[Federal Register Volume 86, Number 149 (Friday, August 6, 2021)]
[Notices]
[Pages 43318-43380]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-16657]



[[Page 43317]]

Vol. 86

Friday,

No. 149

August 6, 2021

Part II





Securities and Exchange Commission





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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; Notice

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

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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.
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    \1\ 17 CFR 240.3a71-6.
    \2\ See Letter from Nausicaa Delfas, Executive Director of 
International, FCA, dated March 19, 2021. The FCA Application is 
available on the Commission's website at: https://www.sec.gov/files/uk-financial-conduct-authority-complete-application-substituted-compliance-031921.pdf.
    \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.
    \4\ Though 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.
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    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.
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    \5\ See Exchange Act Release No. 91476 (Apr. 5, 2021), 86 FR 
18378 (Apr. 8, 2021) (``UK Substituted Compliance Notice and 
Proposed Order'').
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    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).
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    \6\ See 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'').
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    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.
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    \7\ See Exchange Act rule 3a71-6(d); see also UK Substituted 
Compliance Notice and Proposed Order, 86 FR at 18378.
    \8\ See 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).
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    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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Commission on November 1, 2021.\10\ Substituted compliance should 
assist relevant non-U.S. security-based swap market participants in 
preparing for registration.
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    \9\ See 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'').
    \10\ See ``Key Dates for Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants,'' available at: 
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
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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\
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    \11\ See Exchange Act rule 3a71-6(a)(2).
    \12\ See 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 
security-based 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.
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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\
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    \13\ Exchange Act rule 3a71-6(a)(2)(ii).
    \14\ The 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 ``Security-
Based Swap Markets'' page in the Division of Trading and Markets 
section of the site.
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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.
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    \15\ See Exchange Act rule 3a71-6(c)(3).
    \16\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18379 n.8.
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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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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 cross-border rules for SBS Entities pursuant to 
Title VII.
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    \17\ See 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.
    \18\ See Better Markets Letter at 4.
    \19\ See Exchange Act Release No. 72472 (June 25, 2014), 79 FR 
47278, 47286 (Aug. 12, 2014) (``Cross-Border Entity Definitions 
Adopting Release'') (citing Pub. L. 111-203, Preamble (stating that 
the Dodd-Frank 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)).
    \20\ See 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 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 security-based 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).
    \21\ See Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 
48964, 48972-73 (Aug. 14, 2015) (``Registration Adopting Release'').
    \22\ See Registration Adopting Release, 80 FR at 48972-73.
    \23\ See 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.'').
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    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.
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    \24\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18380; see also Business Conduct Adopting Release, 81 FR at 
30076, 30078-79.
    \25\ See Business Conduct Adopting Release, 81 FR at 30067.
    \26\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18380; see also Business Conduct Adopting Release, 81 FR at 
30076, 30078-79.
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    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, custom-made 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.
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    \27\ See Better Markets Letter at 4.
    \28\ See Exchange Act rule 3a71-6(a)(1).
    \29\ 17 CFR 240.15Fi-3(c).
    \30\ See para. (b)(3)(ii) of the Order.
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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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material changes to the foreign regulatory regime.\31\
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    \31\ See Better Markets Letter at 5.
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    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.
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    \32\ See 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).
    \33\ The 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).
    \34\ Any 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).
    \35\ See supra part II.B.2; para. (a)(15) of the Order.
    \36\ See supra note 14.
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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\
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    \37\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18380.
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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.
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    \38\ See para. (g)(1) of the Order.
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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:
    <bullet> ``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\
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    \39\ The 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 non-UK 
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.
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    <bullet> ``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\
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    \40\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
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    <bullet> 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

[[Page 43322]]

(``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\
---------------------------------------------------------------------------

    \41\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \42\ See 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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \43\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \44\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
    \45\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \46\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18381.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \47\ See 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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \48\ See 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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \49\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> ``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\
---------------------------------------------------------------------------

    \50\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> ``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\
---------------------------------------------------------------------------

    \51\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> ``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\
---------------------------------------------------------------------------

    \52\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> 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

[[Page 43323]]

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 UK-established and UK-authorized, 
then the proposed Order would require the Covered Entity to treat the 
counterparty as a financial counterparty; otherwise, the proposed Order 
would require the Covered Entity to treat the counterparty as a non-
financial counterparty. 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\
---------------------------------------------------------------------------

    \53\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \54\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \55\ See 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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \56\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18382.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \57\ See Letter from Kyle L. Brandon, Managing Director, Head of 
Derivatives Policy, SIFMA (May 3, 2021) (``SIFMA 5/3/2021 Letter'') 
at 3-9.
    \58\ See Better Markets Letter at 2.
    \59\ See 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \60\ See SIFMA 5/3/2021 Letter at 3-4.
    \61\ See SIFMA 5/3/2021 Letter at 3.
    \62\ See 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.
---------------------------------------------------------------------------

    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

[[Page 43324]]

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\
---------------------------------------------------------------------------

    \63\ See 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.).
    \64\ See 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).
    \65\ See 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.'').
    \66\ See 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).
    \67\ See PRA Rulebook Glossary.
    \68\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \69\ See General Provisions Sourcebook of the FCA Handbook 
(``FCA GEN'') 2.2.22AR.
    \70\ See FCA PROD 1.3.4R.
    \71\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \72\ See SIFMA 5/3/2021 Letter at 4.
    \73\ See SIFMA 5/3/2021 Letter at 4.
    \74\ See infra parts IV.B, V.B, VI.B, VII.B, and VIII.B.
---------------------------------------------------------------------------

    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

[[Page 43325]]

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\
---------------------------------------------------------------------------

    \75\ See 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).
    \76\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18392 (counterparty protection requirements), 18396 
(recordkeeping and reporting requirements linked to counterparty 
protection requirements).
    \77\ See UK Substituted Compliance Notice and Proposed Order, 86 
FR at 18413-20.
    \78\ For example, this approach did not address and would not 
apply to a Covered Entity's security-based 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.
---------------------------------------------------------------------------

    Consistent with the commenter's request, for any particular set of 
entity-level Exchange Act requirements,\79\ a Covered Entity must 
choose either (1) to apply substituted compliance pursuant to the Order 
with respect to all 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 (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 entity-level 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 security-based 
swap business and to comply directly with the Exchange Act (or comply 
with another applicable substituted compliance order) for other parts 
of its security-based swap business.\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.
---------------------------------------------------------------------------

    \79\ A 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.
    \81\ A 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 security-based 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).
    \82\ For 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.
---------------------------------------------------------------------------

    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 security-based 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

[[Page 43326]]

necessary to facilitate the Commission's oversight under the Order.
---------------------------------------------------------------------------

    \83\ See, e.g., Exchange Act section 15F(f); Exchange Act rule 
18a-6(g).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \85\ See para. (d)(3)(ii) of the Order.
    \86\ See FCA Handbook Glossary, definition of ``designated 
investment business.''
    \87\ See FCA Handbook Glossary, definitions of ``MiFID or 
equivalent third country business,'' ``MiFID business,'' 
``equivalent third country business,'' and ``investment services 
and/or activities.''
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \88\ See SIFMA 5/3/2021 Letter Appendix A.
    \89\ See SIFMA 5/3/2021 Letter Appendix A.
    \90\ See infra part VI.B.1.
---------------------------------------------------------------------------

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 PRA-designated 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.
---------------------------------------------------------------------------

    \91\ See SIFMA 5/3/2021 Letter Appendix A.
    \92\ See SIFMA 5/3/2021 Letter Appendix A parts (a), (b), (d), 
and (e).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \93\ See SIFMA 5/3/2021 Letter at 4-6.
    \94\ See FCA COBS 2.4.3R.
    \95\ See FCA COBS 2.4.3R(2).
---------------------------------------------------------------------------

    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

[[Page 43327]]

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\
---------------------------------------------------------------------------

    \96\ Some 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.
    \97\ FCA 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.
---------------------------------------------------------------------------

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 non-financial 
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\
---------------------------------------------------------------------------

    \98\ See 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 ``non-
financial counterparty'' as defined in UK EMIR articles 2(8) or 2(9) 
respectively, solely because the counterparty is not established in 
the United Kingdom'').
---------------------------------------------------------------------------

    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 
counterparty\102\ 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 
EMIR-based 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

[[Page 43328]]

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 EMIR-based 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.
---------------------------------------------------------------------------

    \99\ See, e.g., UK EMIR RTS article 12 (timely confirmation 
requirements for OTC derivatives contracts concluded between 
financial counterparties and non-financial counterparties).
    \100\ See 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).
    \101\ See 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 Inter-
American 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).
    \102\ UK 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.
    \103\ See 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)).
    \104\ See 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.
    \105\ See, e.g., UK EMIR articles 39(4) and (5).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \106\ A 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.
---------------------------------------------------------------------------

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 non-centrally 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 SEC-registered 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). 
Security-based swaps that have been cleared by a central counterparty 
that is not SEC-registered 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 UK-regulated central counterparty.\110\
---------------------------------------------------------------------------

    \107\ See SIFMA 5/3/2021 Letter at 6-7.
    \108\ See, e.g., UK EMIR article 11.
    \109\ See, 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.
    \110\ See 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.
---------------------------------------------------------------------------

    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 transactions cleared by a non-UK-

[[Page 43329]]

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.
---------------------------------------------------------------------------

    \111\ See SIFMA 5/3/2021 Letter at 7.
    \112\ See supra note 80.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \113\ See SIFMA 5/3/2021 Letter at 7.
    \114\ See SIFMA 5/3/2021 Letter at 7.
    \115\ See 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).
    \116\ See The Central Counterparties (Amendment, etc., and 
Transitional Provision) (EU Exit) Regulations 2018 (2018/1184), part 
6.
    \117\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \118\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18412.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \119\ See 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 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.

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[[Page 43330]]

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.
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    \120\ See Letter from Kyle Brandon, Managing Director, Head of 
Derivative Policy, SIFMA (Jan. 25, 2021) (``SIFMA 1/25/2021 
Letter'') at 8.
    \121\ SIFMA 1/25/2021 Letter at 8.
    \122\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR 18394-403, 18415-420.
    \123\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR 18394-403, 18415-420.
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    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\
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    \124\ See 17 CFR 240.18a-8(c).
    \125\ See 17 CFR 240.18a-8(h).
    \126\ Better Markets Letter at 2-3.
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    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

[[Page 43331]]

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.
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    \127\ These 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 to have arrangements or 
procedures in place for employees to report potential or actual 
breaches or reportable concerns.
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    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).
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    \128\ Better Markets Letter at 2.
    \129\ See 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).
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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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 security-based swaps, and to 
provide prompt notification to the Commission and applicable prudential 
regulators regarding certain valuation disputes.
    <bullet> 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.
    <bullet> 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\
---------------------------------------------------------------------------

    \130\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18383.
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    Taken as a whole, these risk control requirements help to promote 
market stability by mandating that registered entities follow practices 
that are appropriate to manage the market, counterparty, operational, 
and legal risks associated with their security-based swap businesses.
    In proposing to provide conditional substituted compliance in 
connection with this part of 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\
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    \131\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18383.
    \132\ See 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.
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    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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    \133\ See 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.
    \134\ See 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 [euro]15 million and 
outstanding for at least 15 business days.

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[[Page 43332]]

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\
---------------------------------------------------------------------------

    \135\ See para. (b) of the Order.
---------------------------------------------------------------------------

    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.
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    \136\ See 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.
    \137\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \138\ See paras. (b)(1) through (b)(5) of the Order.
    \139\ See 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 [euro]15 million and outstanding 
for at least 15 business days. The Commission is mindful that the UK 
provision does not provide for notice as quickly as rule 15Fi-3, 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.
    \140\ See 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 non-U.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.
---------------------------------------------------------------------------

    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

[[Page 43333]]

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.
---------------------------------------------------------------------------

    \141\ 17 CFR 240.15Fh-3(h)(2)(iii)(I).
---------------------------------------------------------------------------

    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.
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    \142\ See SIFMA 5/3/2021 Letter at 20-21 and Appendix A part 
(d)(3).
    \143\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \144\ See SIFMA 5/3/2021 Letter Appendix A part (b)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \145\ See SIFMA 5/3/2021 Letter Appendix A part (b)(1).
    \146\ See SIFMA 5/3/2021 Letter Appendix A part (b)(1) n.2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    <bullet> 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.
    <bullet> 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.
    <bullet> 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\
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    \148\ The 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'').
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    <bullet> 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 non-financial 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

[[Page 43334]]

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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
---------------------------------------------------------------------------

    \149\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \150\ The 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.
    \151\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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)

[[Page 43335]]

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.
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

    \153\ See 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'').
    \154\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    UK EMIR article 11 requires ``financial counterparties'' and ``non-
financial 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 non-centrally 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\
---------------------------------------------------------------------------

    \155\ See UK EMIR article 11(1)(a).
    \156\ See UK EMIR RTS articles 12(1) and (2).
    \157\ See UK EMIR article 2(8) (definition of ``financial 
counterparty''); UK EMIR article 2(9) (definition of ``non-financial 
counterparty'').
    \158\ See UK EMIR RTS article 1(c).
    \159\ The 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).
    \160\ See 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).
    \161\ Paragraph (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 third-country 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).
    \162\ See UK EMIR RTS article 1(c).
---------------------------------------------------------------------------

    To confirm that the Commission's analysis of the UK requirements 
for OTC derivatives contracts with non-UK-organized 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

[[Page 43336]]

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.
---------------------------------------------------------------------------

    \163\ See European Securities and Markets Authority, Questions 
and Answers: Implementation of the Regulation (EU) No 648/2012 on 
OTC Derivatives, Central Counterparties and Trade Repositories 
(EMIR), available at: https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf 
(``ESMA EMIR Q&A'').
    \164\ See ESMA EMIR Q&A, OTC Answer 12(b).
    \165\ See ESMA EMIR Q&A, OTC Answer 5(a).
    \166\ See Financial Conduct Authority, ``Brexit: our approach to 
EU non-legislative materials,'' para. 9, available at: https://www.fca.org.uk/publication/corporate/brexit-our-approach-to-eu-non-legislative-materials.pdf (``FCA Brexit Guidance''); see also FCA 
Brexit Guidance at para. 12 (``We will continue to have regard to 
other EU non-legislative material where and if they are relevant, 
taking account of Brexit and ongoing domestic legislation. Firms, 
market participants and stakeholders should also continue to do 
so.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \168\ See SIFMA 5/3/2021 Letter at 9 and Appendix A part (b)(2).
---------------------------------------------------------------------------

    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-by-requirement similarity is 
not needed for substituted compliance. The commenter's request for a 
``well-supported, 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\
---------------------------------------------------------------------------

    \169\ See Better Markets Letter at 2.
    \170\ See Better Markets Letter at 4 (requesting the Commission 
make a ``well-supported, evidence-based 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.
    \171\ See 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \172\ See SIFMA 5/3/2021 Letter at 9.
    \173\ See Better Markets Letter at 2.
    \174\ See para. (b)(3) of the Order.
    \175\ See 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 [euro]15 
million and outstanding for at least 15 business days. In the 
Commission's view, the two requirements produce comparable 
regulatory outcomes notwithstanding those differences.
---------------------------------------------------------------------------

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

[[Page 43337]]

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\
---------------------------------------------------------------------------

    \176\ See SIFMA 5/3/2021 Letter at 9.
    \177\ See Better Markets Letter at 2.
    \178\ See para. (b)(4) of the Order.
---------------------------------------------------------------------------

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 non-
financial counterparty when complying UK trade acknowledgment and 
verification requirements.\182\
---------------------------------------------------------------------------

    \179\ See Better Markets Letter at 5-6.
    \180\ See Better Markets Letter at 2.
    \181\ See ESMA EMIR Q&A, OTC Answers 5(a), 12(b); FCA Brexit 
Guidance at paras. 9, 12.
    \182\ See para. (a)(13) of the Order.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \183\ See SIFMA 5/3/2021 Letter at 9 and Appendix A part (b)(5).
---------------------------------------------------------------------------

    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:
    <bullet> 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 self-liquidate 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

[[Page 43338]]

rule 15c3-4 with respect to certain activities.\186\
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    \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).
    \185\ See 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).
    \186\ See 17 CFR 240.15c3-4 and 18a-1(f).
---------------------------------------------------------------------------

    <bullet> Margin--Margin requirements pursuant to Exchange Act 
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially 
regulated SBS Entities.\187\ The margin requirements are designed to 
protect SBS Entities from the consequences of a counterparty's 
default.\188\
---------------------------------------------------------------------------

    \187\ 17 CFR 240.18a-3.
    \188\ See 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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \189\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18385-89, 18413.
    \190\ See, e.g., Basel Committee on Banking Supervision 
(``BCBS''), The Basel Framework, available at: https://www.bis.org/basel_framework/.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \191\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386, 18413.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \192\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386-87.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \193\ See para. (c)(1)(i) of the Order. See also UK Substituted 
Compliance Notice and Proposed Order, 86 FR at 18386.
    \194\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386, n.81.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \195\ See para. (c)(1)(ii) of the Order.
    \196\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395-18403, 18416-17, 19419.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \197\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18387-89 (discussing the additional conditions).
    \198\ As 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.
---------------------------------------------------------------------------

    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

[[Page 43339]]

when foreign regimes are comparable.'' \200\
---------------------------------------------------------------------------

    \199\ See Better Markets Letter at 8.
    \200\ Better Markets Letter at 8 (emphasis in the original).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \201\ Better Markets Letter at 7.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \202\ Better Markets Letter at 7-8.
    \203\ Better Markets Letter at 7-8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \204\ See Letter from Americans for Financial Reform Education 
Fund (May 3, 2021) (``Americans for Financial Reform Education Fund 
Letter'') at 1.
    \205\ See 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.'').
    \206\ See Americans for Financial Reform Education Fund Letter 
at 1.
    \207\ See Americans for Financial Reform Education Fund Letter 
at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \208\ SIFMA 5/3/2021 Letter at 10.
    \209\ SIFMA 5/3/2021 Letter at 10, 17.
    \210\ SIFMA 5/3/2021 Letter at 10-15.
    \211\ SIFMA 5/3/2021 Letter at 15.
    \212\ SIFMA 5/3/2021 Letter at 15-17.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \213\ SIFMA 5/3/2021 Letter at 17.
    \214\ SIFMA 5/3/2021 Letter at 17.
    \215\ SIFMA 5/3/2021 Letter at 17-18.
---------------------------------------------------------------------------

    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. security-based swap market, or hope that the conditions are 
modified and delayed in a manner that will make it feasible to satisfy 
them.\218\
---------------------------------------------------------------------------

    \216\ SIFMA 5/3/2021 Letter at 18.
    \217\ SIFMA 5/3/2021 Letter at 18.
    \218\ SIFMA 5/3/2021 Letter at 19.
---------------------------------------------------------------------------

    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

[[Page 43340]]

for at least 90 days of public comment.\219\
---------------------------------------------------------------------------

    \219\ SIFMA 5/3/2021 Letter at 19-20.
---------------------------------------------------------------------------

    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 
security-based swap activities.
---------------------------------------------------------------------------

    \220\ See Americans for Financial Reform Education Fund Letter 
at 1-2; Better Markets Letter at 7-8.
    \221\ See 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).
    \222\ See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967), 
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was 
adopted to provide safeguards for public investors by setting 
standards of financial responsibility to be met by brokers and 
dealers. The basic concept of the rule is liquidity; its object 
being to require a broker-dealer to have at all times sufficient 
liquid assets to cover his current indebtedness.'') (footnotes 
omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774 
(June 26, 1973) (Commission release of a letter from the Division of 
Market Regulation) (``The purpose of the net capital rule is to 
require a broker or dealer to have at all times sufficient liquid 
assets to cover its current indebtedness. The need for liquidity has 
long been recognized as vital to the public interest and for the 
protection of investors and is predicated on the belief that 
accounts are not opened and maintained with broker-dealers in 
anticipation of relying upon suit, judgment and execution to collect 
claims but rather on a reasonable demand one can liquidate his cash 
or securities positions.''); Exchange Act Release No. 15426 (Dec. 
21, 1978), 44 FR 1754 (Jan. 8, 1979) (``The rule requires brokers or 
dealers to have sufficient cash or liquid assets to protect the cash 
or securities positions carried in their customers' accounts. The 
thrust of the rule is to insure that a broker or dealer has 
sufficient liquid assets to cover current indebtedness.''); Exchange 
Act Release No. 26402 (Dec. 28, 1988), 54 FR 315 (Jan. 5, 1989) 
(``The rule's design is that broker-dealers maintain liquid assets 
in sufficient amounts to enable them to satisfy promptly their 
liabilities. The rule accomplishes this by requiring broker-dealers 
to maintain liquid assets in excess of their liabilities to protect 
against potential market and credit risks.'') (footnote omitted).
---------------------------------------------------------------------------

    The net liquid assets test is imposed through how an SBS Entity is 
required to compute net capital pursuant to Exchange Act rule 18a-1. 
The first step is to compute the SBS Entity's net worth under 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.
---------------------------------------------------------------------------

    \223\ See 17 CFR 240.15c3-1(c)(2).
    \224\ The highly liquid assets under Exchange Act rule 18a-1 are 
otherwise known as ``allowable assets'' because they are not 
deducted when computing net capital. See 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.
---------------------------------------------------------------------------

    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

[[Page 43341]]

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.
---------------------------------------------------------------------------

    \225\ Exchange Act rule 18a-3 does not require SBS Entities to 
post initial margin (though it does not prohibit the practice).
    \226\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
    \227\ See Capital and Margin Adopting Release, 84 FR at 43887.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \228\ SIFMA 5/3/2021 Letter at 10.
    \229\ See 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'').
    \230\ As 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.
    \231\ The Basel capital standard does not preclude a firm from 
having more than a dollar of highly liquid assets for each dollar of 
unsubordinated liabilities. Thus, a firm operating pursuant to the 
standard may structure its assets and liabilities in a manner that 
achieves this result. However, the standard does not mandate this 
result. Rather, it will accommodate a firm that seeks to maintain 
this level of liquidity on its own accord.
---------------------------------------------------------------------------

    However, in seeking to bridge this regulatory gap, the additional 
condition should take into account that Covered Entities are or will be 
subject to 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.
---------------------------------------------------------------------------

    \232\ See Liquidity Coverage Requirement--UK Designated 
Investment Firms part of PRA Rulebook.
    \233\ See 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).
    \234\ See Internal Liquidity Adequacy Assessment part of the PRA 
Rulebook.
    \235\ See SIFMA 5/3/2021 Letter at 12-15.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \236\ See Better Markets Letter at 8 (recommending that the 
Commission consider denying substituted compliance with respect to 
these Exchange Act capital requirements).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \237\ See 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.'').
    \238\ See, e.g., CRR, Part 1 (Own Funds, including Tier 1 
capital) and Part 2 (Capital Requirements).
---------------------------------------------------------------------------

    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

[[Page 43342]]

cover all liabilities (rather than those maturing in 365 days as was 
proposed).
---------------------------------------------------------------------------

    \239\ See 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).
    \240\ The 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.
    \241\ See para. (c)(1)(iii)(A)(1) of the Order. The definition 
of ``liquid assets'' and the method of calculating the deductions 
are discussed below.
---------------------------------------------------------------------------

    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 fixed-dollar 
minimum net capital requirement of Exchange Act rule 18a-1. As 
discussed above, net capital is calculated by applying haircuts 
(deductions) to tentative net capital and the fixed-dollar minimum 
requires that net capital must equal or exceed $20 million. The first 
prong 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\
---------------------------------------------------------------------------

    \242\ See para. (c)(1)(iii)(B) of the Order.
    \243\ See supra notes 224 and 230 (describing allowable assets 
under Exchange Act rule 18a-1).
    \244\ The 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-firms-does-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-and-update.company-information.service.gov.uk/company/01929333/filing-history; Citigroup Global Markets Limited 2019 
Annual Report, available at: https://find-and-update.company-information.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/subsidiary-financial-info/gsi/12-31-20-financial-statements.pdf; Merrill Lynch International 2020 
Annual Report, available at: https://d1io3yog0oux5.cloudfront.net/_9d85f1cf3d21160d5542784492310fed/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-and-update.company-information.service.gov.uk/company/01550505/filing-history.
    \245\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \246\ See para. (c)(1)(iii)(B)(1) of the Order.
    \247\ See, e.g., International Financial Reporting Standards 
Foundation (``IFRS''), IAS 7 Statement of Cash Flows (defining 
``cash'' as comprising cash on hand and demand deposits and ``cash 
equivalents'' as short-term, highly liquid investments that are 
readily convertible to known amounts of cash and which are subject 
to an insignificant risk of changes in value). See also Books and 
Records Adopting Release, 84 FR 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).
    \248\ See para. (c)(1)(iii)(B)(2) of the Order.
    \249\ See 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).
    \250\ See para. (c)(1)(iii)(B)(3) of the Order.
    \251\ See 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).
    \252\ See para. (c)(1)(iii)(B)(4) of the Order.
    \253\ See 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).
---------------------------------------------------------------------------

    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 re-payment of the loan until 
the initial margin is returned to the Covered Entity; and (3) the 
liability of the Covered Entity to the lender can be fully satisfied by 
delivering the collateral serving as initial margin to the

[[Page 43343]]

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\
---------------------------------------------------------------------------

    \254\ See 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).
    \255\ See para. (c)(1)(iii)(B)(5) of the Order.
    \256\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
    \257\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \258\ See para. (c)(1)(iii)(B) of the Order.
    \259\ See SIFMA 5/3/2021 Letter Appendix C.
---------------------------------------------------------------------------

    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 
risk-weight their assets. This involves adjusting the nominal value of 
each asset based on the inherent risk of the asset. Less risky assets 
are adjusted to lower values (i.e., have less weight) than more risky 
assets. As a result, Covered Entities must hold lower levels of 
regulatory capital for less risky assets and higher levels of capital 
for riskier assets. Similarly, under Exchange Act rule 18a-1, less 
risky assets incur lower haircuts than riskier assets and, 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 risk-weighting 
assets under the Basel capital standard to determine the amount of the 
deduction (haircuts) under the first prong of the second additional 
capital condition.
---------------------------------------------------------------------------

    \260\ See para. (c)(1)(ii)(A)(1) of the Order.
    \261\ See BCBS, Risk-based capital requirements (RBC20), 
available at: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20191215&published=20191215.
---------------------------------------------------------------------------

    Under the Basel capital standard, Covered Entities must hold 
regulatory capital equal to at least 8% of the amount of their risk-
weighted assets.\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 risk-
weighted 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\
---------------------------------------------------------------------------

    \262\ See BCBS, Risk-based capital requirements (RBC20).
    \263\ See 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).
    \264\ For example, assume a Covered Entity has total assets of 
$600 million (of which $595 million are liquid and $5 million are 
illiquid) and total liabilities of $450 million. In this case, the 
Covered Entity's liquid assets would exceed total liabilities by 
$145 million ($590 million minus $450 million) and, therefore, the 
Covered Entity would have excess liquid assets greater than $100 
million as required by the first prong of 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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

[[Page 43344]]

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.
---------------------------------------------------------------------------

    \266\ See para. (c)(1)(iii)(A)(3) of the Order.
    \267\ See para. (c)(1)(ii) of the Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \268\ See 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.
---------------------------------------------------------------------------

    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 PRA-designated 
investment firms, these firms report total liquid assets that exceed 
total liabilities and, in most cases, substantially in excess of $100 
million.
---------------------------------------------------------------------------

    \269\ See SIFMA 5/3/2021 Letter at 19.
    \270\ SIFMA 5/3/2021 Letter at 10-11.
    \271\ See SIFMA 5/3/2021 Letter at 10-11, Appendix C.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \272\ See SIFMA 5/3/2021 Letter at 10; UK Substituted Compliance 
Notice and Proposed Order, 86 FR at 18407.
    \273\ UK Substituted Compliance Notice and Proposed Order, 86 FR 
at 18407.
    \274\ See Better Markets Letter at 7; Americans for Financial 
Reform Education Fund Letter at 1-2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \276\ See SIFMA 5/3/2021 Letter at 19-20.
    \277\ See SIFMA 5/3/2021 Letter at Appendix C.
---------------------------------------------------------------------------

    Finally, the Commission has modified the citations to UK laws in 
the capital

[[Page 43345]]

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 PRA-designated 
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\
---------------------------------------------------------------------------

    \278\ SIFMA 5/3/2021 Letter at 10-11, Appendix A.
    \279\ See Better Markets Letter at 5-6.
    \280\ SIFMA 5/3/2021 Letter at Appendix A.
    \281\ See SIFMA 5/3/2021 Letter at Appendix A.
    \282\ FCA 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.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \283\ See SIFMA 5/3/2021 Letter Appendix A.
    \284\ 17 CFR 240.18a-4.
    \285\ The 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.
    \286\ See Capital and Margin Adopting Release, 84 FR at 43950-
51.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \287\ FCA 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.
    \289\ More 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \290\ See SIFMA 5/3/2021 Letter Appendix A.
    \291\ See 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).
    \292\ See SIFMA 5/3/2021 Letter Appendix A.
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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\
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    \293\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386.
    \294\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386, n.82.
---------------------------------------------------------------------------

    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

[[Page 43346]]

sets rules permit the use of a model (including a third party model 
such as ISDA's SIMM\TM\ 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\
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    \295\ See 17 CFR 240.18a-3(c)(1)(ii) and FCA Application at 32-
35.
    \296\ See 17 CFR 240.18a-3(c)(1)(ii) and FCA Application at 40-
43.
    \297\ See 17 CFR 240.18a-3(d)(2)(i) and FCA Application at 21.
    \298\ See 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).
    \299\ See 17 CFR 240.18a-3(c)(1)(iii) and FCA Application at 52-
60.
    \300\ See 17 CFR 240.18a-3(c)(1)(iii) and FCA Application at 52-
60.
---------------------------------------------------------------------------

    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\
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    \301\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18386.
    \302\ See SIFMA 5/3/2021 Letter at 10, Appendix A.
    \303\ See SIFMA 5/3/2021 Letter Appendix A.
---------------------------------------------------------------------------

    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 PRA-designated 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\
---------------------------------------------------------------------------

    \304\ See PRA General Organisational Requirements Rule 2.1.
    \305\ The 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.
    \306\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \307\ French Substituted Compliance Notice and Proposed Order, 
85 FR at 85737.
    \308\ See paras. (c)(2)(ii) and (iii) of the Order.
---------------------------------------------------------------------------

    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 non-cleared security-
based swaps ``to reduce the possibility and severity of another crisis 
related to excessive buildup of risk in the swaps markets.'' \310\
---------------------------------------------------------------------------

    \309\ See Better Markets Letter at 3.
    \310\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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 non-cleared security-based swaps, the Commission 
stated that the ``Dodd-Frank Act seeks to address the risk of 
uncollateralized credit risk exposure arising from OTC derivatives by, 
among other things, mandating margin requirements for non-cleared 
security-based swaps and swaps.'' \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

[[Page 43347]]

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\
---------------------------------------------------------------------------

    \311\ See Better Markets Letter at 2-3.
    \312\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers; Proposed 
Rule, Exchange Act Release No. 68071 (Oct. 18, 2021), 77 FR 70214, 
70258 (Nov. 23, 2012).
    \313\ See 17 CFR 240.3a71-6(d)(5)(i) and (ii).
    \314\ See 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.).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \315\ See 17 CFR 240.18a-3(c)(ii)(A)(1) and (2).
    \316\ See FCA Application at 57.
    \317\ See 17 CFR 240.18a-3(c)(ii)(B).
    \318\ See FCA Application at 20. These thresholds are being 
phased-in with the last initial margin threshold set at EUR 8 
billion.
---------------------------------------------------------------------------

    In some cases these differences may result in a Covered Entity not 
being adequately collateralized to cover its current or future exposure 
to these counterparties with respect to its OTC derivatives 
transactions. In addition, differences in the counterparty exceptions 
could potentially incentivize market participants to engage in non-
cleared security-based swap transactions outside of the United 
States.\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.
---------------------------------------------------------------------------

    \319\ The 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 non-centrally cleared derivatives exceeds a certain 
threshold on a group basis. In contrast, Exchange Act rule 18a-3 
does not require (but permits) a nonbank security-based swap dealer 
to collect initial margin from counterparties that are financial 
market intermediaries. 17 CFR 240.18a-3(c)(1)(iii)(B). The 
comparability analysis, however, focuses on determining whether the 
UK margin rules are comparable to Exchange Act rule 18a-3.
---------------------------------------------------------------------------

    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 security-based swaps, unless the counterparty would qualify for 
an exception under Exchange Act rule 18a-3 from the requirement to 
deliver variation margin to the Covered Entity.\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.
---------------------------------------------------------------------------

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

    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 security-based swaps, unless the counterparty would qualify for 
an exception under Exchange Act rule 18a-3 from the requirement to 
deliver initial margin to 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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \322\ See para. (c)(2)(iv) of the Order.
    \323\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18396-98, 18416.
---------------------------------------------------------------------------

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:
    <bullet> 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.
    <bullet> 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.
    <bullet> Additional Exchange Act section 15F(j) requirements--
Certain additional

[[Page 43348]]

requirements related to information-gathering and antitrust 
prohibitions.\324\
---------------------------------------------------------------------------

    \324\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \325\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \326\ See 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.
    \327\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18389 and n.108.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \328\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \329\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18390.
---------------------------------------------------------------------------

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

[[Page 43349]]

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.
---------------------------------------------------------------------------

    \330\ See 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.
    \331\ See 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.
    \332\ See para. (d) of the Order.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \333\ See 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 anti-
trust 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \335\ 15 U.S.C. 78o-10(k).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \336\ See SIFMA 5/3/2021 Letter at 20-21 and Appendix A part 
(d)(3).
    \337\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \338\ See SIFMA 5/3/2021 Letter Appendix A part (d)(3).

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[[Page 43350]]

    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.
---------------------------------------------------------------------------

    \339\ See SIFMA 5/3/2021 Letter Appendix A part (d)(3).
    \340\ See SIFMA 5/3/2021 Letter Appendix A part (d)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \341\ See SIFMA 5/3/2021 Letter Appendix A part (d)(3).
---------------------------------------------------------------------------

    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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\
---------------------------------------------------------------------------

    \342\ To 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.
---------------------------------------------------------------------------

    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
---------------------------------------------------------------------------

    \343\ The 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.
---------------------------------------------------------------------------

    <bullet> UK CRR articles 286 through 288 and 293 \344\ are 
described in part IV.B.1.
---------------------------------------------------------------------------

    \344\ The 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.
---------------------------------------------------------------------------

    <bullet> UK EMIR Margin RTS article 2 \345\ is described in part 
IV.B.1.
---------------------------------------------------------------------------

    \345\ See supra note 344.
---------------------------------------------------------------------------

    <bullet> 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.
---------------------------------------------------------------------------

    \346\ See supra note 343.
---------------------------------------------------------------------------

    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 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

[[Page 43351]]

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\
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    \347\ The 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.
    \348\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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 outcomes-oriented 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.
---------------------------------------------------------------------------

    \349\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18409.
    \350\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18409.
    \351\ See para. (d)(3)(vi) of the Order.
    \352\ See supra note 342 and accompanying text.
---------------------------------------------------------------------------

2. Compliance Reports
    A commenter requested that the Commission amend three aspects of 
the proposed Order's compliance report-related 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.
---------------------------------------------------------------------------

    \353\ See SIFMA 5/3/2021 Letter at 20-21 and Appendix A part 
(d)(2)(ii).
    \354\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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

[[Page 43352]]

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.
---------------------------------------------------------------------------

    \355\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 85692.
    \356\ See 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 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'').
    \357\ Exchange Act rule 15Fk-1(c)(2)(ii)(D); see also Exchange 
Act rule 15Fk-1(e)(2) (defining ``senior officer'' as ``the chief 
executive officer or other equivalent officer'').
    \358\ See para. (d)(2)(ii)(B) of the Order.
    \359\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \360\ See 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.
    \361\ See 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.
    \363\ See para. (d)(2)(ii)(E) of the Order.
---------------------------------------------------------------------------

    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

[[Page 43353]]

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.
---------------------------------------------------------------------------

    \364\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(d)(2).
    \365\ See SIFMA 5/3/2021 Letter at 21.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \366\ Non-U.S. SBS Entities should assess the applicability of 
the Exchange Act's antitrust prohibitions to their security-based 
swap businesses.
---------------------------------------------------------------------------

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:
    <bullet> 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 
security-based swap, as well as material incentives or conflicts of 
interest that the SBS Entity may have in connection with the security-
based swap.
    <bullet> ``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.
    <bullet> 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.
    <bullet> Fair and balanced communications--Requirements that an SBS 
Entity communicate with security-based swap counterparties in a fair 
and balanced manner based on principles of fair dealing and good faith.
    <bullet> Daily mark disclosure--Requirements that an SBS Entity 
provide daily mark information to certain security-based swap 
counterparties.
    <bullet> 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\
---------------------------------------------------------------------------

    \367\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \368\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18414-15.
---------------------------------------------------------------------------

    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

[[Page 43354]]

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\
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    \369\ See 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 UK-
authorized 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 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.
    \370\ FCA COBS 3.5 describes which clients are ``professional 
clients.'' FCA COBS 3.5.2R describes the types of clients considered 
to be professional clients unless the client elects non-professional 
treatment; these clients are per se professional clients. FCA COBS 
3.5.3R describes the types of clients who may be treated as 
professional clients on request; these clients are elective 
professional clients. See FCA COBS 3.5. 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.
    \372\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18393.
    \373\ See UK EMIR RTS article 13(3)(a)(i); UK EMIR article 10.
    \374\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18393.
    \375\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18393.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \376\ 15 U.S.C. 78c-3(g)(5).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \378\ See 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.
    \379\ See 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.
---------------------------------------------------------------------------

    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

[[Page 43355]]

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.
---------------------------------------------------------------------------

    \380\ See paras. (e)(1) through (5) of the Order.
    \381\ See para. (e)(6) of the Order.
    \382\ See para. (e)(4)(ii) 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.
---------------------------------------------------------------------------

    \383\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(1).
    \384\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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 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 material economic terms of a security-based 
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 non-
UK 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 security-based 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

[[Page 43356]]

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.
---------------------------------------------------------------------------

    \385\ See SIFMA 5/3/2021 Letter Appendix A part (e)(1).
---------------------------------------------------------------------------

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 third-party 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 security-based 
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.
---------------------------------------------------------------------------

    \386\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(1).
    \387\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \388\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(3).
    \389\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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 PRA-designated investment firms. The proposed Order would 
not require a Covered Entity that is a bank or PRA-designated 
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 PRA-designated investment firm). Moreover, the FCA Application 
requested substituted compliance for all MiFID

[[Page 43357]]

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 PRA-regulated 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.
---------------------------------------------------------------------------

    \390\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(4).
    \391\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \392\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(4).
---------------------------------------------------------------------------

    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 counterparty-
specific 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.
---------------------------------------------------------------------------

    \393\ See Exchange Act rule 15Fh-3(f)(1).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \394\ See para. (e)(4)(i)(A) of the Order.
---------------------------------------------------------------------------

    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

[[Page 43358]]

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.
---------------------------------------------------------------------------

    \395\ See, e.g., FCA COBS 3.5.3R.
    \396\ See, e.g., UK MiFID Org Reg article 54(3).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \397\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(5).
    \398\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \399\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(5).
---------------------------------------------------------------------------

    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 ``insurance-based investment products.'' The 
Commission is not making a determination whether an ``insurance-based 
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.
---------------------------------------------------------------------------

    \400\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(5).
---------------------------------------------------------------------------

    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 security-based 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.
---------------------------------------------------------------------------

    \401\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(5).
---------------------------------------------------------------------------

    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 security-based swap or trading 
strategy involving a security-based swap; not imply that

[[Page 43359]]

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-to-model 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\
---------------------------------------------------------------------------

    \402\ See SIFMA 5/3/2021 Letter at 21 and Appendix A part 
(e)(6).
    \403\ See Better Markets Letter at 2.
    \404\ See UK EMIR article 13(2).
    \405\ See para. (e)(6) of the Order.
---------------------------------------------------------------------------

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:
    <bullet> Record Making--Exchange Act rule 18a-5 requires prescribed 
records to be made and kept current.\406\
---------------------------------------------------------------------------

    \406\ See 17 CFR 240.18a-5. The FCA Application discusses UK 
requirements that address firms' record creation obligations related 
to matters such as financial condition, operations, transactions, 
counterparties, and their property, personnel, and business conduct. 
See FCA Application Appendix B category 2 at 101-28, 136-39.
---------------------------------------------------------------------------

    <bullet> Record Preservation--Exchange Act rule 18a-6 requires 
preservation of records.\407\
---------------------------------------------------------------------------

    \407\ See 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.
---------------------------------------------------------------------------

    <bullet> Reporting--Exchange Act rule 18a-7 requires certain 
reports.\408\
---------------------------------------------------------------------------

    \408\ See 17 CFR 240.18a-7. The FCA Application discusses UK 
requirements that address firms' obligations to make certain 
reports. See FCA Application Appendix B category 2 at 172-80, 185-
89.
---------------------------------------------------------------------------

    <bullet> Notification--Exchange Act rule 18a-8 requires 
notification to the Commission when certain financial or operational 
problems occur.\409\
---------------------------------------------------------------------------

    \409\ See 17 CFR 240.18a-8. The FCA Application discusses UK 
requirements that address firms' obligations to make certain 
notifications. See FCA Application Appendix B category 2 at 181-85.
---------------------------------------------------------------------------

    <bullet> Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a 
quarterly securities count.\410\
---------------------------------------------------------------------------

    \410\ See 17 CFR 240.18a-9. The FCA Application discusses UK 
requirements that address firms' obligations to perform securities 
counts. See FCA Application Appendix B category 2 at 129-36.
---------------------------------------------------------------------------

    <bullet> Daily Trading Records. Exchange Act section 15F(g) 
requires SBS Entities to maintain daily trading records.\411\
---------------------------------------------------------------------------

    \411\ See 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.
---------------------------------------------------------------------------

    Taken as a whole, the recordkeeping, reporting, notification, and 
securities count requirements that apply to SBS Entities are designed 
to promote the prudent operation of the firm's security-based swap 
activities, assist the Commission in conducting compliance examinations 
of those activities, and alert the Commission to potential financial or 
operational problems that could impact the firm and its customers.\412\
---------------------------------------------------------------------------

    \412\ Rule 3a71-6 sets forth additional analytic considerations 
in connection with substituted compliance for the Commission's 
recordkeeping, reporting, notification, and securities count 
requirements. In particular, Exchange Act rule 3a71-6(d)(6) provides 
that the Commission intends to consider (in addition to any 
conditions imposed) ``whether the foreign financial regulatory 
system's required records and reports, the timeframes for recording 
or reporting information, the accounting standards governing the 
records and reports, and the required format of the records and 
reports'' are comparable to applicable provisions under the Exchange 
Act, and whether the foreign provisions ``would permit the 
Commission to examine and inspect regulated firms' compliance with 
the applicable securities laws.''
---------------------------------------------------------------------------

    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

[[Page 43360]]

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\
---------------------------------------------------------------------------

    \413\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18394-404, 18415-20.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \414\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395-96.
---------------------------------------------------------------------------

    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 broker-
dealer has implemented to comply with them.
---------------------------------------------------------------------------

    \415\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18394-404, 18415-20.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \416\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014), 
79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \417\ See SIFMA 5/3/2021 Letter at 21-23.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \418\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18394-404, 18415-20.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \419\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395 (discussing this limitation).
    \420\ 17 CFR 240.10b-10.
    \421\ See SIFMA 5/3/2021 Letter at 22-23.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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

[[Page 43361]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \428\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18403-404 (discussing this condition).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \429\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395 (discussing this condition).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \430\ See para. (f)(3)(i)(D) of the Order.
    \431\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18399, 18417.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \432\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395 (discussing this condition).
    \433\ See SIFMA 5/3/2021 Letter at 23.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \434\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18395 (discussing 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

[[Page 43362]]

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.
---------------------------------------------------------------------------

    \435\ See SIFMA 5/3/2021 Letter Appendix B.
    \436\ See SIFMA 5/3/2021 Letter Appendix B.
    \437\ See SIFMA 5/3/2021 Letter Appendix B.
    \438\ See Americans for Financial Reform Education Fund Letter 
at 1.
    \439\ See SIFMA 5/3/2021 Letter Appendix B.
    \440\ See SIFMA 5/3/2021 Letter Appendix B.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \441\ See SIFMA 5/3/2021 Letter Appendix A.
---------------------------------------------------------------------------

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

    \442\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \443\ See SIFMA 5/3/2021 Letter Appendix A.
    \444\ Compare 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.
---------------------------------------------------------------------------

    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

[[Page 43363]]

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\
---------------------------------------------------------------------------

    \445\ See SIFMA 5/3/2021 Letter Appendix A.
    \446\ There 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.
---------------------------------------------------------------------------

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 entity-level 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\
---------------------------------------------------------------------------

    \447\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \448\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \449\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \450\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \451\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \452\ Compare para. (f)(2)(i)(R) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(2)(i)(R) of the 
Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \453\ See FCA Reader's Guide: An Introduction to the Handbook 
(Jan. 2019), available at: https://www.fca.org.uk/publication/handbook/readers-guide_0.pdf.
    \454\ Compare para. (f)(2)(i)(R) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(2)(i)(R) of the 
Order.
---------------------------------------------------------------------------

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

[[Page 43364]]

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\
---------------------------------------------------------------------------

    \455\ See FCA Application at 109.
    \456\ Compare para. (f)(2)(i)(D) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(2)(i)(D) of the 
Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \457\ See FCA Application at 110.
    \458\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \459\ Compare 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.
    \460\ Compare 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \461\ See FCA Application at 111.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \462\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \463\ Compare 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.
    \464\ Compare 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.
---------------------------------------------------------------------------

    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

[[Page 43365]]

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\
---------------------------------------------------------------------------

    \465\ Compare 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.
    \466\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \467\ See FCA Application at 126-27.
    \468\ Compare 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.
---------------------------------------------------------------------------

    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 
record-keeping 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\
---------------------------------------------------------------------------

    \469\ See FCA Application at 127.
    \470\ Compare 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \471\ See FCA Application at 203.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \472\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \473\ Compare 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \474\ Compare 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.
---------------------------------------------------------------------------

    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''

[[Page 43366]]

(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).
---------------------------------------------------------------------------

    \475\ See FCA Application at 127.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \476\ Compare para. (f)(1)(i)(K) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(1)(i)(K) of the 
Order.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \477\ See FCA Application at 146-47.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \478\ See FCA Application at 153-54.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \479\ See FCA Application at 159-60.
---------------------------------------------------------------------------

    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

[[Page 43367]]

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).
---------------------------------------------------------------------------

    \480\ See FCA Application at 160-61.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \481\ See FCA Application at 165.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \482\ Compare para. (f)(3)(i)(A) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(3)(i)(A) of the 
Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \483\ See FCA Application at 178-79.
    \484\ Compare para. (f)(3)(ii)(A) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(3)(ii)(A) of 
the Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \485\ Compare para. (f)(3)(ii)(A) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(3)(ii)(A) of 
the Order.
---------------------------------------------------------------------------

    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

[[Page 43368]]

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).
---------------------------------------------------------------------------

    \486\ See FCA Application at 175-76.
    \487\ See FCA Application at 177 and 186-89.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \488\ Compare para. (f)(3)(iv)(A) of the UK Substituted 
Compliance Notice and Proposed Order, with para. (f)(3)(iv)(A) of 
the Order.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \489\ Compare 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \490\ See FCA Application at 181-85.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \491\ Compare para. (f)(5)(1) of the UK Substituted Compliance 
Notice and Proposed Order, with para. (f)(5)(1) of the Order.
---------------------------------------------------------------------------

    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 client-specific 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

[[Page 43369]]

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.
---------------------------------------------------------------------------

    \492\ See FCA Application at 129-36.
    \493\ See FCA Application at 129.
---------------------------------------------------------------------------

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 high-level 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).
---------------------------------------------------------------------------

    \494\ Compare para. (f)(6) of the UK Substituted Compliance 
Notice and Proposed Order, with para. (f)(6) of the Order.
    \495\ See FCA Application at 102.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \496\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18404.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \497\ See UK Substituted Compliance Notice and Proposed Order, 
86 FR at 18404-06.
---------------------------------------------------------------------------

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 security-
based swap activities constitute ``regulated activities'' as defined 
for purposes of the relevant UK provisions, are carried on by the 
Covered Entity from an establishment in the United Kingdom, and fall 
within the scope of the Covered Entity's authorization from the FCA 
and/or the PRA to conduct regulated activities in the United Kingdom.
    (2) Activities as UK MiFID ``investment services or activities.'' 
For each condition in paragraphs (b) through (f) of this Order that 
requires the application of, and the Covered Entity's compliance with, 
provisions of FCA PROD 3 and/or UK MiFID Org Reg, the Covered Entity's 
relevant security-based swap activities (a) constitute ``investment 
services or activities,'' as defined in the FCA Handbook Glossary;

[[Page 43370]]

(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

[[Page 43371]]

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{time}  or {PRA Internal Capital 
Adequacy Assessment Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1 
through 8.5, 9.1, 10.1, 10.2, and 11.1 through 11.3 and PRA Internal 
Liquidity Adequacy Assessment Rules 3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 
11.1, 11.2, 11.4, 12.1, 12.3, and 12.4{time} ;
    (iv) FCA PRIN 2.1.1R(3);
    (v) FCA SYSC 4.1.1R(1), 4.1.2R, 4.3A.1R, 4.3A.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{time}  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{time} ;
    (vii) Either {FSMA schedule 6 part 2D and FCA COND 2.4.1A{time}  or 
{FSMA schedule 6 parts 3C and 5D, FCA COND 2.4.1C, and PRA Fundamental 
Rules 3 through 6{time} ;
    (viii) UK CRR articles 286 through 288 and 293;
    (ix) UK EMIR Margin RTS article 2; and
    (x) UK MiFID Org Reg articles 21 through 37 and 72 through 76 and 
Annex IV.
    (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

[[Page 43372]]

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 non-cleared security-based swaps, unless the 
counterparty would qualify for an exception from the collateral 
collection requirements under paragraph (c)(1)(iii) or (c)(2)(iii) of 
Exchange Act 18a-3;
    (iii) The Covered Entity collects initial margin, as defined in the 
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

[[Page 43373]]

2.2.32R through 2.2.35R and FCA BIPRU 12.3.4R, 12.3.5R, 12.3.7R, 
12.3.8R, 12.3.22AR, 12.3.22BR, 12.3.27R, 12.4.-2R, 12.4.-1R, 12.4.5AR, 
12.4.10R, and 12.4.11R{time}  or {PRA Internal Capital Adequacy 
Assessment Rules 4.1 through 4.4, 5.1, 6.1, 7.1, 7.2, 8.1 through 8.5, 
9.1, 10.1, 10.2 and 11.1 through 11.3 and PRA Internal Liquidity 
Adequacy Assessment Rules 3.1, 3.2, 3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 
11.2, 11.4, 12.1, 12.3, and 12.4{time} ;
    (iv) FCA PRIN 2.1.1R(3);
    (v) FCA SYSC 4.1.1R(1), 4.1.2R, 4.3A.1R, 4.3A.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{time}  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{time} ;
    (vii) Either {FSMA schedule 6 part 2D and FCA COND 2.4.1A{time}  or 
{FSMA schedule 6 parts 3C and 5D, FCA COND 2.4.1C, and PRA Fundamental 
Rules 3 through 6{time} ;
    (viii) UK CRR articles 286 through 288 and 293;
    (ix) UK EMIR Margin RTS article 2; and
    (x) UK MiFID Org Reg articles 21 through 37 and 72 through 76 and 
Annex IV.
    (4) Additional condition to paragraph (d)(1). Paragraph (d)(1) 
further is conditioned on the requirement that the Covered Entity 
complies with the provisions specified in paragraph (d)(3) as if those 
provisions also require compliance with:
    (i) Applicable requirements under the Exchange Act; and
    (ii) The other applicable conditions of this Order in connection 
with requirements for which the Covered Entity is relying on this 
Order.
(e) Substituted Compliance in Connection With Counterparty Protection 
Requirements.
    This Order extends to the following provisions related to 
counterparty protection:
    (1) Disclosure of information regarding material risks and 
characteristics. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material risks and characteristics of one or 
more security-based swaps subject thereto, provided that the Covered 
Entity, in relation to that security-based swap, is subject to and 
complies with the requirements of:
    (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{time}  or {FCA 
COBS 6.1ZA.9UK, 6.1ZA.14UK, and 14.3A.5UK{time} .
    (2) Disclosure of information regarding material incentives or 
conflicts of interest. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material incentives or conflicts of interest 
that a Covered Entity may have in connection with one or more security-
based swaps subject thereto, provided that the Covered Entity, in 
relation to that security-based swap, is subject to and complies with 
the requirements of either:
    (i) FCA SYSC 10.1.8R and UK MiFID Org Reg articles 33 to 35;
    (ii) FCA COBS 2.3A.5R, 2.3A.6R, 2.3A.7E, and 2.3A.10R through 
2.3A.14R; or
    (iii) UK MAR article 20(1) and UK MAR Investment Recommendations 
Regulation articles 5 and 6.
    (3) ``Know your counterparty.'' The requirements of Exchange Act 
rule 15Fh-3(e), as applied to one or more security-based swap 
counterparties subject thereto, provided that the Covered Entity, in 
relation to the relevant security-based swap counterparty, is subject 
to and complies with the requirements of:
    (i) FCA SYSC 6.1.1R;
    (ii) UK MiFID Org Reg articles 21, 22, 25, 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{time}  or {PRA General 
Organisational Requirement 2.1 and PRA Internal Capital Adequacy 
Assessment Rule 10.1{time} ;
    (v) MLR 2017 Regulations 27 and 28; and
    (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{time}  or {FCA COBS 
2.1.1AR and FCA COBS 4.2.1R{time} ;
    (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{time}  or 
{FCA COBS 4.5A.9UK, 4.7.-1AUK, 6.1ZA.5UK, 6.1ZA.8UK, 6.1ZA.17UK, 
6.1ZA.19UK, 6.1ZA.20UK, 8A.1.5UK to 8A.1.7UK, 14.3A.5UK, 14.3A.7UK, and 
14.3A.9UK{time} ;
    (iv) UK MAR Investment Recommendations Regulation articles 3 and 4; 
and
    (v) UK MAR articles 12(1)(c), 15, and 20(1).
    (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

[[Page 43374]]

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

[[Page 43375]]

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

[[Page 43376]]

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),

[[Page 43377]]

(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-by-Country 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

[[Page 43378]]

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.

[[Page 43379]]

    (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.

[[Page 43380]]

    (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