1, 

10.2, and 11.1 through 11.3 and PRA 

Internal Liquidity Adequacy 

Assessment Rules 3.1 through 3.3, 4.1, 

7.2, 8.1, 9.2, 11.1, 11.2, 11.4, 12.1, 12.3, 

and 12.4, which implement CRD articles 

79 through 87, are described in part 

IV.B.1. 

• FCA SYSC 4.1.1R(1), 4.1.2R, 7.1.4R, 

7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R, 

7.1.20R, 7.1.21R, 7.1.22R, and 19D.2.1R, 

PRA Remuneration Rule 6.2, and PRA 

Risk Control Rules 2.3, 2.7, and 3.1 

through 3.5, which implement parts of 

CRD articles 74 and 76, are described in 

part IV.B.1. 

• FCA SYSC 4.3A.1R, which 

implements parts of CRD article 88(1), 

requires a Covered Entity to ensure that 

the management body defines, oversees, 

and is accountable for the 

implementation of governance 

arrangements that ensure effective and 

prudent management of the Covered 

Entity, including segregation of duties 

and prevention of conflicts of interest. 

• PRA Senior Management Functions 

Rule 8.2, which implements CRD article 

88(1)(e), requires a Covered Entity to 

ensure that the same person does not 

serve as both the chair of the Covered 

Entity’s governing body and the Covered 

Entity’s chief executive officer.342

• FCA SYSC 4.3A.3R, which 

implements parts of CRD article 91(1), 

(2), (7), and (8), requires members of a 

Covered Entity’s management body to 

have certain qualifications to be able to 

perform their duties, understand the 

Covered Entity’s activities and main 

risks, effectively assess and challenge 

senior management decisions, and 

effectively oversee and monitor 

management decision-making. 

• FCA SYSC 4.3A.4R, which 

implements parts of CRD article 91(9), 

requires a Covered Entity to devote 

adequate human and financial resources 

to the induction and training of 

members of the management body. 

• FCA SYSC 9.1.1AR and PRA 

Record Keeping Rule 2.1, which 

implement MiFID article 16(6), require 

a Covered Entity to arrange to keep 

business records sufficient to assess its 

compliance with applicable UK legal 

requirements. 

• FCA SYSC 10A.1.6R, 10A.1.8R, and 

10A.1.11R, which implement MiFID 

article 16(7), require a Covered Entity to 

take all reasonable steps to make and 

keep records of telephone and electronic 

communications and to notify clients 

that telephone communications will be 

recorded. 

• FCA SYSC 19D.3.1R, 19D.3.3R, 

19D.3.7R through 19D.3.11R, 19D.3.15R, 

19D.3.17R, and 19D.3.37R and PRA 

Remuneration Rules 3.1, 4.2, 5.1, 6.2, 

8.2, and 15.2, which implement parts of 

CRD article 92, address implementation 

of a Covered Entity’s remuneration 

policy in a manner that avoids conflicts 

of interest and that is consistent with 

sound and effective risk management, as 

well as internal supervision and review 

of this implementation for compliance 

with the policies and procedures 

adopted by the management body. 

• PRA Fundamental Rule 5,343 which 

contains provisions similar to MiFID 

articles 16(4) and (5), requires a Covered 

Entity to have effective risk strategies 

and risk management systems. 

• UK CRR articles 286 through 288 

and 293 344 are described in part IV.B.1. 

• UK EMIR Margin RTS article 2 345 is 

described in part IV.B.1. 

• UK MiFID Org Reg articles 23,346

27, 30 through 32, 35, 36, and 72 

through 76 and Annex IV address a 

Covered Entity’s policies and 

procedures governing risk management, 

remuneration, and documentation of 

compliance, the Covered Entity’s 

supervision of and responsibility for 

outsourced functions and 

documentation of conflicts of interest 

relevant to the Covered Entity’s 

compliance with conflict of interest 

requirements. 

Taken as a whole, these UK 

requirements help to produce regulatory 

outcomes comparable to Exchange Act 

requirements to establish internal 

systems to supervise the Covered 

Entity’s business and associated 

persons, obtain information necessary to 

perform regulated functions in its 

capacity as an SBS Entity and address 

conflicts of interest, as well as Exchange 

Act requirements to submit an annual 

compliance report to the Commission 

and to ensure that the chief compliance 

officer’s removal and compensation is 

subject to approval by a majority of the 

board of directors. The comparability 

analysis requires consideration of 

Exchange Act requirements as a whole 

against analogous UK requirements as a 

whole, recognizing that U.S. and nonU.S. regimes may follow materially 

different approaches in terms of 

specificity and technical content. This 

‘‘as a whole’’ approach—which the 

Commission is following in lieu of 

requiring requirement-by-requirement 


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347The Commission further believes that those 

conditions to substituted compliance do not expand 

the scope of Exchange Act requirements because 

substituted compliance is an option available to 

non-U.S. person SBS Entities—not a mandate. 348See Better Markets Letter at 2. 

349See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18409. 

350See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18409. 

351See para. (d)(3)(vi) of the Order. 

352See supra note 342 and accompanying text. 

353See SIFMA 5/3/2021 Letter at 20–21 and 

Appendix A part (d)(2)(ii). 

354See Better Markets Letter at 2. 

355See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 85692. 

356See SIFMA 5/3/2021 Letter at 20 and 

Appendix A part (d)(2) (stating that paragraph 

(d)(2)(ii)(B) of the Order, consistent with Exchange 

Act rule 15Fk–1(c)(2)(ii)(D), should be amended so 

Continued 

similarity—further means that the 

conditions to substituted compliance 

should encompass all UK requirements 

that establish comparability with the 

applicable regulatory outcome, and 

helps to avoid ambiguity in the 

application of substituted compliance. It 

would be inconsistent with the holistic 

approach to excise relevant 

requirements and leave only the 

residual UK provisions that most closely 

resemble the analogous Exchange Act 

requirements.347 Moreover, because 

Exchange Act internal supervision and 

chief compliance officer requirements 

serve the purpose of causing SBS 

Entities to have systems and follow 

practices to help ensure they conduct 

their businesses as required, it would be 

paradoxical to conclude that an SBS 

Entity that fails to implement requisite 

internal risk management, 

documentation, capital, and/or margin 

systems and practices nonetheless may 

be considered to be following internal 

supervision and chief compliance 

officer standards that are sufficient to 

meet the regulatory outcomes required 

under the Exchange Act. An internal 

risk management, documentation, 

capital, or margin-related failure 

necessarily constitutes a compliance 

failure. For these reasons, the 

Commission believes that these UK 

provisions appropriately constitute part 

of the substituted compliance 

conditions for internal supervision and 

chief compliance officer requirements 

and is retaining the references to these 

provisions. In reaching this conclusion, 

the Commission emphasizes the 

importance of ensuring that substituted 

compliance is grounded on the 

comparability of regulatory outcomes. 

Retaining conditions of the Order 

necessary to help produce regulatory 

outcomes comparable to Exchange Act 

internal risk management requirements 

also should address another 

commenter’s concern that any 

substituted compliance determination 

not weaken the internal supervision and 

chief compliance officer conditions in 

the proposed Order.348

The Commission is making two 

changes to the proposed Order’s list of 

UK requirements to which a Covered 

Entity must be subject and with which 

it must comply if it uses substituted 

compliance for internal supervision 

and/or chief compliance officer 

requirements. First, the UK Substituted 

Compliance Notice and Proposed Order 

requested comment on whether the 

Commission should revise the Order to 

require compliance with UK provisions 

that implement CRD articles 93 to 95 

which relate to a Covered Entity’s 

remuneration policies.349 The proposed 

additions were intended to promote 

compliance goals similar to those of the 

other UK requirements listed in 

paragraph (d)(3) of the proposed 

Order.350 No commenters addressed this 

issue, and the Commission has 

determined to add a requirement for the 

Covered Entity to be subject to and 

comply with certain provisions of either 

FCA SYSC 19A (in the case of a Covered 

Entity that is an IFPRU investment firm) 

or FCA SYSC 19D (in the case of a 

Covered Entity that is a UK bank or UK 

designated investment firm).351 These 

provisions together implement CRD 

articles 94 and 95 and address 

additional aspects of a Covered Entity’s 

internal systems for preventing and 

addressing conflicts of interest related to 

compensation. The Commission is not 

adding provisions that implement CRD 

article 93, as they relate to remuneration 

policies for institutions that benefit from 

exceptional government intervention. 

The Commission believes that the UK 

provisions implementing CRD articles 

94 and 95 are necessary to better 

promote regulatory outcomes 

comparable to the relevant Exchange 

Act requirements on a holistic, 

outcomes-oriented basis. Second, the 

Commission is requiring a Covered 

Entity using substituted compliance for 

internal supervision and/or chief 

compliance officer requirements to be 

subject to and comply with FCA SYSC 

4.3A.2R. This requirement implements 

parts of CRD article 88(1) and is nearly 

identical to PRA Senior Management 

Functions Rule 8.2, which appeared in 

the proposed Order.352 Including FCA 

SYSC 4.3A.2R will ensure that Covered 

Entities regulated by only the FCA, 

rather than by the FCA and the PRA 

together, will be subject to a 

requirement similar to PRA Senior 

Management Functions Rule 8.2. In 

deciding to make a positive substituted 

compliance determination for UK 

internal supervision and chief 

compliance officer requirements, the 

Commission considers that the Order’s 

condition requiring a Covered Entity to 

be subject to and comply with all of the 

UK requirements listed in paragraph 

(d)(3) of the Order help to produce 

regulatory outcomes comparable to 

Exchange Act internal supervision and 

chief compliance officer requirements. 

The Commission recognizes that some 

of the UK requirements related to 

internal supervision and chief 

compliance officers follow a more 

granular approach than the high-level 

approach of Exchange Act internal 

supervision and chief compliance 

officer requirements, but these UK 

requirements, taken as a whole, are 

crafted to promote a Covered Entity’s 

compliance with applicable law and 

ability to identify and cure instances of 

noncompliance and manage conflicts of 

interest. Within the requisite outcomesoriented approach for analyzing 

comparability, the Commission 

concludes that a Covered Entity’s failure 

to comply with any of those UK internal 

supervision and chief compliance 

officer requirements would be 

inconsistent with a Covered Entity’s 

obligations under Exchange Act internal 

supervision and chief compliance 

officer requirements and that 

compliance with the full set of UK 

requirements listed in paragraph (d)(3) 

of the Order would promote comparable 

regulatory outcomes. 

2. Compliance Reports 

A commenter requested that the 

Commission amend three aspects of the 

proposed Order’s compliance reportrelated condition to a Covered Entity’s 

use of substituted compliance for chief 

compliance officer requirements.353

Another commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 354 The 

Commission details below its 

consideration of each of these requests. 

First, the proposed Order would 

require all compliance reports required 

by UK law to include a certification 

that, under penalty of law, the report is 

accurate and complete.355 The 

commenter requested that the 

Commission revise this certification to 

conform more closely with the required 

certification of annual compliance 

reports pursuant to Exchange Act rule 

15Fk–1.356 Rule 15Fk–1 requires an 


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that a Covered Entity’s certification would include 

statements that the certification is ‘‘to the best of the 

certifier’s knowledge and reasonable belief’’ and 

that the report is accurate and complete ‘‘in all 

material respects’’). 357Exchange Act rule 15Fk–1(c)(2)(ii)(D); see also 

Exchange Act rule 15Fk–1(e)(2) (defining ‘‘senior 

officer’’ as ‘‘the chief executive officer or other 

equivalent officer’’). 358See para. (d)(2)(ii)(B) of the Order. 

359See para. (d)(4) of the Order. In practice, a 

Covered Entity may satisfy this condition by 

identifying relevant Order conditions and reporting 

on the implementation and effectiveness of its 

controls with regard to compliance with applicable 

Exchange Act requirements and relevant provisions 

of the Order. 

360See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (d)(2). With regard to the French 

Substituted Compliance Notice and Proposed 

Order, SIFMA supported an additional timing 

standard that would provide for an annual 

submission 15 days after the submission to the 

French regulatory authority. The Commission 

addresses SIFMA’s comment in connection with its 

consideration of French authorities’ application for 

substituted compliance. 

361See para. (d)(2)(ii)(D) of the Order. 

362 In its comment on the same provision in the 

French Substituted Compliance Notice and 

Proposed Order, the commenter asked the 

Commission to permit a Covered Entity to make an 

annual submission of the foreign compliance report 

within 15 days after submission of that report to the 

foreign regulatory authority. The commenter 

explained that, absent clarification, the Order 

would appear to require a Covered Entity to provide 

the Commission its foreign compliance report 

within 30 days following the deadline for the 

Covered Entity to file its annual financial report 

with the Commission, without regard to when the 

Covered Entity prepares its foreign compliance 

report. See SIFMA 5/3/2021 Letter at 19–20 and 

Appendix A part (d)(2), available at: https://

www.sec.gov/comments/s7-22-20/s72220.htm. 

363See para. (d)(2)(ii)(E) of the Order. 

annual compliance report to include ‘‘a 

certification by the chief compliance 

officer or senior officer that, to the best 

of his or her knowledge and reasonable 

belief and under penalty of law, the 

information contained in the 

compliance report is accurate and 

complete in all material respects.’’ 357

The Commission concurs that the 

Order’s required certification should 

align with that of Exchange Act rule 

15Fk–1. It would seem incongruous and 

not within the intent of substituted 

compliance to apply a higher standard 

of certification to Covered Entities 

relying on substituted compliance than 

required under that rule. Therefore, the 

Commission is amending the Order to 

require that all required UK compliance 

reports include a certification signed by 

the chief compliance officer or senior 

officer of the Covered Entity that, to the 

best of the certifier’s knowledge and 

reasonable belief and under penalty of 

law, the report is accurate and complete 

in all material respects.358 In addition, 

the Order has been updated to clarify 

that each UK compliance report, and 

therefore also the chief compliance 

officer or senior officer certification, 

must address the Covered Entity’s 

compliance with applicable Exchange 

Act requirements, consistent with the 

Order’s conditions with respect to 

internal supervision.359 The 

Commission believes that this 

clarification is necessary to promote 

comparable regulatory outcomes, 

particularly in light of the granular 

approach to substituted compliance, to 

ensure that the compliance report 

covers applicable Exchange Act 

requirements if the Covered Entity uses 

substituted compliance for chief 

compliance officer requirements, 

whether or not the Covered Entity relies 

on substituted compliance for internal 

supervision. 

Second, because Covered Entities may 

prepare multiple UK compliance reports 

per year, the commenter requested that 

the Commission permit a Covered Entity 

‘‘to either (a) make an annual 

submission of these multiple reports 

with a supplement of information 

regarding compliance with conditions to 

substituted compliance or (b) create and 

submit a single, annual report regarding 

its SBS Entity business, including 

information regarding compliance with 

conditions to substituted 

compliance.’’ 360 The Commission is 

persuaded that additional clarification 

regarding the timing of these UK 

compliance reports is warranted, but 

believes that submission of multiple 

outdated and/or subsequently 

superseded UK compliance reports at 

the end of each year likely would not 

promote regulatory outcomes 

comparable to Exchange Act compliance 

report requirements. Rather, in the case 

of a Covered Entity that prepares 

multiple UK compliance reports each 

year, the Commission believes that it is 

appropriate for the Commission to 

receive compliance reports shortly after 

their submission to the management 

body. Providing these reports to the 

Commission near the times that the 

Covered Entity submits them to the 

management body also will better align 

with the UK regulatory framework, 

which permits a Covered Entity to 

prepare and submit to the management 

body multiple compliance reports 

throughout the year, but does not 

contemplate a Covered Entity preparing 

multiple internal compliance reports 

throughout the year and submitting 

those reports to the management body 

only at the end of the year. The 

Commission thus is changing the Order 

to clarify that a Covered Entity must 

provide the Commission each UK 

compliance report prepared pursuant to 

UK MiFID Org Reg article 22(2)(c) no 

later than 15 days following the earlier 

of its submission to the Covered Entity’s 

management body or the time the report 

is required to be submitted to the 

management body.361 In line with UK 

MiFID Org Reg article 22(2)(c), a 

Covered Entity must provide at least one 

report annually to the Commission but 

if a Covered Entity makes more than one 

report pursuant to UK MiFID Org Reg 

article 22(2)(c), the Covered Entity must 

provide and certify each such report 

within the required 15-day deadline. 

The Commission views 15 days as 

providing a reasonable time to translate 

reports, if needed, and convey them to 

the Commission, and this change is 

consistent with the same commenter’s 

suggested clarification of the French 

Substituted Compliance Notice and 

Proposed Order.362 This deadline is 

intended to promote timely notice of 

compliance matters in a manner 

comparable to Exchange Act 

requirements, while also accounting for 

the annual deadline required under UK 

MiFID Org Reg article 22(2)(c) as well as 

the possibility that the Covered Entity 

may submit reports ahead of this annual 

deadline. In addition, reports required 

to be provided under UK MiFID Org Reg 

article 22(2)(c) must together cover the 

entire period that an Exchange Act rule 

15Fk–1 annual report would have 

covered.363 This requirement prevents a 

Covered Entity from notifying the 

Commission just prior to the due date of 

its annual Exchange Act compliance 

report that it will use substituted 

compliance for chief compliance officer 

requirements and then providing the 

Commission a UK compliance report 

that covers only a part of the year that 

would have been covered in the 

Exchange Act report. 

The Commission recognizes that a 

Covered Entity preparing multiple UK 

compliance reports each year may find 

it difficult to submit to the Commission 

multiple UK compliance reports 

throughout the year, each with a chief 

compliance officer or senior officer 

certification and a section addressing 

the Covered Entity’s compliance with 

U.S. requirements. However, on balance 

the Commission believes that these 

elements are necessary to achieve a 

regulatory outcome comparable to the 

Exchange Act, and is retaining the 

requirement for all reports to include 

them. The commenter’s suggested 

alternative—to allow a Covered Entity to 

create a single annual report regarding 

its SBS business—amounts to a request 

to allow a Covered Entity to prepare a 

bespoke compliance report outside of 

the requirements of both the Exchange 

Act and the UK regulatory framework. 

The Commission believes this bespoke 


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364See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (d)(2). 

365See SIFMA 5/3/2021 Letter at 21. 

366Non-U.S. SBS Entities should assess the 

applicability of the Exchange Act’s antitrust 

prohibitions to their security-based swap 

businesses. 

367See Business Conduct Adopting Release, 81 

FR at 30065. These transaction-level requirements 

apply only to a non-U.S. SBS Entity’s transactions 

with U.S. counterparties (apart from certain 

transactions conducted through a foreign branch of 

the U.S. counterparty), or to transactions arranged, 

negotiated, or executed in the United States. See 

Exchange Act rule 3a71–3(c) (exception from 

business conduct requirements for a security-based 

swap dealer’s ‘‘foreign business’’); see also 

Exchange Act rule 3a71–3(a)(3), (8), and (9) 

(definitions of ‘‘transaction conducted through a 

foreign branch,’’ ‘‘U.S. business’’ and ‘‘foreign 

business’’). 

368See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18414–15. 

369See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18392 n.134. Each of the 

comparable UK requirements listed in the proposed 

Order applies to a uniquely defined set of UKauthorized firms. See UK Substituted Compliance 

Notice and Proposed Order, 86 FR at 18392 n.137. 

To assist UK firms in determining whether they are 

subject to these requirements, the Commission 

preliminarily determined that any Covered Entity 

would be subject to the required UK requirements 

related to disclosure of material risks and 

characteristics, disclosure of material incentives or 

conflicts of interest, suitability, and fair and 

balanced communications and thus eligible to 

apply substituted compliance in these areas. The 

Commission also preliminarily determined that any 

Continued 

report would be inconsistent with its 

mandate to make a positive substituted 

compliance determination only when 

the Covered Entity complies with 

comparable foreign requirements, and is 

not amending the Order to provide this 

option. A Covered Entity that produces 

multiple UK compliance reports each 

year, but wishes to prepare a single 

annual compliance report addressing its 

compliance with Exchange Act 

requirements, is not required to use 

substituted compliance for chief 

compliance officer requirements, even if 

it chooses to use substituted compliance 

for other Exchange Act requirements. 

Such a Covered Entity instead could 

choose to comply directly with 

Exchange Act chief compliance officer 

requirements, including requirements 

related to the annual compliance report, 

rather than use substituted compliance 

for those requirements. 

Third, the commenter requested that 

the proposed Order be modified to 

narrow the scope of the compliance 

reports provided to the Commission, 

stating that the Covered Entity should 

be permitted to provide the Commission 

its UK compliance reports only ‘‘to the 

extent that they are related to a Covered 

Entity’s business as an [SBS Entity].’’ 364

The commenter stated that it would be 

‘‘disproportionate and unnecessary’’ to 

require the Covered Entity to provide 

the Commission all of its UK 

compliance reports prepared pursuant 

to UK MiFID Org Reg article 22(2)(c).365

The Commission disagrees, and believes 

that the Commission should be fully 

informed—consistent with the scope of 

UK MiFID Org Reg article 22(2)(c)—as to 

the ‘‘implementation and effectiveness’’ 

of the Covered Entity’s ‘‘overall control 

environment for investment services 

and activities,’’ as well as associated 

risks, complaints handling and 

remedies. The alternative approach of 

apportioning compliance reports into 

two buckets, and providing the 

Commission reports in only one of the 

buckets, does not match the analytic 

approach of considering the Exchange 

Act and UK frameworks as a whole. 

Accordingly, the Commission is 

retaining the requirement that a Covered 

Entity provide all reports required 

pursuant to UK MiFID Org Reg article 

22(2)(c) to the Commission. 

3. Antitrust Requirements 

The Commission did not receive any 

comments on the absence of a positive 

substituted compliance determination 

for antitrust requirements in Exchange 

Act section 15F(j)(6) (and related 

internal supervision requirements of 

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

in the proposed Order. The Commission 

continues to believe that allowing an 

alternative means of compliance would 

not lead to outcomes comparable to the 

Exchange Act, and is not making a 

positive substituted compliance 

determination for those requirements.366

VII. Substituted Compliance for 

Counterparty Protection Requirements 

A. Proposed Approach 

The FCA 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. 

• ‘‘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. 

• 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. 

• Daily mark disclosure— 

Requirements that an SBS Entity 

provide daily mark information to 

certain security-based swap 

counterparties. 

• Clearing rights disclosure— 

Requirements that an SBS Entity 

provide certain counterparties with 

information regarding clearing rights 

under the Exchange Act. 

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.’’ 367

The proposed Order provided for 

substituted compliance in connection 

with disclosure of material risks and 

characteristics, disclosure of material 

incentives or conflicts of interest, 

‘‘know your counterparty,’’ suitability, 

fair and balanced communications, and 

daily mark disclosure requirements.368

In proposing to provide conditional 

substituted compliance for these 

requirements, the Commission 

preliminarily concluded that the 

relevant UK requirements in general 

would produce regulatory outcomes that 

are comparable to requirements under 

the Exchange Act, by subjecting 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 proposed Order, substituted 

compliance for disclosure of material 

risks and characteristics, disclosure of 

material incentives or conflicts of 

interest, ‘‘know your counterparty,’’ 

suitability, and fair and balanced 

communications requirements would be 

conditioned on Covered Entities being 

subject to, and complying with, relevant 

UK requirements.369 Second, the 


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Covered Entity that is an ‘‘IFPRU investment firm,’’ 

‘‘UK bank’’ or ‘‘UK designated investment firm,’’ 

each as defined for purposes of UK law, would be 

subject to all of the required UK requirements 

related to ‘‘know your counterparty’’ requirements 

and thus eligible to apply substituted compliance 

for ‘‘know your counterparty’’ requirements. 

Finally, the Commission preliminarily determined 

that any Covered Entity that is a ‘‘financial 

counterparty’’ would be subject to all of the 

required UK requirements related to daily mark 

disclosure and thus eligible to apply substituted 

compliance for daily mark disclosure requirements. 

See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18392–93. 

370FCA COBS 3.5 describes which clients are 

‘‘professional clients.’’ FCA COBS 3.5.2R describes 

the types of clients considered to be professional 

clients unless the client elects non-professional 

treatment; these clients are per se professional 

clients. FCA COBS 3.5.3R describes the types of 

clients who may be treated as professional clients 

on request; these clients are elective professional 

clients. See FCA COBS 3.5. Retail clients are those 

that are not professional clients (nor eligible 

counterparties, in contexts other than suitability 

assessments in which treatment as an eligible 

counterparty is permitted). See FCA COBS 3.4.1R. 

371 15 U.S.C. 78o–10(h)(2)(C); 17 CFR 240.15Fh– 

2(d). See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18393–94. 

372See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18393. 

373See UK EMIR RTS article 13(3)(a)(i); UK EMIR 

article 10. 

374See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18393. 

375See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18393. 

376 15 U.S.C. 78c–3(g)(5). 

377See paras. (e)(1)(i), (e)(5)(ii) and (e)(4)(i)(A) of 

the Order. 

378See SIFMA 5/3/2021 Letter at 21. The 

commenter also requested that the Commission not 

require a Covered Entity to be subject to and 

comply with some of the UK counterparty 

protection requirements listed in the proposed 

Order. See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e). The Commission addresses 

those requests in the relevant sections of this part 

VII below. 

379See Better Markets Letter at 2. The commenter 

also stated that, if the Commission nevertheless 

makes a positive substituted compliance 

determination, it must at a minimum ensure that 

the conditions in the proposed Order ‘‘are applied 

with full force and without exceptions or dilution.’’ 

The Commission addresses that comment in the 

relevant sections of this part VII below. 380See paras. (e)(1) through (5) of the Order. 381See para. (e)(6) of the Order. 382See para. (e)(4)(ii) of the Order. 

proposed Order would additionally 

condition substituted compliance for 

suitability requirements on the 

counterparty being a per se 

‘‘professional client’’ as defined in FCA 

COBS (rather an elective professional 

client or a retail client 370) and not a 

‘‘special entity’’ as defined in Exchange 

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

Act rule 15Fh–2(d).371 Finally, in the 

proposed Order the Commission 

preliminarily viewed UK daily portfolio 

reconciliation requirements as 

comparable to Exchange Act daily mark 

disclosure requirements.372 These daily 

portfolio reconciliation requirements 

apply to portfolios of a financial 

counterparty or a non-financial 

counterparty subject to the clearing 

obligation in UK EMIR in which the 

counterparties have 500 or more OTC 

derivatives contracts outstanding with 

each other.373 The Commission 

preliminarily viewed UK 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.374 Accordingly, the 

proposed Order 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 UK 

requirements.375

The proposed Order 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).376

The FCA Application argued that 

certain UK provisions related to a 

counterparty’s clearing rights in the UK 

are comparable to requirements to 

disclose the counterparty’s Exchange 

Act-based clearing rights. Because these 

UK provisions do not require disclosure 

of these clearing rights, the Commission 

preliminarily viewed the UK clearing 

provisions as not comparable to 

Exchange Act clearing rights disclosure 

requirements. 

B. Commenter Views and Final 

Provisions 

Having considered commenters’ 

recommendations regarding the 

counterparty protection requirements, 

the Commission is making positive 

substituted compliance determinations 

in connection with disclosure of 

material risks and characteristics, 

disclosure of material incentives or 

conflicts of interest, ‘‘know your 

counterparty,’’ suitability, fair and 

balanced communications, and daily 

mark disclosure requirements. With 

respect to Exchange Act clearing rights 

disclosure requirements, however, 

consistent with the proposed Order the 

Commission is not providing 

substituted compliance. The Order is 

largely consistent with the proposed 

Order except for removing one UK 

requirement listed in two sections of the 

Order and correcting a typographical 

error.377

One commenter expressed general 

support for the proposed approach 

toward substituted compliance for the 

counterparty protection provisions.378

Another commenter stated that UK 

requirements are not sufficiently 

comparable to Exchange Act 

requirements.379 The Commission 

continues to believe that, taken as a 

whole, applicable requirements under 

UK law subject 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. The Commission 

recognizes that there are differences 

between the approaches taken by 

disclosure of material risks and 

characteristics, disclosure of material 

incentives or conflicts of interest, 

‘‘know your counterparty,’’ suitability, 

fair and balanced communications, and 

daily mark disclosure requirements 

under the Exchange Act, on the one 

hand, and relevant UK requirements, on 

the other hand. The Commission 

continues to view those differences as 

not so material as to be inconsistent 

with substituted compliance within the 

requisite outcomes-oriented context. 

To help ensure the comparability of 

outcomes, substituted compliance for 

counterparty protection requirements is 

subject to certain conditions. 

Substituted compliance for disclosure of 

material risks and characteristics, 

disclosure of material incentives or 

conflicts of interest, ‘‘know your 

counterparty,’’ suitability, and fair and 

balanced communications requirements 

is conditioned on the Covered Entity 

being subject to, and complying with, 

relevant UK requirements.380

Substituted compliance for daily mark 

disclosure requirements 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 UK 

requirements.381 Substituted 

compliance for suitability requirements 

additionally is conditioned on the 

counterparty being a per se 

‘‘professional client’’ mentioned in FCA 

COBS 3.5.2R (i.e., not an elective 

professional client or a retail client) and 

not a ‘‘special entity’’ as defined in 

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

Exchange Act rule 15Fh–2(d).382 A 

Covered Entity that is unable to comply 

with a condition—and thus is not 

eligible to use substituted compliance 

for the particular set of Exchange Act 

counterparty protection requirements 

related to that condition—nevertheless 


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383See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(1). 

384See Better Markets Letter at 2. 

may use substituted compliance for 

another set of Exchange Act 

requirements addressed in the Order if 

it complies with the conditions to the 

relevant parts of the Order. 

Under the Order, substituted 

compliance for counterparty protection 

requirements (relating to disclosure of 

information regarding material risks and 

characteristics, disclosure of 

information regarding material 

incentives or conflicts of interest, 

‘‘know your counterparty,’’ suitability, 

fair and balanced communications, and 

daily mark disclosure) is not subject to 

a condition that the Covered Entity 

apply substituted compliance for related 

recordkeeping requirements in 

Exchange Act rules 18a–5 and 18a–6. A 

Covered Entity that applies substituted 

compliance for one or more 

counterparty protection requirements, 

but does not apply substituted 

compliance for the related 

recordkeeping requirements in 

Exchange Act rules 18a–5 and 18a–6, 

will remain subject to the relevant 

provisions of Exchange Act rules 18a–5 

and 18a–6. Those rules require the 

Covered Entity to make and preserve 

records of its compliance with Exchange 

Act counterparty protection 

requirements and of its security-based 

swap activities required or governed by 

those requirements. A Covered Entity 

that applies substituted compliance for 

a counterparty protection requirement, 

but complies directly with related 

recordkeeping requirements in rules 

18a–5 and 18a–6, therefore must make 

and preserve records of its compliance 

with the relevant conditions to the 

Order and of its security-based swap 

activities required or governed by those 

conditions and/or referenced in the 

relevant parts of rules 18a–5 and 18a– 

6. 

The Commission details below its 

consideration of comments on the 

proposed Order. 

1. Disclosure of Information Regarding 

Material Risks and Characteristics 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

some of these specified requirements.383

By contrast, another commenter stated 

that, if the Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 384 The 

Commission details below its 

consideration of each of these requests. 

First, the commenter stated that FCA 

COBS 2.2A.2R(1)(d), 6.1ZA.11R, 

6.1ZA.12R, and 6.1ZA.14UK and UK 

MiFID Org Reg article 50 relate to 

disclosure of costs and charges and thus 

go beyond the scope of Exchange Act 

material risks and characteristics 

disclosure requirements. Exchange Act 

rule 15Fh–3(b)(1) requires a Covered 

Entity, before entering into a securitybased swap, to disclose to certain 

counterparties material information 

about the security-based swap in a 

manner reasonably designed to allow 

the counterparty to assess the material 

risks and characteristics of the securitybased swap, which may include the 

material economic terms of the securitybased swap and the rights and 

obligations of the parties during the 

term of the security-based swap. The 

material economic terms of a securitybased swap and the rights and 

obligations of the parties include the 

costs and charges associated with the 

security-based swap. Accordingly, the 

Commission is retaining the references 

to these provisions. 

Second, the commenter stated that 

FCA COBS 2.2A.2R(1)(c) relates to 

insurance-based investments and thus 

goes beyond the scope of Exchange Act 

material risks and characteristics 

disclosure requirements. FCA COBS 

2.2A.2R(1)(c) would require a Covered 

Entity to provide its client in good time 

appropriate information about the 

distribution of ‘‘insurance-based 

investment products.’’ The Commission 

is not making a determination whether 

an ‘‘insurance-based investment 

product,’’ as defined for purposes of this 

provision, could also be a security-based 

swap. However, even without this 

provision, FCA COBS 2.2A.2R(b) would 

require the Covered Entity to provide its 

client in good time appropriate 

information about any relevant 

‘‘financial instruments,’’ which are a 

defined set of instruments to which this 

and other MiFID-based provisions 

apply. The general condition in 

paragraph (a)(3) of the Order would 

require any Covered Entity using 

substituted compliance for Exchange 

Act material risks and characteristics 

disclosure requirements to ensure that 

its relevant security-based swap 

activities (in this case, disclosure to 

counterparties before entering into a 

security-based swap) constitute ‘‘MiFID 

or equivalent third country business,’’ 

which is defined to include the same set 

of instruments in the definition of 

‘‘financial instruments.’’ As a result, the 

disclosures of a Covered Entity applying 

substituted compliance for Exchange 

Act material risks and characteristics 

disclosure requirements would always 

be in relation to a security-based swap 

that is a ‘‘financial instrument.’’ 

Accordingly, the Commission believes it 

is appropriate to delete the reference to 

FCA COBS 2.2A.2R(1)(c) in the Order. 

Third, the commenter stated that FCA 

COBS 6.1ZA.9UK and UK MiFID Org 

Reg article 49 relate to information 

about the safeguarding of client assets 

and thus go beyond the scope of 

Exchange Act material risks and 

characteristics disclosure requirements. 

These provisions would require a 

Covered Entity to inform its client about 

the risks of the Covered Entity placing 

client assets, which would include the 

relevant security-based swap and funds 

related to it, to be held by a third party, 

the risks of the Covered Entity holding 

client assets in an omnibus account, the 

risks of holding client assets that are not 

segregated from the assets of the 

Covered Entity or a third party holding 

the client’s assets and the risks of the 

Covered Entity entering into securities 

financing transactions using client 

assets. A Covered Entity also would 

have to inform the client when the 

relevant security-based swap is held in 

an account subject to the laws of a nonUK jurisdiction and indicate that client 

rights relating to the security-based 

swap may differ from those under UK 

law. A Covered Entity also would have 

to inform the client about any security 

interest, lien, or right of set-off that the 

Covered Entity or a depository may have 

over client assets. In comparison, 

Exchange Act rule 15Fh–3(b)(1) requires 

a Covered Entity, before entering into a 

security-based swap, to disclose to 

certain counterparties material 

information about the security-based 

swap in a manner reasonably designed 

to allow the counterparty to assess the 

material risks and characteristics of the 

security-based swap, which may 

include market, credit, liquidity, foreign 

currency, legal, operational, and any 

other applicable risks of the securitybased swap. Legal and operational risks 

of a security-based swap include the 

types of risks to client assets that FCA 

COBS 6.1ZA.9UK and UK MiFID Org 

Reg article 49 would require the 

Covered Entity to disclose. Accordingly, 

the Commission is retaining the 

references to these provisions. 

Finally, the commenter stated that 

FCA COBS 6.2B.33R and 9A.3.6R relate 

to disclosure about whether a firm is 

providing independent advice or will 

undertake a periodic suitability 

assessment and thus go beyond the 

scope of Exchange Act material risks 

and characteristics disclosure 


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385See SIFMA 5/3/2021 Letter Appendix A part 

(e)(1). 

386See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(1). 

387See Better Markets Letter at 2. 

388See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(3). 

389See Better Markets Letter at 2. 

requirements.385 As described above, 

Exchange Act rule 15Fh–3(b)(1) requires 

a Covered Entity, before entering into a 

security-based swap, to disclose to 

certain counterparties material 

information about the security-based 

swap in a manner reasonably designed 

to allow the counterparty to assess the 

material risks and characteristics of the 

security-based swap, which may 

include the material economic terms of 

the security-based swap and the rights 

and obligations of the parties during the 

term of the security-based swap. The 

Commission believes that a 

counterparty would consider the 

independence of the Covered Entity’s 

advice and the presence or absence of a 

periodic suitability assessment in the 

counterparty’s assessment of these risks 

and characteristics. The holistic 

approach taken by the Commission in 

considering whether regulatory 

requirements are comparable further 

warrants the inclusion of these 

provisions in the Order. Accordingly, 

the Commission is retaining the 

references to these provisions. 

2. Disclosure of Information Regarding 

Material Incentives or Conflicts of 

Interest 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

FCA COBS 2.3A.5R, 2.3A.6R, 2.3A.7E, 

or 2.3A.11R through 2.3A.14R, stating 

that these provisions relate to thirdparty payments and thus go beyond the 

scope of Exchange Act material 

incentives or conflicts of interest 

disclosure requirements.386 By contrast, 

another commenter stated that, if the 

Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 387 These 

provisions would require a Covered 

Entity to refrain from paying to, or 

accepting from, third parties certain 

fees, commissions or non-monetary 

benefits in connection with providing 

an investment service (inducements) 

and, in circumstances in which the 

general prohibition on inducements 

does not apply, to disclose to the client 

the existence, nature, and amount of the 

inducement prior to providing the 

service and in a manner that is 

comprehensive, accurate, and 

understandable. In comparison, 

Exchange Act rule 15Fh–3(b)(2) requires 

a Covered Entity, before entering into a 

security-based swap, to disclose to 

certain counterparties material 

information about the security-based 

swap in a manner reasonably designed 

to allow the counterparty to assess the 

material incentives or conflicts of 

interest that the Covered Entity may 

have in connection with the securitybased swap, including any 

compensation or other incentives from 

any source other than the counterparty. 

Disclosure of this compensation or other 

incentives would include disclosure of 

the existence, nature, and amount of an 

inducement that FCA COBS 2.3A.5R, 

2.3A.6R, 2.3A.7E, and 2.3A.11R through 

2.3A.14R would require the Covered 

Entity to disclose. Accordingly, the 

Commission is retaining the references 

to these provisions. 

3. ‘‘Know Your Counterparty’’ 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

some of these specified requirements.388

By contrast, another commenter stated 

that, if the Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 389 The 

Commission details below its 

consideration of each of these requests. 

First, the commenter stated that UK 

MiFID Org Reg articles 21, 22, 25, and 

26 and applicable parts of Annex I relate 

to organizational requirements, 

compliance, responsibility of senior 

management, complaints handling, and 

associated recordkeeping and thus go 

beyond the scope of Exchange Act 

‘‘know your counterparty’’ 

requirements. In addition to these 

provisions cited by the commenter, the 

proposed Order would require (with no 

objection from the commenter) a 

Covered Entity using substituted 

compliance for Exchange Act ‘‘know 

your counterparty’’ requirements to be 

subject to and comply with FCA SYSC 

6.1.1R, which implements MiFID article 

16(2) in the UK and would require a 

Covered Entity to establish, implement, 

and maintain adequate policies and 

procedures sufficient to ensure the 

Covered Entity’s compliance with its 

obligations under UK financial services 

laws. This requirement relates to the 

requirement in Exchange Act rules 

15Fh–3(e)(1) and (2) for the Covered 

Entity to establish, maintain, and 

enforce written policies and procedures 

to obtain and retain a record of the 

essential facts about the counterparty 

that are necessary for complying with 

applicable laws, regulations, and rules 

and for implementing the Covered 

Entity’s credit and operational risk 

management policies. UK MiFID Org 

Reg articles 21, 22, 25, and 26 and 

applicable parts of Annex I are 

regulations that implement MiFID 

article 16(2). They provide additional 

detail about the Covered Entity’s 

required policies and procedures under 

the UK framework, and as such are 

relevant to the policies and procedures 

required under Exchange Act rule 

15Fh–3(e). Accordingly, the 

Commission is retaining the references 

to these provisions. 

Second, the commenter stated that 

FCA SYSC 4.1.1R(1) relates to general 

organizational requirements and thus 

goes beyond the scope of Exchange Act 

‘‘know your counterparty’’ 

requirements. FCA SYSC 4.1.1R(1) 

would require the Covered Entity to 

have robust governance arrangements, 

including effective processes to identify, 

manage, monitor, and report the risks it 

is or might be exposed to. This 

requirement relates to the requirement 

in Exchange Act rule 15Fh–3(e)(2) for 

the Covered Entity to establish, 

maintain, and enforce written policies 

and procedures to obtain and retain a 

record of the essential facts about the 

counterparty that are necessary for 

implementing the Covered Entity’s 

credit and operational risk management 

policies. Accordingly, the Commission 

is retaining the reference to this 

provision. 

Third, the commenter recommended 

deleting FCA IFPRU 2.2.7R(2) and 

2.2.32R because they do not apply to 

banks or PRA-designated investment 

firms and the commenter expects only 

banks and PRA-designated investment 

firms to apply substituted compliance 

pursuant to the Order. These FCA 

IFPRU provisions apply to smaller 

investment firms not regulated by the 

PRA and are nearly identical to 

provisions that apply to banks and PRAdesignated investment firms. The 

proposed Order would not require a 

Covered Entity that is a bank or PRAdesignated investment firm to be subject 

to and comply with these provisions. 

Rather, the proposed Order would 

require each Covered Entity to be 

subject to and comply with either these 

IFPRU provisions (if it is a smaller 

investment firm) or analogous PRA 

requirements (if it is a bank or PRAdesignated investment firm). Moreover, 

the FCA Application requested 

substituted compliance for all MiFID 


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390See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(4). 

391See Better Markets Letter at 2. 

392See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(4). 393See Exchange Act rule 15Fh–3(f)(1). 394See para. (e)(4)(i)(A) of the Order. 

investment firms and third country 

investment firms, and was not limited to 

banks and PRA-designated investment 

firms. Accordingly, the Commission is 

retaining the references to these 

provisions. 

Fourth, the commenter stated that 

PRA General Organisational 

Requirement 2.1 relates to high-level 

governance requirements and thus goes 

beyond the scope of Exchange Act 

‘‘know your counterparty’’ 

requirements. The provision is identical 

in all material respects to FCA SYSC 

4.1.1R(1) and serves as the PRA’s 

version of that requirement for PRAregulated Covered Entities. Accordingly, 

the Commission is retaining the 

reference to this provision. 

Finally, the commenter stated that 

PRA Internal Capital Adequacy 

Assessment Rule 10.1 relates to 

assessment of the capital needed to 

cover risks and thus goes beyond the 

scope of Exchange Act ‘‘know your 

counterparty’’ requirements. This 

provision would require a Covered 

Entity to implement policies and 

processes to evaluate and manage the 

exposure to operational risk. These 

policies and processes are related to the 

requirement in Exchange Act rule 15Fh– 

3(e)(2) for the Covered Entity to 

establish, maintain, and enforce written 

policies and procedures to obtain and 

retain a record of the essential facts 

about the counterparty that are 

necessary for implementing the Covered 

Entity’s credit and operational risk 

management policies. Accordingly, the 

Commission is retaining the reference to 

this provision. 

4. Suitability 

A commenter requested that the 

Commission amend these conditions.390

By contrast, another commenter stated 

that, if the Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 391 The 

Commission details below its 

consideration of each of these requests. 

First, the commenter requested that 

the Commission not require a Covered 

Entity to be subject to and comply with 

some of the UK suitability requirements 

specified in the proposed Order.392 The 

commenter stated that FCA COBS 

4.2.1R is more appropriately addressed 

in the section of the order relating to fair 

and balanced communications and that 

MiFID Org Reg article 21(1)(b) is more 

appropriately addressed in the section 

of the order relating to internal 

supervision. The commenter further 

stated that FCA SYSC 5.1.5AAR and 

5.1.5ABR and UK MiFID Org Reg article 

21(1)(d) go beyond the scope of 

Exchange Act suitability requirements. 

Exchange Act rule 15Fh–3(f) requires 

an SBS Entity, when making certain 

security-based swap recommendations 

to a counterparty, to undertake 

reasonable diligence to understand the 

potential risks and rewards associated 

with the recommendation (the 

reasonable basis suitability standard) 

and to have a reasonable basis to believe 

that the recommendation is suitable for 

the counterparty (the counterpartyspecific suitability standard).393 FCA 

SYSC 5.1.5AAR and 5.1.5ABR, which 

implement MiFID article 25(1), would 

require a Covered Entity to ensure that 

individuals making personal 

recommendations to clients in relation 

to a relevant security-based swap have 

the necessary knowledge and 

competence so as to ensure that the 

Covered Entity is able to meet its 

obligations under FCA rules that 

implement MIFID articles 24 and 25 and 

the related provisions of the UK MiFID 

Org Reg. FCA COBS 9A.2.1R and 

9A.2.16R, which implement MiFID 

article 25(2), would require the Covered 

Entity to obtain information about a 

client necessary to ensure that it makes 

only recommendations that are suitable 

for the client, and thus are relevant to 

the Exchange Act counterparty-specific 

suitability standard. FCA SYSC 

5.1.5AAR and 5.1.5ABR thus would 

require the Covered Entity to ensure that 

recommendations to clients are made 

with the knowledge and competence 

necessary to fulfill the Covered Entity’s 

obligation under FCA COBS 9A.2.1R 

and 9A.2.16R to make only suitable 

recommendations. This knowledge and 

competence requirement in FCA SYSC 

5.1.5AAR and 5.1.5ABR is directly 

related to the Exchange Act reasonable 

basis suitability standard. 

Moreover, FCA COBS 4.2.1R, which 

implements MiFID article 24(3), is 

particularly relevant to the Exchange 

Act reasonable basis standard. FCA 

COBS 4.2.1R, together with FCA SYSC 

5.1.5AAR and 5.1.5ABR, would require 

the Covered Entity to ensure that 

individuals making recommendations 

have the knowledge and competence to 

communicate about the relevant 

security-based swap in a way that is fair, 

clear, and not misleading. The 

Commission believes that in order to 

meet the FCA requirement to 

communicate in a fair, clear, and not 

misleading manner, the Covered Entity’s 

due diligence would reflect that 

individuals engaged in such 

communication understand the 

potential risks and rewards of the 

recommendation in a manner that is 

comparable to the requirement in 

Exchange Act rule 15Fh–3(f)(1)(i). 

MiFID Org Reg articles 21(1)(b) and (d), 

in turn, would require the Covered 

Entity to ensure that its personnel have 

the skills, knowledge, and expertise, 

and be aware of the procedures, 

necessary to properly discharge their 

responsibilities, which include their 

suitability obligations. These 

requirements again relate to the 

Exchange Act reasonable basis standard 

because they would require the Covered 

Entity to ensure that personnel making 

recommendations are equipped with the 

requisite training and information to be 

able to communicate about the relevant 

security-based swap in a way that 

complies with its communication and 

suitability obligations in FCA COBS and 

FCA SYSC. 

For these reasons, the Commission is 

retaining in the Order the references to 

these UK requirements that the 

commenter asked to delete, and thus is 

requiring a Covered Entity to be subject 

to and comply with these UK 

requirements if the Covered Entity 

wishes to make use of substituted 

compliance for Exchange Act suitability 

requirements. Separately, as stated by 

the commenter, the proposed Order 

erroneously referred to FCA COBS 

9A.1.16R instead of FCA COBS 

9A.2.16R, and the Commission is 

amending the Order to correct this 

error.394

Second, the commenter requested that 

the Commission change the condition to 

substituted compliance for Exchange 

Act suitability requirements that would 

require the Covered Entity’s 

counterparty to be a ‘‘professional 

client’’ mentioned in FCA COBS 3.5.2R. 

Professional clients mentioned in FCA 

COBS 3.5.2R are per se professional 

clients, a category of clients that 

generally includes those with more 

experience, knowledge, expertise, and 

resources and that excludes elective 

professional clients and retail clients. 

The commenter requested that the 

Commission replace FCA COBS 3.5.2R 

with FCA COBS 3.5.1R, a provision that 

refers to both per se and elective 

professional clients. Elective 

professional clients generally have less 

experience, knowledge, expertise, and/ 

or resources than per se professional 


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395See, e.g., FCA COBS 3.5.3R. 

396See, e.g., UK MiFID Org Reg article 54(3). 

397See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(5). 

398See Better Markets Letter at 2. 

399See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(5). 

400See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(5). 

401See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(5). 

clients.395 Because UK suitability 

requirements permit a Covered Entity, 

when conducting a suitability analysis 

for elective professional clients, to make 

certain assumptions,396 while the 

Exchange Act permits a similar 

mechanism only for institutional 

counterparties, the Commission believes 

that UK suitability requirements are 

comparable only in respect of per se 

professional clients. Accordingly, the 

Commission is retaining the condition 

requiring the Covered Entity’s 

counterparty to be a per se professional 

client and is not expanding that 

condition to permit Covered Entities to 

apply substituted compliance for 

Exchange Act suitability requirements 

when its counterparty is an elective 

professional client. 

5. Fair and Balanced Communications 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

some of these specified requirements.397

By contrast, another commenter stated 

that, if the Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 398 The 

Commission details below its 

consideration of each of these requests. 

First, the commenter asked the 

Commission not to require a Covered 

Entity to be subject to and comply with 

FCA COBS 2.2A.2R(1)(d), 6.1ZA.11R, 

6.1ZA.12R, and 6.1ZA.13R because they 

relate to disclosure of costs and charges 

and thus go beyond the scope of 

Exchange Act fair and balanced 

communications requirements.399

Exchange Act rule 15Fh–3(g)(1) requires 

a Covered Entity’s communications to 

provide a sound basis for evaluating the 

facts with regard to any particular 

security-based swap or trading strategy 

involving a security-based swap. The 

Commission believes that information 

about costs and charges required to be 

disclosed under these UK requirements 

is comparable to one type of information 

that would help to provide a sound 

basis for evaluating the facts as required 

under 15Fh–3(g)(1). Accordingly, the 

Commission is retaining the references 

to these provisions. 

Second, the commenter asked the 

Commission not to require a Covered 

Entity to be subject to and comply with 

FCA COBS 2.2A.2R(1)(c) because it 

relates to insurance-based investments 

and thus goes beyond the scope of 

Exchange Act fair and balanced 

communications requirements.400 FCA 

COBS 2.2A.2R(1)(c) would require a 

Covered Entity to provide its client in 

good time appropriate information 

about the distribution of ‘‘insurancebased investment products.’’ The 

Commission is not making a 

determination whether an ‘‘insurancebased investment product,’’ as defined 

for purposes of this UK provision, could 

also be a security-based swap. However, 

even without this provision, FCA COBS 

2.2A.2R(1)(b) would require the Covered 

Entity to provide its client in good time 

appropriate information about any 

relevant ‘‘financial instruments,’’ which 

are a defined set of instruments to 

which this and other MiFID-based 

provisions apply. The general condition 

in paragraph (a)(3) of the Order would 

require any Covered Entity using 

substituted compliance for Exchange 

Act fair and balanced communications 

requirements to ensure that its relevant 

security-based swap activities (in this 

case, communications with 

counterparties) constitute ‘‘MiFID or 

equivalent third country business,’’ 

which is defined to include the same set 

of instruments in the definition of 

‘‘financial instruments.’’ As a result, the 

communications of a Covered Entity 

applying substituted compliance for 

Exchange Act fair and balanced 

communications requirements would 

always be in relation to a security-based 

swap that is a ‘‘financial instrument.’’ 

Accordingly, the Commission believes it 

is appropriate to delete the reference to 

FCA COBS 2.2A.2R(1)(c) in the Order. 

Third, the commenter asked the 

Commission not to require a Covered 

Entity to be subject to and comply with 

FCA COBS 2.2A.3R because it relates to 

the format of disclosure and thus goes 

beyond the scope of Exchange Act fair 

and balanced communications 

requirements.401 Exchange Act rule 

15Fh–3(g)(1) requires a Covered Entity’s 

communications to provide a sound 

basis for evaluating the facts with regard 

to any particular security-based swap or 

trading strategy involving a securitybased swap. FCA COBS 2.2A.3R would 

require the Covered Entity to provide 

the information required by FCA COBS 

2.2A.2R in a comprehensive form in 

such a manner that the client is 

reasonably able to understand the 

nature and risks of the investment 

service and of the specific type of 

financial instrument that is being 

offered and, consequently, to take 

investment decisions on an informed 

basis. This requirement to provide 

information in a manner that the client 

is reasonably able to take informed 

investment decisions is well within the 

scope of the Exchange Act requirement 

to provide counterparties a sound basis 

for evaluating the relevant facts of a 

transaction or strategy. Accordingly, the 

Commission is retaining the reference to 

this provision. 

Fourth, the commenter asked the 

Commission not to require a Covered 

Entity to be subject to and comply with 

FCA COBS 6.1ZA.8UK because it relates 

to portfolio management services and 

thus goes beyond the scope of Exchange 

Act fair and balanced communications 

requirements. FCA COBS 6.1ZA.8UK 

would require a Covered Entity, when 

providing or proposing to provide 

portfolio management services, to 

provide certain information to its client 

to enable the client to assess the 

Covered Entity’s performance. The 

Commission is not making a 

determination whether particular 

examples of ‘‘portfolio management,’’ as 

the term is used in this provision, also 

constitute dealing in a security-based 

swap for purposes of the Exchange Act. 

However, to the extent that FCA COBS 

6.1ZA.8UK applies to a Covered Entity’s 

communication, it is an element of the 

UK’s fair and balanced communications 

framework that compares to Exchange 

Act requirements to provide a sound 

basis for evaluating the facts with regard 

to a security-based swap or trading 

strategy involving a security-based 

swap. If the Covered Entity is applying 

substituted compliance in relation to 

such a communication, the Commission 

believes that it is appropriate to require 

the Covered Entity to comply with this 

requirement. Accordingly, the 

Commission is retaining the reference to 

this provision. 

Fifth, the commenter asked the 

Commission not to require a Covered 

Entity to be subject to and comply with 

UK MAR Investment Recommendations 

Regulation articles 3 and 4 and UK MAR 

articles 12(1)(c), 15, and 20(1) because 

they relate to investment 

recommendations and market 

manipulation and thus go beyond the 

scope of Exchange Act fair and balanced 

communications requirements. 

Exchange Act rule 15Fh–3(g) requires in 

relevant part that an SBS Entity’s 

communications with counterparties 

provide a sound basis for evaluating the 

facts with regard to a particular securitybased swap or trading strategy involving 

a security-based swap; not imply that 


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402See SIFMA 5/3/2021 Letter at 21 and 

Appendix A part (e)(6). 

403See Better Markets Letter at 2. 

404See UK EMIR article 13(2). 

405See para. (e)(6) of the Order. 

406See 17 CFR 240.18a–5. The FCA Application 

discusses UK requirements that address firms’ 

record creation obligations related to matters such 

as financial condition, operations, transactions, 

counterparties, and their property, personnel, and 

business conduct. See FCA Application Appendix 

B category 2 at 101–28, 136–39. 

407See 17 CFR 240.18a–6. The FCA Application 

discusses UK requirements that address firms’ 

record preservation obligations related to records 

that firms are required to create, as well as 

additional records such as records of 

communications. See FCA Application Appendix B 

category 2 at 140–71. 

408See 17 CFR 240.18a–7. The FCA Application 

discusses UK requirements that address firms’ 

obligations to make certain reports. See FCA 

Application Appendix B category 2 at 172–80, 185– 

89. 

409See 17 CFR 240.18a–8. The FCA Application 

discusses UK requirements that address firms’ 

obligations to make certain notifications. See FCA 

Application Appendix B category 2 at 181–85. 

410See 17 CFR 240.18a–9. The FCA Application 

discusses UK requirements that address firms’ 

obligations to perform securities counts. See FCA 

Application Appendix B category 2 at 129–36. 

411See 15 U.S.C. 78o–10(g). The FCA Application 

discusses UK requirements that address firms’ 

record preservation obligations related to records 

that firms are required to create, as well as 

additional records such as records of 

communications. See FCA Application Appendix B 

category 2 at 140–71. 

412Rule 3a71–6 sets forth additional analytic 

considerations in connection with substituted 

compliance for the Commission’s recordkeeping, 

reporting, notification, and securities count 

requirements. In particular, Exchange Act rule 

3a71–6(d)(6) provides that the Commission intends 

to consider (in addition to any conditions imposed) 

‘‘whether the foreign financial regulatory system’s 

required records and reports, the timeframes for 

recording or reporting information, the accounting 

standards governing the records and reports, and 

the required format of the records and reports’’ are 

comparable to applicable provisions under the 

Exchange Act, and whether the foreign provisions 

‘‘would permit the Commission to examine and 

inspect regulated firms’ compliance with the 

applicable securities laws.’’ 

past performance will recur; not make 

exaggerated or unwarranted claims, 

opinions, or forecasts; and balance 

statements about potential opportunities 

or advantages of a security-based swap 

with an equally detailed statement of 

the corresponding risks. UK MAR article 

20(1) would require the Covered Entity 

to present recommendations in a 

manner that ensures the information is 

objectively presented and to disclose 

interests and conflicts of interest 

concerning the financial instruments to 

which the information relates. UK MAR 

Investment Recommendations 

Regulation article 3 would require a 

Covered Entity to communicate only 

recommendations that present facts in a 

way that they are clearly distinguished 

from interpretations, estimates, 

opinions, and other types of non-factual 

information; label clearly and 

prominently projections, forecasts, and 

price targets; indicate the relevant 

material assumptions and substantially 

material sources of information; and 

include only reliable information or a 

clear indication when there is doubt 

about reliability. UK MAR Investment 

Recommendations Regulation article 4 

would require the Covered Entity to 

provide in its recommendation 

additional information about the factual 

basis of its recommendation. UK MAR 

articles 12(1)(c) and 15 would require 

the Covered Entity to refrain from 

disseminating information that gives or 

is likely to give false or misleading 

signals as to the supply of, demand for, 

or price of, a financial instrument or 

secures or is likely to secure the price 

of one or several financial instruments 

at an abnormal or artificial level, if the 

Covered Entity knows or ought to know 

that the information is false or 

misleading. These requirements form 

part of the UK’s framework for fair and 

balanced communications, and the 

Commission believes that together they 

relate to Exchange Act rule 15Fh–3(g)’s 

requirements regarding presentation of 

factual information described above. 

Accordingly, the Commission is 

retaining the references to these 

provisions. 

6. Daily Mark Disclosure 

A commenter requested that the 

Commission not require a Covered 

Entity to be subject to and comply with 

UK EMIR article 11(2), stating that it is 

not related to portfolio reconciliation.402

By contrast, another commenter stated 

that, if the Commission makes a positive 

substituted compliance determination, 

it must at a minimum ensure that the 

conditions in the proposed Order ‘‘are 

applied with full force and without 

exceptions or dilution.’’ 403 UK EMIR 

article 11(2) would require the Covered 

Entity to mark-to-market or mark-tomodel its non–centrally cleared 

contracts. Other UK portfolio 

reconciliation requirements contemplate 

that counterparties will use this 

valuation as an input to the 

reconciliation process. For example, a 

portfolio reconciliation must include at 

least the valuation attributed to each 

contract in accordance with UK EMIR 

article 11(2).404 As UK EMIR article 

11(2) sets the standards under which a 

Covered Entity must calculate this key 

input in the portfolio reconciliation 

process, the Commission has 

determined that this provision is related 

to portfolio reconciliation and 

accordingly is retaining the Order’s 

reference to it.405

7. Clearing Rights Disclosure 

Because UK 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. 

Commenters did not address this 

conclusion and, consistent with the 

proposed Order, the Commission is not 

providing substituted compliance. 

VIII. Substituted Compliance for 

Recordkeeping, Reporting and 

Notification Requirements 

A. Proposed Approach 

The FCA Application in part 

requested substituted compliance for 

requirements applicable to SBS Entities 

under the Exchange Act relating to: 

• Record Making—Exchange Act rule 

18a–5 requires prescribed records to be 

made and kept current.406

• Record Preservation—Exchange Act 

rule 18a–6 requires preservation of 

records.407

• Reporting—Exchange Act rule 18a– 

7 requires certain reports.408

• Notification—Exchange Act rule 

18a–8 requires notification to the 

Commission when certain financial or 

operational problems occur.409

• Securities Count—Exchange Act 

rule 18a–9 requires non-prudentially 

regulated security-based swap dealers to 

perform a quarterly securities count.410

• Daily Trading Records. Exchange 

Act section 15F(g) requires SBS Entities 

to maintain daily trading records.411

Taken as a whole, the recordkeeping, 

reporting, notification, and securities 

count requirements that apply to SBS 

Entities are designed to promote the 

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

Commission in conducting compliance 

examinations of those activities, and 

alert the Commission to potential 

financial or operational problems that 

could impact the firm and its 

customers.412

In proposing to provide conditional 

substituted compliance in connection 

with this part of the FCA Application, 

the Commission preliminarily 

concluded that the relevant UK 

requirements, subject to conditions and 

limitations, would produce regulatory 

outcomes that are comparable to the 

outcomes associated with the vast 

majority of the recordkeeping, reporting, 

notification, and securities count 

requirements under the Exchange Act 

applicable to SBS Entities pursuant to 


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413See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18394–404, 18415–20. 

414See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395–96. 

415See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18394–404, 18415–20. 

416See, e.g., Exchange Act Release No. 71958 

(Apr. 17, 2014), 79 FR 25194, 25199–200 (May 2, 

2014). 417See SIFMA 5/3/2021 Letter at 21–23. 418See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18394–404, 18415–20. 

419See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395 (discussing this 

limitation). 

420 17 CFR 240.10b–10. 

421See SIFMA 5/3/2021 Letter at 22–23. 

422See para. (f)(2)(i)(L) of the Order. 

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

7, 18a–8, and 18a–9 and Exchange Act 

section 15F(g) (collectively, the 

‘‘Exchange Act Recordkeeping and 

Reporting Requirements’’).413

Finally, the proposed structure of the 

substituted compliance determinations 

with respect to Exchange Act rules 18a– 

5, 18a–6, 18a–7, 18a–8, and 18a–9, as 

well as Exchange Act Section 15F(g) 

would have permitted a covered entity 

to apply substituted compliance with 

respect to certain of these rules (e.g., 

Exchange Act rules 18a–5 and 18a–6) 

and comply with the Exchange Act 

requirements of the remaining rules and 

statute (i.e., Exchange Act rules 18a–7, 

18a–8, and 18a–9, as well as Exchange 

Act Section 15F(g)).414 Moreover, the 

proposed structure of the substituted 

compliance determinations with respect 

to the recordkeeping rules would have 

provided Covered Entities with greater 

flexibility to select distinct requirements 

within the broader rules for which they 

want to apply substituted compliance. 

Because the Exchange Act 

Recordkeeping and Reporting 

Requirements were entity-level 

requirements, the Covered Entity 

needed to apply substituted compliance 

at the entity level for each of the 

substituted compliance determinations 

with respect to these requirements with 

one limited exception. Under the 

exception, a Covered Entity could apply 

substituted compliance at the 

transaction level with respect to 

requirements in Exchange Act rules 

18a–5 and 18a–6 linked to counterparty 

protection rules (i.e., Exchange Act rules 

15Fh–3(b), (c), (e), (f), and (g)). 

B. Commenter Views and Final 

Provisions 

1. General Considerations 

The Commission structured its 

preliminary substituted compliance 

determinations in the proposed Order 

with respect to Exchange Act rules 18a– 

5, 18a–6, 18a–7, and 18a–8 to provide 

Covered Entities with greater flexibility 

to select which distinct requirements 

within the broader rules for which they 

want to apply substituted 

compliance.415 This flexibility was 

intended to permit Covered Entities to 

leverage existing recordkeeping and 

reporting systems that are designed to 

comply with the broker-dealer 

recordkeeping and reporting 

requirements on which the 

recordkeeping and reporting 

requirements applicable to SBS Entities 

are based. For example, it may be more 

efficient for a Covered Entity to comply 

with certain Exchange Act requirements 

within a given recordkeeping or 

reporting rule (rather than apply 

substituted compliance) because it can 

utilize systems that its affiliated brokerdealer has implemented to comply with 

them. 

As applied to Exchange Act rules 

18a–5 and 18a–6, this approach of 

providing greater flexibility resulted in 

preliminary substituted compliance 

determinations with respect to the 

different categories of records these 

rules require SBS Entities to make, keep 

current, and/or preserve. The objectives 

of these rules—taken as a whole—is to 

assist the Commission in monitoring 

and examining for compliance with 

Exchange Act requirements applicable 

to SBS Entities as well as to promote the 

prudent operation of these firms.416 The 

Commission preliminarily found that 

the comparable UK recordkeeping rules 

achieve these outcomes with respect to 

compliance with the substantive UK 

requirements for which preliminary 

positive substituted compliance 

determinations were made (e.g., capital 

and margin requirements). At the same 

time, the recordkeeping rules address 

different categories of records through 

distinct requirements within the rules. 

Each requirement with respect to a 

specific category of records (e.g., 

paragraph (a)(2) of Exchange Act rule 

18a–5 addressing ledgers (or other 

records) reflecting all assets and 

liabilities, income and expense, and 

capital accounts) can be viewed in 

isolation as a distinct recordkeeping 

rule. Therefore, the Commission 

preliminarily found it appropriate to 

make substituted compliance 

determinations at this level of Exchange 

Act rules 18a–5 and 18a–6. 

A commenter generally supported the 

Commission’s proposed granular 

approach to making substituted 

compliance determinations.417 The 

Order implements this granular 

approach substantially as proposed. 

The Commission’s preliminary 

substituted compliance determinations 

for the Exchange Act Recordkeeping and 

Reporting Requirements were subject to 

the condition that the Covered Entity is 

subject to and complies with the 

relevant UK laws.418 Further, the 

Commission proposed limitations and 

additional conditions for certain of the 

proposed preliminary substituted 

compliance determinations. The 

limitations and conditions are discussed 

below as well any comments on them 

and the Commission’s response to those 

comments. 

First, the Commission did not make a 

preliminary positive substituted 

compliance determination with respect 

to a discrete provision of the Exchange 

Act Recordkeeping and Reporting 

Requirements if it was fully or partially 

linked to a substantive Exchange Act 

requirement for which substituted 

compliance was not available or for 

which a preliminary positive 

substituted compliance determination 

was not being made.419 In this regard, 

the Commission linked a requirement in 

Exchange Act rule 18a–5 to Exchange 

Act rule 10b–10.420 A commenter 

pointed out that Covered Entities will 

not be subject to Exchange Act rule 10b– 

10.421 The Commission agrees with the 

commenter that there are no provisions 

in the Exchange Act Recordkeeping and 

Reporting Requirements that are linked 

to Exchange Act rule 10b–10. 

Consequently, the Order does not 

contain this exclusion. 

In addition, Exchange Act rule 18a– 

6(c), in part, requires firms to preserve 

Forms SBSE, SBSE–A, SBSE–C, SBSE– 

W, all amendments to these forms, and 

all other licenses or other 

documentation showing the firm’s 

registration with any securities 

regulatory authority or the U.S. 

Commodity Futures Trading 

Commission. Because these 

requirements are linked to the 

Commission’s and other U.S. regulators’ 

registration rules, for which substituted 

compliance is not granted, the Order 

excludes the requirement to preserve 

these records from the Commission’s 

positive substituted compliance 

determination with respect to Exchange 

Act rule 18a–6(c).422

Aside from these modifications, the 

Order does not extend substituted 

compliance to discrete Exchange Act 

Recordkeeping and Reporting 

Requirements that are linked to 

substantive Exchange Act requirements 

for which there is no substituted 

compliance, as proposed. In particular, 

a positive substituted compliance 

determination is not being made, in full 

or in part, for recordkeeping, reporting, 

or notification requirements linked to 


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423 17 CFR 240.15Fh–4. 

424 17 CFR 240.15Fh–5. 

425 17 CFR 240.15Fh–6. 

426 17 CFR 240.18a–2. 

427 17 CFR 242.900 et seq. 

428See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18403–404 (discussing 

this condition). 

429See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395 (discussing this 

condition). 

430See para. (f)(3)(i)(D) of the Order. 

431See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18399, 18417. 

432See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395 (discussing this 

condition). 

433See SIFMA 5/3/2021 Letter at 23. 

434See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18395 (discussing this 

condition). 

435See SIFMA 5/3/2021 Letter Appendix B. 

436See SIFMA 5/3/2021 Letter Appendix B. 

the following Exchange Act rules for 

which substituted compliance is not 

available or a positive substituted 

compliance determination is not being 

made: (1) Exchange Act rule 15Fh–4; 423

(2) Exchange Act rule 15Fh–5; 424 (3) 

Exchange Act rule 15Fh–6; 425 (4) 

Exchange Act rule 18a–2; 426 (5) 

Exchange Act rule 18a–4; and (6) 

Regulation SBSR.427

Second, the Commission did not 

make a positive substituted compliance 

determination with respect to the 

inspection requirement of Exchange Act 

section 15F(f) and the records 

production requirement of Exchange 

Act rule 18a–6(g).428 The Commission 

did not receive comment on this 

approach and the Order does not extend 

substituted compliance to these 

requirements. 

Third, the Commission conditioned 

substituted compliance with discrete 

provisions of the Exchange Act 

Recordkeeping and Reporting 

Requirements that were fully or 

partially linked to a substantive 

Exchange Act requirement for which 

substituted compliance was available on 

the Covered Entity applying substituted 

compliance with respect to the linked 

Exchange Act requirement.429 In 

particular, substituted compliance for a 

provision of the Exchange Act 

Recordkeeping and Reporting 

Requirements that is linked to the 

following Exchange Act rules was 

conditioned on the SBS Entity applying 

substituted compliance to the linked 

substantive Exchange Act rule: (1) 

Exchange Act rule 15Fh–3, except 

paragraphs (a) and (d) of the rule for 

which substituted compliance is not 

available; (2) Exchange Act rule 15Fi–2; 

(3) Exchange Act rule 15Fi–3; (4) 

Exchange Act rule 15Fi–4; (5) Exchange 

Act rule 15Fi–5; (6) Exchange Act rule 

15Fk–1; (7) Exchange Act rule 18a–1 

(‘‘Rule 18a–1 Condition’’); (8) Exchange 

Act rule 18a–3; (8) Exchange Act rule 

18a–5; and (9) Exchange Act rule 18a– 

7. The Commission did not receive 

comment on this approach and is 

adopting it as proposed. 

The only difference is that the 

positive substituted compliance 

determination for Exchange Act rule 

18a–6(b)(1)(viii) is now conditioned on 

the Covered Entity applying substituted 

compliance for the requirements of 

Exchange Act rule 18a–7(a)(1), (b), and 

(c) through (h), and Exchange Act rule 

18a–7(j) as applied to these 

requirements, rather than on the entirety 

of Exchange Act rule 18a–7, to reflect 

that substituted compliance with 

respect to Exchange Act rule 18a–7 is 

granted on a paragraph-by-paragraph 

basis and not all paragraphs of Exchange 

Act rule 18a–7 are pertinent to 

Exchange Act rule 18a–6(b)(1)(viii). 

Moreover, for the reasons discussed 

above in part III.B.2.k. of this release, 

substituted compliance with respect to 

paragraphs (a)(1), (b), and (c) through (h) 

of Exchange Act rule 18a–7 is subject to 

the additional condition that the 

Covered Entity applies substituted 

compliance with respect to Exchange 

Act rule 18a–6(b)(1)(viii) (a record 

preservation requirement).430 This 

record preservation requirement is 

directly linked to the financial and 

operational reporting requirements of 

paragraphs (a)(1), (b), and (c) through (h) 

of Exchange Act rule 18a–7. The 

proposed Order conditioned substituted 

compliance with respect to this record 

preservation requirement on the 

Covered Entity applying substituted 

compliance with respect to Exchange 

Act rule 18a–7(a)(1).431 This additional 

condition is designed to provide clarity 

as to the Covered Entity’s obligations 

under this record preservation 

requirement when applying substituted 

compliance with respect to paragraphs 

(a)(1), (b), and (c) through (h) of 

Exchange Act rule 18a–7 pursuant this 

Order. 

Fourth, the Commission conditioned 

substituted compliance with discrete 

provisions of the Exchange Act 

Recordkeeping and Reporting 

Requirements that would be important 

for monitoring or examining compliance 

with the capital rule for nonbank 

security-based swap dealers on the 

Covered Entity applying substituted 

compliance with respect to the capital 

rule (i.e., the Rule 18a–1 Condition).432

The Commission included the Rule 

18a–1 Condition as part of the 

substituted compliance determination 

for the daily trading records 

requirement of Exchange Act section 

15F(g). A commenter asked that the 

condition be modified so that it applies 

only if the Covered Entity is not 

prudentially regulated (and therefore 

subject to rule 18a–1).433 Instead, the 

Commission is deleting this condition 

from the substituted compliance 

determination because these 

requirements are not important to 

monitoring or examining for compliance 

with Exchange Act rule 18a–1. 

Therefore, all Covered Entities— 

whether or not subject to rule 18a–1— 

can apply substituted compliance with 

respect to Exchange Act section 15F(g). 

The Order otherwise includes the Rule 

18a–1 Condition for discrete provisions 

of the Exchange Act Recordkeeping and 

Reporting Requirements that would be 

important for monitoring or examining 

compliance with the capital rule for 

nonbank security-based swap dealers, as 

proposed. 

Fifth, the proposed Order included a 

condition that Covered Entities must 

promptly furnish to a representative of 

the Commission upon request an 

English translation of any record, report, 

or notification of the Covered Entity that 

is required to be made, preserved, filed, 

or subject to examination pursuant to 

Exchange Act section 15F of this 

Order.434 The Commission did not 

receive a comment on this approach and 

the Order includes this condition. 

Sixth, the Commission conditioned 

substituted compliance with Exchange 

Act rule 18a–7 on Covered Entities 

filing periodic unaudited financial and 

operational information with the 

Commission or its designee in the 

manner and format required by 

Commission rule or order. Commenters 

made new suggestions about the scope 

and requirements of such a Commission 

order or rule in addition to reiterating 

comments previously made in response 

to the same condition in the German 

Substituted Compliance Order.435 First, 

if SBS Entities are required to prepare 

FOCUS Report Part II, and a positive 

substituted compliance determination is 

made with respect to the Commission’s 

capital requirements, a commenter 

proposed that the Commission permit a 

Covered Entity to submit capital 

computations in a manner consistent 

with its home country capital standards 

and related reporting rules.436 Second, 

some commenters asked that Covered 

Entities be permitted to file their 

unaudited financial information less 

frequently (e.g., quarterly) and provide a 

later submission deadline to match the 

frequency of reporting and reporting 

deadlines required by the Covered 


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437See SIFMA 5/3/2021 Letter Appendix B. 

438See Americans for Financial Reform Education 

Fund Letter at 1. 

439See SIFMA 5/3/2021 Letter Appendix B. 

440See SIFMA 5/3/2021 Letter Appendix B. 

441See SIFMA 5/3/2021 Letter Appendix A. 

442See 17 CFR 240.18a–8. 

443See SIFMA 5/3/2021 Letter Appendix A. 

444Compare paras. (f)(2)(i)(H)(1), (f)(3)(i)(A), and 

(f)(3)(ii)(A) of the UK Substituted Compliance 

Notice and Proposed Order, with paras. 

(f)(2)(i)(H)(1), (f)(3)(i)(A), and (f)(3)(ii)(A) of the 

Order. 

445See SIFMA 5/3/2021 Letter Appendix A. 

Entity’s home country regulator,437

while other commenters urged that 

Covered Entities be subject to monthly 

instead of quarterly reporting of their 

financial condition.438 Third, 

commenters supported a potential 

approach identified by the Commission 

under which Covered 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.439

Fourth, the Commission received 

comment recommending that the 

FOCUS Report be modified to omit 

certain line items either permanently or 

during a two-year transition.440 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 filing requirements is 

conditioned on Covered Entities filing 

unaudited financial and operational 

information in the manner and format 

specified by Commission order or rule. 

Seventh, the Commission proposed to 

make a positive substituted compliance 

determination with respect to Exchange 

Act rule 18a–6(b)(2)(v) but not with 

respect to Exchange Act rule 18a– 

6(b)(1)(viii)(L), even though both 

provisions require firms to preserve 

detail relating to information for 

possession or control requirements 

under Exchange Act rule 18a–4 and 

reported on Part II of Form X–17A–5. 

These provisions are fully linked with 

Exchange Act rule 18a–4 for which a 

positive substituted compliance is not 

available, so a positive substituted 

compliance determination should not be 

made for these linked record retention 

requirements. Accordingly, the Order 

does not make a positive substituted 

compliance determination with respect 

to Exchange Act rule 18a–6(b)(2)(v). 

The Commission also received 

comment suggesting certain 

modifications to the ordering language. 

Specifically, a commenter suggested 

revising paragraph (f)(4)(ii)(A)(1) of the 

proposed Order, which requires a 

Covered Entity to send a copy of any 

notice required to be sent by UK laws 

cited in paragraph (f)(4) simultaneously 

to the Commission. The commenter 

recommended revising this provision to 

require the notices that a Covered Entity 

would be required to send to the 

Commission be limited to those notices 

required by UK law cited in paragraph 

(f)(4)(i)(C) only instead of paragraph 

(f)(4). Furthermore, the commenter 

recommended conditioning the 

requirement to provide these notices to 

the Commission to be limited to those 

notifications that are related to: (1) A 

breach of the UK laws cited in the 

relevant portions of paragraphs (f)(1) or 

(2) of the Order, which, in the case of 

a Covered Entity that is prudentially 

regulated, also relates to the Covered 

Entity’s business as a security-based 

swap dealer or major security-based 

swap participant; or (2) a deficiency 

relating to capital requirements.441 The 

commenter reasoned that the provisions 

of UK law requiring notification 

referenced in paragraph (f)(4) require 

notification of a far wider array of 

matters than those described in 

Exchange Act rule 18a–8. 

The Commission disagrees. Exchange 

Act rule 18a–8 requires security-based 

swap dealers and major security-based 

swap participants for which there is no 

prudential regulator to notify the 

Commission of a failure to meet 

minimum net capital. Exchange Act rule 

18a–8 also specifies several events that 

trigger a requirement that a securitybased swap dealer or major securitybased swap participant for which there 

is no prudential regulator must send 

notice within twenty-four hours to the 

Commission. These notices are designed 

to provide the Commission with ‘‘early 

warning’’ that the SBS entity may 

experience financial difficulty. 

Furthermore, Exchange Act rule 18a–8 

requires bank security-based swap 

dealers to give notice to the Commission 

when it files an adjustment of its 

reported capital category with its 

prudential regulator. Additional 

notification requirements arise with 

respect to the failure to maintain and 

keep current required books and 

records, the discovery of material 

weaknesses, and failure to make a 

required deposit into the special reserve 

account for the exclusive benefit of 

security-bases swap customers.442 While 

the specific UK requirements cited with 

respect to Exchange Act rule 18a–8 are 

different from the specific requirements 

set forth in Exchange Act rule 18a–8, the 

Commission believes the UK notice 

requirements cited in paragraph (f)(4) of 

the Order provide for comparable 

regulatory outcomes by requiring 

notification of events or conditions 

which may impact an SBS Entity’s 

capital or signal the potential for 

financial difficulty, indicate the failure 

to maintain and keep current books and 

records, or the potential for the failure 

to comply with other requirements 

related to the protection of customer 

assets. The recommended revisions 

would reduce the scope of notifications 

the Commission would receive. 

Consequently, the Commission is not 

making the recommended revisions 

with respect to paragraph (f)(4)(ii)(A)(1). 

The commenter also recommended 

revising paragraphs (f)(2)(i)(H)(1), 

(f)(3)(i)(A), and (f)(3)(ii)(A) to include 

the qualifier ‘‘as applicable’’ with 

respect to citations to UK CRR Reporting 

ITS annexes. The commenter stated that 

not all firms submit all of the UK CRR 

Reporting ITS annexes.443 Accordingly, 

the Commission is modifying these 

paragraphs to include the qualifier ‘‘as 

applicable.’’ 444

Finally, with respect to recordkeeping 

rules that are linked with Exchange Act 

rule 15Fh–3, references to Exchange Act 

rule 15Fh–3 are revised to clarify that 

substituted compliance is available with 

respect to Exchange Act rule 15Fh–3 

except paragraphs (a) and (d) of the rule, 

instead of the entirety of Exchange Act 

rule 15Fh–3. Accordingly, the 

Commission is revising the conditions 

in paragraphs (f)(1)(i)(M)(2) and 

(f)(2)(i)(K)(2) of the Order to state that 

the Covered Entity must apply 

substituted compliance with respect to 

the portion of the recordkeeping rule 

that relates to ‘‘one or more provisions 

of Exchange Act rule 15Fh–3 for which 

substituted compliance is available 

under this Order’’ (instead of just 

‘‘Exchange Act rule 15Fh–3’’). 

2. Citations to UK Law 

The Commission also received 

comment recommending changes to the 

proposed Order to refine the scope of 

UK law provisions that would operate 

as conditions to substituted 

compliance.445 The Commission 

reviewed each of the UK law citations 

that the commenter recommended 

adding or removing from the Order for 

relevance to the comparable Exchange 

Act requirement while also keeping in 

mind that each UK law citation was 

included in the FCA Application 

intentionally. The Commission’s 

conclusion and reasoning with respect 

to the commenter’s recommendations is 

discussed in further detail below. In 

addition to refining the scope of UK law 

citations in response to comment, the 


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446There are a number of subparagraphs of the 

recordkeeping, reporting, notification, and 

securities count paragraph of the Order that reflect 

changes for consistency with the FCA Application 

and French Substituted Compliance Order. 

Compare paras. (f)(1)(i)(B)(1), (f)(1)(i)(C)(1), 

(f)(1)(i)(D)(1), (f)(1)(i)(F)(1), (f)(1)(i)(G)(1), 

(f)(1)(i)(H)(1), (f)(1)(i)(I)(1), (f)(1)(i)(J)(1), (f)(1)(i)(K), 

(f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(C)(1), 

(f)(2)(i)(D), (f)(2)(i)(E)(1), (f)(2)(i)(F)(1), (f)(2)(i)(G)(1), 

(f)(2)(i)(H)(1), (f)(2)(i)(I)(1), (f)(2)(i)(J)(1), 

(f)(2)(i)(K)(1), (f)(2)(i)(L), (f)(2)(i)(M), (f)(2)(i)(N)(1), 

(f)(2)(i)(O)(1), (f)(2)(i)(P)(1), (f)(2)(i)(Q), (f)(2)(i)(R), 

(f)(3)(ii)(A), (f)(3)(iii), (f)(3)(iv)(A), (f)(4)(i)(A)(1), 

(f)(4)(i)(B), (f)(4)(i)(C)(1), and (f)(4)(i)(D)(1) of the UK 

Substituted Compliance Notice and Proposed 

Order, with paras. (f)(1)(i)(B)(1), (f)(1)(i)(C)(1), 

(f)(1)(i)(D)(1), (f)(1)(i)(F)(1), (f)(1)(i)(G)(1), 

(f)(1)(i)(H)(1), (f)(1)(i)(I)(1), (f)(1)(i)(J)(1), (f)(1)(i)(K), 

(f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(C)(1), 

(f)(2)(i)(D), (f)(2)(i)(E)(1), (f)(2)(i)(F)(1), (f)(2)(i)(G)(1), 

(f)(2)(i)(H)(1), (f)(2)(i)(I)(1), (f)(2)(i)(J)(1), 

(f)(2)(i)(K)(1), (f)(2)(i)(L)(1), (f)(2)(i)(M), 

(f)(2)(i)(N)(1), (f)(2)(i)(O)(1), (f)(2)(i)(P)(1), 

(f)(2)(i)(Q), (f)(2)(i)(R), (f)(3)(ii)(A), (f)(3)(iii), 

(f)(3)(iv)(A), (f)(4)(i)(A)(1), (f)(4)(i)(B), (f)(4)(i)(C)(1), 

(f)(4)(i)(D)(1), and (f)(6) of the Order. 

447Compare paras. (f)(1)(i)(B)(1), (f)(1)(i)(J)(1), 

(f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(C)(1), 

(f)(2)(i)(D), (f)(2)(i)(I)(1), (f)(2)(i)(J)(1), (f)(4)(i)(A)(1), 

(f)(4)(i)(B), (f)(4)(i)(C)(1), and (f)(4)(i)(D)(1) of the UK 

Substituted Compliance Notice and Proposed 

Order, with paras. (f)(1)(i)(B)(1), (f)(1)(i)(J)(1), 

(f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(C)(1), 

(f)(2)(i)(D), (f)(2)(i)(I)(1), (f)(2)(i)(J)(1), (f)(4)(i)(A)(1), 

(f)(4)(i)(B), and (f)(4)(i)(C)(1) of the Order. 

448Compare paras. (f)(1)(i)(D)(1), (f)(1)(i)(G)(1), 

(f)(1)(i)(I)(1), (f)(2)(i)(A), (f)(2)(i)(B), and (f)(2)(i)(D) 

of the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(D)(1), 

(f)(1)(i)(G)(1), (f)(1)(i)(I)(1), (f)(2)(i)(A), (f)(2)(i)(B), 

and (f)(2)(i)(D) of the Order. 

449Compare paras. (f)(1)(i)(A)(1), (f)(1)(i)(D)(1), 

(f)(1)(i)(F)(1), (f)(1)(i)(G)(1), (f)(1)(i)(I)(1), (f)(1)(i)(M), 

(f)(2)(i)(A), (f)(2)(i)(B), and (f)(2)(i)(O)(i) of the UK 

Substituted Compliance Notice and Proposed 

Order, with paras. (f)(1)(i)(A)(1), (f)(1)(i)(D)(1), 

(f)(1)(i)(F)(1), (f)(1)(i)(G)(1), (f)(1)(i)(I)(1), (f)(1)(i)(M), 

(f)(2)(i)(A), (f)(2)(i)(B), and (f)(2)(i)(O)(i) of the 

Order. 

450Compare paras. (f)(1)(i)(B)(1), (f)(1)(i)(J)(1), 

(f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), and (f)(2)(i)(D) 

of the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(B)(1), 

(f)(1)(i)(J)(1), (f)(1)(i)(L)(1), (f)(2)(i)(A), (f)(2)(i)(B), 

and (f)(2)(i)(D) of the Order. 

451Compare paras. (f)(1)(i)(K) and (f)(2)(i)(M) of 

the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(K) and 

(f)(2)(i)(M) of the Order. 

452Compare para. (f)(2)(i)(R) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(2)(i)(R) of the Order. 

453See FCA Reader’s Guide: An Introduction to 

the Handbook (Jan. 2019), available at: https://

www.fca.org.uk/publication/handbook/readersguide_0.pdf. 

454Compare para. (f)(2)(i)(R) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(2)(i)(R) of the Order. 

Order reflects changes to the UK law 

citations after refining the UK law 

provisions in the proposed Order to 

better reflect the UK law provisions 

cited in the FCA Application, as well as 

the EU law provisions cited in the 

French Substituted Compliance 

Order.446

a. Global 

The commenter recommended 

deleting references to UK MiFID Org 

Reg, COBS 8A, and UK MiFIR article 

25(1), reasoning that these provisions 

could raise issues due to the 

discrepancy between Exchange Act 

requirements, which apply on an entitylevel basis, and these UK requirements, 

which are territorially limited. As 

explained in part III.B.2. above, 

conducting business outside the UK 

does not preclude a firm from relying on 

substituted compliance for the business 

it conducts within the UK. Accordingly, 

other than the specific articles of UK 

MiFID Org Reg, FCA COBS, and UK 

MiFIR discussed below, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to the Commission’s 

recordkeeping, reporting, notification, 

and securities count requirements. 

The commenter recommended 

deleting references to FCA IFPRU, 

reasoning that FCA IFPRU does not 

apply to banks and PRA-designated 

investment firms, and all Covered 

Entities are expected to be banks or 

PRA-designated investment firms. On 

further examination, the Commission 

believes that the IFPRU provisions are 

not necessary to find comparability with 

respect to the Commission’s 

recordkeeping, reporting, notification, 

and securities count requirements and is 

therefore removing references to this UK 

requirement.447

The commenter recommended 

deleting references to FCA COBS 

9A.2.1R, which relates to suitability 

requirements, reasoning that the 

provision does not correspond to, and 

goes beyond, the Commission’s 

recordkeeping, reporting, notification, 

and securities count requirements. The 

Commission agrees with the 

commenter’s reasoning, except with 

respect to Exchange Act rules 18a– 

5(a)(17) and (b)(13), which relate to 

suitability records, and is therefore 

removing references to this UK 

requirement from the Order’s list of UK 

requirements comparable to the 

Commission’s recordkeeping, reporting, 

notification, and securities count 

requirements, except for Exchange Act 

rules 18a–5(a)(17) and (b)(13).448

The commenter recommended 

deleting references to UK MiFID Org 

Reg article 76 and FCA SYSC 10A.1.6R 

and 10A.1.8R, which relate to the 

recording of telephone and electronic 

communications, reasoning that they do 

not correspond to, and go beyond, the 

requirements of the Commission’s 

recordkeeping, reporting, notification, 

and securities count rules. The 

Commission agrees with the 

commenter’s reasoning, except with 

respect to Exchange Act rules 18a– 

6(b)(1)(iv) and (b)(2)(ii), which relate to 

communications including telephonic 

communications. Therefore, the 

Commission is removing references to 

these UK requirements from the Order’s 

list of UK requirements comparable to 

the Commission’s recordkeeping, 

reporting, notification, and securities 

count requirements, except for 

Exchange Act rules 18a–6(b)(1)(iv) and 

(b)(2)(ii).449

The commenter recommended 

deleting references to FCA FCG, 

reasoning that this sourcebook only 

contains nonbinding guidance. The 

Commission agrees with the 

commenter’s reasoning and is therefore 

removing references to this UK 

requirement from the Order’s list of UK 

requirements comparable to the 

Commission’s recordkeeping, reporting, 

notification, and securities count 

requirements.450

The commenter recommended 

deleting references to FCA FIT, 

reasoning that FCA FIT only contains 

nonbinding guidance. The Commission 

agrees with the commenter’s reasoning 

and is therefore removing references to 

this UK requirement from the Order’s 

list of UK requirements comparable to 

the Commission’s recordkeeping, 

reporting, notification, and securities 

count requirements.451

The commenter recommended 

deleting references to the EBA 

Guidelines on Outsourcing, reasoning 

that they only contain nonbinding 

guidance. The Commission agrees with 

the commenter’s reasoning and is 

therefore removing references to this UK 

requirement from the Order’s list of UK 

requirements comparable to the 

Commission’s recordkeeping, reporting, 

notification, and securities count 

requirements.452

In addition, the Commission is 

deleting references to FCA provisions 

ending in ‘‘G’’, because they only 

contain nonbinding guidance.453

Therefore, these UK requirements are 

removed from the Order’s list of UK 

requirements comparable to the 

Commission’s recordkeeping, reporting, 

notification, and securities count 

requirements.454

b. Exchange Act Rules 18a–5 and 18a– 

6 

The commenter recommended 

deleting references to UK MiFIR article 

25(1), which sets a duration of five years 

for firms to keep relevant data relating 

to orders and transactions in financial 

instruments, reasoning that this does 


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455See FCA Application at 109. 

456Compare para. (f)(2)(i)(D) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(2)(i)(D) of the Order. 

457See FCA Application at 110. 

458Compare paras. (f)(1)(i)(L)(1) and (f)(2)(i)(D) of 

the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(L)(1) and 

(f)(2)(i)(D) of the Order. 

459Compare para. (f)(1)(i)(L)(1) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(1)(i)(L)(1) of the Order. 

460Compare paras. (f)(2)(i)(A), (f)(2)(i)(B), 

(f)(2)(i)(C)(1), (f)(2)(i)(D), (f)(2)(i)(G)(1), (f)(2)(i)(I)(1), 

and (f)(2)(i)(O)(1) of the UK Substituted Compliance 

Notice and Proposed Order, with paras. (f)(2)(i)(A), 

(f)(2)(i)(B), (f)(2)(i)(C)(1), (f)(2)(i)(D), (f)(2)(i)(G)(1), 

(f)(2)(i)(I)(1), and (f)(2)(i)(O)(1) of the Order. 

461See FCA Application at 111. 

462Compare paras. (f)(2)(i)(E)(1) and (f)(2)(i)(H)(1) 

of the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(2)(i)(E)(1) and 

(f)(2)(i)(H)(i) of the Order. 

463Compare paras. (f)(1)(i)(D)(1) and (f)(1)(i)(I)(1) 

of the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(D)(1) and 

(f)(1)(i)(I)(1) of the Order. 

464Compare paras. (f)(2)(i)(A), (f)(2)(i)(B), 

(f)(2)(i)(D), (f)(2)(i)(F)(1), (f)(2)(i)(G)(1), and 

(f)(2)(i)(Q) of the UK Substituted Compliance Notice 

and Proposed Order, with paras. (f)(2)(i)(A), 

(f)(2)(i)(B), (f)(2)(i)(D), (f)(2)(i)(F)(1), (f)(2)(i)(G)(1), 

and (f)(2)(i)(Q) of the Order. 

not correspond to, and goes beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. With respect to 

Exchange Act rule 18a–6, the five year 

record retention period is directly 

relevant to the record preservation 

requirement in Exchange Act rule 18a– 

6. With respect to Exchange Act rule 

18a–5, while this UK requirement 

contains a record retention element, it 

also contains a record creation 

requirement that is relevant to Exchange 

Act rule 18a–5. Accordingly, the 

Commission is not removing references 

to this UK requirement from the Order’s 

list of UK requirements comparable to 

Exchange Act rules 18a–5 and 18a–6. 

The commenter recommended 

deleting references to PRA Internal 

Capital Adequacy Assessment Rules, 

which relate to a firm’s distribution of 

financial resources, own funds and 

internal capital, and related risk 

management processes, reasoning that 

they do not correspond to, and go 

beyond, the requirements of Exchange 

Act rules 18a–5 and 18a–6. While the 

rules require firms to implement 

‘‘strategies, processes and systems’’, the 

FCA Application states that in practice, 

one or more of these provisions ‘‘will 

require the maintenance of full records 

of the Investment Firm’s assets, 

liabilities, income and expense and 

capital accounts to be maintained’’ 

which is relevant to Exchange Act rules 

18a–5 and 18a–6.455 Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5 and 18a–6, except with respect to 

Exchange Act rules 18a–6(b)(1)(iv) and 

(b)(2)(ii) for which the Commission 

agrees with the commenter’s 

reasoning.456

The commenter recommended 

deleting references to certain parts of 

FCA CASS, which relate to a firm’s 

holding of safe custody assets and client 

money, reasoning that this does not 

correspond to, and goes beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. However, the FCA 

Application states that, among other 

things, these provisions require firms to 

‘‘maintain detailed, up-to-date and 

accurate accounts and records 

distinguishing client money and assets 

from those of the Investment Firm,’’ 

which is relevant to Exchange Act rules 

18a–5 and 18a–6.457 Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5 and 18a–6, except with respect to 

Exchange Act rule 18a–5(a)(12) and 

Exchange Act rules 18a–6(b)(1)(iv) and 

(b)(2)(ii) for which the Commission 

agrees with the commenter’s 

reasoning.458

The commenter recommended 

deleting references to UK EMIR article 

11, which relates to the timely 

confirmation of transactions, and UK 

EMIR article 39, which relates to a 

firm’s requirement to segregate the 

positions they clear for a client with a 

UK central counterparty from their own 

positions, reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. While these UK 

requirements contain segregation and 

confirmation requirements, they also 

contain record creation requirements 

that are relevant to Exchange Act rule 

18a–5. Accordingly, the Commission is 

not removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–5, except with respect to 

Exchange Act rule 18a–5(a)(12) for 

which the Commission agrees with the 

commenter’s reasoning.459 However, the 

Commission agrees with the 

commenter’s reasoning with respect to 

Exchange Act rule 18a–6 and is 

removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6.460

The commenter recommended 

deleting references to UK CRR articles 

103, 105(3), and 105(10), which relate to 

the firm’s management of trading book 

exposures, reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. However, the FCA 

Application states that these 

requirements in practice require firms to 

have ‘‘a record of their long and short 

positions to enable these to be 

monitored’’ which is relevant to 

Exchange Act rules 18a–5 and 18a–6.461

Accordingly, the Commission is not 

removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rules 18a–5 and 18a–6. 

The commenter recommended 

deleting references to UK CRR article 

104(1)(j) from the Order, reasoning that 

the provision does not exist. The 

Commission agrees with the 

commenter’s reasoning, and is therefore 

removing references to this citation from 

the Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5 and 18a–6.462

The commenter recommended 

deleting certain references to FCA 

COBS, which relate to client agreements 

for services and client reporting, 

reasoning that they do not correspond 

to, and go beyond, the requirements of 

Exchange Act rules 18a–5 and 18a–6. 

With respect to Exchange Act rule 18a– 

5, these provisions (other than FCA 

COBS 9A.2.1R which is discussed 

above) generally also contains record 

creation requirements that are relevant 

to Exchange Act rule 18a–5 and 

Exchange Act rules 18a–6(b)(1)(ix) and 

(d)(4) and (d)(5) (which implicate record 

creation). Accordingly, the Commission 

is not removing references to most of 

these UK requirements from the Order’s 

list of UK requirements comparable to 

Exchange Act rule 18a–5 and Exchange 

Act rule 18a–6(b)(1)(ix), except for FCA 

COBS 8A.1.9R and 16A.2.1R with 

respect to Exchange Act rule 18a– 

5(a)(4), (a)(8), and (b)(3) for which the 

Commission agrees with the 

commenter’s reasoning.463 With respect 

to the remainder of Exchange Act rule 

18a–6, the Commission is removing 

references to these UK requirements 

because FCA COBS is relevant to record 

creation but not record preservation.464

The commenter recommended 

deleting references to MLR 2017 

Regulations 28 through 30, which relate 

to anti-money laundering customer due 

diligence measures, reasoning that they 

do not correspond to, and go beyond, 

the requirements of Exchange Act rules 

18a–5 and 18a–6. These UK provisions 

contain record creation requirements 

regarding customers, but not record 

preservation requirements. Accordingly, 

the Commission is not removing 


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465Compare paras. (f)(1)(i)(D)(1) and (f)(1)(i)(G)(1) 

of the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(D)(1) and 

(f)(1)(i)(G)(1) of the Order. 

466Compare paras. (f)(2)(i)(A), (f)(2)(i)(B), and 

(f)(2)(i)(D) of the UK Substituted Compliance Notice 

and Proposed Order, with paras. (f)(2)(i)(A), 

(f)(2)(i)(B), and (f)(2)(i)(D) of the Order. 

467See FCA Application at 126–27. 

468Compare paras. (f)(1)(i)(G)(1), (f)(1)(i)(I)(1), and 

(f)(2)(i)(D) of the UK Substituted Compliance Notice 

and Proposed Order, with paras. (f)(1)(i)(G)(1), 

(f)(1)(i)(I)(1), and (f)(2)(i)(D) of the Order. 

469See FCA Application at 127. 

470Compare paras. (f)(1)(i)(G)(1), (f)(1)(i)(I)(1), and 

(f)(2)(i)(D) of the UK Substituted Compliance Notice 

and Proposed Order, with paras. (f)(1)(i)(G)(1), 

(f)(1)(i)(I)(1), and (f)(2)(i)(D) of the Order. 

471See FCA Application at 203. 

472Compare paras. (f)(1)(i)(K) and (f)(2)(i)(M) of 

the UK Substituted Compliance Notice and 

Proposed Order, with paras. (f)(1)(i)(K) and 

(f)(2)(i)(M) of the Order. 

473Compare paras. (f)(1)(i)(A)(1), (f)(1)(i)(B)(1), 

(f)(1)(i)(C)(1), and (f)(1)(i)(F)(1) of the UK 

Substituted Compliance Notice and Proposed 

Order, with paras. (f)(1)(i)(A)(1), (f)(1)(i)(B)(1), 

(f)(1)(i)(C)(1), and (f)(1)(i)(F)(1) of the Order. 

474Compare paras. (f)(2)(i)(A), (f)(2)(i)(B), 

(f)(2)(i)(D), and (f)(2)(i)(G)(1) of the UK Substituted 

Compliance Notice and Proposed Order, with paras. 

(f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(D), and (f)(2)(i)(G)(1) 

of the Order. 

references to these UK requirements 

from the Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

5 and Exchange Act rules 18a– 

6(b)(1)(xii) and (b)(2)(vii) (which 

implicate record creation), except with 

respect to Exchange Act rule 18a– 

5(a)(4), (a)(6), (a)(15), (b)(3), (b)(6), and 

(b)(11) for which the Commission agrees 

with the commenter’s reasoning.465

However, the Commission is removing 

references to these UK requirements 

from the Order’s list of UK requirements 

comparable to the remainder of 

Exchange Act rule 18a–6.466

The commenter recommended 

deleting references to FCA COND at 

paragraphs 2C, 2D, 3B, 3C, 5D, and 5F, 

which set out certain minimum 

requirements for obtaining and 

maintaining PRA authorization, 

reasoning that they do not correspond 

to, and go beyond, the requirements of 

Exchange Act rules 18a–5 and 18a–6. 

However, the FCA Application states 

that these requirements effectively 

require firms to have ‘‘systems and 

controls for maintaining records’’ which 

is relevant to Exchange Act rules 18a– 

5 and 18a–6.467 Accordingly, the 

Commission is not removing references 

to this UK requirement from the Order’s 

list of UK requirements comparable to 

Exchange Act rules 18a–5 and 18a–6, 

except with respect to Exchange Act 

rule 18a–5(a)(6), (a)(8), (a)(15), (b)(6), 

and (b)(11) and Exchange Act rules 18a– 

6(b)(1)(iv) and (b)(2)(ii) for which the 

Commission agrees with the 

commenter’s reasoning.468

The commenter recommended 

deleting references to PRA Fundamental 

Rules 2 and 6 and FCA PRIN 2.1.1R(2) 

and (3), which set out certain high-level 

principles for businesses, reasoning that 

they do not correspond to, and go 

beyond, the requirements of Exchange 

Act rules 18a–5 and 18a–6. However, 

the FCA Application states that, ‘‘In 

practice, this will require UK firms to 

maintain adequate records and recordkeeping systems.’’ 469 Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5 and 18a–6, except with respect to 

Exchange Act rule 18a–5(a)(6), (a)(8), 

(a)(15), (b)(6), and (b)(11) and Exchange 

Act rules 18a–6(b)(1)(iv) and (b)(2)(ii) 

for which the Commission agrees with 

the commenter’s reasoning.470

The commenter recommended 

deleting references to FSMA section 

63(2A), which relates to the annual fit 

and proper reassessment requirement, 

and FSMA section 63F(5), which relates 

to the validity of a certificate issued to 

a firm’s ‘‘certification staff,’’ and FSMA 

section 63(2A), which relates to the 

annual fit and proper reassessment 

requirement, reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. However, the FCA 

Application cites these provisions to 

support the statement that these 

certifications must be conducted 

annually,471 and frequency of these 

certifications is relevant to Exchange 

Act rules 18a–5 and 18a–6. Accordingly, 

the Commission is not removing 

references to this UK requirement from 

the Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5 and 18a–6. 

The commenter recommended 

deleting references to the PRA 

Certification Rules, the general PRA 

regime for certified employees, 

reasoning that they do not correspond 

to, and go beyond, the requirements of 

Exchange Act rules 18a–5 and 18a–6. 

The Commission agrees with the 

commenter’s reasoning with respect to 

most of the PRA Certification Rules, but 

PRA Certification Rule 2.1 requires 

employees performing certification 

functions to have a valid certificate 

issued by the firm, which is relevant to 

Exchange Act rule 18a–5. Accordingly, 

the Commission is replacing references 

to the PRA Certification Rules with PRA 

Certification Rule 2.1 in the Order’s list 

of UK requirements comparable to 

Exchange Act rules 18a–5 and 18a–6.472

The commenter recommended adding 

to paragraph (f)(1) of the Order 

regarding Exchange Act rule 18a–5 

references to PRA Recordkeeping Rule 

2.1 and FCA SYSC 9.1.1AR, which 

require firms to ‘‘arrange for orderly 

records to be kept of its business and 

internal organization’’, and to ‘‘arrange 

for records to be kept of all services, 

activities, and transactions undertaken 

by it,’’ respectively. The Commission 

agrees these UK requirements are 

relevant and is therefore adding them to 

the Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

5.473

The commenter recommended 

deleting from paragraphs (f)(1) and (f)(2) 

of the Order references to UK MiFID Org 

Reg article 59, which set out the 

requirement to confirm execution of an 

order to the client, reasoning that it does 

not correspond to, and goes beyond, the 

requirements of Exchange Act rules 

18a–5 and 18a–6. UK MiFID Org Reg 

article 59 identifies specific data 

elements that are relevant to the records 

required to be created under Exchange 

Act rule 18a–5, so the Commission is 

not removing references to this 

requirement from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–5. However, the 

Commission agrees with the 

commenter’s reasoning with respect to 

Exchange Act rule 18a–6 because UK 

MiFID Org Reg article 59 relates to 

record creation but not record 

preservation and is therefore removing 

references to this requirement from the 

Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

6.474

The commenter recommended 

deleting from paragraphs (f)(1)(i)(K) and 

(f)(2)(i)(M) of the Order references to 

PRA General Organisational 

Requirements Rules 5.1 and 5.2, 

regarding management body 

requirements, reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rules 

18a–5(a)(10) and (b)(8) (employment 

application record creation) and 18a– 

6(d)(1) (employment application record 

preservation). However, the FCA 

Application states that a ‘‘CRR Firm’s 

management body must define, oversee 

and be accountable for the 

implementation of the governance 

arrangements including, among other 

matters, ensuring the prevention of 

conflicts of interest’’ (with respect to 

PRA General Organisational 

Requirement 5.1) and ‘‘[e]ach member of 

the management body of a CRR Firm 

must be of sufficiently good repute and 

possess sufficient knowledge, skills and 

experience to perform their duties’’ 


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475See FCA Application at 127. 

476Compare para. (f)(1)(i)(K) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(1)(i)(K) of the Order. 477See FCA Application at 146–47. 

478See FCA Application at 153–54. 

479See FCA Application at 159–60. 

(with respect to PRA General 

Organisational Requirement 5.2),475

both of which are relevant to 

employment application record creation 

but not employment application record 

preservation. Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5(a)(10) and (b)(8), but is removing 

references to these requirements from 

the Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

6(d)(1). 

The commenter recommended 

deleting from paragraphs (f)(1)(i)(K) and 

(f)(2)(i)(M) of the Order references to 

FCA SYSC 4.3A.1R and 4.3A.3R 

(management body), FCA SYSC 10.1.7R 

(managing conflicts), and FCA SYSC 27 

(certification regime), reasoning that 

they do not correspond to, and go 

beyond, the requirements of Exchange 

Act rules 18a–5(a)(10) and (b)(8) 

(employment application record 

creation) and 18a–6(d)(1) (employment 

application record preservation). These 

provisions identify characteristics and 

standards applicable to a firm’s 

employees, or require a conflicts of 

interest record to be maintained, which 

are relevant to employment application 

record creation but not employment 

application record preservation. 

Accordingly, the Commission is not 

removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rules 18a–5(a)(10) and (b)(8), but is 

removing references to these 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(d)(1). 

The commenter recommended 

replacing in paragraph (f)(1)(i)(K) of the 

Order references to UK MiFID Org Reg 

article 21(1)(a) with references to UK 

MiFID Org Reg article 21(1)(d) due to an 

incorrect reference in the FCA 

Application with respect to Exchange 

Act rules 18a–5(a)(10) and (b)(8). The 

Commission agrees with the 

commenter’s reasoning and is therefore 

replacing references to UK MiFID Org 

Reg article 21(1)(a) with references to 

UK MiFID Org Reg article 21(1)(d) in the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

5(a)(10) and (b)(8).476

The commenter recommended 

replacing in paragraphs (f)(1)(i)(N)(1) 

and (f)(1)(i)(O)(1) of the Order references 

to UK EMIR RTS article 15(1) with UK 

EMIR RTS article 15(1)(a) with respect 

to Exchange Act rules 18a–5(a)(18) and 

(b)(14) because the remainder of article 

15(1) does not include a record creation 

requirement. The Commission agrees 

with the commenter’s reasoning and is 

therefore replacing references to UK 

EMIR RTS article 15(1) with UK EMIR 

RTS article 15(1)(a) in the Order’s list of 

UK requirements comparable to 

Exchange Act rules 18a–5(a)(18) and 

(b)(14). 

The commenter recommended 

deleting from paragraph (f)(2)(E)(1) of 

the Order references to UK CRR and UK 

CRR Reporting ITS, which relate to 

supervisory reports to be made, 

reasoning that they do not correspond 

to, and go beyond, the requirements of 

Exchange Act rule 18a–6(b)(1)(v). 

Although these UK laws relate to 

reporting requirements, the information 

contained in these reports is relevant to 

the records required by Exchange Act 

rule 18a–6(b)(1)(v). In addition, the FCA 

Application specifically cites these 

requirements as comparable to 

Exchange Act rule 18a–6(b)(1)(v).477

Accordingly, the Commission is not 

removing references to this UK 

requirement from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(b)(1)(v). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(I)(1) of 

the Order references to UK CRR articles 

286 and 293(1)(d), which relate to the 

use of internal models for credit risk, 

reasoning that they do not correspond 

to, and go beyond, the requirements of 

Exchange Act rule 18a–6(b)(1)(ix). The 

‘‘policies, processes and systems’’ (with 

respect to UK CRR article 286) and 

‘‘adequate resources [ ] devoted to credit 

and counterparty risk control’’ (with 

respect to UK CRR article 293(1)(d)) in 

practice require firms to maintain 

records relevant to Exchange Act rule 

18a–6(b)(1)(ix). Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

6(b)(1)(ix). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(I)(1) of 

the Order references to PRA Risk 

Control Rule 2.3, which sets a 

requirement that the management body 

approves and periodically reviews the 

strategies and policies for taking up, 

managing, monitoring, and mitigating 

risks, reasoning that it does not 

correspond to, and goes beyond, the 

requirements of Exchange Act rule 18a– 

6(b)(1)(ix). The Commission disagrees 

because in practice, this UK rule 

requires records to manage the firm’s 

risks. Accordingly, the Commission is 

not removing references to this UK 

requirement from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(b)(1)(ix). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(I)(1) of 

the Order references to UK EMIR RTS, 

reasoning that referencing an entire UK 

law without referencing a specific 

provision is does not correspond to, and 

goes beyond, the requirements of 

Exchange Act rule 18a–6(b)(1)(ix). This 

provision is cited by the FCA 

Application as directly relevant because 

it requires firms to ‘‘implement 

formalised processes’’ for ‘‘identifying 

and resolving disputes,’’ 478 which is 

relevant to Exchange Act rule 18a– 

6(b)(1)(ix). Accordingly, the 

Commission is not removing references 

to this UK requirement from the Order’s 

list of UK requirements comparable to 

Exchange Act rule 18a–6(b)(1)(ix). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(M) of 

the Order references to FSMA sections 

60A(2) and 63F(2), SMR Applications 

and Notifications Rules, PRA 

Certification Rules, PRA General 

Organisational Requirements Rules, and 

FCA SUP, reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rule 18a– 

6(d)(1). The Commission agrees with the 

commenter’s reasoning because these 

provisions relate to record creation 

rather than record preservation, and is 

removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(d)(1). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(O) of 

the Order references to FCA SYSC 

6.1.1R and 10.1.6R, which relate to risk 

management control systems and risk 

control records, reasoning that they do 

not correspond to, and go beyond, the 

requirements of Exchange Act rule 18a– 

6(d)(3). However, the FCA Application 

cites these provisions as requiring ‘‘the 

maintenance of a range of compliance 

policies and procedures’’,479 which is 

relevant to Exchange Act rule 18a– 

6(d)(3). Accordingly, the Commission is 

not removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(d)(3). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(P)(1) of 

the Order references to FCA SYSC 

4.1.1R(1), which is a general 

requirement concerning a firm’s 


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480See FCA Application at 160–61. 

481See FCA Application at 165. 

482Compare para. (f)(3)(i)(A) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(3)(i)(A) of the Order. 

483See FCA Application at 178–79. 

484Compare para. (f)(3)(ii)(A) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(3)(ii)(A) of the Order. 

485Compare para. (f)(3)(ii)(A) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(3)(ii)(A) of the Order. 

486See FCA Application at 175–76. 

487See FCA Application at 177 and 186–89. 

governance, reasoning that it does not 

correspond to, and goes beyond, the 

requirements of Exchange Act rules 

18a–6(d)(4) and (d)(5). However, the 

FCA Application cites this provision as 

requiring ‘‘the maintenance of a range of 

risk management records’’,480 which is 

relevant to Exchange Act rules 18a– 

6(d)(4) and (d)(5). Accordingly, the 

Commission is not removing references 

to these UK requirements from the 

Order’s list of UK requirements 

comparable to Exchange Act rules 18a– 

6(d)(4) and (d)(5). 

The commenter recommended 

deleting from paragraph (f)(2)(i)(Q) of 

the Order references to FCA SYSC 

4.1.1R(1), which is a general 

requirement concerning a firm’s 

governance, reasoning that it does not 

correspond to, and goes beyond, the 

requirements of Exchange Act rule 18a– 

6(e). However, the FCA Application 

cites this provision as requiring ‘‘sound 

security mechanisms in place to 

guarantee the security and 

authentication of the means of transfer 

of information, minimize the risk of data 

corruption and unauthorized access and 

to prevent information leakage 

maintaining the confidentiality of the 

data at all times’’,481 which is relevant 

to Exchange Act rule 18a–6(e). 

Accordingly, the Commission is not 

removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–6(e). 

c. Exchange Act Rule 18a–7 

The commenter recommended 

deleting references to FSMA sections 

137A, 137G, and 137T from paragraph 

(f)(3)(i)(A) reasoning that these 

provisions relate to the FCA’s and PRA’s 

powers to make rules and do not impose 

requirements on firms. Additionally, the 

commenter recommended deleting 

reference to CRD article 104(1)(j) 

reasoning that this provision does not 

form part of UK law. The Commission 

agrees with the commenter’s reasoning 

and is removing references to these UK 

requirements from the list of UK 

requirements comparable to Exchange 

Act rules 18a–7(a)(1) and (a)(2).482

The commenter recommended 

deleting references to UK CRR rules that 

are set out in Part 8 of UK CRR relating 

to public disclosure in paragraph 

(f)(3)(ii)(A), reasoning that they do not 

correspond to, and go beyond, the 

requirements of Exchange Act rule 18a– 

7(a)(3) and Exchange Act rule 18a–7(j). 

However, the FCA application cites CRR 

articles 431, 433, 452, 454, and 455 as 

requiring, among other things, firms to 

make ‘‘Pillar III’ disclosures which 

include information on the use of 

capital models and matters such as 

credit risk, the exposure values by class 

of exposures subject to evaluation using 

models, and internal controls on the 

development and use of models.483 This 

information is relevant to rule 18a– 

7(a)(3) and 18a–7(j). Accordingly, the 

Commission is removing references to 

UK CRR rules that are set out in Part 8 

of UK CRR except for UK CRR articles 

431, 433, 452, 454, and 455 in the 

Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

7(a)(3) and 18a–7(j).484

The commenter recommended 

deleting references to FSMA sections 

137A, 137G, and 137T in paragraph 

(f)(3)(ii)(A). As discussed above, the 

commenter has stated that these 

sections relate to the FCA’s and the 

PRA’s powers to make rules, and do not 

impose requirements on firms. The 

Commission agrees with this reasoning 

and is therefore removing references to 

these to these UK requirements from the 

Order’s list of requirements comparable 

to Exchange Act rules 18a–7(a)(3) and 

18a–7(j).485

The commenter recommended 

deleting from paragraph (f)(3)(iv)(A) 

references to the following FCA CASS 

sections: 6.2.2R, 6.6.2R, 6.6.3.R, 6.6.33G, 

6.6.34R, 7.12.2R, 7.15.2R, 7.15.3R, 

7.15.20R, and 7.15.21R. Additionally, 

the commenter recommended deleting 

references to FCA SUP sections 3.10.4R 

through 3.10.7R and the following UK 

CRR articles: 26(2), 132(5), 154, 191, 

321, 325bi, 350, 353, 368, and 418. The 

commenter reasoned that these 

provisions do not correspond to, and go 

beyond, the requirements of Exchange 

Act rules 18a–7(c), (d), (e), (f), (g), and 

(h), and Exchange Act rule 18a–7(j). 

However, the FCA Application states 

that, pursuant to FCA CASS 6.2.2R, 

6.62R, 6.63R, 6.6.33G, 6.6.34R 7.12.2R, 

7.15.2R, 7.15.3R, 7.15.20R, and 

7.15.21R, investment firms must ensure 

the segregation of client money and 

assets from those of the firm, maintain 

detailed records distinguishing client 

money and assets from those of the firm, 

and must conduct regular 

reconciliations between their accounts 

and records and those accounts and 

records of any third-parties with whom 

client money or assets may be held. 

Additionally, the FCA Application 

states that the that information about 

client money required under FCA CASS 

7.12.2R, 7.15.2R, 7.15.3R, 7.15.20R, and 

7.15.21R is comparable to the 

information required under Exchange 

Act rules 18a–7(c)(1)(i)(B) and 17a– 

7(c)(3) and (4).486 Moreover, the FCA 

Application states that certain firms 

must have their financial statements 

audited pursuant to Companies Act 

section 475, and that under FCA SUP 

3.8.5R and 3.10.4R through 3.10.7R an 

independent auditor must submit a 

client money and assets report to the 

FCA, within the prescribed time period 

and format, providing reasonable 

assurance that, among other things, the 

investment firm has maintained 

adequate systems to enable it to comply 

with the FCA CASS Rules. The FCA 

Application goes on to state that CRR 

article 26(2) relates to the inclusion of 

a firm’s interim or year-end profits in 

Common Equity Tier 1 capital and the 

associated requirement that such profits 

be verified by persons independent of 

the firm, and that CRR articles 132(5) 

and 154 set forth requirements for a firm 

to engage an external auditor to confirm 

the accuracy of information regarding 

the firm’s calculations with respect to 

average risk weights for certain 

exposures which is comparable to the 

requirements under Exchange Act rules 

18a–7(c)(1)(i)(C) and 18a–7(d) through 

(g). Furthermore the FCA Application 

states that, for firms using internal 

models to calculate credit risk, 

operational risk, market risk exposures, 

or market risk capital requirement, CRR 

articles 191, 321, 325bi, and 368 require 

various levels of internal or external 

audit and/or review of the models, 

systems, and/or operations. The FCA 

application states where investment 

firms rely on a depository or 

management company of a collective 

investment undertaking, CRR articles 

418, 350, and 353 require the 

investment firm to calculate and report 

own funds requirements for the market 

value of haircuts, and position risk with 

respect to positions in specified 

instruments.487 As a result, the FCA 

Application states that the UK report 

review requirements provide for 

comparable regulatory outcomes to the 

SEC report review requirements, as both 

regulatory regimes require firms to 

submit reports by independent auditors 

on the firm’s financial and operational 

information in order to ensure the 

accuracy of information and protect 


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488Compare para. (f)(3)(iv)(A) of the UK 

Substituted Compliance Notice and Proposed 

Order, with para. (f)(3)(iv)(A) of the Order. 

489Compare paras. (f)(4)(i)(A)(1), (f)(4)(i)(B), 

(f)(4)(i)(C)(1), and (f)(4)(i)(D)(1) of the UK 

Substituted Compliance Notice and Proposed 

Order, with paras. (f)(4)(i)(A)(1), (f)(4)(i)(B), 

(f)(4)(i)(C)(1), and (f)(4)(i)(D)(1) of the Order. 490See FCA Application at 181–85. 

491Compare para. (f)(5)(1) of the UK Substituted 

Compliance Notice and Proposed Order, with para. 

(f)(5)(1) of the Order. 

market participants. The Commission 

believes these provisions are relevant to 

Exchange Act rules 18a–7(c), (d), (e), (f), 

(g), and (h). Accordingly, the 

Commission is not deleting references to 

these UK requirements from the Order’s 

list of UK requirements comparable to 

Exchange Act rules 18a–7(c), (d), (e), (f), 

(g), and (h) and Exchange Act rule 18a– 

7(j). 

The commenter recommended 

deleting from paragraph (f)(3)(iv)(A) 

reference to Capital Requirements 2013 

Regulation 2(4), reasoning that this 

provision does not impose requirements 

directly on firms. The Commission 

agrees with the commenter’s reasoning 

and, accordingly, is removing reference 

to this requirement from the Order’s list 

of UK requirements comparable to 

Exchange Act rules 18a–7(c), (d), (e), (f), 

(g), and (h) and Exchange Act rule 18a– 

7(j). However, the FCA Application cites 

regulation 2(4) of the Capital 

Requirements (Country-by-Country 

Reporting) Regulations 2013 as relevant 

and which the Commission understands 

imposes reporting obligations directly 

on firms. As a result, the Commission is 

including reference to this requirement 

in the Order’s list of UK requirements 

comparable to Exchange Act rule 18a– 

7(c), (d), (e), (f), (g), and (h) and 

Exchange Act rule 18a–7(j).488

d. Exchange Act Rule 18a–8 

The commenter recommended 

deleting from paragraphs (f)(4)(i)(A)(1), 

(f)(4)(i)(B), (f)(4)(i)(C)(1), and 

(f)(4)(i)(D)(1) references to FCA SUP 

15.3.12G and 15.3.14G, reasoning that 

these provisions are guidance. The 

Commission agrees. Accordingly, the 

removing reference to these 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–8(a)(1)((i), (a)(1)(ii), (b)(1), 

(b)(2), (b)(4), (c), (d), (e), and (h).489

The commenter recommended 

deleting from paragraphs (f)(4)(i)(A)(1), 

(f)(4)(i)(B), (f)(4)(i)(C)(1), and 

(f)(4)(i)(D)(1) references to: FCA SUP 

15.3.15R, 15.3.17R, 15.3.21R; PRA 

Notifications Rules 2.6, 2.8, and 2.9; 

FCA CASS 6.657R, 7.15.33R, and 

Schedule 2; FCA SYSC 18.6.1R and 

18.6.4G; and PRA General 

Organisational Requirements 2A.2, 

2A.1(2), and 2A.3 to 2A.6. The 

commenter reasoned that these 

provisions do not correspond to, and go 

beyond, the requirements of Exchange 

Act rule 18a–8(a)(1)((i), (a)(1)(ii), (b)(1), 

(b)(2), (b)(4), (c), (d), (e), and (h). 

However, the FCA Application states 

that these provisions provide for a 

comparable regulatory outcome to the 

SEC notice requirements as these 

provisions require a CRR firm to notify 

the FCA immediately if the firm 

becomes aware of, or has information 

that reasonably suggests, that specified 

matters have occurred, may have 

occurred, or may occur in the 

foreseeable future. Additionally, 

specific notification obligations apply 

for breaches of requirements related to 

client money and assets, and with 

respect to civil, criminal, or disciplinary 

proceedings, fraud, errors, or other 

regularities, and insolvency, 

bankruptcy, and winding up. 

Furthermore, CRR firms must have 

procedures in place for employees to 

report a breach of, among other things, 

any rule, as well as appropriate 

arrangements for individuals, including 

employees, to disclose reportable 

concerns internally.490 In practice, these 

provisions establish reporting 

mechanisms that will result in 

regulators being notified of events 

relevant to the disclosures required 

under rule 18a–8. Accordingly, the 

Commission is not deleting references to 

this UK requirement from the Order’s 

list of UK requirements comparable to 

Exchange Act rule 18a–8(a)(1)((i), 

(a)(1)(ii), (b)(1), (b)(2), (b)(4), (c), (d), (e), 

and (h). 

e. Exchange Act Rule 18a–9 

The commenter recommends deleting 

from paragraph (f)(5)(1) references to 

FCA CASS 6.2.1R, 6.2.2R, 6.3.4A–1R, 

6.3.6AR, 6.6.2R, 6.6.3R, 6.6.33G, 

6.6.34R, 6.6.47G, 6.6.5G, 6.6.8R, 

7.12.1R, 7.12.2R, 7.13.12R, 7.13.32R(3), 

7.13.33R(3), 7.15.2R, 7.15.5R, 7.15.9R, 

7.15.3R, 7.15.8R, 7.15.20R, 7.15.21G, 

10.1.2G, 10.1.3R, 10.1.7, and 10.1.9E. 

The commenter also recommended 

deleting references to UK MiFID Org 

Reg articles 74 and 75, and to UK EMIR 

RTS article 12. The commenter reasoned 

that these provisions do not correspond 

to, and go beyond, the requirements of 

Exchange act rule 18a–9. With respect to 

FCA CASS 7.12R, 7.12.2R, 7.13.12R, 

7.13.32R(3), 7.13.33R(3), 7.15.2R, 

7.15.5R, 7.15.9R, 7.15.3R, 7.15.8R, 

7.15.20R, and 7.15.21G the Commission 

agrees. These provisions relate to 

treatment of client money, and not the 

holding of client financial instruments. 

Accordingly, the Commission is 

removing references to these 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–9. Additionally, the 

Commission is removing references to 

FCA CASS 6.6.33G, 6.6.47G, and 6.6.5G 

as these provisions are non-binding 

guidance.491

With respect to the remaining 

provisions, the Commission disagrees. 

The FCA Applications states that, 

pursuant to FCA CASS 6.2.1R, firms 

holding financial instruments belonging 

to clients must make adequate 

arrangements to safeguard the 

ownership rights of clients and to 

prevent the use of a client’s financial 

instruments on own account except 

with express consent of the client. To 

that end, the FCA Application states 

that the remaining provisions require 

investment firms to, among other things, 

maintain records enabling the firm to 

distinguish client assets from the firm’s 

assets, including maintaining a clientspecific safe custody asset record, and 

conduct on a regular basis 

reconciliations between internal 

accounts and records and those of any 

third-parties by whom client assets are 

held. Additionally, firms must ensure 

that client financial instruments 

deposited with third-party are 

identifiable separately from those of the 

firm and the third-party, and must 

minimize risk of loss of client assets. 

Moreover, the remaining provisions also 

require that checks and reconciliations 

must be carried out by a person who is 

independent of the production or 

maintenance of the records to be 

checked and/or reconciled, and must 

record any liens or rights of set-off 

against so that ownership is clear. Firms 

are also required, pursuant to the 

remaining provisions, to keep any 

internal records and accounts of client 

assets separate from any records the 

firm obtains from any third parties, and 

must also create specified records 

regarding each record check and 

reconciliation. Firms are required under 

the cited provision to keep detailed 

records in relation to every client order 

and decision to deal, and must also, 

with respect to verifying open 

transactions, comply with certain 

confirmation and portfolio 

reconciliation requirements for 

uncleared OTC derivatives contracts. 

Finally, firms must maintain a client 

asset resolution pack that can be used to 

achieve a timely return of client assets 

in a resolution scenario, as well as 

internal and external client asset 

reconciliations that must be available or 

retrievable within prescribed time 


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492See FCA Application at 129–36. 

493See FCA Application at 129. 

494Compare para. (f)(6) of the UK Substituted 

Compliance Notice and Proposed Order, with para. 

(f)(6) of the Order. 

495See FCA Application at 102. 

496See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18404. 

497See UK Substituted Compliance Notice and 

Proposed Order, 86 FR at 18404–06. 

periods.492 Based on these provisions, 

the FCA Application states that the UK 

periodic securities count requirements 

provide for a comparable regulatory 

outcome to the Commission’s periodic 

securities count requirements.493 The 

Commission believes these provisions 

are relevant to the requirements of rule 

18a–9. Accordingly, the Commission is 

not removing references to these UK 

requirements from the Order’s list of UK 

requirements comparable to Exchange 

Act rule 18a–9. 

f. Exchange Act Section 15F(g) 

The commenter recommended 

deleting from paragraph (f)(6) references 

to FCA COND at paragraphs 2C, 2D, 3B, 

3C, 5D, and 5F, stating that these 

provisions set our certain minimum 

requirements for obtaining and 

maintaining PRA authorization. The 

commenter also recommended 

removing references in paragraph (f)(6) 

to PRA Fundamental Rules 2 and 6, and 

FCA PRIN 2.1.1R(2) and (3), stating that 

these provisions set out certain highlevel principals for business. The 

commenter reasoned that these 

provisions do not correspond to, and go 

beyond, the requirements of Exchange 

Act section 15F(g). The Commission 

agrees with respect to references to FCA 

COND at paragraphs 2C, 2D, 3B, 3C, 5D, 

and 5F. Accordingly, the Commission is 

removing references to FCA COND at 

paragraphs 2C, 2D, 3B, 3C, 5D, and 5F 

from the Order’s list of requirements 

comparable to Exchange Act section 

15F(g).494 However, the FCA 

Application states that pursuant to PRA 

Fundamental Rules 2 and 6, and FCA 

PRIN 2.1.1R(2) and (3) a UK firm must 

conduct its business with due skill, 

care, and diligence, and take reasonable 

care to organize and control its affairs 

responsibly and effectively. In practice, 

the FCA Application states that this will 

require UK firms to maintain adequate 

records and recordkeeping systems.495

The Commission believes that these 

provisions are relevant to the 

requirements of Exchange Act section 

15F(g). Accordingly, the Commission is 

not removing reference to these UK 

requirements from the Order’s list of 

requirements comparable to Exchange 

Act section 15F(g). 

IX. 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.496 The FCA Application 

accordingly included information 

regarding the supervisory and 

enforcement framework applicable to 

derivatives markets and market 

participants in the UK. 

In proposing to grant substituted 

compliance in connection with the UK, 

the Commission preliminarily 

concluded that the relevant supervisory 

and enforcement considerations were 

consistent with substituted compliance. 

That preliminary conclusion took into 

account information regarding the 

FCA’s and the PRA’s roles and practices 

in supervising banks and investment 

firms located in the UK, as well as their 

enforcement-related authority and 

practices.497

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 the UK are consistent 

with substituted compliance. In 

particular, based on the available 

information regarding the FCA’s and the 

PRA’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 UK 

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. 

X. Conclusion 

It is hereby determined and ordered, 

pursuant to rule 3a71–6 under the 

Exchange Act, that a Covered Entity (as 

defined in paragraph (g)(1) of this 

Order) may satisfy the requirements 

under the Exchange Act that are 

addressed in paragraphs (b) through (f) 

of this Order so long as the Covered 

Entity is subject to and complies with 

relevant requirements of the United 

Kingdom and with the conditions of this 

Order, as amended or superseded from 

time to time. 

(a) General Conditions. 

This Order is subject to the following 

general conditions, in addition to the 

conditions specified in paragraphs (b) 

through (f): 

(1) Activities as UK ‘‘regulated 

activities.’’ For each condition in 

paragraphs (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of FCA SYSC 4, 5, 6, 7, 9, 

and/or 10, PRA General Organisational 

Requirements, PRA Recordkeeping 

Rules, PRA Remuneration Rules, PRA 

Risk Control Rules, and/or MLR 2017, 

the Covered Entity’s relevant securitybased swap activities constitute 

‘‘regulated activities’’ as defined for 

purposes of the relevant UK provisions, 

are carried on by the Covered Entity 

from an establishment in the United 

Kingdom, and fall within the scope of 

the Covered Entity’s authorization from 

the FCA and/or the PRA to conduct 

regulated activities in the United 

Kingdom. 

(2) Activities as UK MiFID 

‘‘investment services or activities.’’ For 

each condition in paragraphs (b) 

through (f) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

FCA PROD 3 and/or UK MiFID Org Reg, 

the Covered Entity’s relevant securitybased swap activities (a) constitute 

‘‘investment services or activities,’’ as 

defined in the FCA Handbook Glossary; 


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(b) are carried on by the Covered Entity 

from an establishment in the United 

Kingdom or from any other place that 

would cause FCA PROD 3 and/or UK 

MiFID Org Reg, as applicable, to apply 

to those activities, and (c) fall within the 

scope of the Covered Entity’s 

authorization from the FCA and/or PRA 

to conduct regulated activities in the 

United Kingdom. 

(3) Activities as UK ‘‘MiFID or 

equivalent third country business.’’ For 

each condition in paragraphs (b) 

through (f) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

FCA COBS 2, 4, 6, 8A, 9A, 14, and/or 

16A, the Covered Entity’s relevant 

security-based swap activities (a) 

constitute ‘‘MiFID or equivalent third 

country business,’’ as defined in the 

FCA Handbook Glossary; (b) are carried 

on by the Covered Entity from an 

establishment in the United Kingdom or 

from any other place that would cause 

FCA COBS 2, 4, 6, 8A, 9A, 14, and/or 

16A, as applicable, to apply to those 

activities; and (c) fall within the scope 

of the Covered Entity’s authorization 

from the FCA and/or PRA to conduct 

regulated activities in the United 

Kingdom. 

(4) Activities as UK ‘‘designated 

investment business.’’ For each 

condition in paragraphs (b) through (f) 

of this Order that requires the 

application of, and the Covered Entity’s 

compliance with, provisions of FCA 

COBS 11, the Covered Entity’s relevant 

security-based swap activities (a) 

constitute ‘‘MiFID business’’ that is also 

‘‘designated investment business,’’ each 

as defined in the FCA Handbook 

Glossary; (b) are carried on by the 

Covered Entity from an establishment in 

the United Kingdom or from any other 

place that would cause FCA COBS 11, 

as applicable, to apply to those 

activities; and (c) fall within the scope 

of the Covered Entity’s authorization 

from the FCA and/or PRA to conduct 

regulated activities in the United 

Kingdom. 

(5) Activities as UK ‘‘MiFID business.’’ 

For each condition in paragraphs (b) 

through (f) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

FCA CASS 6 and/or 7, the Covered 

Entity is not an ICVC as defined in the 

FCA Handbook Glossary and the 

Covered Entity’s relevant security-based 

swap activities constitute ‘‘regulated 

activities’’ as defined for purposes of the 

relevant UK provisions and ‘‘MiFID 

business’’ as defined in the FCA 

Handbook Glossary; are carried on by 

the Covered Entity from an 

establishment in the United Kingdom; 

and fall within the scope of the Covered 

Entity’s authorization from the FCA 

and/or the PRA to conduct regulated 

activities in the United Kingdom. 

(6) Activities covered by FCA SYSC 

10A. For each condition in paragraphs 

(b) through (f) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

FCA SYSC 10A, the Covered Entity’s 

relevant security-based swap activities 

constitute activities described in FCA 

SYSC 10A.1.1(2)(a), (b), and/or (c); are 

carried on by the Covered Entity from 

an establishment in the United Kingdom 

and fall within the scope of the Covered 

Entity’s authorization from the FCA 

and/or the PRA to conduct regulated 

activities in the United Kingdom. 

(7) Counterparties as UK MiFID 

‘‘clients.’’ For each condition in 

paragraphs (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of FCA CASS 6 and/or 7, 

FCA COBS 2, 4, 6, 8A, 9A, 11, 14, and/ 

or 16A, FCA PROD 3, FCA SYSC 10.1.8, 

FCA SYSC 10A, and/or UK MiFID Org 

Reg, the relevant counterparty (or 

potential counterparty) to the Covered 

Entity is a ‘‘client’’ (or potential 

‘‘client’’), as defined in COBS 3.2.1R. 

(8) Security-based swaps as UK MiFID 

‘‘financial instruments.’’ For each 

condition in paragraphs (b) through (f) 

of this Order that requires the 

application of, and the Covered Entity’s 

compliance with, provisions of FCA 

CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 

9A, 11, 14, and/or 16A, FCA PROD 3, 

FCA SYSC 10A, UK MAR, UK MAR 

Investment Recommendations 

Regulation, and/or UK MiFID Org Reg, 

the relevant security-based swap is a 

‘‘financial instrument,’’ as defined in 

Part 1 of Schedule 2 of the UK 

Regulated Activities Order. 

(9) Covered Entity as UK CRD/CRR 

‘‘institution.’’ For each condition in 

paragraph (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of UK CRR, the Covered 

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

UK CRR article 4(1)(3). 

(10) Covered Entity as UK ‘‘common 

platform firm’’ or ‘‘third country firm.’’ 

For each condition in paragraph (b) 

through (f) of this Order that requires 

the application of, and the Covered 

Entity’s compliance with, provisions of 

FCA SYSC 4, 5, 6, 7, 9, and/or 10, the 

Covered Entity is either a ‘‘common 

platform firm’’ (other than a ‘‘UCITS 

investment firm’’) or a ‘‘third country 

firm,’’ each as defined in the FCA 

Handbook Glossary. 

(11) Covered Entity as UK ‘‘IFPRU 

investment firm.’’ For each condition in 

paragraph (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of FCA SYSC 19A, FCA 

IFPRU, and/or FCA BIPRU, the Covered 

Entity is an ‘‘IFPRU investment firm,’’ 

as defined in the FCA Handbook 

Glossary. 

(12) Covered Entity as ‘‘UK bank’’ or 

‘‘UK designated investment firm.’’ For 

each condition in paragraph (b) through 

(f) of this Order that requires the 

application of, and the Covered Entity’s 

compliance with, provisions of FCA 

SYSC 19D, PRA Internal Capital 

Adequacy Assessment Rules, PRA 

Internal Liquidity Adequacy 

Assessment Rules, PRA General 

Organisational Requirements, PRA 

Remuneration Rules, and/or PRA Risk 

Control Rules, the Covered Entity is a 

‘‘UK bank’’ or ‘‘UK designated 

investment firm,’’ each as defined in the 

FCA Handbook Glossary (in the case of 

a provision of FCA SYSC 19D) or as 

defined in the PRA Rulebook Glossary 

(in the case of a provision of a PRA 

rule). 

(13) Covered Entity’s counterparties 

as UK EMIR ‘‘counterparties.’’ For each 

condition in paragraphs (b) through (f) 

of this Order that requires the 

application of, and the Covered Entity’s 

compliance with, provisions of UK 

EMIR, UK EMIR RTS, UK EMIR Margin 

RTS, and/or other UK requirements 

adopted pursuant to those provisions, if 

the relevant provision applies only to 

the Covered Entity’s activities with 

specified types of counterparties, and if 

the counterparty to the Covered Entity 

is not any of the specified types of 

counterparty, the Covered Entity 

complies with the applicable condition 

of this Order: 

(i) As if the counterparty were the 

specified type of counterparty; in this 

regard, if the Covered Entity reasonably 

determines that the counterparty would 

be a financial counterparty if it were 

established in the UK and authorized by 

an appropriate UK authority, it must 

treat the counterparty as if the 

counterparty were a financial 

counterparty; and 

(ii) Without regard to the application 

of UK EMIR article 13. 

(14) Security-based swap status under 

UK EMIR. For each condition in 

paragraphs (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, 

provisions of UK EMIR, UK EMIR RTS, 

UK EMIR Margin RTS, and/or other UK 

requirements adopted pursuant to those 

provisions, if the relevant provision 

applies to the Covered Entity’s OTC 

derivatives or OTC derivative contracts 


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that have not been cleared by a central 

counterparty, then either: 

(i) The relevant security-based swap is 

an ‘‘OTC derivative’’ or ‘‘OTC derivative 

contract,’’ as defined in UK EMIR article 

2(7), that has not been cleared by a 

central counterparty and otherwise is 

subject to the provisions of UK EMIR 

article 11, UK EMIR RTS articles 11 

through 15, and UK EMIR Margin RTS 

article 2; or 

(ii) The relevant security-based swap 

has been cleared by a central 

counterparty that is authorized, 

recognized, or taken to be recognized by 

a relevant UK authority to provide 

clearing services to clearing members or 

trading venues established in the UK. 

(15) Memorandum of Understanding 

with the FCA and the Bank of England 

(including in its capacity as the PRA). 

The Commission has a supervisory and 

enforcement memorandum of 

understanding and/or other arrangement 

with the FCA and the Bank of England 

(including in its capacity as the PRA) 

addressing cooperation with respect to 

this Order at the time the Covered Entity 

complies with the relevant requirements 

under the Exchange Act via compliance 

with one or more provisions of this 

Order. 

(16) Notice to Commission. A Covered 

Entity relying on this Order must 

provide notice of its intent to rely on 

this Order by notifying the Commission 

in writing. Such notice must be sent to 

the Commission in the manner specified 

on the Commission’s website. The 

notice must include the contact 

information of an individual who can 

provide further information about the 

matter that is the subject of the notice. 

The notice must also identify each 

specific substituted compliance 

determination within paragraphs (b) 

through (f) of the Order for which the 

Covered Entity intends to apply 

substituted compliance. A Covered 

Entity must promptly provide an 

amended notice if it modifies its 

reliance on the substituted compliance 

determinations in this Order. 

(17) Notification Requirements 

Related to Changes in Capital. A 

Covered Entity that is prudentially 

regulated relying on this Order must 

apply substituted compliance with 

respect to the requirements of Exchange 

Act rule 18a–8(c) and the requirements 

of Exchange Act rule 18a–8(h) as 

applied to Exchange Act rule 18a–8(c). 

(b) Substituted Compliance in 

Connection With Risk Control 

Requirements 

This Order extends to the following 

provisions related to risk control: 

(1) Internal risk management. The 

requirements of Exchange Act section 

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

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

provided that the Covered Entity is 

subject to and complies with the 

requirements of: 

(i) FCA CASS 6.2.1R, 7.11.1R, and 

7.12.1R; 

(ii) FCA COBS 11.7A.3R; 

(iii) Either {FCA IFPRU 2.2.7R(2), 

2.2.17R through 2.2.28R, 2.2.30R, and 

2.2.32R through 2.2.35R and FCA 

BIPRU 12.3.4R, 12.3.5R, 12.3.7R, 

12.3.8R, 12.3.22AR, 12.3.22BR, 

12.3.27R, 12.4.–2R, 12.4.–1R, 12.4.5AR, 

12.4.10R, and 12.4.11R} or {PRA 

Internal Capital Adequacy Assessment 

Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 

8.1 through 8.5, 9.1, 10.1, 10.2, and 11.1 

through 11.3 and PRA Internal Liquidity 

Adequacy Assessment Rules 3.1, 3.2, 

3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2, 11.4, 

12.1, 12.3, and 12.4}; 

(iv) FCA PRIN 2.1.1R(3); 

(v) FCA SYSC 4.1.1R(1), 4.1.2R, 

4.3A.1R, 4.3A.2R, 4.3A.3R, 4.3A.4R, 

7.1.4R, 7.1.17R, 7.1.18R, 7.1.18BR, 

7.1.19R, 7.1.20R, 7.1.21R, 7.1.22R, 

9.1.1AR, 10.1.3R, 10.1.7R, 10.1.8R, 

10A.1.6R, 10A.1.8R, and 10A.1.11R and, 

if the Covered Entity is a UK bank or UK 

designated investment firm, also PRA 

General Organisational Requirements 

Rules 2.1, 2.2, and 5.1 through 5.3; PRA 

Record Keeping Rule 2.1; PRA Risk 

Control Rules 2.3, 2.7, and 3.1 through 

3.5, and PRA Senior Management 

Functions Rule 8.2; 

(vi) Either {FCA SYSC 19A.2.1R, 

19A.3.1R(1), 19A.3.3R, 19A.3.7R 

through 19A.3.11R, 19A.3.13R, 

19A.3.14R, 19A.3.16R, 19A.3.18R, 

19A.3.22R, 19A.3.25R, 19A.3.27R, 

19A.3.29R, 19A.3.30R, 19A.3.32R, 

19A.3.35R, 19A.3.35AR, 19A.3.36R, 

19A.3.38R, 19A.3.40R, 19A.3.40AR, 

19A.3.44R through 19A.3.44DR, 

19A.3.45R, 19A.3.47R, 19A.3.49R, 

19A.3.51R, 19A.3.51AR, and 19A.3.52E} 

or {FCA SYSC 19D.2.1R, 19D.3.1R, 

19D.3.3R, 19D.3.7R through 19D.3.12R, 

19D.3.15R, 19D.3.17R, 19D.3.19R, 

19D.3.23R, 19D.3.25R, 19D.3.27R, 

19D.3.29R, 19D.3.31R, 19D.3.32R, 

19D.3.34R, 19D.3.35R through 

19D.3.39R, 19D.3.42R through 

19D.3.45R, 19D.3.48R through 

19D.3.52R, 19D.3.54R, 19D.3.56R, 

19D.3.59R, 19D.3.61R, 19D.3.62R, 

19D.3.63E, and 19D.3.64R and PRA 

Remuneration Rules 3.1, 4.2, 5.1, 5.3, 

6.2, 6.3, 6.4, 7.2 through 7.4, 8.1, 8.2, 

9.1, 11.1, 11.6, 12.1, 13.1, 14.1, and 15.2 

through 15.23}; 

(vii) Either {FSMA schedule 6 part 2D 

and FCA COND 2.4.1A} or {FSMA 

schedule 6 parts 3C and 5D, FCA COND 

2.4.1C, and PRA Fundamental Rules 3 

through 6}; 

(viii) UK CRR articles 286 through 288 

and 293; 

(ix) UK EMIR Margin RTS article 2; 

and 

(x) UK MiFID Org Reg articles 21 

through 37 and 72 through 76 and 

Annex IV. 

(2) Trade acknowledgement and 

verification. The requirements of 

Exchange Act rule 15Fi–2, provided that 

the Covered Entity is subject to and 

complies with the requirements of UK 

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

article 12. 

(3) Portfolio reconciliation and 

dispute reporting. The requirements of 

Exchange Act rule 15Fi–3, provided 

that: 

(i) The Covered Entity is subject to 

and complies with the requirements of 

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

RTS articles 13 and 15; and 

(ii) The Covered Entity provides the 

Commission with reports regarding 

disputes between counterparties on the 

same basis as it provides those reports 

to the FCA pursuant to UK EMIR RTS 

article 15(2). 

(4) Portfolio compression. The 

requirements of Exchange Act rule 

15Fi–4, provided that the Covered 

Entity is subject to and complies with 

the requirements of UK EMIR RTS 

article 14. 

(5) Trading relationship 

documentation. The requirements of 

Exchange Act rule 15Fi–5, other than 

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

counterparty is a U.S. person, provided 

that the Covered Entity is subject to and 

complies with the requirements of UK 

EMIR article 11(1)(a), UK EMIR RTS 

article 12 and UK EMIR Margin RTS 

article 2. 

(c) Substituted Compliance in 

Connection With Capital and Margin 

(1) Capital. The requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1, and 18a–1a 

through d, provided that: 

(i) The Covered Entity is subject to 

and complies with: UK CRR, Part One 

(General Provisions) Article 6(1), Part 

Two (Own Funds), Part Three (Capital 

Requirements), Part Four (Large 

Exposures), Part Five (Exposures to 

Transferred Credit Risk), Part Six 

(Liquidity), and Part Seven (Leverage); 

UK MiFID Org Reg article 23; UK EMIR 

Margin RTS, articles 2, 3(b), 7, and 

19(1)(d) and (e), (3), and (8); PRA 

General Organisational Requirements 

Rule 2.1; PRA Fundamental Rules 2.4 

and 2.5; PRA Risk Control Rules 2.3 and 

3.1(1); PRA Capital Buffers Rules; PRA 

Internal Capital Adequacy Assessment 


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Rules; PRA Internal Liquidity Adequacy 

Assessment Rules; PRA Liquidity 

Coverage Requirement—UK Designated 

Investment Firms Rules; PRA 

Notifications Rules 2.1, 2.4 through 2.6, 

2.8, 2.9; and Part 9 of the Bank Recovery 

and Resolution (No 2) Order 2014; 

(ii) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rules 

18a–5(a)(9), 18a–6(b)(1)(x), and 18a– 

8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and 

(b)(4) pursuant to this Order; and 

(iii)(A) The Covered Entity: 

(1) Maintains liquid assets as defined 

in paragraph (c)(1)(iii)(B) that have an 

aggregate market value that exceeds the 

amount of the Covered Entity’s total 

liabilities by at least $100 million before 

applying the deduction specified in 

paragraph (c)(1)(iii)(C) and by at least 

$20 million after applying the deduction 

specified in paragraph (c)(1)(iii)(C); 

(2) Makes and preserves for three 

years a quarterly record that: 

(a) Identifies and values the liquid 

assets maintained pursuant to paragraph 

(c)(1)(iii)(A)(1); 

(b) Compares the amount of the 

aggregate value the liquid assets 

maintained pursuant to paragraph 

(c)(1)(iii)(A)(1) to the amount of the 

Covered Entity’s total liabilities and 

shows the amount of the difference 

between the two amounts (‘‘the excess 

liquid assets amount’’); and 

(c) Shows the amount of the 

deduction specified in paragraph 

(c)(1)(iii)(C) and the amount that 

deduction reduces the excess liquid 

assets amount; 

(3) The Covered Entity notifies the 

Commission in writing within 24 hours 

in the manner specified on the 

Commission’s website if the Covered 

Entity fails to meet the requirements of 

paragraph (c)(iii)(A)(1) and includes in 

the notice the contact information of an 

individual who can provide further 

information about the failure to meet the 

requirements; and 

(4) Includes its most recent statement 

of financial condition filed with its local 

supervisor (whether audited or 

unaudited) with its initial written notice 

to the Commission of its intent to rely 

on substituted compliance under 

condition (a)(16) above. 

(B) For the purposes of paragraph 

(c)(1)(iii)(A)(1), liquid assets are: 

(1) Cash and cash equivalents; 

(2) Collateralized agreements; 

(3) Customer and other trading related 

receivables; 

(4) Trading and financial assets; and 

(5) Initial margin posted by the 

Covered Entity to a counterparty or a 

third-party custodian, provided: 

(a) The initial margin requirement is 

funded by a fully executed written loan 

agreement with an affiliate of the 

Covered Entity; 

(b) The loan agreement provides that 

the lender waives re-payment of the 

loan until the initial margin is returned 

to the Covered Entity; and 

(c) The liability of the Covered Entity 

to the lender can be fully satisfied by 

delivering the collateral serving as 

initial margin to the lender. 

(C) The deduction required by 

paragraph (c)(1)(iii)(A) is the amount of 

the Covered Entity’s risk-weighted 

assets calculated for the purposes of the 

capital requirements identified in 

paragraph (c)(1)(i) divided by 12.5. 

(2) Margin. The requirements of 

Exchange Act section 15F(e) and 

Exchange Act rule 18a–3, provided that: 

(i) The Covered Entity is subject to 

and complies with the requirements of 

UK EMIR article 11; UK EMIR Margin 

RTS; UK CRR articles 103, 105(3); 

105(10); 111(2), 224, 285, 286, 286(7), 

290, 295, 296(2)(b), 297(1), 297(3), and 

298(1); UK MiFID Org Reg article 23(1); 

PRA General Organisational 

Requirements Rule 2.1; and PRA 

Internal Capital Adequacy Assessment 

Rule 4.2; 

(ii) The Covered Entity collects 

variation margin, as defined in the UK 

EMIR Margin RTS, from a counterparty 

with respect to transactions in noncleared security-based swaps, unless the 

counterparty would qualify for an 

exception from the collateral collection 

requirements under paragraph (c)(1)(iii) 

or (c)(2)(iii) of Exchange Act 18a–3; 

(iii) The Covered Entity collects initial 

margin, as defined in the UK EMIR 

Margin RTS, from a counterparty with 

respect to transactions in non-cleared 

security-based swaps, unless the 

counterparty would qualify for an 

exception from the collateral collection 

requirements under paragraph (c)(1)(iii) 

of Exchange Act rule 18a–3; and 

(iv) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

5(a)(12) pursuant to this Order. 

(d) Substituted Compliance in 

Connection With Internal Supervision 

and Compliance Requirements and 

Certain Exchange Act Section 15F(J) 

Requirements 

This Order extends to the following 

provisions related to internal 

supervision and compliance and 

Exchange Act section 15F(j) 

requirements: 

(1) Internal supervision. The 

requirements of Exchange Act rule 

15Fh–3(h) and Exchange Act sections 

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

(i) The Covered Entity is subject to 

and complies with the requirements 

identified in paragraph (d)(3) of this 

Order; 

(ii) The Covered Entity complies with 

paragraph (d)(4) of this Order; and 

(iii) This paragraph (d) does not 

extend to the requirements of paragraph 

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

those requirements pertain to 

compliance with Exchange Act sections 

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

the general and supporting provisions of 

paragraph (h) to rule 15Fh–3 in 

connection with those Exchange Act 

sections. 

(2) Chief compliance officers. The 

requirements of Exchange Act section 

15F(k) and Exchange Act rule 15Fk–1, 

provided that: 

(i) The Covered Entity is subject to 

and complies with the requirements 

identified in paragraph (d)(3) of this 

Order; 

(ii) All reports required pursuant to 

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

also: 

(A) Be provided to the Commission at 

least annually and in the English 

language; 

(B) Include a certification signed by 

the chief compliance officer or senior 

officer (as defined in Exchange Act rule 

15Fk–1(e)(2)) of the Covered Entity that, 

to the best of the certifier’s knowledge 

and reasonable belief and under penalty 

of law, the report is accurate and 

complete in all material respects; 

(C) Address the Covered Entity’s 

compliance with: 

(1) Applicable requirements under the 

Exchange Act; and 

(2) The other applicable conditions of 

this Order in connection with 

requirements for which the Covered 

Entity is relying on this Order; 

(D) Be provided to the Commission no 

later than 15 days following the earlier 

of: 

(1) The submission of the report to the 

Covered Entity’s management body; or 

(2) The time the report is required to 

be submitted to the management body; 

and 

(E) Together cover the entire period 

that the Covered Entity’s annual 

compliance report referenced in 

Exchange Act section 15F(k)(3) and 

Exchange Act rule 15Fk–1(c) would be 

required to cover. 

(3) Applicable supervisory and 

compliance requirements. Paragraphs 

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

Covered Entity being subject to and 

complying with the following 

requirements: 

(i) FCA CASS 6.2.1R, 7.11.1R, and 

7.12.1R; 

(ii) FCA COBS 11.7A.3R; 

(iii) Either {FCA IFPRU 2.2.7R(2), 

2.2.17R through 2.2.28R, 2.2.30R, and 


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2.2.32R through 2.2.35R and FCA 

BIPRU 12.3.4R, 12.3.5R, 12.3.7R, 

12.3.8R, 12.3.22AR, 12.3.22BR, 

12.3.27R, 12.4.–2R, 12.4.–1R, 12.4.5AR, 

12.4.10R, and 12.4.11R} or {PRA 

Internal Capital Adequacy Assessment 

Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 

8.1 through 8.5, 9.1, 10.1, 10.2 and 11.1 

through 11.3 and PRA Internal Liquidity 

Adequacy Assessment Rules 3.1, 3.2, 

3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2, 11.4, 

12.1, 12.3, and 12.4}; 

(iv) FCA PRIN 2.1.1R(3); 

(v) FCA SYSC 4.1.1R(1), 4.1.2R, 

4.3A.1R, 4.3A.2R, 4.3A.3R, 4.3A.4R, 

7.1.4R, 7.1.17R, 7.1.18R, 7.1.18BR, 

7.1.19R, 7.1.20R, 7.1.21R, 7.1.22R, 

9.1.1AR, 10.1.3R, 10.1.7R, 10.1.8R, 

10A.1.6R, 10A.1.8R, 10A.1.11R, and 

24.2.6R(8) and, if the Covered Entity is 

a UK bank or UK designated investment 

firm, also PRA Allocation of 

Responsibilities Rule 4.1(16); PRA 

General Organisational Requirements 

Rules 2.1, 2.2, and 5.1 through 5.3; PRA 

Record Keeping Rule 2.1; PRA Risk 

Control Rules 2.3, 2.7, and 3.1 through 

3.5; and PRA Senior Management 

Functions Rule 8.2; 

(vi) Either {FCA SYSC 19A.2.1R, 

19A.3.1R(1), 19A.3.3R, 19A.3.7R 

through 19A.3.11R, 19A.3.13R, 

19A.3.14R, 19A.3.16R, 19A.3.18R, 

19A.3.22R, 19A.3.25R, 19A.3.27R, 

19A.3.29R, 19A.3.30R, 19A.3.32R, 

19A.3.35R, 19A.3.35AR, 19A.3.36R, 

19A.3.38R, 19A.3.40R, 19A.3.40AR, 

19A.3.44R through 19A.3.44DR, 

19A.3.45R, 19A.3.47R, 19A.3.49R, 

19A.3.51R, 19A.3.51AR, and 19A.3.52E} 

or {FCA SYSC 19D.2.1R, 19D.3.1R, 

19D.3.3R, 19D.3.7R through 19D.3.12R, 

19D.3.15R, 19D.3.17R, 19D.3.19R, 

19D.3.23R, 19D.3.25R, 19D.3.27R, 

19D.3.29R, 19D.3.31R, 19D.3.32R, 

19D.3.34R, 19D.3.35R through 

19D.3.39R, 19D.3.42R through 

19D.3.45R, 19D.3.48R through 

19D.3.52R, 19D.3.54R, 19D.3.56R, 

19D.3.59R, 19D.3.61R, 19D.3.62R, 

19D.3.63E, and 19D.3.64R and PRA 

Remuneration Rules 3.1, 4.2, 5.1, 5.3, 

6.2, 6.3, 6.4, 7.2, through 7.4, 8.1, 8.2, 

9.1, 11.1, 11.6, 12.1, 13.1, 14.1, and 15.2 

through 15.23}; 

(vii) Either {FSMA schedule 6 part 2D 

and FCA COND 2.4.1A} or {FSMA 

schedule 6 parts 3C and 5D, FCA COND 

2.4.1C, and PRA Fundamental Rules 3 

through 6}; 

(viii) UK CRR articles 286 through 288 

and 293; 

(ix) UK EMIR Margin RTS article 2; 

and 

(x) UK MiFID Org Reg articles 21 

through 37 and 72 through 76 and 

Annex IV. 

(4) Additional condition to paragraph 

(d)(1). Paragraph (d)(1) further is 

conditioned on the requirement that the 

Covered Entity complies with the 

provisions specified in paragraph (d)(3) 

as if those provisions also require 

compliance with: 

(i) Applicable requirements under the 

Exchange Act; and 

(ii) The other applicable conditions of 

this Order in connection with 

requirements for which the Covered 

Entity is relying on this Order. 

(e) Substituted Compliance in 

Connection With Counterparty 

Protection Requirements. 

This Order extends to the following 

provisions related to counterparty 

protection: 

(1) Disclosure of information 

regarding material risks and 

characteristics. The requirements of 

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

disclosure of material risks and 

characteristics of one or more securitybased swaps subject thereto, provided 

that the Covered Entity, in relation to 

that security-based swap, is subject to 

and complies with the requirements of: 

(i) FCA COBS 2.2A.2R (excluding 

paragraph (1)(c) thereof), 6.1ZA.11R, 

6.1ZA.12R, 6.2B.33R, 9A.3.6R, and 

14.3A.3R; and 

(ii) Either {UK MiFID Org Reg articles 

48 through 50} or {FCA COBS 

6.1ZA.9UK, 6.1ZA.14UK, and 

14.3A.5UK}. 

(2) Disclosure of information 

regarding material incentives or 

conflicts of interest. The requirements of 

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

disclosure of material incentives or 

conflicts of interest that a Covered 

Entity may have in connection with one 

or more security-based swaps subject 

thereto, provided that the Covered 

Entity, in relation to that security-based 

swap, is subject to and complies with 

the requirements of either: 

(i) FCA SYSC 10.1.8R and UK MiFID 

Org Reg articles 33 to 35; 

(ii) FCA COBS 2.3A.5R, 2.3A.6R, 

2.3A.7E, and 2.3A.10R through 

2.3A.14R; or 

(iii) UK MAR article 20(1) and UK 

MAR Investment Recommendations 

Regulation articles 5 and 6. 

(3) ‘‘Know your counterparty.’’ The 

requirements of Exchange Act rule 

15Fh–3(e), as applied to one or more 

security-based swap counterparties 

subject thereto, provided that the 

Covered Entity, in relation to the 

relevant security-based swap 

counterparty, is subject to and complies 

with the requirements of: 

(i) FCA SYSC 6.1.1R; 

(ii) UK MiFID Org Reg articles 21, 22, 

25, and 26 and applicable parts of 

Annex I; 

(iii) FCA SYSC 4.1.1R(1); 

(iv) Either {FCA IFPRU 2.2.7R(2) and 

2.2.32R} or {PRA General 

Organisational Requirement 2.1 and 

PRA Internal Capital Adequacy 

Assessment Rule 10.1}; 

(v) MLR 2017 Regulations 27 and 28; 

and 

(vi) MLR 2017 Regulations 19(1) 

through (3), as applied to policies, 

controls, and procedures regarding 

customer due diligence. 

(4) Suitability. The requirements of 

Exchange Act rule 15Fh–3(f), as applied 

to one or more recommendations of a 

security-based swap or trading strategy 

involving a security-based swap subject 

thereto, provided that: 

(i) The Covered Entity, in relation to 

the relevant recommendation, is subject 

to and complies with the requirements 

of: 

(A) FCA COBS 4.2.1R, 9A.2.1R, and 

9A.2.16R; 

(B) FCA PROD 3.2.1R and 3.3.1R; 

(C) FCA SYSC 5.1.5AAR and 

5.1.5ABR; and 

(D) UK MiFID Org Reg articles 

21(1)(b) and (d), 54, and 55; and 

(ii) The counterparty to which the 

Covered Entity makes the 

recommendation is a ‘‘professional 

client’’ mentioned in FCA COBS 3.5.2R 

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

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

and Exchange Act rule 15Fh–2(d). 

(5) Fair and balanced 

communications. The requirements of 

Exchange Act rule 15Fh–3(g), as applied 

to one or more communications subject 

thereto, provided that the Covered 

Entity, in relation to the relevant 

communication, is subject to and 

complies with the requirements of: 

(i) Either {FCA COBS 2.1.1R and FCA 

COBS 4.2.1R} or {FCA COBS 2.1.1AR 

and FCA COBS 4.2.1R}; 

(ii) FCA COBS 2.2A.2R (excluding 

paragraph (1)(c) thereof), 2.2A.3R, 

6.1ZA.11R, 6.1ZA.12R, 6.1ZA.13R, 

6.2B.33R, 6.2B.34R, 9A.3.6R, and 

14.3A.3R; 

(iii) Either {UK MiFID Org Reg articles 

46 through 48} or {FCA COBS 

4.5A.9UK, 4.7.–1AUK, 6.1ZA.5UK, 

6.1ZA.8UK, 6.1ZA.17UK, 6.1ZA.19UK, 

6.1ZA.20UK, 8A.1.5UK to 8A.1.7UK, 

14.3A.5UK, 14.3A.7UK, and 

14.3A.9UK}; 

(iv) UK MAR Investment 

Recommendations Regulation articles 3 

and 4; and 

(v) UK MAR articles 12(1)(c), 15, and 

20(1). 

(6) Daily mark disclosure. The 

requirements of Exchange Act rule 

15Fh–3(c), as applied to one or more 

security-based swaps subject thereto, 

provided that the Covered Entity is 


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required to reconcile, and does 

reconcile, the portfolio containing the 

relevant security-based swap on each 

business day pursuant to UK EMIR 

articles 11(1)(b) and 11(2) and UK EMIR 

RTS article 13. 

(f) Substituted Compliance in 

Connection With Recordkeeping, 

Reporting, Notification, and Securities 

Count Requirements. 

This Order extends to the following 

provisions that apply to a Covered 

Entity related to recordkeeping, 

reporting, notification, and securities 

counts: 

(1)(i) Make and keep current certain 

records. The requirements of the 

following provisions of Exchange Act 

rule 18a–5, provided that the Covered 

Entity complies with the relevant 

conditions in this paragraph (f)(1)(i) and 

with the applicable conditions in 

paragraph (f)(1)(ii): 

(A) The requirements of Exchange Act 

rule 18a–5(a)(1) or (b)(1), as applicable, 

provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rule 2.1; UK MiFID 

Org Reg articles 74, 75, and Annex IV; 

UK MiFIR article 25(1); and FCA SYSC 

9.1.1AR; and 

(2) With respect to the requirements 

of Exchange Act rule 18a–5(a)(1), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order. 

(B) The requirements of Exchange Act 

rule 18a–5(a)(2), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rule 2.1; FCA 

SYSC 9.1.1AR; PRA Internal Capital 

Adequacy Assessment Rule 3.1; FCA 

CASS 6, 7, 10.1.3R, 10.1.7, and 10.1.9E; 

UK MiFID Org Reg articles 72, 74, and 

75; and UK EMIR article 39(4); and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(C) The requirements of Exchange Act 

rule 18a–5(a)(3) or (b)(2), as applicable, 

provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rule 2.1; FCA 

SYSC 9.1.1AR; FCA CASS 6, 7, 10.1.3R, 

10.1.7, and 10.1.9E; UK MiFID Org Reg 

articles 72, 74, and 75; and UK EMIR 

article 39(4); and 

(2) With respect to the requirements 

of Exchange Act rule 18a–5(a)(3), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(D) The requirements of Exchange Act 

rule 18a–5(a)(4) or (b)(3), as applicable, 

provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

UK CRR article 103; FCA COND at 

paragraphs 2C, 2D, 3B, 3C, 5D, and 5F; 

PRA Fundamental Rules 2 and 6; FCA 

PRIN 2.1.1.R(2) and (3); PRA 

Recordkeeping Rule 2.1; UK MiFID Org 

Reg articles 59, 74, 75 and Annex IV; 

UK MiFIR article 25(1); FCA SYSC 

9.1.1AR; FCA COBS 16A.3.1UK; UK 

EMIR articles 9(2) and 11(1)(a); and 

(2) With respect to the requirements 

of Exchange Act rule 18a–5(a)(4), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(E) The requirements of Exchange Act 

rule 18a–5(b)(4) provided that the 

Covered Entity is subject to and 

complies with the requirements of FCA 

COBS 8A.1.9R, 16A.2.1R, 16A.3.1UK; 

UK MiFID Org Reg article 59; FCA SYSC 

9.1.1AR; and UK EMIR articles 9(2) and 

11(1)(a); 

(F) The requirements of Exchange Act 

rule 18a–5(a)(5) or (b)(5), as applicable, 

provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rule 2.1; UK MiFID 

Org Reg articles 74, 75, and Annex IV; 

UK MiFIR article 25(1); and FCA SYSC 

9.1.1AR; and 

(2) With respect to the requirements 

of Exchange Act rule 18a–5(a)(5), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(G) The requirements of Exchange Act 

rules 18a–5(a)(6) and (a)(15) or (b)(6) 

and (b)(11), as applicable, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Fundamental Rules 2 and 6; PRA 

Recordkeeping Rule 2.1; CRR articles 

103, 105(3), and 105(10); UK MiFID Org 

Reg articles 59, 74, 75, and Annex IV; 

UK MiFIR article 25(1); FCA SYSC 

9.1.1AR; FCA COBS 8A.1.9R, 16A.2.1R, 

and 16A.3.1UK; UK EMIR articles 9(2), 

11(1)(a), and 39(4); and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rule 

15Fi–2 pursuant to this Order; 

(H) The requirements of Exchange Act 

rule 18a–5(a)(7) or (b)(7), as applicable, 

provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

UK MiFIR article 25(1); MLR 2017 

Regulations 28 through 30; FCA SYSC 

9.1.1AR; and PRA Recordkeeping Rule 

2.1; and 

(2) With respect to the requirements 

of Exchange Act rule 18a–5(a)(7), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(I) The requirements of Exchange Act 

rule 18a–5(a)(8), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

CRR articles 103, 105(3), and 105(10); 

PRA Fundamental Rules 2 and 6; PRA 

Recordkeeping Rule 2.1; UK MiFID Org 

Reg articles 59, 74, 75, and Annex IV; 

UK MiFIR article 25(1); FCA SYSC 

9.1.1AR; UK EMIR articles 9(2), 11(1)(a), 

and 39(4); MLR 2017 Regulations 28 

through 30; and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order.; 

(J) The requirements of Exchange Act 

rule 18a–5(a)(9), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Internal Capital Adequacy 

Assessment Rule 3.1; FCA CASS 6, 7, 

10.1.3R, 10.1.7, and 10.1.9E; UK EMIR 

article 39(4); and UK MiFID Org Reg 

articles 72, 74, and 75; 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

and 

(3) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

5(a)(9) relating to Exchange Act rule 

18a–2; 

(K) The requirements of Exchange Act 

rules 18a–5(a)(10) and (b)(8), provided 

that the Covered Entity is subject to and 

complies with the requirements of 

FSMA sections 63F(2), 63F(5), 63(2A), 

60A(2); PRA Fitness and Propriety Rules 

2.6 and 2.9; SMR Applications and 

Notifications Rules 2.1, 2.2, and 2.6; 

PRA Certification Rule 2.1; PRA General 

Organisational Requirements Rules 5.1 

and 5.2; FCA SUP 10C.10.8D, 

10C.10.8AD, 10C.15, 10C.10.16R, and 

10C Annex 3D; FCA SYSC 4.3A.1R., 

4.3A.3R, 10.1.7R, and 27; and UK MiFID 

Org Reg articles 21(1)(d) and 35; 

(L) The requirements of Exchange Act 

rule 18a–5(a)(12), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

UK CRR articles 103, 105(3), and 


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105(10); PRA Internal Capital Adequacy 

Assessment Rule 3.1; and MiFID Org 

Reg. articles 72, 74, and 75; 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rule 18a–3 

pursuant to this Order; 

(M) The requirements of Exchange 

Act rules 18a–5(a)(17) and (b)(13), as 

applicable, regarding one or more 

provisions of Exchange Act rules 15Fh– 

3 or 15Fk–1 for which substituted 

compliance is available under this 

Order, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA COND at paragraphs 2C, 2D, 3B, 

3C, 5D, and 5F; PRA Fundamental Rules 

2 and 6; FCA PRIN 2.1.1.R(2) and (3); 

PRA Recordkeeping Rule 2.1; FCA 

SYSC 9.1.1AR; FCA COBS 9A.2.1R, UK 

MiFID Org Reg articles 72, 73, and 

Annex I; and UK EMIR article 39(5), in 

each case with respect to the relevant 

security-based swap or activity; 

(2) With respect to the portion of 

Exchange Act rules 18a–5(a)(17) and 

(b)(13) that relates to one or more 

provisions of Exchange Act rule 15Fh– 

3 for which substituted compliance is 

available under this Order, the Covered 

Entity applies substituted compliance 

for such business conduct standard(s) of 

Exchange Act rule 15Fh–3 pursuant to 

this Order, as applicable, with respect to 

the relevant security-based swap or 

activity; and 

(3) With respect to the portion of 

Exchange Act rules 18a–5(a)(17) and 

(b)(13) that relates to Exchange Act rule 

15Fk–1, the Covered Entity applies 

substituted compliance for Exchange 

Act section 15F(k) and Exchange Act 

rule 15Fk–1 pursuant to this Order; 

(N) The requirements of Exchange Act 

rules 18a–5(a)(18)(i) and (ii) or (b)(14)(i) 

and (ii), as applicable, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

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

RTS article 15(1)(a); and 

(2) The Covered Entity applies 

substituted compliance for Exchange 

Act rule 15Fi–3 pursuant to this Order; 

and 

(O) The requirements of Exchange Act 

rule 18a–5(a)(18)(iii) or (b)(14)(iii), as 

applicable, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

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

RTS article 15(1)(a), in each case with 

respect to such security-based swap 

portfolio(s); and 

(2) The Covered Entity applies 

substituted compliance for Exchange 

Act rule 15Fi–4 pursuant to this Order. 

(ii) Paragraph (f)(1)(i) is subject to the 

following further conditions: 

(A) Paragraphs (f)(1)(i)(A) through (D) 

and (H) are subject to the condition that 

the Covered Entity preserves all of the 

data elements necessary to create the 

records required by the applicable 

Exchange Act rules cited in such 

paragraphs and upon request furnishes 

promptly to representatives of the 

Commission the records required by 

those rules; 

(B) A Covered Entity may apply the 

substituted compliance determination 

in paragraph (f)(1)(i)(M) to records of 

compliance with Exchange Act rule 

15Fh–3(b), (c), (e), (f), and (g) in respect 

of one or more security-based swaps or 

activities related to security-based 

swaps; and 

(C) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

5(a)(13), (a)(14), (a)(16), (b)(9), (b)(10), or 

(b)(12). 

(2)(i) Preserve certain records. The 

requirements of the following 

provisions of Exchange Act rule 18a–6, 

provided that the Covered Entity 

complies with the relevant conditions in 

this paragraph (f)(2)(i) and with the 

applicable conditions in paragraph 

(f)(2)(ii): 

(A) The requirements of Exchange Act 

rule 18a–6(a)(1) or (a)(2), as applicable, 

provided that the Covered Entity is 

subject to and complies with the 

requirements of UK MiFID Org Reg 

articles 72, 74, 75, and Annex IV; FCA 

SYSC 9.1.1AR and 9.1.2R; FSMA 

section 165; PRA Internal Capital 

Adequacy Assessment Rule 3.1; PRA 

Fundamental Rules 2 and 6; PRA 

Recordkeeping Rules 2.1 and 2.2; FCA 

PRIN 2.1.1.R(2) and (3); FCA CASS 6, 7, 

10.1.3R, 10.1.7, and 10.1.9E; UK CRR 

article 103; FCA COND at paragraphs 

2C, 2D, 3B, 3C, 5D, and 5F; UK MiFIR 

article 25(1); and UK EMIR article 9(2); 

(B) The requirements of Exchange Act 

rule 18a–6(b)(1)(i) or (b)(2)(i), as 

applicable, provided that the Covered 

Entity is subject to and complies with 

the requirements of UK MiFID Org Reg 

articles 72, 74, 75, and Annex IV; FCA 

SYSC 9.1.1AR and 9.1.2R; FSMA 

section 165; PRA Internal Capital 

Adequacy Assessment Rule 3.1; PRA 

Fundamental Rules 2 and 6; PRA 

Recordkeeping Rules 2.1 and 2.2; FCA 

PRIN 2.1.1.R(2) and (3); FCA CASS 6, 7, 

10.1.3R, 10.1.7, and 10.1.9E; UK CRR 

article 103; FCA COND at paragraphs 

2C, 2D, 3B, 3C, 5D, and 5F; UK MiFIR 

article 25(1); and UK EMIR article 9(2); 

(C) The requirements of Exchange Act 

rules 18a–6(b)(1)(ii) and (iii), provided 

that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Internal Capital Adequacy 

Assessment Rule 3.1; FCA CASS 6, 7, 

10.1.3R, 10.1.7, and 10.1.9E; UK MiFID 

Org Reg articles 72, 74, and 75; PRA 

Recordkeeping Rules 2.1 and 2.2; FCA 

SYSC 9.1.1AR and 9.1.2R; and UK EMIR 

article 9(2); and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(D) The requirements of Exchange Act 

rule 18a–6(b)(1)(iv) or (b)(2)(ii), as 

applicable, provided that the Covered 

Entity is subject to and complies with 

the requirements of PRA Fundamental 

Rules 2 and 6; PRA Recordkeeping 

Rules 2.1 and 2.2; UK CRR article 103; 

FCA SYSC 9.1.1AR, 9.1.2R, 10A.1.6R, 

and 10A.1.8R; UK MiFID Org Reg 

articles 72, 73, 74, 75, 76, Annex I, and 

Annex IV; UK MiFIR article 25(1); and 

UK EMIR article 9(2); 

(E) The requirements of Exchange Act 

rule 18a–6(b)(1)(v), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

UK EMIR article 9(2); UK CRR articles 

99, 294, 394, 415, 430, and Part Six: 

Title II and Title III; UK CRR Reporting 

ITS article 14 and annexes I–V and VIII– 

XIII; PRA Recordkeeping Rules 2.1 and 

2.2; FCA SYSC 9.1.1AR and 9.1.2R; and 

UK MiFID Org Reg article 72(1); 

(2) With respect to the requirements 

of Exchange Act rule 18a–6(b)(1)(v), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant this Order; and 

(3) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(v) relating to Exchange Act rule 

18a–2; 

(F) The requirements of Exchange Act 

rule 18a–6(b)(1)(vi) or (b)(2)(iii), as 

applicable, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rules 2.1 and 2.2; 

FCA SYSC 9.1.1AR and 9.1.2R; UK 

MiFID Org Reg articles 72(1) and 73; 

and UK EMIR article 9(2); and 

(2) With respect to the requirements 

of Exchange Act rule 18a–6(b)(1)(vi), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(G) The requirements of Exchange Act 

rule 18a–6(b)(1)(vii) or (b)(2)(iv), as 

applicable, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rules 2.1 and 2.2; 

FCA SYSC 9.1.1AR and 9.1.2R; UK 


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MiFID Org Reg articles 72(1) and 73; UK 

MiFIR article 25(1); and UK EMIR 

article 9(2); and 

(2) With respect to the requirements 

of Exchange Act rule 18a–6(b)(1)(vii), 

the Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(H) The requirements of Exchange Act 

rule 18a–6(b)(1)(viii), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

UK CRR articles 99, 294, 394, 415, 430, 

and Part Six: Title II and Title III; UK 

CRR Reporting ITS article 14 and 

annexes I–V and VIII–XIII, as 

applicable; PRA Recordkeeping Rules 

2.1 and 2.2; FCA SYSC 9.1.1AR and 

9.1.2R; and UK MiFID Org Reg article 

72(1); 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

7(a)(1), (b), (c) through (h), and 

Exchange Act rule 18a–7(j) as applied to 

these requirements pursuant to this 

Order; 

(3) With respect to the requirements 

of Exchange Act rule 18a–6(b)(1)(viii), 

the Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(4) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii)(L); and 

(5) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii)(M) relating to Exchange Act 

rule 18a–2. 

(I) The requirements of Exchange Act 

rule 18a–6(b)(1)(ix), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA SYSC 4.1.1R(1), 6.1.1R, 7.1.4R, 

9.1.1AR, 9.1.2R, and 10.1.7R; FCA 

COBS 2.3A.32R; UK MiFID Org Reg 

articles 22(3)(c), 23, 24, 25(2), 26, 

29(2)(c), 35, and 72(1); PRA Risk Control 

Rule 2.3; PRA Internal Capital 

Adequacy Assessment Rules 3 through 

11; UK CRR articles 176, 286, and 

293(1)(d); UK EMIR RTS; PRA 

Recordkeeping Rule 2.1 and 2.2; and UK 

EMIR article 9(2); and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(J) The requirements of Exchange Act 

rule 18a–6(b)(1)(x), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Internal Capital Adequacy 

Assessment Rules 3.1 and 13.2; PRA 

Recordkeeping Rules 2.1 and 2.2; FCA 

SYSC 9.1.1AR and 9.1.2R; UK MiFID 

Org Reg article 72(1); and UK EMIR 

article 9(2); and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(K) The requirements of Exchange Act 

rule 18a–6(b)(1)(xii) or (b)(2)(vii), as 

applicable, regarding one or more 

provisions of Exchange Act rules 15Fh– 

3 or 15Fk–1 for which substituted 

compliance is available under this 

Order, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

MLR 2017 Regulations 27 through 30; 

PRA Recordkeeping Rule 2.1 and 2.2; 

FCA SYSC 9.1.1AR and 9.1.2R; UK 

MiFID Org Reg article 72(1); and UK 

EMIR article 9(2), in each case with 

respect to the relevant security-based 

swap or activity; 

(2) With respect to the portion of 

Exchange Act rule 18a–6(b)(1)(xii) or 

(b)(2)(vii) that relates to one or more 

provisions of Exchange Act rule 15Fh– 

3 for which substituted compliance is 

available under this Order, the Covered 

Entity applies substituted compliance 

for such business conduct standard(s) of 

Exchange Act rule 15Fh–3 pursuant to 

this Order, as applicable, with respect to 

the relevant security-based swap or 

activity; and 

(3) With respect to the portion of 

Exchange Act rule 18a–6(b)(1)(xii) or 

(b)(2)(vii), as applicable, that relates to 

Exchange Act rule 15Fk–1, the Covered 

Entity applies substituted compliance 

for Exchange Act section 15F(k) and 

Exchange Act rule 15Fk–1 pursuant to 

this Order; 

(L) The requirements of Exchange Act 

rule 18a–6(c), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rules 2.1 and 2.2; 

FCA SYSC 9.1.1AR and 9.1.2R; and UK 

MiFID Org Reg articles 21(1)(f) and 

72(1); and 

(2) This Order does not extend to the 

requirements of Exchange act rule 18a– 

6(c) relating to Forms SBSE, SBSE–A, 

SBSE–C, SBSE–W, all amendments to 

these forms, and all other licenses or 

other documentation showing the 

registration of the Covered Entity with 

any securities regulatory authority or 

the U.S. Commodity Futures Trading 

Commission; 

(M) The requirements of Exchange 

Act rule 18a–6(d)(1), provided that the 

Covered Entity is subject to and 

complies with the requirements of 

FSMA sections 63(2A) and 63F(5); FCA 

SYSC 9.1.1AR and 9.1.2R; UK MiFID 

Org Reg articles 35 and 72(1); and PRA 

Recordkeeping Rules 2.1 and 2.2; 

(N) The requirements of Exchange Act 

rule 18a–6(d)(2), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

PRA Recordkeeping Rules 2.1 and 2.2; 

FCA SYSC 9.1.1AR and 9.1.2R; UK 

MiFID Org Reg articles 72(1) and 72(3); 

and UK EMIR article 9(2); and 

(2) With respect to the requirements 

of Exchange Act rule 18a–6(d)(2)(i), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(O) The requirements of Exchange Act 

rule 18a–6(d)(3), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA COND at paragraphs 2C, 2D, 3B, 

3C, 5D, and 5F; PRA Fundamental Rules 

2 and 6; FCA PRIN 2.1.1.R(2) and (3); 

FCA SYSC 6.1.1R, 9.1.1AR, 9.1.2R, 

10A.1.6R; PRA Recordkeeping Rules 2.1 

and 2.2; UK MiFID Org Reg articles 

21(1)(f), 72, and Annex I; and 

(2) With respect to the requirements 

of Exchange Act rule 18a–6(d)(3)(i), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(P) The requirements of Exchange Act 

rules 18a–6(d)(4) and (d)(5), provided 

that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA COBS 8A.1.9R; PRA 

Recordkeeping Rules 2.1 and 2.2; FCA 

SYSC 4.1.1R(1), 6.1.1, 9.1.1AR, and 

9.1.2R; UK MiFID Org Reg articles 24, 

25(2), 72(1), and 73; and UK EMIR 

article 9(2); and 

(2) The Covered Entity applies 

substituted compliance for Exchange 

Act rules 15Fi–3, 15Fi–4, and 15Fi–5 

pursuant to this Order; 

(Q) The requirements of Exchange Act 

rule 18a–6(e), provided that the Covered 

Entity is subject to and complies with 

the requirements of PRA Recordkeeping 

Rule 2.1; FCA SYSC 4.1.1R, 9.1.1AR, 

and 9.1.2R; and UK MiFID Org Reg 

articles 21(2), 58, 72(1), and 72(3); and 

(R) The requirements of Exchange Act 

rule 18a–6(f), provided that the Covered 

Entity is subject to and complies with 

the requirements of PRA Outsourcing 

Rule 2.1; FCA SYSC 8.1.1R; and UK 

MiFID Org Reg articles 31(1). 

(ii) Paragraph (f)(2)(i) is subject to the 

following further conditions: 

(A) A Covered Entity may apply the 

substituted compliance determination 

in paragraph (f)(2)(i)(K) to records 

related to Exchange Act rule 15Fh–3(b), 


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(c), (e), (f), and (g) in respect of one or 

more security-based swaps or activities 

related to security-based swaps; and 

(B) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(xi), (b)(1)(xiii), (b)(2)(v), 

(b)(2)(vi), or (b)(2)(viii). 

(3) File Reports. The requirements of 

the following provisions of Exchange 

Act rule 18a–7, provided that the 

Covered Entity complies with the 

relevant conditions in this paragraph 

(f)(3): 

(i) The requirements of Exchange Act 

rule 18a–7(a)(1) or (a)(2), as applicable, 

and the requirements of Exchange Act 

rule 18a–7(j) as applied to the 

requirements of Exchange Act rule 18a– 

7(a)(1) or (a)(2), as applicable, provided 

that: 

(A) The Covered Entity is subject to 

and complies with the requirements of 

PRA Definition of Capital Rule 4.5; UK 

CRR articles 99, 394, 430, and Part Six: 

Title II and Title III; and UK CRR 

Reporting ITS annexes I, II, III, IV, V, 

VIII, IX, X, XI, XII, and XIII, as 

applicable; 

(B) The Covered Entity files periodic 

unaudited financial and operational 

information with the Commission or its 

designee in the manner and format 

required by Commission rule or order 

and presents the financial information 

in the filing in accordance with 

generally accepted accounting 

principles that the Covered Entity uses 

to prepare general purpose publicly 

available or available to be issued 

financial statements in the UK.; 

(C) With respect to the requirements 

of Exchange Act rule 18a–7(a)(1), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act section 15F(e) and 

Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; and 

(D) With respect to the requirements 

of Exchange Act rule 18a–7(a)(1), the 

Covered Entity applies substituted 

compliance for the requirements of 

Exchange Act rule 18a–6(b)(1)(viii) 

pursuant to this Order; 

(ii) The requirements of Exchange Act 

rule 18a–7(a)(3) and the requirements of 

Exchange Act rule 18a–7(j) as applied to 

the requirements of paragraph (a)(3) of 

Exchange Act rule 18a–7, provided that: 

(A) The Covered Entity is subject to 

and complies with the requirements of 

UK CRR articles 99, 394, 431, 433, 452, 

454, and 455; UK CRR Reporting ITS 

annexes I, II, VIII, and IX, as applicable; 

PRA Definition of Capital Rule 4.5; and 

Companies Act sections 394, 415, 442, 

and 475; and 

(B) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(iii) The requirements of Exchange 

Act rule 18a–7(b), provided that: 

(A) the Covered Entity is subject to 

and complies with the requirements of 

UK CRR articles 431 through 455; and 

Companies Act sections 394, 415, 442, 

and 475; and 

(B) the Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii) pursuant to this Order; 

(iv) The requirements of Exchange Act 

rule 18a–7(c), (d), (e), (f), (g), and (h) and 

the requirements of Exchange Act rule 

18a–7(j) as applied to the requirements 

of paragraphs (c), (d), (e), (f), (g), and (h) 

of Exchange Act rule 18a–7, provided 

that: 

(A) The Covered Entity is subject to 

and complies with the requirements of 

FCA CASS 6.2.2R, 6.6.2R, 6.6.3R, 

6.6.33G, 6.6.34R, 7.12.2R, 7.15.2R, 

7.15.3R, 7.15.20R, and 7.15.21R; FCA 

SUP 3.8.5R, 3.10.4R through 3.10.7R; 

UK CRR articles 26(2), 132(5), 154, 191, 

321, 325bi, 350, 353, 368, 418; 

Companies Act section 475; and the 

Capital Requirements (Country-byCountry Reporting) Regulations 2013 

Regulation 2(4); 

(B) With respect to financial 

statements the Covered Entity is 

required to file annually with the UK 

PRA or FCA, including a report of an 

independent public accountant covering 

the financial statements, the Covered 

Entity: 

(1) Simultaneously sends a copy of 

such annual financial statements and 

the report of the independent public 

accountant covering the annual 

financial statements to the Commission 

in the manner specified on the 

Commission’s website; 

(2) Includes with the transmission the 

contact information of an individual 

who can provide further information 

about the financial statements and 

report; 

(3) Includes with the transmission the 

report of an independent public 

accountant required by Exchange Act 

rule 18a–7(c)(1)(i)(C) covering the 

annual financial statements if UK laws 

do not require the Covered Entity to 

engage an independent public 

accountant to prepare a report covering 

the annual financial statements; 

provided, however, that such report of 

the independent public accountant may 

be prepared in accordance with 

generally accepted auditing standards in 

UK that the independent public 

accountant uses to perform audit and 

attestation services and the accountant 

complies with UK independence 

requirements; 

(4) Includes with the transmission the 

reports required by Exchange Act rules 

18a–7(c)(1)(i)(B) and (C) addressing the 

statements identified in Exchange Act 

rule 18a–7(c)(3) or (c)(4), as applicable, 

that relate to Exchange Act rule 18a–4; 

provided, however, that the report of the 

independent public accountant required 

by Exchange Act rule 18a–7(c)(1)(i)(C) 

may be prepared in accordance with 

generally accepted auditing standards in 

the UK that the independent public 

accountant uses to perform audit and 

attestation services and the accountant 

complies with UK independence 

requirements; 

(5) Includes with the transmission the 

supporting schedules and 

reconciliations, as applicable, required 

by Exchange Act rules 18a–7(c)(2)(ii) 

and (iii), respectively, relating to 

Exchange Act rule 18a–2; and 

(6) Includes with the transmission the 

supporting schedules and 

reconciliations, as applicable, required 

by Exchange Act rules 18a–7(c)(2)(ii) 

and (iii), respectively, relating to 

Exchange Act rules 18a–4 and 18a–4a; 

(C) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

and 

(D) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii) pursuant to this Order. 

(v) The requirements of Exchange Act 

rule 18a–7(i), provided that: 

(A) The Covered Entity is subject to 

and complies with the requirements of 

FCA SUP 16.3.17R and PRA Regulatory 

Reporting Rule 18; and 

(B) The Covered Entity: 

(1) Simultaneously sends a copy of 

any notice required to be sent by UK 

law cited in paragraph (f)(3)(v)(A) of the 

Order to the Commission in the manner 

specified on the Commission’s website; 

and 

(2) Includes with the transmission the 

contact information of an individual 

who can provide further information 

about the matter that is the subject of 

the notice. 

(4)(i) Provide Notification. The 

requirements of the following 

provisions of Exchange Act rule 18a–8, 

provided that the Covered Entity 

complies with the relevant conditions in 

this paragraph (f)(4)(i) and with the 

applicable conditions in paragraph 

(f)(4)(ii): 

(A) The requirements of paragraphs 

(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) 

of Exchange Act rule 18a–8 and the 

requirements of Exchange Act rule 18a– 

8(h) as applied to the requirements of 


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paragraphs (a)(1)(i), (a)(1)(ii), (b)(1), 

(b)(2), and (b)(4) of Exchange Act rule 

18a–8, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA PRIN 2.1.1R (Principle 11); PRA 

Fundamental Rule 7; FCA SUP 15.3.1R, 

15.3.11R, 15.3.15R, 15.3.17R, and 

15.3.21R; PRA Notifications Rules 2.1, 

2.4, 2.5, 2.6, 2.8, and 2.9; FCA SYSC 

18.6.1R; PRA General Organisational 

Requirements 2A.2, 2A.1(2) and 2A.3 to 

2A.6; and CRR article 366(5); and 

(2) The Covered Entity applies 

substituted compliance with respect to 

the requirements of Exchange Act 

section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this 

Order; 

(B) The requirements of Exchange Act 

rule 18a–8(c) and the requirements of 

Exchange Act rule 18a–8(h) as applied 

to Exchange Act rule 18a–8(c), provided 

that the Covered Entity is subject to and 

complies with the requirements of FCA 

PRIN 2.1.1R (Principle 11); PRA 

Fundamental Rule 7; FCA SUP 15.3.1R, 

15.3.11R, 15.3.15R, 15.3.17R, and 

15.3.21R; FCA CASS 6.6.57R and 

7.15.33R; PRA Notifications Rules 2.1, 

2.4, 2.5, 2.6, 2.8, and 2.9; FCA SYSC 

18.6.1R; and PRA General 

Organisational Requirements 2A.2, 

2A.1(2), and 2A.3 to 2A.6; 

(C) The requirements of Exchange Act 

rule 18a–8(d) and the requirements of 

Exchange Act rule 18a–8(h) as applied 

to the requirements of Exchange Act 

rule 18a–8(d), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA PRIN 2.1.1R (Principle 11); PRA 

Fundamental Rule 7; FCA SUP 15.3.1R, 

15.3.11R, 15.3.15R, 15.3.17R, and 

15.3.21R; FCA CASS 6.6.57R and 

7.15.33R; PRA Notifications Rules 2.1, 

2.4, 2.5, 2.6, 2.8, and 2.9; FCA SYSC 

18.6.1R; and PRA General 

Organisational Requirements 2A.2, 

2A.1(2), and 2A.3 through 2A.6; and 

(2) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

8(d) to give notice with respect to books 

and records required by Exchange Act 

rule 18a–5 for which the Covered Entity 

does not apply substituted compliance 

pursuant to this Order; 

(D) The requirements of Exchange Act 

rule 18a–8(e) and the requirements of 

Exchange Act rule 18a–8(h) as applied 

to the requirements of Exchange Act 

rule 18a–8(e), provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA PRIN 2.1.1R (Principle 11); PRA 

Fundamental Rule 7; FCA SUP 15.3.1R, 

15.3.11R, 15.3.15R, 15.3.17R, and 

15.3.21R; FCA CASS 6.6.57R and 

7.15.33R; PRA Notifications Rules 2.1, 

2.4, 2.5, 2.6, 2.8, and 2.9; FCA SYSC 

18.6.1R; and PRA General 

Organisational Requirements 2A.2, 

2A.1(2), and 2A.3 through 2A.6; 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order; 

(3) This Order does not extend to the 

requirements of Exchange act rule 18a– 

8(e) relating to Exchange Act rule 18a– 

2 or to the requirements of Exchange 

Act rule 18a–8(h) as applied to the 

requirements Exchange Act rule 18a– 

8(e) relating to Exchange Act rule 18a– 

2; and 

(4) This Order does not extend to the 

requirements of Exchange act rule 18a– 

8(e) relating to Exchange Act rule 18a– 

4 or to the requirements of Exchange 

Act rule 18a–8(h) as applied to the 

requirements of Exchange Act rule 18a– 

8(e) relating to Exchange Act rule 18a– 

4; 

(ii) Paragraph (f)(4)(i) is subject to the 

following further conditions: 

(A) The Covered Entity: 

(1) Simultaneously sends a copy of 

any notice required to be sent by UK 

law cited in this paragraph of the Order 

to the Commission in the manner 

specified on the Commission’s website; 

and 

(2) Includes with the transmission the 

contact information of an individual 

who can provide further information 

about the matter that is the subject of 

the notice. 

(B) This Order does not extend to the 

requirements of paragraphs (a)(2) and 

(b)(3) of Exchange Act rule 18a–8 

relating to Exchange Act rule 18a–2 or 

to the requirements of Exchange Act 

rule 18a–8(h) as applied to the 

requirements of paragraphs (a)(2) and 

(b)(3) of Exchange Act rule 18a–8 

relating to Exchange Act rule 18a–2; and 

(C) This Order does not extend to the 

requirements of paragraph (g) of 

Exchange Act rule 18a–8 or to the 

requirements of Exchange Act rule 18a– 

8(h) as applied to the requirements of 

paragraph (g) of Exchange Act rule 18a– 

8. 

(5) Securities Counts. The 

requirements of Exchange Act rule 18a– 

9, provided that: 

(1) The Covered Entity is subject to 

and complies with the requirements of 

FCA CASS 6.2.1R, 6.2.2R, 6.3.4A–1R, 

6.3.6AR, 6.6.2R, 6.6.3R, 6.6.34R, 6.6.4R, 

6.6.8R, 10.1.3R, 10.1.7R, and 10.1.9E; 

FCA SUP 3.10.4R through 3.10.7R; UK 

MiFID Org Reg articles 74 and 75; UK 

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

articles 12 and 13; and 

(2) The Covered Entity applies 

substituted compliance for the 

requirements of Exchange Act section 

15F(e) and Exchange Act rules 18a–1 

through 18a–1d pursuant to this Order. 

(6) Daily Trading Records. The 

requirements of Exchange Act section 

15F(g), provided that the Covered Entity 

is subject to and complies with the 

requirements of PRA Fundamental 

Rules 2 and 6; FCA PRIN 2.1.1.R(2) and 

(3); PRA Recordkeeping Rule 2.1; FCA 

SYSC 9.1.1AR; and MiFID Org Reg 

article 21(1)(f), 21(4), and 72(1). 

(7) Examination and Production of 

Records. Notwithstanding the forgoing 

provisions of paragraph (f) of this Order, 

this Order does not extend to, and 

Covered Entities remain subject to, the 

requirement of Exchange Act section 

15F(f) to keep books and records open 

to inspection by any representative of 

the Commission and the requirement of 

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

promptly to a representative of the 

Commission legible, true, complete, and 

current copies of those records of the 

Covered Entity that are required to be 

preserved under Exchange Act rule 18a– 

6, or any other records of the Covered 

Entity that are subject to examination or 

required to be made or maintained 

pursuant to Exchange Act section 15F 

that are requested by a representative of 

the Commission. 

(8) English Translations. 

Notwithstanding the forgoing provisions 

of paragraph (f) of this Order, to the 

extent documents are not prepared in 

the English language, Covered Entities 

must promptly furnish to a 

representative of the Commission upon 

request an English translation of any 

record, report, or notification of the 

Covered Entity that is required to be 

made, preserved, filed, or subject to 

examination pursuant to Exchange Act 

section 15F of this Order. 

(g) Definitions 

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

that: 

(i) Is a security-based swap dealer or 

major security-based swap participant 

registered with the Commission; 

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

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

Exchange Act; 

(iii) Is a ‘‘MiFID investment firm’’ or 

‘‘third country investment firm,’’ as 

such terms are defined in the FCA 

Handbook Glossary, that has permission 

from the FCA or PRA under Part 4A of 

FSMA to carry on regulated activities 

relating to investment services and 

activities in the United Kingdom; and 

(iv) Is supervised by the FCA under 

the fixed supervision model and, if the 

firm is a PRA-authorized person, also 

supervised by the PRA as a Category 1 

firm. 


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(2) ‘‘Capital Requirements Regulations 

2013’’ means the UK Capital 

Requirements Regulations 2013, as 

amended from time to time. 

(3) ‘‘Companies Act’’ means the UK 

Companies Act 2006, as amended from 

time to time. 

(4) ‘‘FCA’’ means the UK’s Financial 

Conduct Authority. 

(5) ‘‘FCA BIPRU’’ means the 

Prudential Sourcebook for Banks, 

Building Societies and Investment 

Firms of the FCA Handbook, as 

amended from time to time. 

(6) ‘‘FCA CASS’’ means the Client 

Asset Sourcebook of the FCA Handbook, 

as amended from time to time. 

(7) ‘‘FCA COBS’’ means the Conduct 

of Business Sourcebook of the FCA 

Handbook, as amended from time to 

time. 

(8) ‘‘FCA COND’’ means the 

Threshold Conditions of the FCA 

Handbook, as amended from time to 

time. 

(9) ‘‘FCA Enforcement Guide’’ means 

the Enforcement Guide of the FCA 

Handbook, as amended from time to 

time. 

(10) ‘‘FCA FCG’’ means the Financial 

Crime Guide of the FCA Handbook, as 

amended from time to time. 

(11) ‘‘FCA FIT’’ means the Fit and 

Proper Test for Employees and Senior 

Personnel Sourcebook of the FCA 

Handbook, as amended from time to 

time. 

(12) ‘‘FCA Handbook’’ means the 

FCA’s Handbook of rules and guidance, 

as amended from time to time. 

(13) ‘‘FCA Handbook Glossary’’ means 

the Glossary part of the FCA’s 

Handbook of rules and guidance, as 

amended from time to time. 

(14) ‘‘FCA IFPRU’’ means the 

Prudential Sourcebook for Investment 

Firms of the FCA Handbook, as 

amended from time to time. 

(15) ‘‘FCA PRIN’’ means the 

Principles for Businesses Sourcebook of 

the FCA Handbook, as amended from 

time to time. 

(16) ‘‘FCA PROD’’ means the Product 

Intervention and Product Governance 

Sourcebook of the FCA Handbook, as 

amended from time to time. 

(17) ‘‘FCA SUP’’ means the 

Supervision Sourcebook of the FCA 

Handbook, as amended from time to 

time. 

(18) ‘‘FCA SYSC’’ means the Senior 

Management Arrangements, Systems 

and Controls Sourcebook of the FCA 

Handbook, as amended from time to 

time. 

(19) ‘‘FSMA’’ means the UK’s 

Financial Services and Markets Act 

2000, as amended from time to time. 

(20) ‘‘ICVC’’ means investment 

company with variable capital as 

defined in the FCA Handbook Glossary. 

(21) ‘‘MLR 2017’’ means the UK’s 

Money Laundering, Terrorist Financing 

and Transfer of Funds (Information on 

the Payer) Regulations 2017, as 

amended from time to time. 

(22) ‘‘PRA’’ means the UK’s 

Prudential Regulation Authority. 

(23) ‘‘PRA Capital Buffer Rules’’ 

means the Capital Buffer Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(24) ‘‘PRA Certification Rules’’ means 

the Certification Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(25) ‘‘PRA Definition of Capital 

Rules’’ means the Definition of Capital 

Part of the PRA Rulebook for CRR 

Firms, as amended from time to time. 

(26) ‘‘PRA Fitness and Proprietary 

Rules’’ means the Fitness and Propriety 

Part of the PRA Rulebook for CRR 

Firms, as amended from time to time. 

(27) ‘‘PRA Fundamental Rules’’ means 

the Fundamental Rules Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(28) ‘‘PRA General Organisational 

Requirements’’ means the General 

Organisational Requirements Part of the 

PRA Rulebook for CRR Firms, as 

amended from time to time. 

(29) ‘‘PRA Internal Capital Adequacy 

Assessment Rules’’ means the Internal 

Capital Adequacy Assessment Part of 

the PRA Rulebook for CRR Firms, as 

amended from time to time. 

(30) ‘‘PRA Internal Liquidity 

Adequacy Assessment Rules’’ means the 

Internal Liquidity Adequacy 

Assessment Part of the PRA Rulebook 

for CRR Firms, as amended from time to 

time. 

(31) ‘‘PRA Liquidity Coverage 

Requirement—UK Designated 

Investment Firms Rules’’ means the 

PRA Liquidity Coverage Requirement— 

UK Designated Investment Firms Part of 

the PRA Rulebook for CRR Firms, as 

amended from time to time. 

(32) ‘‘PRA Notifications Rules’’ means 

the Notifications Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(33) ‘‘PRA Outsourcing Rules’’ means 

the Outsourcing Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(34) ‘‘PRA Recordkeeping Rules’’ 

means the Recordkeeping Part of the 

PRA Rulebook for CRR Firms, as 

amended from time to time. 

(35) ‘‘PRA Regulatory Reporting 

Rules’’ means the Regulatory Reporting 

Part of the PRA Rulebook for CRR 

Firms, as amended from time to time. 

(36) ‘‘PRA Remuneration Rules’’ 

means the Remuneration Part of the 

PRA Rulebook for CRR Firms, as 

amended from time to time. 

(37) ‘‘PRA Risk Control Rules’’ means 

the Risk Control Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(38) ‘‘PRA Rulebook’’ or ‘‘PRA 

Rulebook for CRR Firms’’ means the 

PRA’s Rulebook for Capital Requirement 

Regulation Firms, as amended from time 

to time. 

(39) ‘‘PRA Rulebook Glossary’’ means 

the Glossary part of the PRA Rulebook 

for CRR Firms, as amended from time to 

time. 

(40) ‘‘PRA Senior Management 

Functions Rules’’ means the Senior 

Management Functions Part of the PRA 

Rulebook for CRR Firms, as amended 

from time to time. 

(41) ‘‘Prudentially regulated’’ means a 

Covered Entity that has a ‘‘prudential 

regulator’’ as that term is defined in 

Exchange Act section 3(a)(74). 

(42) ‘‘SMR’’ means the Senior 

Managers Regime that forms part of the 

Senior Managers and Certification 

Regime, as amended from time to time. 

(43) ‘‘UK’’ means the United 

Kingdom. 

(44) ‘‘UK CRR’’ means the UK version 

of Regulation (EU) No 575/2013, as 

amended from time to time. 

(45) ‘‘UK CRR Reporting ITS’’ means 

the UK version of Commission 

Implementing Regulation (EU) 680/ 

2014. 

(46) ‘‘UK EMIR’’ means the UK 

version of the ‘‘European Market 

Infrastructure Regulation,’’ Regulation 

(EU) No 648/2012, as amended from 

time to time. 

(47) ‘‘UK EMIR Margin RTS’’ means 

the UK version of Commission 

Delegated Regulation (EU) 2016/2251, as 

amended from time to time. 

(48) ‘‘UK EMIR RTS’’ means UK 

version of Commission Delegated 

Regulation (EU) No 149/2013, as 

amended from time to time. 

(49) ‘‘UK MAR’’ means the UK 

version of Market Abuse Regulation 

(EU) 596/2014, as amended from time to 

time. 

(50) ‘‘UK MAR Investment 

Recommendations Regulation’’ means 

the UK version of Commission 

Delegated Regulation (EU) 2016/958, as 

amended from time to time. 

(51) ‘‘UK MiFID Org Reg’’ means the 

UK version of Commission Delegated 

Regulation (EU) 2017/565, as amended 

from time to time. 

(52) ‘‘UK MiFIR’’ means the UK 

version of the ‘‘Markets in Financial 

Instruments Regulation,’’ Regulation 

(EU) 600/2014, as amended from time to 

time. 


jbell on DSKJLSW7X2PROD with NOTICES2
43380 Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices 

(53) ‘‘UK Regulated Activities Order’’ 

means the Financial Services and 

Markets Act 2000 (Regulated Activities) 

Order (SI 2001/544), as amended from 

time to time. 

By the Commission. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2021–16657 Filed 8–5–21; 8:45 am] 

BILLING CODE 8011–01–P 


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