46500 Federal Register / Vol. 86, No. 157 / Wednesday, August 18, 2021 / Notices 

1Exchange Act Release No. 90765 (Dec. 22, 2020), 

85 FR 85686, 85687 (Dec. 29, 2020) (‘‘Order’’). 

2 Id. at 85689–97. 

3Section 15F(e)(1)(B) of the Exchange Act 

provides that SBS Entities for which there is not a 

prudential regulator shall meet such minimum 

capital requirements and minimum initial and 

variation margin requirements as the Commission 

shall by rule or regulation prescribe. The term 

‘‘prudential regulator’’ is defined in Section 1(a)(39) 

of the Commodity Exchange Act (7 U.S.C. 1(a)(39)) 

and that definition is incorporated by reference in 

Section 3(a)(74) of the Exchange Act. Pursuant to 

the definition, the Board of Governors of the 

Federal Reserve System (‘‘Federal Reserve’’), the 

Office of the Comptroller of the Currency (‘‘OCC’’), 

the Federal Deposit Insurance Corporation 

(‘‘FDIC’’), the Farm Credit Administration, or the 

Federal Housing Finance Agency is the ‘‘prudential 

regulator’’ of an SBS Entity if the entity is directly 

supervised by that agency. The Commission 

adopted Exchange Act rules 18a–1 through 18a–1d 

(capital) and 18a–3 (margin) pursuant to Section 

15F(e)(1)(B) of the Exchange Act. See Exchange Act 

Release No. 86175 (June 21, 2019) 84 FR 43872, 

43879 (Aug. 22, 2019) (‘‘Capital and Margin 

Adopting Release’’). 

4Exchange Act Release No. 92494 (July 23, 2021], 

86 FR 41612 (Aug. 2, 2021) (‘‘French Order’’). See 

also Exchange Act No. 90766 (Dec. 22, 2020), 85 FR 

85720 (Dec. 29, 2020) (‘‘French Substituted 

Compliance Notice and Proposed Order’’); 

Exchange Act Release No. 91477 (Apr. 5, 2021), 86 

FR 18341 (Apr. 8, 2021) (‘‘Reopening Release’’). 

5Exchange Act Release No. 92529 (July 30, 2021), 

86 FR 43318 (August 6, 2021) (‘‘UK Order’’). See 

also Exchange Act Release No. 91476 (Apr. 5, 2021), 

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

Compliance Notice and Proposed Order’’). 

6See, e.g., Letter from Kyle Brandon, Managing 

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

2021) (‘‘SIFMA Letter I’’); Letter from Wim Mijs, 

Chief Executive Officer, European Banking 

Federation (Jan. 25, 2021) (‘‘EBF Letter I’’) 

(generally supporting the SIFMA Letter I); Letter 

from Etienne Barel, Deputy Chief Executive Officer, 

French Banking Federation (Jan. 25, 2021) (‘‘FBF 

Letter I’’), Letter from Kyle Brandon, Managing 

Director, Head of Derivative Policy, SIFMA (May 3, 

2021) (‘‘SIFMA Letter II’’); Letter from Wim Mijs, 

Chief Executive Officer, European Banking 

Federation (May 3, 2021) (‘‘EBF Letter II’’); Letter 

from Etienne Barel, Deputy Chief Executive Officer, 

French Banking Federation (May 3, 2021) (‘‘FBF 

Letter II’’); Letter from Americans for Financial 

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

Letter’’); Letter from Dennis M. Kelleher, President 

and CEO, Stephen Hall, Legal Director and 

Securities Specialist, and Jason Grimes, Senior 

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

Markets Letter’’). Comments may be found on the 

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

comments/s7-22-20/s72220.htm. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–92647; File No. S7–08–21] 

Notice of Application for the 

Amendment of Substituted 

Compliance Determination Regarding 

Security-Based Swap Entities Subject 

to Regulation in the Federal Republic 

of Germany; Proposed Amendments to 

Order 

August 12, 2021. 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Notice of application for 

amended substituted compliance 

determination; proposed amendments to 

order. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

soliciting public comment on an 

application by the Bundesanstalt fu ̈r 

Finanzdienstleistungsaufsicht 

(‘‘BaFin’’), pursuant to rule 3a71–6 

under the Securities Exchange Act of 

1934 (‘‘Exchange Act’’), requesting that 

the Commission amend an existing 

substituted compliance Order for 

Germany to extend the Order to 

nonbank capital and margin 

requirements (the ‘‘Amended 

Application’’). The Commission also is 

soliciting comment on proposed 

amendments to the Order and is 

proposing to amend and restate the 

Order (the ‘‘proposed Amended 

Order’’). 

DATES: Submit comments on or before 

September 13, 2021. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/submitcomments.htm); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

08–21 on the subject line. 

Paper Comments 

• Send paper comments to Vanessa 

A. Countryman, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–08–21. This file number 

should be included on the subject line 

if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/other.shtml). Typically, comments 

are also available for website viewing 

and printing in the Commission’s Public 

Reference Room, 100 F Street NW, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Due to 

pandemic conditions, however, access 

to the Commission’s public reference 

room is not permitted at this time. All 

comments received will be posted 

without change. Persons submitting 

comments are cautioned that the 

Commission does not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make publicly available. 

FOR FURTHER INFORMATION CONTACT: 

Carol M. McGee, Assistant Director, at 

202–551–5870, Office of Derivatives 

Policy, Division of Trading and Markets, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–7010. 

SUPPLEMENTARY INFORMATION: The 

Commission is soliciting public 

comment on the Amended Application. 

The Commission also is proposing to 

amend and restate the Order in certain 

other ways, and is soliciting comment 

on the proposed Amended Order set 

forth in Attachment A. 

I. Introduction 

Rule 3a71–6 under the Exchange Act 

provides a framework whereby non-U.S. 

security-based swap dealers and major 

security-based swap participants (‘‘SBS 

Entities’’) may satisfy certain 

requirements under Exchange Act 

section 15F by complying with 

comparable regulatory requirements of a 

foreign jurisdiction. Substituted 

compliance is intended to promote 

efficiency and competition within the 

security-based swap market by helping 

to address potential duplication and 

inconsistency between relevant U.S. and 

foreign requirements, making it possible 

for SBS Entities to leverage their 

existing systems and practices to 

comply with relevant Exchange Act 

requirements in conjunction with their 

compliance with relevant foreign 

requirements.1

Pursuant to rule 3a71–6, in December 

2020 the Commission issued a 

substituted compliance Order to provide 

that German SBS Entities may use 

substituted compliance with conditions 

to satisfy certain requirements under the 

Exchange Act related to risk control, 

internal supervision and compliance, 

counterparty protection, and books and 

records.2 That Order (and the 

underlying application from BaFin) did 

not address substituted compliance for 

Exchange Act capital and margin 

requirements applicable to SBS Entities 

without a prudential regulator.3

In the Commission’s preliminary 

view, certain developments warrant 

modifications to the substituted 

compliance Order for Germany. First, 

since finalizing the Order, the 

Commission has finalized substituted 

compliance orders for SBS Entities 

subject to regulation in the French 

Republic (‘‘France’’) 4 and the United 

Kingdom (‘‘UK’’).5 When finalizing the 

French and UK Orders, the Commission 

had the benefit of additional public 

comment, some of which also 

referenced the Order.6 Particularly given 


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7Letter from Thorsten Po ̈tzsch, Chief Executive 

Director of BaFin’s Resolution Sector, BaFin, to 

Vanessa Countryman, Secretary, Commission, dated 

August 12, 2021. The Amended Application is 

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

www.sec.gov/page/exchange-act-substitutedcompliance-and-listed-jurisdiction-applicationssecurity-based-swap. 

8The Amended Application requests substituted 

compliance with respect to investment firms and 

credit institutions that are authorized by BaFin to 

provide investment services or perform investment 

activities in Germany and are supervised by the 

ECB (or have a licensing application pending with 

the ECB as of the date of this application letter) as 

a significant institution. See Amended Application 

at 1. As such, the Commission is proposing to 

amend the definition of Covered Entity to conform 

to the request and the information provided. See 

para. (g)(1)(iii). 

9The entity-level requirements relate to non-bank 

capital and margin, books and records (other than 

those linked to the counterparty protection rules), 

internal risk management systems, trade 

acknowledgement and verification, portfolio 

reconciliation, compression, trading relationship 

documentation, and internal supervision and chief 

compliance officer requirements See Capital and 

Margin Adopting Release, 84 FR 43879; Exchange 

Act Release No. 87005 (June 19, 2019) 84 FR 68550, 

68596 (Dec. 16, 2019) (‘‘Books and Records 

Adopting Release’’); Exchange Act Release No. 

78011 (June 8, 2016) 81 FR 39808, 39827 (June 17, 

2016) (‘‘TAV Adopting Release’’); Exchange Act 

Release No. 87782 (Dec. 18, 2019) 85 FR 6359, 6378 

(Feb. 4, 2020) (‘‘Risk Mitigation Adopting Release’’); 

Exchange Act Release No. 77617 (Apr. 14, 2016), 81 

FR 29960, 30064 (May 13, 2016) (‘‘Business 

Conduct Adopting Release’’). Transaction-level 

requirements encompass business conduct 

requirements for the protection of counterparties, 

and additional provisions for the protection of 

special entities. See also Business Conduct 

Adopting Release, 81 FR 30065. 

10 In the context of the EMIR counterparties 

condition in para. (a)(5) of the proposed Amended 

Order, a Covered Entity must choose (1) to apply 

substituted compliance pursuant to the Order— 

including compliance with para. (a)(5) as 

applicable—for a particular set of entity-level 

requirements with respect to all of its business that 

would be subject to the relevant EMIR-based 

requirement if the counterparty were the relevant 

type of counterparty, or (2) to comply directly with 

the Exchange Act with respect to such business. 

11Transaction-level requirements are the 

counterparty protection requirements and the books 

and records requirements related to those 

counterparty protection requirements. 

12See para. (a)(9) of the proposed Amended 

Order. To promote up-to-date notice, the proposal 

further would require the Covered Entity to amend 

the notice if it modifies the scope of its reliance on 

substituted compliance. In addition, the proposal 

would make a technical modification to the general 

condition to clarify that the notice must be sent to 

the Commission in the manner specified on the 

Commission’s website (in lieu of the condition’s 

current reference to an email address specified on 

that website). 

13See French Order, 86 FR 41658; UK Order, 86 

FR 43371. As explained in the French and UK 

Orders, under the proposed amended notification 

provision, if a Covered Entity intends to rely on all 

the substituted compliance determinations in a 

given paragraph of the Order, it could cite that 

paragraph in the notice. For example, if the Covered 

Entity intends to rely on the capital and margin 

determinations in paragraph (c) of the proposed 

Amended Order, it would indicate in the notice that 

it is relying on the determinations in paragraph (c). 

However, if the Covered Entity intends to rely on 

the margin determination but not the capital 

determination, it would need to indicate in the 

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

proposed Amended Order (the margin 

determination). In this case, paragraph (c)(1) of the 

proposed Amended Order (the capital 

determination) would be excluded from the notice 

and the Covered Entity would need to comply with 

the Exchange Act capital requirements. Further, as 

discussed below in part VII.B.1, the amended 

recordkeeping and reporting determinations in the 

proposed Amended Order have been structured to 

provide Covered Entities with a high level of 

flexibility in selecting specific requirements within 

those rules for which they want to rely on 

substituted compliance. For example, paragraph 

(f)(1)(i) of the proposed Amended Order sets forth 

the Commission’s substituted compliance 

preliminary determinations with respect to the 

requirements of Exchange Act rule 18a–5, 17 CFR 

240.18a–5. These preliminary determinations are 

set forth in paragraphs (f)(1)(i)(A) through (O) of the 

proposed Amended Order. If a Covered Entity 

intends to rely on some but not all of the 

preliminary determinations, it would need to 

identify in the notice the specific preliminary 

determinations in this paragraph it intends to rely 

on (e.g., paragraphs (f)(1)(i)(A), (B), (C), (D), (G), (H), 

(I), and (O)). For any determinations excluded from 

the notice, the Covered Entity would need to 

comply with the Exchange Act rule 18a–5 

requirement. Finally, a Covered Entity would be 

able to apply substituted compliance at the 

transaction level (rather than the entity level) for 

certain counterparty protection requirements and 

the recordkeeping requirements that are linked to 

them. In this case, the notice would need to 

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

with UK counterparties) for which the Covered 

Entity is applying substituted compliance with 

respect to the Exchange Act counterparty protection 

requirements and linked recordkeeping 

requirements. Similarly, as discussed above, a 

Covered Entity would be able to apply substituted 

compliance for entity-level Exchange Act 

requirements to all of its security-based swap 

business that is eligible for substituted compliance 

under the proposed Amended Order, and may 

either comply directly with the Exchange Act or 

apply substituted compliance under another 

applicable order for its security-based swap 

business that is not eligible for substituted 

compliance under the proposed Amended Order. In 

this case, the notice would need to indicate the 

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

security-based swap business carried on from an 

establishment in the UK) for which the Covered 

Entity is applying substituted compliance with 

respect to the relevant Exchange Act entity-level 

requirements. A Covered Entity would modify its 

Continued 

substantial similarity of the three 

regimes, the Commission believes that 

modifications to the Order may be 

necessary for consistency. The 

Commission is therefore proposing to 

amend the Order to align with the 

French and UK orders where 

appropriate. 

Moreover, BaFin’s Amended 

Application requests that the 

Commission extend the Order to also 

provide for substituted compliance for 

the capital requirements of Exchange 

Act Section 15F(e) and Exchange Act 

rules 18a–1 through 18a–1d 

(collectively, ‘‘Exchange Act Rule 18a– 

1’’), the margin requirements Exchange 

Act Section 15F(e) and Exchange Act 

rule 18a–3, and related recordkeeping, 

reporting, notification, and securities 

count requirements.7 As discussed in 

parts IV and VII below, the Commission 

is proposing to amend the Order to 

conditionally permit German SBS 

Entities to comply with these 

requirements via substituted 

compliance.8

II. Scope of Substituted Compliance 

and Additional General Conditions 

A. Scope of Substituted Compliance 

For entity-level Exchange Act 

requirements,9 a Covered Entity must 

choose either to apply substituted 

compliance pursuant to the Order with 

respect to all security-based swap 

business subject to the relevant German 

and EU requirements or to comply 

directly with the Exchange Act with 

respect to all such business; a Covered 

Entity may not choose to apply 

substituted compliance for some of the 

business subject to the relevant German 

or EU requirements and comply directly 

with the Exchange Act for another part 

of the business that is subject to the 

relevant German and EU requirements. 

Additionally, for entity-level Exchange 

Act requirements, if the Covered Entity 

also has security-based swap business 

that is not subject to the relevant 

German requirements, the Covered 

Entity must either comply directly with 

the Exchange Act for that business or 

comply with the terms of another 

applicable substituted compliance 

order.10 For transaction-level Exchange 

Act requirements,11 a Covered Entity 

may decide to apply substituted 

compliance for some of its securitybased swap business and to comply 

directly with the Exchange Act (or 

comply with another applicable 

substituted compliance order) for other 

parts of its security-based swap 

business. 

B. Proposed Revision of General 

Condition Regarding Notice 

The Commission also is proposing to 

modify the Order’s general condition 

requiring that Covered Entities provide 

the Commission with written notice of 

their intent to rely on substituted 

compliance. To promote clarity in the 

notice regarding the Covered Entity’s 

intended use of substituted compliance, 

the Commission is proposing to amend 

the general condition to require that the 

notice identify each specific substituted 

compliance determination for which the 

Covered Entity intends to apply 

substituted compliance.12 The 

modification would be consistent with 

the conditions for notification included 

in the Commission’s other substituted 

compliance orders.13


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reliance on the positive substituted compliance 

determinations in the Order, and thereby trigger the 

requirement to update its notice, if it adds or 

subtracts determinations for which it is applying 

substituted compliance or completely discontinues 

its reliance on the proposed Amended Order. 

14See para. (a)(11) of the proposed Amended 

Order. See also French Order, 86 FR 41620–22; UK 

Order, 86 FR 43330–31. 

15See French Order, 86 FR 41621; UK Order, 86 

FR 43330. 

16See 17 CFR 240.18a–8(c). 

17See 17 CFR 240.18a–8(h). 

18These German provisions include KWG section 

25a(1) sentence 6 no. 3, and FinDAG section 4d, 

which provide, among other things, processes for 

employees to report breaches of certain EU 

regulations, and the establishment of systems by 

BaFin to accept reports of potential or actual 

violations of laws, ordinances, general rulings, and 

regulations and directives of the EU. 

19See Exchange Act Release No. 71958 (Sept. 19, 

2019), 84 FR 68550, 68589–90 (Dec. 16, 2019) 

(‘‘Recordkeeping and Reporting Adopting Release’’) 

(citing Exchange Act Release No. 71958 (Aug. 17, 

2014) 79 FR 25193 (May 2, 2014) at 25249). 

20See part III.A, infra. 

21See MiFID art. 35(8) (in part allocating 

responsibility over MiFIR articles 14 to 26 to 

competent authorities in member states in which 

branches are located). 

22See article (a)(10) of the proposed Amended 

Order. 

23See para. (a)(10) of the French Order. 

C. Additional Condition Regarding 

Notification Requirements Related to 

Changes in Capital 

Consistent with the UK and French 

Orders, the Commission is proposing to 

add a general condition that Covered 

Entities with a prudential regulator 

relying on substituted compliance 

pursuant to the proposed Amended 

Order must apply substituted 

compliance with respect to the 

requirements of Exchange Act rule 18a– 

8(c) and the requirements of Exchange 

Act rule 18a–8(h) as applied to 

Exchange Act rule 18a–8(c).14 In the UK 

and French Orders, the Commission 

took a granular approach with respect to 

substituted compliance determinations 

regarding the Exchange Act 

recordkeeping, reporting, and 

notification requirements. 

Consequently, a Covered Entity may 

comply directly with certain of the 

Exchange Act’s recordkeeping, 

reporting, and notification provisions 

while applying substituted compliance 

to others. In taking this granular 

approach, the Commission conditioned 

substituted compliance with certain of 

the discrete recordkeeping, reporting, 

and notification requirements on the 

Covered Entity applying substituted 

compliance for the substantive 

Exchange Act requirement to which 

they are linked.15 Further, the 

Commission conditioned substituted 

compliance with respect to the 

substantive requirement on the Covered 

Entity applying substituted compliance 

for the linked recordkeeping, reporting, 

or notification requirement. These 

linked conditions are designed to ensure 

that a Covered Entity consistently 

applies substituted compliance with 

respect to the substantive Exchange Act 

requirement and the Exchange Act 

recordkeeping, reporting, or notification 

requirement that complements the 

substantive requirement. 

Exchange Act rule 18a–8(c) generally 

requires every prudentially regulated 

security-based swap dealer that files a 

notice of adjustment of its reported 

capital category with the Federal 

Reserve, the OCC, or the FDIC to give 

notice of this fact that same day by 

transmitting a copy of the notice of 

adjustment of reported capital category 

in accordance with Exchange Act rule 

18a–8(h).16 Exchange Act rule 18a–8(h) 

sets forth the manner in which every 

notice or report required to be given or 

transmitted pursuant to Exchange Act 

rule 18a–8 must be made.17 While 

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

to a substantive Exchange Act 

requirement, it is linked to substantive 

capital requirements applicable to 

prudentially regulated SBS Entities in 

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

Federal Reserve, the OCC, or the FDIC). 

Therefore, to implement the granular 

approach adopted in the U.K. and 

French Orders, the Commission is 

proposing to add a general condition 

that Covered Entities with a prudential 

regulator relying on substituted 

compliance must apply substituted 

compliance with respect to the 

requirements of Exchange Act rule 18a– 

8(c) and the requirements of Exchange 

Act rule 18a–8(h) as applied to 

Exchange Act rule (c). 

In its application, BaFin citied several 

German and EU provisions as providing 

similar outcomes to the notification 

requirements of Exchange Act rule 18a– 

8.18 This general condition is necessary 

in order to clarify that a prudentially 

regulated Covered Entity must provide 

the Commission with copies of any 

notifications regarding changes in the 

Covered Entity’s capital situation 

required by German or EU law. In 

particular, absent this condition, a 

prudentially regulated Covered Entity 

could elect not to apply substituted 

compliance with respect to Exchange 

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

Covered Entity is not required to 

provide any notifications to the Federal 

Reserve, the OCC, or the FDIC, 

‘‘compliance’’ with the provisions of 

Exchange Act rule 18a–8(c) raises a 

question as to the Covered Entity’s 

obligations under this proposed 

Amended Order to provide the 

Commission with notification of 

changes in capital. 

The Commission adopted Exchange 

Act Rule 18a–8(c) to require SBS 

Entities with a prudential regulator to 

give notice to the Commission when 

filing an adjustment of reported capital 

category because such notices may 

indicate that the entity is in or is 

approaching financial difficulty.19 The 

Commission has a regulatory interest in 

being notified of changes in the capital 

of a prudentially regulated Covered 

Entity, as it could signal the firm is in 

or approaching financial difficulty and 

presents a risk to U.S. security-based 

swap markets and participants. For the 

foregoing reasons, the Commission is 

conditioning applying substituted 

compliance pursuant to the proposed 

Amended Order on the general 

condition that a prudentially regulated 

Covered Entity apply substituted 

compliance with respect to Exchange 

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

of Exchange Act rule 18a–8(h) as 

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

D. Proposed Amendment to General 

Condition Regarding EU Cross-Border 

Matters 

The Commission also is proposing to 

modify the Order’s general condition 

related to EU cross-border matters. 

Substituted compliance under the Order 

in part is predicated on BaFin being 

responsible for the supervision and 

enforcement of Covered Entities in 

connection with certain MiFID 

provisions that constitute conditions to 

individual substituted compliance 

provisions.20 That general condition is 

intended to help ensure that the 

prerequisites to substituted compliance 

with respect to supervision and 

enforcement are satisfied in practice 

when MiFID allocates responsibility for 

ensuring compliance to another EU 

Member State. Because MiFIR is subject 

to similar allocation provisions,21 the 

Commission is proposing to incorporate 

references to MiFIR requirements into 

the general condition.22 This change 

would be consistent with the French 

Order.23

E. Additional MOU-Related General 

Condition 

In light of the Amended Application, 

the Commission also is proposing to add 

a new general condition that would 

predicate substituted compliance on the 

presence of a supervisory and 

enforcement memorandum of 

understanding between the Commission 

and the European Central Bank (‘‘ECB’’) 


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24See para. (a)(8) of the proposed Amended 

Order. 

25See paras. (b)(2) and (b)(5) of the proposed 

Amended Order. 

26See SIFMA Letter I at 3–6 (commenting on the 

French Substituted Compliance Notice and 

Proposed Order but stating that the concerns 

applied equally to the German Order). In relevant 

part, the cross-border condition of paragraph (a)(10) 

of the proposed Amended Order states that if 

responsibility for ensuring compliance with any 

provision of MiFID or MiFIR (or EU or German 

implementing requirement) that is a condition for 

substituted compliance is allocated to an authority 

in a Member State of the EU in whose territory a 

Covered Entity provides a service, BaFin must be 

the authority responsible for supervision and 

enforcement of that provision. In practice (pursuant 

to MiFID article 35), this allocation of oversight 

applies to requirements pursuant to MiFID article 

25 (‘‘assessment of suitability and appropriateness 

and reporting to clients’’) as well as certain other 

MiFID provisions not relevant here. In the 

commenter’s view, application of those MiFID 

article 25 conditions in connection with trade 

acknowledgment and verification requirements and 

trading relationship documentation requirements 

would ‘‘in practice lead to an untenable patchwork 

of substituted compliance.’’ See SIFMA Letter I at 

3. The commenter further states that SBS Entities 

‘‘operating branches throughout the EU’’ would not 

be able to avail themselves of substituted 

compliance in connection with these requirements 

‘‘unless authorities or regulated SBS Entities in 

every or nearly every one of the 27 EU Member 

States submit their own substituted compliance 

applications covering local branches of SBS 

Entities, and the Commission reviews and responds 

to those applications and enters into memoranda of 

understanding . . . with authorities in each of these 

Member States.’’ That problem does not arise in 

connection with requirements under EMIR, which 

does not allocate oversight of a German entity’s 

compliance to authorities in other EU Member 

States. That problem also does not arise in 

connection with other requirements under MiFID 

(e.g., MiFID art. 16 organizational provisions) that 

are not subject to the same allocation of oversight. 

27See SIFMA letter I at 5–6. 

28SBS Entities subject to regulation in France are 

subject to the condition, and the proposed change 

would be consistent with the French Order. See 

para. (a)(10) of the French Order. The Commission 

addressed certain of the other issues raised by 

commenters when extending the comment period 

for the French Substituted Compliance Notice and 

Proposed Order. See Reopening Release, 86 FR 

18341 (discussing commenter concerns regarding 

the scope of reliance on substituted compliance and 

the EU cross-border condition). 

29The proposed addition of two new EMIRrelated general conditions as paragraphs (a)(5) and 

(a)(6) of the proposed Amended Order would 

necessitate renumbering of certain of the extant 

general conditions, and also suggests the need to 

clarify the captions for certain of the other proposed 

general conditions (e.g., recaptioning proposed 

general conditions (a)(1) through (a)(3) of the 

proposed Amended Order to specifically refer to 

MiFID, and recaptioning of proposed general 

condition (a)(4) to specifically refer to CRD/CRR). 

30EMIR article 2(8) defines ‘‘financial 

counterparty’’ to encompass investment firms, 

credit institutions, insurers and certain other types 

of businesses that have been authorized in 

accordance with EU law. Under EMIR, the 

distinction between financial counterparties and 

other types of counterparties such as non-financial 

counterparties is manifested, inter alia, in 

connection with confirmation timing standards. See 

EMIR RTS article 12. 

31See para. (a)(5) of the proposed Amended 

Order. 

32 In other words, the Covered Entity would be 

subject to the relevant requirements under EMIR 

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

(such as by virtue of being a natural person), or is 

not established in the EU (by virtue of being a U.S. 

person or otherwise being established in some nonEU jurisdiction). The issue of whether the Covered 

Entity must treat the counterparty as a ‘‘financial 

counterparty’’ or ‘‘non-financial counterparty’’ 

would turn on whether the counterparty’s business 

would require that it be registered pursuant to the 

categories identified in the EMIR article 2(8) 

‘‘financial counterparty’’ definition (e.g., an 

authorized investment firm, credit institution, 

insurance undertaking) were the counterparty 

subject to the applicable authorization 

requirements. This approach generally appears to 

Continued 

and/or BaFin, pertaining to information 

owned by the ECB.24 The Commission’s 

access to this ECB information will 

assist the Commission’s effective 

oversight of Covered Entities that use 

substituted compliance in connection 

with capital and margin requirements. 

III. Proposed Changes to Risk Control 

and Internal Supervision 

A. Background—Order’s MiFID 

Prerequisites Related to Trade 

Acknowledgment and Verification and 

Trading Relationship Documentation 

Under the Order, substituted 

compliance for trade acknowledgement 

and verification and for trading 

relationship documentation in part 

requires that relevant SBS Entities 

(‘‘Covered Entities’’ as defined in the 

Order) comply with certain 

requirements under MiFID (plus the 

German implementation of MiFID) and 

with certain requirements under 

EMIR.25 Commenters expressed concern 

that the interplay between those 

particular MiFID conditions and a 

separate EU cross-border condition to 

the Order in practice would preclude 

the availability of substituted 

compliance for entities that have 

branches in other EU Member States.26

The commenters requested that the 

Commission remove those particular 

MiFID conditions, arguing that 

compliance with EMIR conditions 

standing alone still would produce 

regulatory outcomes comparable to 

those of the trade acknowledgement and 

verification requirement and the trading 

relationship documentation requirement 

under the Exchange Act.27

After careful consideration, the 

Commission is proposing to amend the 

Order to address those concerns and for 

consistency with the French Order. The 

Order’s EU cross-border condition 

provides an important safeguard to help 

ensure that firms that avail themselves 

of substituted compliance are subject to 

appropriate regulatory supervision and 

enforcement. At the same time, the 

Commission recognizes the significance 

of commenter concerns that the 

interplay between the EU cross-border 

condition and the MiFID conditions 

associated with trade acknowledgment 

and verification and with trading 

relationship documentation could have 

the effect of unnecessarily interfering 

with the use of substituted compliance 

when other provisions standing alone 

are sufficient for the Commission to 

make a positive substituted compliance 

determination.28 As discussed below, 

the Commission is proposing to revise 

the Order’s conditions related to trade 

acknowledgment and verification and to 

trading relationship documentation, by 

removing MiFID-related conditions and 

instead relying solely on EMIR 

conditions to establish comparability for 

those requirements. 

B. Proposed Addition of EMIR-Related 

General Conditions 

The proposed amendments addressed 

below would remove MiFID conditions 

and rely solely on EMIR conditions to 

establish comparability in connection 

with trade acknowledgment and 

verification and trading relationship 

documentation. This heightened 

reliance on EMIR highlights the need for 

safeguards to help ensure that there will 

be no opportunity for gaps that may 

prevent the EMIR provisions in practice 

from producing outcomes consistent 

with those of the Exchange Act rules. 

The Commission accordingly is 

proposing to add two EMIR-related 

general conditions to the Order to help 

preclude such gaps.29

The first condition provides that the 

Covered Entity must comply with the 

applicable condition of the proposed 

Amended Order as if the counterparty 

were the type of counterparty that 

would trigger the application of the 

relevant EMIR-based requirements. If 

the Covered Entity reasonably 

determines that its counterparty would 

be a financial counterparty 30 if not for 

the counterparty’s location and/or lack 

of regulatory authorization in the EU, 

the condition further requires the 

Covered Entity to treat the counterparty 

as if the counterparty were a financial 

counterparty, rather than as another 

type of counterparty to which the 

relevant EMIR-based requirements may 

apply.31 By requiring a Covered Entity 

to treat its counterparty as a type of 

counterparty that would trigger the 

application of the relevant EMIR-based 

requirements, the condition will require 

the Covered Entity to perform the 

relevant obligations pursuant to those 

EMIR-based requirements and thus to 

act in a way that is comparable to 

Exchange Act requirements.32


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be consistent with European guidance. See 

European Securities and Markets Authority, 

‘‘Questions and Answers: Implementation of the 

Regulation (EU) No 648/2012 on OTC derivatives, 

central counterparties and trade repositories 

(EMIR)’’ (https://www.esma.europa.eu/sites/ 

default/files/library/esma70-1861941480-52_qa_on_

emir_implementation.pdf) answer 5(a) (stating that 

compliance with the EMIR confirmation 

requirement necessitates that the counterparties 

must reach a legally binding agreement to all terms 

of the OTC derivative contract, and that the EMIR 

RTS ‘‘implies’’ that both parties must comply and 

agree in advance to a specific process to do so); 

answer 12(b) (stating that where an EU counterparty 

transacts with a third country entity, the EU 

counterparty generally must ensure that the EMIR 

requirements for portfolio reconciliation, dispute 

resolution, timely confirmation and portfolio 

compression are met for the relevant portfolio and/ 

or transactions even though the third country entity 

would not itself be subject to EMIR; this is subject 

to special processes when the European 

Commission has declared the third country 

requirements to be comparable to EU requirements). 

33See para. (a)(6) of the proposed Amended 

Order. Prong (i) to this proposed condition would 

be satisfied by uncleared instruments that fall 

within the ambit of the EMIR requirements at issue. 

The alternative prong (ii) would be satisfied when 

instruments fall outside the ambit of those EMIR 

requirements by virtue of being cleared in the EU, 

akin to the Exchange Act rules’ exclusion for 

security-based swaps cleared by clearing agencies 

registered with the Commission. 

34See para. (b)(2) of the French Order. 

35See para. (b)(2) of the proposed Amended 

Order. 

36See Exchange Act rule 15Fi–5(b)(2). 

37These proposed changes are consistent with the 

French Order. See paras. (a)(5) and (a)(6) of the 

French Order. 

38See para. (b)(1) of the proposed Amended 

Order. 

39See para. (d)(3) of the proposed Amended 

Order. 

40See paras. (b)(1) and (d)(3) of the French Order. 

41See paras. (b)(1) and (d)(3) of the proposed 

Amended Order. 

In addition, the Commission is 

proposing to revise the Order to account 

for the fact that the relevant trade 

acknowledgement and verification and 

trading relationship documentation 

rules under the Exchange Act do not 

apply to security-based swaps cleared 

by a clearing agency registered with the 

Commission (or exempt from 

registration), while the analogous EMIR 

provisions exclude instruments that are 

cleared by a central counterparty that 

has been authorized or recognized to 

clear derivatives contracts in the EU. In 

particular—to help ensure that 

substituted compliance is available in 

connection with an instrument that has 

been cleared at an EU-authorized or EUrecognized central counterparty (and 

hence is not within the Exchange Act 

rule’s exclusion but also is not subject 

to relevant EMIR requirements)—the 

Commission is proposing a new general 

condition that, for each part of the Order 

that requires compliance with EMIRrelated requirements, either: (i) The 

relevant security-based swap is an ‘‘OTC 

derivative’’ or ‘‘OTC derivative 

contract,’’ as defined in EMIR article 

2(7), that has not been cleared by a 

central counterparty and otherwise is 

subject to the provisions of EMIR article 

11, EMIR RTS articles 11 through 15, 

and EMIR Margin RTS article 2; or (ii) 

the relevant security-based swap has 

been cleared by a central counterparty 

that has been authorized or recognized 

to clear derivatives contracts by a 

relevant authority in the EU.33

C. Proposed Revisions to Conditions 

Related to Trade Acknowledgment and 

Verification, and Trading Relationship 

Documentation 

Consistent with the French Order 34

the Commission is proposing to modify 

the Order to remove the existing MiFID 

conditions to substituted compliance for 

trade acknowledgment and verification. 

Substituted compliance instead would 

be conditioned solely on compliance 

with the confirmation provisions of 

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

article 12.35 Those EMIR provisions 

promote comparable risk control goals 

as the Exchange Act rule by providing 

for definitive written records of 

transactions. While the Commission 

recognizes that MiFID confirmation 

requirements also help to promote that 

goal, the Commission preliminarily 

believes that the EMIR provisions alone 

are sufficient for regulatory 

comparability, and recognizes that in 

practice the interplay between the EU 

cross-border condition and MiFID 

confirmation requirements may 

unnecessarily limit the use of 

substituted compliance and its 

associated efficiency benefits. 

The Commission similarly is 

proposing to modify the Order to 

remove the existing MiFID conditions to 

substituted compliance for trading 

relationship documentation, and also to 

add the above EMIR confirmation 

provisions (reflecting that the Exchange 

Act trading relationship documentation 

rule requires that the necessary 

documentation include trade 

acknowledgments and verifications 36). 

Together with EMIR Margin RTS article 

2 provisions that address risk 

management procedures related to the 

exchange of collateral, including 

procedures related to the terms of all 

necessary agreements to be entered into 

by counterparties (e.g., payment 

obligations, netting conditions, events of 

default, calculation methods, transfers 

of rights and obligations upon 

termination, and governing law), the 

EMIR conditions promote comparable 

risk mitigation purposes as the trading 

relationship documentation rule under 

the Exchange Act by promoting 

certainty regarding the relevant 

framework governing the counterparties. 

Here too, while the Commission 

recognizes that MiFID documentation 

requirements also promote that goal, the 

Commission preliminarily believes the 

EMIR provisions alone are sufficient for 

regulatory comparability, and 

recognizes that in practice the interplay 

between the EU cross-border condition 

and MiFID documentation provisions 

may limit the use of substituted 

compliance and its associated regulatory 

benefits.37

D. Proposed Revisions to Internal Risk 

Management and Internal Supervision 

The Commission is also proposing to 

incorporate—as part of the relevant 

conditions in paragraph (b)(1) of the 

proposed Amended Order relating to 

internal risk management—MiFID 

articles 16 and 23 and the related 

implementing provisions, MiFID Org 

Reg articles 25 through 37, 72 through 

76 and Annex IV, as well as CRD 

articles 88(1), 91(1)–(2) and (7)–(9) and 

the related implementing provisions.38

These provisions address additional 

aspects of a Covered Entity’s 

management of the risks posed by 

internal governance and organization, 

business operations, conflicts of interest 

with and between clients, and senior 

staff remuneration policies and were 

part of the Commission’s comparability 

determination for entities subject to 

regulation in France. The Commission is 

also incorporating CRR articles 286–88 

and 293 and EMIR Margin RTS article 

2 to the conditions of paragraph (d)(3) 

of the proposed Amended Order relating 

to internal supervision.39 These 

provisions relate to counterparty credit 

risk and risk management generally and 

collateral-related risk management 

procedures and were also part of the 

Commission’s comparability analysis in 

the French Order.40 Also consistent 

with the French Order, the Commission 

is proposing to delete CRD article 93 

and the related implementing 

provisions from both paragraph (d)(1) 

and (d)(3), as those provisions relate to 

remuneration policies for institutions 

that benefit from exceptional (German 

and EU) government intervention. 41

IV. Proposed Substituted Compliance in 

Connection With Capital and Margin 

A. BaFin’s Request and Associated 

Analytic Considerations 

The Amended Application in part 

requests substituted compliance in 

connection with requirements under the 

Exchange Act relating to: 


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42Exchange Act rule 18a–1 applies to securitybased swap dealers that: (1) Do not have a 

prudential regulator; and (2) are either (a) not 

dually registered with the Commission as a brokerdealer or (b) are dually registered with the 

Commission as a special purpose broker-dealer 

known as an OTC derivatives dealer. Security-based 

swap dealers that are dually registered with the 

Commission as a full-service broker-dealer are 

subject to the capital requirements of Exchange Act 

rule 15c3–1 (17 CFR 240.15c3–1) for which 

substituted compliance is not available. See 17 CFR 

240.3a71–6(d)(4)(i) (making substituted compliance 

available only with respect to the capital 

requirements of Exchange Act section 15F(e) and 

Exchange Act rule 18a–1). 

43See Capital and Margin Adopting Release, 84 

FR 43947. The Amended Application discusses EU 

and German requirements that address firms’ 

capital requirements. See Amended Application 

Annex A category 3 (Side Letter Addressing Capital 

Requirements). See also Amended Application 

Annex A category 4 (Internal Risk Management 

Requirements) (generally discussing internal risk 

management requirements). 

44See Capital and Margin Adopting Release, 84 

FR 43879–83. The capital standard of Exchange Act 

rule 18a–1 is based on the net liquid assets test of 

Exchange Act rule 15c3–1 applicable to brokerdealers. Id. The net liquid assets test seeks to 

promote liquidity by requiring that a firm maintain 

sufficient liquid assets to meet all liabilities, 

including obligations to customers, counterparties, 

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

financially, to have adequate additional resources to 

wind-down its business in an orderly manner 

without the need for a formal proceeding. See id. 

at 43879. See Amended Application Annex A 

category 3 (Side Letter Addressing Capital 

Requirements). 

45See 17 CFR 240.15c3–4 and 18a–1(f). 

46 17 CFR 240.18a–3. 

47See Capital and Margin Adopting Release, 84 

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

ways OTC derivatives dealers manage their credit 

risk exposure to OTC derivatives counterparties. 

Prior to the financial crisis, in certain 

circumstances, counterparties were able to enter 

into OTC derivatives transactions without having to 

deliver collateral. When ‘trigger events’ occurred 

during the financial crisis, those counterparties 

faced significant liquidity strains when they were 

required to deliver collateral’’). The Amended 

Application discusses EU and German requirements 

that address firms’ margin requirements. See 

Amended Application Annex A category 4 (Margin 

Requirements for Nonbank Firms). 

48 In connection with capital requirements, 

Covered Entities must comply with: CRR, Part One 

(General Provisions) Article 6(1), Part Two (Own 

Funds), Part Three (Capital Requirements), Part 

Four (Large Exposures), Part Five (Exposures to 

Transferred Credit Risk), Part Six (Liquidity), and 

Part Seven (Leverage); MiFID Org Reg article 23; 

BRRD articles 45(6) and 81(1); CRD articles 73, 79, 

86, 129, 129(1), 130, 130(1), 130(5), 131, 133, 

133(1), 133(4), 141, and 142(1) and (2); EMIR 

Margin RTS articles 2, 3(b), 7, and 19(1)(d) and (e), 

(3) and (8); KWG sections 10b–10h, 10i(2)–(9), 

25a(1) sentence 3 no. 2 and no. 3b), 33(1) sentence 

1c),; SAG section 49(2), 49d, 62(1), 138(1); and 

SolvV section 37. See para. (c)(1)(i) of the proposed 

Amended Order. 

49See para. (c)(1)(ii) of the proposed Amended 

Order. This additional condition is included in the 

French and UK Orders. See French Order, 86 FR 

41659; UK Order, 86 FR 43372. 

50See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) 

of the proposed Amended Order. 

51See note 48, supra (citing EU and German 

capital requirements under the CRR). See also Basel 

Committee on Banking Supervision (‘‘BCBS’’), The 

Basel Framework, available at: https://www.bis.org/ 

basel_framework/. 

52See, e.g., Capital and Margin Adopting Release, 

84 FR 43881 (‘‘The Commission believes that the 

broker-dealer capital standard is the most 

appropriate alternative for nonbank SBSDs, given 

the nature of their business activities and the 

Commission’s experience administering the 

standard with respect to broker-dealers. The 

objective of the broker-dealer capital standard is to 

Continued 

• Capital—Capital requirements 

pursuant to Exchange Act section 15F(e) 

and Exchange Act rule 18a–1 and 18a– 

1a through 18a–1d applicable to certain 

SBS Entities.42 Exchange Act rule 18a– 

1 helps to ensure the SBS Entity 

maintains at all times sufficient liquid 

assets to promptly satisfy its liabilities, 

and to provide a cushion of liquid assets 

in excess of liabilities to cover potential 

market, credit, and other risks.43 The 

rule’s net liquid assets test standard 

protects customers and counterparties 

and mitigates the consequences of an 

SBS Entity’s failure by promoting the 

ability of the firm to absorb financial 

shocks and, if necessary, to selfliquidate in an orderly manner.44 As 

part of the capital requirements, 

security-based swap dealers without a 

prudential regulator also must comply 

with the internal risk management 

control requirements of Exchange Act 

Rule 15c3–4 with respect to certain 

activities.45

• Margin—Margin requirements 

pursuant to Exchange Act section 15F(e) 

and Exchange Act rule 18a–3 for nonprudentially regulated SBS Entities.46

The margin requirements are designed 

to protect SBS Entities from the 

consequences of a counterparty’s 

default.47

Taken as a whole, these capital and 

margin requirements help to promote 

market stability by mandating that SBS 

Entities follow practices to manage the 

market, credit, liquidity, solvency, 

counterparty, and operational risks 

associated with their security-based 

swap businesses. The Commission’s 

comparability assessment accordingly 

focuses on whether the analogous 

foreign requirements—taken as a 

whole—produce comparable outcomes 

with regard to providing that Covered 

Entities follow capital and margin 

requirements that address the risks 

associated with their security-based 

swap businesses. 

B. Capital—Preliminary Views and 

Proposed Amended Order 

In the Commission’s preliminary 

view, based on the Amended 

Application and the Commission’s 

review of applicable provisions, 

additional conditions on applying 

substituted compliance with respect to 

the Exchange Act capital requirements 

are necessary in order to produce 

comparable regulatory outcomes. 

Consequently, substituted compliance 

with respect to the capital requirements 

of Exchange Act rule 18a–1 would be 

conditioned on Covered Entities being 

subject to and complying with relevant 

EU and German capital requirements.48

However, the proposed Amended Order 

would include the additional conditions 

discussed below that, in the aggregate, 

would be designed to establish a 

framework that produces outcomes 

comparable to those associated with the 

capital requirements of Exchange Act 

rule 18a–1. 

The first additional capital condition 

would require that the Covered Entity 

apply substituted compliance with 

respect to Exchange Act rules 18a– 

5(a)(9) (a record making requirement), 

18a–6(b)(1)(x) (a record preservation 

requirement), and 18a–8(a)(1)(i), 

(a)(1)(ii), (b)(1), (b)(2), and (b)(4) 

(notification requirements relating to 

capital).49 These recordkeeping and 

notification requirements are directly 

linked to the capital requirements of 

Exchange Act rule 18a–1. As discussed 

below in part VII.B.1 of this release, the 

proposed Amended Order conditions 

substituted compliance with respect to 

these recordkeeping and notification 

requirements on the Covered Entity 

applying substituted compliance with 

respect to Exchange Act rule 18a–1.50

This proposed capital condition would 

do the reverse: Condition substituted 

compliance with respect to Exchange 

Act rule 18a–1 on the Covered Entity 

applying substituted compliance for 

these linked recordkeeping and 

notification requirements. This 

additional capital condition is designed 

to provide clarity as to the Covered 

Entity’s obligations under these 

recordkeeping and notification 

requirements when applying substituted 

compliance with respect to Exchange 

Act rule 18a–1 pursuant the proposed 

Amended Order. 

The second additional capital 

condition would be designed to ensure 

comparable regulatory outcomes 

between the standard of Exchange Act 

rule 18a–1 and the capital standard of 

the relevant EU and German laws, 

which is based on the international 

capital standard for banks (the ‘‘Basel 

capital standard’’).51 In particular, the 

capital standard of Exchange Act rule 

18a–1 is the net liquid assets test. This 

is the same capital standard that applies 

to broker-dealers under Exchange Act 

rule 15c3–1.52 The net liquid assets test 


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protect customers and counterparties and to 

mitigate the consequences of a firm’s failure by 

promoting the ability of these entities to absorb 

financial shocks and, if necessary, to self-liquidate 

in an orderly manner.’’). 53See id. (‘‘Consequently, in the Commission’s 

judgment, the broker-dealer capital standard is the 

appropriate standard for nonbank SBSDs because it 

is designed to promote a firm’s liquidity and selfsufficiency (in other words, to account for the lack 

of inexpensive funding sources that are available to 

banks, such as deposits and central bank 

support).’’). 54See, 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). 

55See 17 CFR 240.15c3–1(c)(2). 

56The highly liquid assets under Exchange Act 

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

assets’’ because they are not deducted when 

computing net capital. See Books and Records 

Adopting Release, 84 FR 68673–74, 68677–80 (the 

sections of the amended Part II of the FOCUS 

Report setting forth the assets side of the balance 

sheet and the net capital computation). Illiquid 

assets otherwise known as ‘‘non-allowable assets’’ 

are deducted when computing net capital. Id. 

Allowable assets include cash, certain unsecured 

receivables from broker-dealers and clearing 

organizations, reverse repurchase agreements, 

securities borrowed, fully secured customer margin 

loans, and proprietary securities, commodities, and 

swaps positions. Id. The term ‘‘high quality liquid 

assets’’ or ‘‘HQLA’’ are defined under the Basel 

capital standard’s liquidity coverage ratio (‘‘LCR’’) 

and generally consist of cash and specific classes of 

liquid securities. See BCBS, LCR30—High-quality 

liquid assets (under the Basel capital standards), 

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

chapter/LCR/30.htm?. Generally, cash and 

securities that qualify as HQLA under the LCR 

would be allowable assets under Exchange Act rule 

18a–1. 

57Exchange Act rule 18a–3 does not require SBS 

Entities to post initial margin (though it does not 

prohibit the practice). 58See Capital and Margin Adopting Release, 84 

FR 43887–88. 59See id. at 43887. 

is designed to promote liquidity.53 In 

particular, Exchange Act rule 18a–1 

allows an SBS Entity to engage in 

activities that are part of conducting a 

securities business (e.g., taking 

securities into inventory) but in a 

manner that places the firm in the 

position of holding at all times more 

than one dollar of highly liquid assets 

for each dollar of unsubordinated 

liabilities (e.g., money owed to 

customers, counterparties, and 

creditors).54 For example, Exchange Act 

rule 18a–1 allows securities positions to 

count as allowable net capital, subject to 

standardized or internal model-based 

haircuts. The rule, however, does not 

permit most unsecured receivables to 

count as allowable net capital. This 

aspect of the rule severely limits the 

ability of SBS Entities to engage in 

activities, such as uncollateralized 

lending, that generate unsecured 

receivables. The rule also does not 

permit fixed assets or other illiquid 

assets to count as allowable net capital, 

which creates disincentives for SBS 

Entities to own real estate and other 

fixed assets that cannot be readily 

converted into cash. For these reasons, 

Exchange Act rule 18a–1 incentivizes 

SBS Entities to confine their business 

activities and devote capital to securitybased swap activities. 

The net liquid assets test is imposed 

through how an SBS Entity is required 

to compute net capital pursuant to 

Exchange Act rule 18a–1. The first step 

is to compute the SBS Entity’s net worth 

under generally accepted accounting 

principles (‘‘GAAP’’). Next, the SBS 

Entity must make certain adjustments to 

its net worth to calculate net capital, 

such as deducting illiquid assets and 

taking other capital charges and adding 

qualifying subordinated loans.55 The 

amount remaining after these 

deductions is defined as ‘‘tentative net 

capital.’’ Exchange Act rule 18a–1 

prescribes a minimum tentative net 

capital requirement of $100 million for 

SBS Entities approved to use models to 

calculate net capital. An SBS Entity that 

is meeting its minimum tentative net 

capital requirement will be in the 

position where each dollar of 

unsubordinated liabilities is matched by 

more than a dollar of highly liquid 

assets.56 The final step in computing net 

capital is to take prescribed percentage 

deductions (standardized haircuts) or 

model-based deductions from the markto-market value of the SBS Entity’s 

proprietary positions (e.g., securities, 

money market instruments, and 

commodities) that are included in its 

tentative net capital. The amount 

remaining is the firm’s net capital, 

which must exceed the greater of $20 

million or a ratio amount. 

In comparison, the Basel capital 

standard counts as capital assets that 

Exchange Act rule 18a–1 would exclude 

(e.g., loans and most other types of 

uncollateralized receivables, furniture 

and fixtures, real estate). The Basel 

capital standard accommodates the 

business of banking: Making loans 

(including extending unsecured credit) 

and taking deposits. While the Covered 

Entities that would apply substituted 

compliance with respect to Exchange 

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

Basel capital standard allows them to 

count illiquid assets such as real estate 

and fixtures as capital. It also allows 

them to treat unsecured receivables 

related to activities beyond dealing in 

security-based swaps as capital 

notwithstanding the illiquidity of these 

assets. 

Further, one critical example of the 

difference between the requirements of 

Exchange Act rule 18a–1 and the Basel 

capital standard relates to the treatment 

of initial margin with respect to 

security-based swaps and swaps. Under 

the EU margin requirements, Covered 

Entities will be required to post initial 

margin to counterparties unless an 

exception applies.57 Under Exchange 

Act rule 18a–1, an SBS Entity cannot 

count as capital the amount of initial 

margin posted to a counterparty unless 

it enters into a special loan agreement 

with an affiliate.58 The special loan 

agreement requires the affiliate to fund 

the initial margin amount and the 

agreement must be structured so that the 

affiliate—rather than the SBS Entity— 

bears the risk that the counterparty may 

default on the obligation to return the 

initial margin. The reason for this 

restrictive approach to initial margin 

posted away is that it ‘‘would not be 

available [to the SBS Entity] for other 

purposes, and, therefore, the firm’s 

liquidity would be reduced.’’ 59 Under 

the Basel capital standard, a Covered 

Entity can count initial margin posted 

away as capital without the need to 

enter into a special loan arrangement 

with an affiliate. Consequently, because 

of the ability to include illiquid assets 

and margin posted away as capital, 

Covered Entities subject to the Basel 

capital standard may have less balance 

sheet liquidity than SBS Entities subject 

to Exchange Act rule 18a–1. 

In summary, there are key differences 

between the net liquid assets test of 

Exchange Act rule 18a–1 and the Basel 

capital standard applicable to Covered 

Entities. Those differences in terms of 

the types of assets that count as 

regulatory capital and how regulatory 


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60As discussed above, highly liquid assets under 

Exchange Act rule 18a–1 are also known as 

‘‘allowable assets’’ and generally are consistent with 

the LCR’s HQLA. 

61The Basel capital standard does not preclude a 

firm from having more than a dollar of highly liquid 

assets for each dollar of unsubordinated liabilities. 

Thus, a firm operating pursuant to the standard may 

structure its assets and liabilities in a manner that 

achieves this result. However, the standard does not 

mandate this result. Rather, it would accommodate 

a firm that seeks to maintain this level of liquidity 

on its own accord. 

62See CRR, Article 412(1). 

63See CRR, Articles 413, 428a and 428az. 

64See KWG, Article 25a(1), sentence 3 no. 3b). 

65See KWG, Article 6b(2) no.7. 

66See para. (c)(1)(iii) of the proposed Amended 

Order. This additional condition is included in the 

French and UK Orders. See French Order, 86 FR 

41659; UK Order, 86 FR 43372. 

See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) of 

the proposed Amended Order. 

67See, e.g., CRR, Part 1 (Own Funds, including 

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

68See para. (c)(1)(iii) of the proposed Amended 

Order. This proposed additional condition is 

included in the French and UK Orders. See French 

Order, 86 FR 41659; UK Order, 86 FR 43372. 

69See para. (c)(1)(iii)(A)(1) of the proposed 

Amended Order. The definition of ‘‘liquid assets’’ 

and the method of calculating the deductions are 

discussed below. 

capital is calculated lead to different 

regulatory outcomes. In particular, the 

net liquid assets test produces a 

regulatory outcome in which the SBS 

Entity has more than one dollar of 

highly liquid assets for each dollar of 

unsubordinated liabilities.60 The Basel 

capital standard—while having 

measures designed to promote 

liquidity—does not produce this 

regulatory outcome.61 Therefore, the 

Commission preliminarily believes that 

an additional capital condition is 

needed to bridge the gap between these 

two capital standards and thereby 

achieve more comparable regulatory 

outcomes in terms of promoting liquid 

balance sheets for SBS Entities and 

Covered Entities. 

However, in seeking to bridge this 

regulatory gap, the additional condition 

should take into account that Covered 

Entities are or will be subject to EU and 

German laws and measures designed to 

promote liquidity. In particular, 

Covered Entities are or will be subject 

to: (1) Requirements to hold an amount 

of HQLA to meet expected payment 

obligations under stressed conditions 

for thirty days (the ‘‘LCR 

requirement’’); 62 (2) requirements to 

hold a diversity of stable funding 

instruments sufficient to meet long-term 

obligations under both normal and 

stressed conditions (the ‘‘NSFR 

requirements’’); 63 (3) requirements to 

perform liquidity stress tests and 

manage liquidity risk (the ‘‘internal 

liquidity assessment requirements’’); 64

and (4) regular reviews of a Covered 

Entity’s liquidity risk management 

processes (the ‘‘liquidity review 

process’’).65 These EU and German laws 

and measures will require Covered 

Entities to hold significant levels of 

liquid assets. However, the laws and 

measures on their own, do not impose 

a net liquid assets test. Therefore, the 

Commission preliminarily believes that 

an additional condition is necessary to 

supplement these requirements. 

The Commission has taken into 

account the EU and German liquidity 

laws and measures discussed above in 

making a substituted compliance 

determination with respect to Exchange 

Act rule 18a–1, and in tailoring 

additional capital conditions designed 

to achieve comparable regulatory 

outcomes. The LCR, NSFR, and internal 

liquidity assessment requirements 

collectively will require Covered 

Entities to maintain pools of 

unencumbered HQLA to cover potential 

cash outflows during a 30-day stress 

period, to fund long-term obligations 

with stable funding instruments, and to 

manage liquidity risk. These 

requirements—coupled with 

supervisory reviews of the liquidity risk 

management practices of Covered 

Entities—will require Covered Entities 

to hold significant levels of liquid 

assets. These requirements and 

measures in combination with the other 

capital requirements applicable to 

Covered Entities provide a starting 

foundation for making a positive 

substituted compliance determination 

with respect to the capital requirements 

of Exchange Act section 15F(e) and 

Exchange Act rule 18a–1. However, the 

Commission preliminarily believes that 

more is needed to achieve a comparable 

regulatory outcome to the net liquid 

assets test of Exchange Act rule 18a–1. 

For these reasons, the proposed 

Amended Order includes an additional 

capital condition that would impose a 

simplified net liquid assets test.66 This 

simplified test would require the 

Covered Entity to hold more than one 

dollar of liquid assets for each dollar of 

liabilities. The simplified net liquid 

assets test—when coupled with the CRR 

capital requirements,67 LCR 

requirements, NSFR requirements, 

internal liquidity assessment 

requirements, and liquidity review 

process—is designed to produce a 

regulatory outcome that is comparable 

to the net liquid assets test of Exchange 

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

to cover liabilities and to promote the 

maintenance of highly liquid balance 

sheets). 

More specifically, substituted 

compliance with respect to Exchange 

Act rule 18a–1 would be subject to the 

condition that a Covered Entity: (1) 

Maintains liquid assets (as defined in 

the proposed condition) that have an 

aggregate market value that exceeds the 

amount of the Covered Entity’s total 

liabilities by at least $100 million before 

applying the deduction specified in the 

proposed condition, and by at least $20 

million after applying the deduction 

specified in the proposed condition; (2) 

makes and preserves for three years a 

quarterly record that: (a) Identifies and 

values the liquid assets maintained as 

defined in the proposed condition, (b) 

compares the amount of the aggregate 

value the liquid assets maintained 

pursuant to the proposed condition to 

the amount of the Covered Entity’s total 

liabilities and shows the amount of the 

difference between the two amounts 

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

(c) shows the amount of the deduction 

specified in the proposed condition and 

the amount that deduction reduces the 

excess liquid assets amount; (3) notifies 

the Commission in writing within 24 

hours in the manner specified on the 

Commission’s website if the Covered 

Entity fails to meet the requirements of 

the proposed condition and includes in 

the notice the contact information of an 

individual who can provide further 

information about the failure to meet the 

requirements; and (4) includes its most 

recent statement of financial condition 

filed with its local supervisor (whether 

audited or unaudited) with its initial 

written notice to the Commission of its 

intent to rely on substituted 

compliance.68

Under the first prong of this 

additional capital condition, the 

Covered Entity would be required to 

maintain liquid assets (as defined in the 

proposed capital condition) that have an 

aggregate market value that exceeds the 

amount of the Covered Entity’s total 

liabilities by at least: (1) $100 million 

before applying a deduction (as 

specified in the proposed capital 

condition); and (2) $20 million after 

applying the deduction.69 The first 

prong is designed to be consistent with 

the $100 million tentative net capital 

requirement of Exchange Act rule 18a– 

1 applicable to SBS Entities approved to 

use models. As discussed above, 

Exchange Act rule 18a–1 requires SBS 

Entities that have been approved to use 

models to maintain at least $100 million 

in tentative net capital. And, tentative 

net capital is the amount that an SBS 

Entity’s liquid assets exceed its total 

unsubordinated liabilities before 

applying haircuts. The first prong would 

require the Covered Entity to subtract 


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70See para. (c)(1)(iii)(B) of the proposed 

Amended Order. 

71See supra notes 56 and 60 (describing 

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

72See para. (c)(1)(iii)(B)(1) of the proposed 

Amended Order. 

73See, e.g., International Financial Reporting 

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

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

hand and demand deposits and ‘‘cash equivalents’’ 

as short-term, highly liquid investments that are 

readily convertible to known amounts of cash and 

which are subject to an insignificant risk of changes 

in value). See also Books and Records Adopting 

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

amended Part II of the FOCUS Report setting forth 

the assets side of the balance sheet and identifying 

cash as an allowable asset in Box 200). 

74See para. (c)(1)(iii)(B)(2) of the proposed 

Amended Order. 

75See Books and Records Adopting Release, 84 

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

the FOCUS Report setting forth the assets side of 

the balance sheet and identifying securities 

borrowed as an allowable asset in Boxes 240 and 

250 and securities purchased under agreements to 

resell as an allowable asset in Box 360). 

76See para. (c)(1)(iii)(B)(3) of the proposed 

Amended Order. 

77See Books and Records Adopting Release, 84 

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

the FOCUS Report setting forth the assets side of 

the balance sheet and identifying fails to deliver as 

allowable assets in Boxes 220 and 230, receivables 

from clearing organizations as allowable assets in 

Boxes 280 and 290, and receivables from customers 

as allowable assets in Boxes 310, 320, and 330). 

78See para. (c)(1)(iii)(B)(4) of the proposed 

Amended Order. 

79See Books and Records Adopting Release, 84 

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

the FOCUS Report setting forth the assets side of 

the balance sheet and identifying securities, 

commodities, and swaps positions as allowable 

assets in Box 12019). 

80See para. (c)(1)(iii)(B)(5) of the proposed 

Amended Order. 

81See Capital and Margin Adopting Release, 84 

FR 43887–88. 

82 Id. 

83See para. (c)(1)(iii)(B) of the proposed 

Amended Order. 

84See para. (c)(1)(iii)(A)(1) of the proposed 

Amended Order. 

85See BCBS, Risk-based capital requirements 

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

framework/chapter/RBC/ 

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

total liabilities from total liquid assets. 

The amount remaining will need to 

equal or exceed $100 million. The first 

prong also is designed to be consistent 

with the $20 million fixed-dollar 

minimum net capital requirement of 

Exchange Act rule 18a–1. As discussed 

above, net capital is calculated by 

applying haircuts (deductions) to 

tentative net capital and the fixed-dollar 

minimum requires that net capital must 

equal or exceed $20 million. The first 

prong would require the Covered Entity 

to subtract total liabilities from total 

liquid assets and then apply the 

deduction to the difference. The amount 

remaining after the deduction would 

need to equal or exceed $20 million. 

For the purposes of the first prong, 

‘‘liquid assets’’ would be defined as: (1) 

Cash and cash equivalents; (2) 

collateralized agreements; (3) customer 

and other trading related receivables; (4) 

trading and financial assets; and (5) 

initial margin posted by the Covered 

Entity to a counterparty or third-party 

(subject to certain conditions discussed 

below).70 These categories of liquid 

assets are designed to align with assets 

that are considered allowable assets for 

purposes of calculating net capital 

under Exchange Act rule 18a–1.71

Further, the first four categories of 

liquid assets also are designed to align 

with how Covered Entities categorize 

liquid assets on their financial 

statements. 

The first category of liquid assets 

would be cash and cash equivalents.72

These assets would consist of cash and 

demand deposits at banks (net of 

overdrafts) and highly liquid 

investments with original maturities of 

three months or less that are readily 

convertible into known amounts of cash 

and subject to insignificant risk of 

change in value.73 The second category 

of liquid assets would be collateralized 

agreements.74 These assets would 

consist of secured financings where 

securities serve as collateral such as 

repurchase agreements and securities 

loaned transactions.75 The third 

category of liquid assets would be 

customer and other trading related 

receivables.76 These assets would 

consist of customer margin loans, 

receivables from broker-dealers, 

receivables related to fails to deliver, 

and receivables from clearing 

organizations.77 The fourth category of 

liquid assets would be trading and 

financial assets.78 These assets would 

consist of cash market securities 

positions and listed and over-thecounter derivatives positions.79

As discussed above, initial margin 

posted to a counterparty is treated 

differently under Exchange Act rule 

18a–1 and the Basel capital standard. 

The fifth category of liquid assets would 

be initial margin posted by the Covered 

Entity to a counterparty or a third-party 

custodian, provided: (1) The initial 

margin requirement is funded by a fully 

executed written loan agreement with 

an affiliate of the Covered Entity; (2) the 

loan agreement provides that the lender 

waives re-payment of the loan until the 

initial margin is returned to the Covered 

Entity; and (3) the liability of the 

Covered Entity to the lender can be fully 

satisfied by delivering the collateral 

serving as initial margin to the lender.80

As discussed above, one critical 

difference between Exchange Act rule 

18a–1 and the Basel capital standard is 

that an SBS Entity cannot count as 

capital the amount of initial margin 

posted to a counterparty or third-party 

custodian unless it enters into a special 

loan agreement with an affiliate.81

Under the Basel capital standard, a 

Covered Entity can count initial margin 

posted away as capital without the need 

to enter into a special loan arrangement 

with an affiliate. Consequently, to count 

initial margin posted away as a liquid 

asset for purposes of this capital 

condition, the Covered Entity would be 

required to enter into the same type of 

special agreement that an SBS Entity 

must execute to count initial margin as 

an allowable asset for purposes of 

Exchange Act rule 18a–1.82

If an asset does not fall within one of 

the five categories of ‘‘liquid assets’’ as 

defined in the proposed Amended 

Order,83 it would be considered nonliquid, and could not be treated as a 

liquid asset for purposes of this capital 

condition. For example, the following 

categories of assets generally could not 

be treated as liquid assets: (1) 

Investments; (2) loans; and (3) other 

assets. The non-liquid ‘‘investment’’ 

category would include the Covered 

Entity’s ownership interests in 

subsidiaries or other affiliates. The nonliquid ‘‘loans’’ category would include 

unsecured loans and advances. The 

non-liquid ‘‘other’’ assets category 

would refer to assets that do not fall into 

any of the other categories of liquid or 

non-liquid assets. These non-liquid 

‘‘other’’ assets would include furniture, 

fixtures, equipment, real estate, 

property, leasehold improvements, 

deferred tax assets, prepayments, and 

intangible assets. 

As discussed above, the first prong of 

this capital condition would require the 

Covered Entity to subtract total 

liabilities from total liquid assets and 

then apply a deduction (haircut) to the 

difference.84 The amount remaining 

after the deduction would need to equal 

or exceed $20 million. The method of 

calculating the amount of the deduction 

would rely on the calculations Covered 

Entities must make under the Basel 

capital standard.85 In particular, under 

the Basel standard, Covered Entities 

must risk-weight their assets. This 

involves adjusting the nominal value of 

each asset based on the inherent risk of 

the asset. Less risky assets are adjusted 

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

than more risky assets. As a result, 

Covered Entities must hold lower levels 

of regulatory capital for less risky assets 

and higher levels of capital for riskier 

assets. Similarly, under Exchange Act 

rule 18a–1, less risky assets incur lower 

haircuts than riskier assets and, 


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86 Id. 

87See para. (c)(1)(iii)(C) of the proposed 

Amended Order. The Commission acknowledges 

that a Covered Entity’s risk-weighted assets will 

include components in addition to market and 

credit risk charges (e.g., operational risk charges). 

However, the Commission expects the combined 

market and credit risk charges would make up the 

substantial majority of the risk-weighted assets. In 

addition, the Commission believes that this method 

of calculating the deduction in the first prong of the 

third additional capital condition is a reasonable 

approach in that it addresses market and credit risk 

similar to the process used by security-based swap 

dealers authorized to use internal models to 

compute market and credit risk deductions under 

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

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

market and credit risk charges, including use of an 

8% multiplication factor for calculating the credit 

risk charges). 

88For example, assume a Covered Entity has total 

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

liquid and $5 million are illiquid) and total 

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

Entity’s liquid assets would exceed total liabilities 

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

and, therefore, the Covered Entity would have 

excess liquid assets greater than $100 million as 

required by the first prong of this capital condition. 

Assume further that the Covered Entity’s riskweighted assets under the Basel capital standard 

equal $400 million. In this case, the Covered 

Entity’s deduction would equal $32 million ($400 

million divided by 12.5). Subtracting $32 million 

from $145 million leaves $113 million, which 

exceeds $20 million. Therefore, the Covered Entity 

would meet the second requirement of the first 

prong of this capital condition. 

89See para. (c)(1)(iii)(A)(2) of the proposed 

Amended Order. 

90See para. (c)(1)(iii)(A)(3) of the proposed 

Amended Order. 

91See para. (c)(1)(ii) of the proposed Amended 

Order. 

92See para. (c)(1)(iii)(A)(4) of the proposed 

Amended Order. 

93See part VII.B.4, infra (discussing proposed 

reporting conditions with respect to applying 

substituted compliance for Exchange Act rule 18a– 

7). 

therefore, require less net capital to be 

held in relation to them. Consequently, 

the process of risk-weighting assets 

under the Basel capital standard 

provides a method to account for the 

inherent risk in an asset held by a 

Covered Entity similar to how the 

haircuts under the Exchange Act rule 

18a–1 account for the risk of assets held 

by SBS Entities. For these reasons, the 

Commission preliminarily believes it 

would be appropriate to use the process 

of risk-weighting assets under the Basel 

capital standard to determine the 

amount of the deduction (haircuts) 

under the first prong of the third 

additional capital condition. 

Under the Basel capital standard, 

Covered Entities must hold regulatory 

capital equal to at least 8% of the 

amount of their risk-weighted assets.86

Therefore, the deduction (haircut) 

required for purposes of this capital 

condition would be determined by 

dividing the amount of the Covered 

Entity’s risk-weighted assets by 12.5 

(i.e., the reciprocal of 8%).87 In sum, the 

Covered Entity would be required to 

maintain an excess of liquid assets over 

total liabilities that equals or exceeds 

$100 million before the deduction 

(derived from the firm’s risk-weighted 

assets) and $20 million after the 

deduction.88

The second prong of this capital 

condition would require the Covered 

Entity to make and preserve for three 

years a quarterly record that: (1) 

Identifies and values the liquid assets 

maintained pursuant to the first prong; 

(2) compares the amount of the 

aggregate value the liquid assets 

maintained pursuant to the first prong 

to the amount of the Covered Entity’s 

total liabilities and shows the excess 

liquid assets amount; and (3) shows the 

amount of the deduction required under 

the first prong and the amount that 

deduction reduces the excess liquid 

assets amount.89 Consequently, the 

quarterly record would include details 

showing whether the Covered Entity is 

meeting the $100 million and $20 

million requirements of the first prong. 

The third prong of this capital 

condition would require the Covered 

Entity to notify the Commission in 

writing within 24 hours in the manner 

specified on the Commission’s website 

if the Covered Entity fails to meet the 

requirements of the first prong and 

include in the notice the contact 

information of an individual who can 

provide further information about the 

failure to meet the requirements.90 As 

discussed above, the first additional 

capital condition would require the 

Covered Entity to apply substituted 

compliance with respect to notification 

requirements of Exchange Act rule 18a– 

8 relating to capital.91 A Covered Entity 

applying substituted compliance with 

respect to Exchange Act rule 18a–8 

under the proposed Amended Order 

would need to simultaneously submit to 

the Commission any notifications 

relating to capital that it must submit to 

the EU and German authorities. 

However, EU and German notification 

requirements do not address a failure to 

adhere to the simplified net liquid 

assets test that would be required by the 

first prong of this capital condition. 

Moreover, due to the differences 

between Exchange Act rule 18a–1 and 

the Basel capital standard discussed 

above, a Covered Entity could fall out of 

compliance with the requirements of the 

first prong but still remain in 

compliance with the requirements of the 

Basel capital standard. Accordingly, the 

third prong would require the Covered 

Entity to notify the Commission if the 

firm fails to meet the requirements of 

the first prong. This would alert the 

Commission of potential issues with the 

Covered Entity’s financial condition that 

could pose risks to the firm’s customers 

and counterparties. 

The fourth prong of this condition 

would require the Covered Entity to 

include its most recently filed statement 

of financial condition (whether audited 

or unaudited) with its initial notice to 

the Commission of its intent to rely on 

substituted compliance.92 This one-time 

obligation would provide the 

Commission with information about the 

assets, liabilities, and capital of Covered 

Entities applying substituted 

compliance with respect to Exchange 

Act rule 18a–1. The Commission would 

use the statement of financial condition 

and the periodic audited and unaudited 

reports Covered Entities would file with 

the Commission to monitor the 

appropriateness of the capital condition 

if it is included in an amended order. 

The Commission expects that most 

Covered Entities will file their initial 

notice of intent to apply substituted 

compliance with respect to Exchange 

Act rule 18a–1 at or around the time 

they file their registration applications 

with the Commission. Therefore, receipt 

of the statement of financial condition at 

that time would allow the Commission 

to begin this monitoring process before 

Covered Entities begin filing audited 

and unaudited reports with the 

Commission pursuant to Exchange Act 

rule 18a–7 or an amended order 

providing substituted compliance for 

Exchange Act rule 18a–7.93

C. Margin—Preliminary Views and 

Proposed Amended Order 

In the Commission’s preliminary 

view, based on the Amended 

Application and the Commission’s 

review of applicable provisions, 

relevant EU and German margin 

requirements would produce regulatory 

outcomes that are comparable to those 

associated with Exchange Act rule 18a– 

3, provided Covered Entities are subject 

to additional conditions (discussed 

below) to address differences between 

the two margining regimes with respect 

to counterparty exceptions. 

In terms of producing comparable 

outcomes, in adopting Exchange Act 

rule 18a–3, the Commission stated that 

it modified the proposal to more closely 

align the final rule with the margin rules 

of the Commodity Futures Trading 

Commission and the U.S. prudential 

regulators and, in doing so, with the 

recommendations made by the BCBS 

and the Board of the International 


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94See Capital and Margin Adopting Release, 84 

FR 43908–09; see also BCBS/IOSCO, Margin 

Requirements for Non-centrally Cleared Derivatives 

(April 2020), available at: https://www.bis.org/bcbs/ 

publ/d499.pdf (‘‘BCBS/IOSCO Paper’’). The EU and 

German margin requirements also are based on the 

recommendation in the BCBS/IOSCO Paper. 

95See 17 CFR 240.18a–3(c)(1)(ii) and the 

Amended Application Annex A category 4 at 28– 

31. 

96See 17 CFR 240.18a–3(c)(1)(ii) and the 

Amended Application Annex A category 4 at 38– 

39. 

97See 17 CFR 240.18a–3(d)(2)(i) and the 

Amended Application Annex A category 4 at 12– 

18. 

98See 17 CFR 240.18a–3(d)(2)(i) and the 

Amended Application Annex A category 4 at 12. 

The Commission must approve the use of an initial 

margin model. 17 CFR 240.18a–3(d)(2)(i). EMIR 

article 11(15) directs European supervisory 

authorities to develop regulatory technical 

standards under which initial margin models have 

to be approved (initial and ongoing approval). EU 

and German requirements currently provide that, 

upon request, counterparties using an initial margin 

model shall provide the regulators with any 

documentation relating to the risk management 

procedures relating to such model at any time. 

EMIR Margin RTS article 2(6). 

99See 17 CFR 240.18a–3(c)(1)(iii) and the 

Amended Application Annex A category 4 at 54– 

63. 

100See 17 CFR 240.18a–3(c)(1)(iii) and the 

Amended Application Annex A category 4 at 64– 

66. 

101See para. (c)(2)(i) of the proposed Amended 

Order. In connection with margin requirements, 

Covered Entities would need to comply with: EMIR 

article 11; EMIR Margin RTS; CRR articles 103, 

105(3); 105(10); 111(2), 224, 285, 286, 286(7), 290, 

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

Org Reg article 23(1); CRD articles 74 and 79(b); and 

KWG section 25a(1). See para. (c)(2)(i) of the 

proposed Amended Order. 

102See Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers; Proposed Rule, 

Exchange Act Release No. 68071 (Oct. 18, 2012), 77 

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

103See 17 CFR 240.3a71–6(d)(5)(i) and (ii). 

104See Capital and Margin Adopting Release, 84 

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

OTC derivatives dealers manage their credit risk 

exposure to OTC derivatives counterparties. Prior to 

the financial crisis, in certain circumstances, 

counterparties were able to enter into OTC 

derivatives transactions without having to deliver 

collateral. When ‘‘trigger events’’ occurred during 

the financial crisis, those counterparties faced 

significant liquidity strains when they were 

required to deliver collateral.). Id. 

105See 17 CFR 240.18a–3(c)(ii)(A)(1) and (2). 

106See the Amended Application Annex A 

category 4 at 60–61. 

107See 17 CFR 240.18a–3(c)(ii)(B). 

108See the Amended Application Annex A 

category 4 at 7 and 63. These thresholds are being 

phased-in with the last initial margin threshold set 

at EUR 8 billion. 

109The Commission recognizes there are also 

cases where the EU and German margin rules are 

more restrictive than Exchange Act rule 18a–3. EU 

margin rules require Covered Entities to post initial 

margin to covered counterparties, while the 

Exchange Act rule 18a–3 would permit posting but 

not require it. In addition, EU margin rules also 

require a Covered Entity to collect (and post) initial 

margin to financial and non-financial 

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

threshold on a group basis. In contrast, Exchange 

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

nonbank security-based swap dealer to collect 

initial margin from counterparties that are financial 

market intermediaries. 17 CFR 240.18a– 

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

focuses on determining whether the EU and 

German margin rules are comparable to Exchange 

Act rule 18a–3. 

Organization of Securities Commissions 

(‘‘IOSCO’’) with respect to margin 

requirements for non-centrally cleared 

derivatives.94 In this regard, Exchange 

Act rule 18a–3 and the EU and German 

margin rules require firms to collect 

liquid collateral from a counterparty to 

cover variation and/or initial margin 

requirements.95 Both sets of rules also 

require firms to deliver liquid collateral 

to a counterparty to cover variation 

margin requirements. Under both sets of 

rules, the fair market value of collateral 

used to meet a margin requirement must 

be reduced by a haircut.96 Further, both 

sets of rules permit the use of a model 

(including a third party model such as 

ISDA’s SIMMTM model) to calculate 

initial margin.97 The initial margin 

model under both sets of rules must 

meet certain minimum qualitative and 

quantitative requirements, including 

that the model must use a 99 percent, 

one-tailed confidence level with price 

changes equivalent to a 10-day 

movement in rates and prices.98 Both 

sets of rules have common exceptions to 

the requirements to collect and/or post 

initial or variation margin, including 

exceptions for certain commercial end 

users, the Bank for International 

Settlements, and certain multilateral 

development banks.99 Both sets of rules 

also permit a threshold below which 

initial margin is not required to be 

collected and incorporate a minimum 

transfer amount.100 For these reasons, 

substituted compliance with respect to 

Exchange Act rule 18a–3 would be 

conditioned on Covered Entities being 

subject to and complying with these EU 

and German margin requirements.101

However, there would be additional 

conditions to address differences in the 

exceptions to collecting variation and/or 

initial margin between Exchange Act 

rule 18a–3 and the EU and German 

margin rules. In this regard, the 

Commission stated when proposing 

Exchange Act rule 18a–3 that the 

‘‘Dodd-Frank Act seeks to address the 

risk of uncollateralized credit risk 

exposure arising from OTC derivatives 

by, among other things, mandating 

margin requirements for non-cleared 

security-based swaps and swaps.’’ 102

Further, the comparability criteria for 

margin requirements under Exchange 

Act rule 3a71–6 provides that prior to 

making a substituted compliance 

determination, the Commission intends 

to consider (in addition to any 

conditions imposed) whether the 

foreign financial regulatory system 

requires registrants to adequately cover 

their current and future exposure to 

OTC derivatives counterparties, and 

ensures registrants’ safety and 

soundness, in a manner comparable to 

the applicable provisions arising under 

the Exchange Act and its rules and 

regulations.103 In adopting this 

comparability criteria for margin 

requirements, the Commission stated 

that obtaining collateral is one of the 

ways OTC derivatives dealers manage 

their credit risk exposure to OTC 

derivatives counterparties.104

To address the risk of uncollateralized 

exposures, Exchange Act rule 18a–3 

requires SBS Entities without a 

prudential regulator to collect variation 

margin from all counterparties, 

including affiliates, unless an exception 

applies.105 Under the EU and German 

margin requirements, there are 

exceptions from the variation margin 

requirements for certain intragroup 

transactions (i.e., transactions between 

affiliates).106 In addition, Exchange Act 

rule 18a–3 requires firms to collect 

initial margin from all counterparties, 

unless an exception applies.107 This 

initial margin requirement under 

Exchange Act rule 18a–3 requires the 

firm to collect initial margin from a 

financial counterparty such as a hedge 

fund without regard to whether the 

counterparty has material exposures to 

non-cleared security-based swaps and 

uncleared swaps. In contrast, EU and 

German margin requirements do not 

require Covered Entities to collect initial 

margin from financial counterparties, if 

their notional exposure to non-centrally 

cleared derivatives does not exceed a 

certain threshold on a group basis.108

In some cases these differences may 

result in a Covered Entity not being 

adequately collateralized to cover its 

current or future exposure to these 

counterparties with respect to its OTC 

derivatives transactions. In addition, 

differences in the counterparty 

exceptions could potentially incentivize 

market participants to engage in noncleared security-based swap 

transactions outside of the United 

States.109 Consequently, the 

Commission preliminarily believes it 

would be appropriate to propose 

additional margin conditions to produce 

comparable regulatory outcomes in 

terms of counterparty exceptions 

between Exchange Act rule 18a–3 and 

the EU and German requirements. 

The first additional condition is 

designed to address differences in the 

counterparty exceptions with respect to 


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110See para. (c)(2)(ii) of the proposed Amended 

Order. This proposed additional condition is 

included in the French and UK Orders. See French 

Order, 86 FR 41659; UK Order, 86 FR 43372. 

111See para. (c)(2)(iii) of the proposed Amended 

Order. This proposed additional condition is 

included in the French and UK Orders. See French 

Order, 86 FR 41659; UK Order, 86 FR 43372. 

112See para. (c)(2)(iv) of the proposed Amended 

Order. This proposed additional condition is 

included in the French and UK Orders. See French 

Order, 86 FR 41659; UK Order, 86 FR 43372. 

113See para. (f)(1)(i)(L) of the proposed Amended 

Order. 

114Exchange 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’’). 

115See para. (d)(2) of the Order. 

116See French Order, 86 FR 41659. 

117See para. (d)(2)(ii)(B) of the proposed 

Amended Order. In addition, for consistency with 

the French Order, the Commission is proposing to 

incorporate CRR articles 286–88 and 293 and EMIR 

Margin RTS article 2 as part of para. (d)(3) of the 

proposed Amended Order. 

118See French Order, 86 FR 41659. 

119See para. (d)(2)(D) of the proposed Amended 

Order. 

120See para. (d)(2)(E) of the proposed Amended 

Order. 

variation margin. It would require a 

Covered Entity to collect variation 

margin, as defined in the EMIR Margin 

RTS, from a counterparty with respect 

to a transaction in non-cleared securitybased swaps, unless the counterparty 

would qualify for an exception under 

Exchange Act rule 18a–3 from the 

requirement to deliver variation margin 

to the Covered Entity.110 This condition 

would define variation margin by 

referencing EMIR Margin RTS to 

facilitate implementation of the 

condition by Covered Entities. Under 

this condition, for example, Covered 

Entities would be required to collect 

variation margin from their affiliates, 

but would be permitted to comply with 

all other EU and German margin 

requirements, including calculation, 

collateral, documentation, and timing of 

collection requirements. The first 

proposed additional condition would 

close the gap between the counterparty 

exceptions of Exchange Act rule 18a–3 

and the EU and German margin rules 

with respect to variation margin. 

The second proposed additional 

condition is designed to address the 

counterparty exceptions with respect to 

initial margin. It would require a 

Covered Entity to collect initial margin, 

as defined in the EMIR Margin RTS, 

from a counterparty with respect to 

transactions in non-cleared securitybased swaps, unless the counterparty 

would qualify for an exception under 

Exchange Act rule 18a–3 from the 

requirement to deliver initial margin to 

a Covered Entity.111 The condition 

would define initial margin by 

referencing EMIR Margin RTS to 

facilitate implementation of the 

condition by Covered Entities. Under 

this condition, for example, Covered 

Entities would be required to collect 

initial margin from their certain 

counterparties, but would be permitted 

to comply with all other EU and German 

margin requirements, including 

calculation, collateral, documentation, 

and timing of collection requirements. 

The second proposed additional 

condition would close the gap between 

the counterparty exceptions of Exchange 

Act rule 18a–3 and the EU and German 

margin rules with respect to initial 

margin. 

Finally, the proposed Amended Order 

also includes as a proposed margin 

condition that the Covered Entity apply 

substituted compliance with respect to 

Exchange Act rule 18a–5(a)(12) (a record 

making requirement).112 This record 

making requirement is directly linked to 

the margin requirements of Exchange 

Act rule 18a–3. The proposed Amended 

Order conditions substituted 

compliance with respect to this record 

making requirement on the Covered 

Entity applying substituted compliance 

with respect to Exchange Act rule 18a– 

3.113 This condition would do the 

reverse: Condition substituted 

compliance with respect to Exchange 

Act rule 18a–3 on the Covered Entity 

applying substituted compliance with 

respect to Exchange Act rule 18a– 

5(a)(12). This condition is designed to 

provide clarity as to the Covered 

Entity’s obligations under this record 

making requirement when applying 

substituted compliance with respect to 

Exchange Act rule 18a–3 pursuant this 

proposed Amended Order. 

V. Proposed Amendments Related to 

CCO Reports 

A. Compliance Report Certifications 

Rule 15Fk–1 states that the required 

reports must include ‘‘a certification by 

the chief compliance officer or senior 

officer that, to the best of his or her 

knowledge and reasonable belief and 

under penalty of law, the information 

contained in the compliance report is 

accurate and complete in all material 

respects.’’ 114 The standard applied in 

the Order required certification that 

‘‘under penalty of law, the report is 

accurate and complete.’’ 115 The 

Commission preliminarily believes that, 

consistent with the French Order,116

further alignment of the proposed 

Amended Order’s certification 

requirement with that of the applicable 

Exchange Act rule is appropriate. 

Therefore, the proposed Amended 

Order would clarify that the required 

reports should be certified by ‘‘the chief 

compliance officer or senior officer’’ of 

the Covered Entity and that the same 

certification standard contained in 

Exchange Act rule 15Fk–1 would 

apply.117

B. Timing of Compliance Report 

Submission 

Also consistent with the French 

Order,118 the Commission is proposing 

to amend the Order to clarify the timing 

for Covered Entities to submit 

compliance reports to the Commission. 

To promote timely notice comparable to 

what the Exchange Act rule provides, 

the Commission is proposing to 

incorporate a timing standard that 

accounts for MiFID-required timing as 

well as the possibility that the relevant 

reports may be submitted to the 

management body early. Under the 

proposed Amended Order, the 

applicable compliance reports must be 

provided to the Commission no later 

than 15 days following the earlier of: (i) 

The submission of the report to the 

Covered Entity’s management body; or 

(ii) the time the report is required to be 

submitted to the management body.119

The proposed Amended Order would 

also clarify that together the reports 

must cover the entire period that the 

Covered Entity’s annual compliance 

report referenced in Exchange Act 

section 15F(k)(3) and Exchange Act rule 

15Fk–1(c) would be required to 

cover.120

VI. Proposed Amendments 

Counterparty Protection Requirements 

A. Disclosure of Information Regarding 

Material Risks and Characteristics 

The Commission is proposing to add 

two requirements to the list of German 

and EU disclosure of information 

regarding material incentives or 

conflicts of interest requirements that 

the Covered Entity must be subject to 

and comply with. The MAR Investment 

Recommendations Regulation articles 5 

and 6 enumerate specific obligations in 

relation to disclosure of interests or of 

conflicts of interest. Article 5 requires 

that persons who produce 

recommendations disclose in their 

recommendations all relationships and 

circumstances that may reasonably be 

expected to impair the objectivity of the 

recommendation, including interests or 

conflicts of interest. Article 6 imposes 

additional obligations on certain 

entities, including the disclosure of 

information on their interests and 

conflicts of interest concerning the 

issuer to which a recommendation 

relates. The Commission preliminarily 

believes that requiring Covered Entities 


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121See para. (e)(2)(iii) of the proposed Amended 

Order. 

122See para. (e)(5) of the Order. 

123See para. (d)(2) of the Order. 

124See 17 CFR 240.18a–5. The BaFin Application 

discusses German requirements that address firms’ 

record creation obligations related to matters such 

as financial condition, operations, transactions, 

counterparties and their property, personnel and 

business conduct. See BaFin Application Annex A 

category 2 at 4–34. 

125See 17 CFR 240.18a–6. The BaFin Application 

discusses German requirements that address firms’ 

record preservation obligations related to records 

that firms are required to create, as well as 

additional records such as records of 

communications. See BaFin Application Annex A 

category 2 at 35–79. 

126See 17 CFR 240.18a–7. The BaFin Application 

discusses German requirements that address firms’ 

obligations to make certain reports. See BaFin 

Application Annex A category 2 at 80–91, 96–102. 

127See 17 CFR 240.18a–8. The BaFin Application 

discusses German requirements that address firms’ 

obligations to make certain notifications. See BaFin 

Application Annex A category 2 at 92–96, 102. 

128See 17 CFR 240.18a–9. The BaFin Application 

discusses German requirements that address firms’ 

obligations to perform securities counts. See BaFin 

Application Annex A category 2 at 27–30. 

129See 15 U.S.C. 78o–10(g). The BaFin 

Application discusses German requirements that 

address firms’ record preservation obligations 

related to records that firms are required to create, 

as well as additional records such as records of 

communications. See BaFin Application Annex A 

category 2 at 35–79. 

to be subject to and comply with MAR 

Investment Recommendations 

Regulation articles 5 and 6 contributes 

to a determination that relevant German 

and EU requirements produce 

regulatory outcomes that are comparable 

to relevant requirements of Exchange 

Act rule 15Fh–3(b). 

B. Fair and Balanced Communications 

The Commission is also proposing to 

modify the fair and balanced 

communications section of the proposed 

Amended Order.121 First, the 

Commission believes that German and 

EU fair and balanced communications 

requirements are more comparable to 

Exchange Act requirements when 

considering three additional EU 

requirements: MAR article 20(1) would 

require the Covered Entity to present 

recommendations in a manner that 

ensures the information is objectively 

presented and to disclose interests and 

conflicts of interest concerning the 

financial instruments to which the 

information relates. MAR Investment 

Recommendations Regulation article 3 

would require a Covered Entity to 

communicate only recommendations 

that present facts in a way that they are 

clearly distinguished from 

interpretations, estimates, opinions and 

other types of non-factual information; 

label clearly and prominently 

projections, forecasts and price targets; 

indicate the relevant material 

assumptions and substantial material 

sources of information; and include 

only reliable information or a clear 

indication when there is doubt about 

reliability. MAR Investment 

Recommendations Regulation article 4 

would require the Covered Entity to 

provide in its recommendation 

additional information about the factual 

basis of its recommendation. 

Accordingly, the Commission is adding 

these three requirements to the Order’s 

list of German and EU fair and balanced 

communications requirements that the 

Covered Entity must be subject to and 

comply with.122 Second, the Order 

required the Covered Entity to be 

subject to and comply with MAR 

Investment Recommendations 

Regulation article 5,123 which relates to 

obligations to disclose conflicts of 

interest. As discussed above, the 

Commission is requiring Covered 

Entities to comply with this requirement 

and with MAR Investment 

Recommendations Regulation article 6 

when using substituted compliance for 

disclosure of material incentives and 

conflicts of interest requirements. 

Accordingly, the Commission believes 

that MAR Investment Recommendations 

Regulation article 5 is less relevant to 

comparability of fair and balanced 

communications requirements and is 

proposing to delete the reference to it in 

relation to substituted compliance for 

fair and balanced communications. 

VII. Proposed Amendments Related to 

Recordkeeping, Reporting, Notification, 

and Securities Count Requirements 

A. BaFin Request and Associated 

Analytic Considerations 

In its initial application (the ‘‘BaFin 

Application’’), in part, requests 

substituted compliance for requirements 

applicable to SBS Entities with and 

without a prudential regulator under the 

Exchange Act relating to: 

• Recordmaking—Exchange Act rule 

18a–5 requires prescribed records to be 

made and kept current.124

• Record Preservation—Exchange Act 

rule 18a–6 requires preservation of 

records.125

• Reporting—Exchange Act rule 18a– 

7 requires certain reports.126

• Notification—Exchange Act rule 

18a–8 requires notification to the 

Commission when certain financial or 

operational problems occur.127

• Securities Count—Exchange Act 

rule 18a–9 requires non-prudentially 

regulated security-based swap dealers to 

perform a quarterly securities count.128

• Daily Trading Records—Exchange 

Act section 15F(g) requires SBS Entities 

to maintain daily trading records.129

Taken as a whole, the recordkeeping, 

reporting, notification, and securities 

count requirements that apply to SBS 

Entities are designed to promote the 

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

Commission in conducting compliance 

examinations of those activities, and 

alert the Commission to potential 

financial or operational problems that 

could impact the firm and its customers. 

B. Preliminary Views and Proposed 

Amended Order 

1. General Considerations 

In issuing the Order, the Commission 

found that relevant EU and German 

requirements, subject to conditions and 

limitations, would produce regulatory 

outcomes that are comparable to the 

outcomes associated with the 

recordkeeping, reporting, and 

notification requirements of Exchange 

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

8 applicable to SBS Entities with a 

prudential regulator. However, the 

BaFin Application did not seek 

substituted compliance for the Exchange 

Act capital and margin requirements 

applicable to SBS Entities without a 

prudential regulator. Because of the 

close relationship between many of the 

Exchange Act recordkeeping, reporting, 

and notification requirements and the 

administration and oversight of 

Exchange Act capital and margin 

requirements, the Order did not address 

substituted compliance for 

recordkeeping, reporting, notification, 

and securities count requirements 

applicable to SBS Entities without a 

prudential regulator. The Commission is 

now considering substituted compliance 

for these Exchange Act requirements 

because the Amended Application 

requests substituted compliance for the 

Exchange Act capital and margin 

requirements applicable to SBS Entities 

without a prudential regulator. The 

Commission also is considering 

substituted compliance with respect to 

the trading record preservation 

requirements of Exchange Act section 

15F(g), which are applicable to SBS 

Entities with and without a prudential 

regulator. 

The Commission preliminarily 

concludes that the relevant EU and 

German requirements, subject to 

conditions and limitations, would 

produce regulatory outcomes that are 

comparable to the outcomes associated 

with the requirements of Exchange Act 

rules 18a–5, 18a–6, 18a–7, 18a–8, and 

18a–9 applicable to SBS Entities 

without a prudential regulator and to 

the outcomes associated with Exchange 

Act section 15F(g) applicable to all SBS 


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130See French Order, 86 FR 41649; UK Order, 86 

FR 43360. 

131See, e.g., Exchange Act Release No. 71958 

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

2014). 

132See French Order, 86 FR 41650; UK Order, 86 

FR 43361. 

Entities. In reaching this preliminary 

conclusion, the Commission recognizes 

that there are certain differences 

between the EU and German 

requirements and the Exchange Act 

requirements. In the Commission’s 

preliminary view, on balance, those 

differences generally would not be 

inconsistent with substituted 

compliance for these requirements. 

Requirement-by-requirement similarity 

is not needed for substituted 

compliance. 

The Order makes substituted 

compliance available with respect to the 

entirety of Exchange Act rules 18a–5, 

18a–6, 18a–7, and 18a–8 as applicable 

to Covered Entities with a prudential 

regulator. Consequently, under the 

Order, the Covered Entity can elect to 

apply substituted compliance with 

respect to the entire rule (subject to 

conditions and limitations) or, 

alternatively, comply with the Exchange 

Act rule. The proposed Amended Order 

would modify this approach to provide 

all Covered Entities with greater 

flexibility to select which distinct 

requirements within the broader rule for 

which they would apply substituted 

compliance. This would not preclude a 

Covered Entity from applying 

substituted compliance for the entire 

rule (subject to conditions and 

limitations). However, it would permit 

the Covered Entity to apply substituted 

compliance with respect to certain 

requirements of a given rule and to 

comply directly with the remaining 

requirements. This more granular 

approach to making substituted 

compliance determinations with respect 

to discrete requirements within 

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

7, and 18a–8 (collectively, the 

‘‘recordkeeping, reporting, and 

notification rules’’) is intended to 

permit Covered Entities to leverage 

existing recordkeeping and reporting 

systems that are designed to comply 

with the broker-dealer recordkeeping 

and reporting requirements on which 

the recordkeeping, reporting, and 

notification requirements applicable to 

SBS Entities are based. For example, it 

may be more efficient for a Covered 

Entity to comply with certain Exchange 

Act requirements within a given 

recordkeeping, reporting, or notification 

rule (rather than apply substituted 

compliance) because it can utilize 

systems that its affiliated broker-dealer 

has implemented to comply with them. 

This proposed approach is consistent 

with the approach taken by the 

Commission in the French and UK 

Orders.130

As applied to Exchange Act rules 

18a–5 and 18a–6, this approach of 

providing greater flexibility results in 

preliminary substituted compliance 

determinations with respect to the 

different categories of records these 

rules require SBS Entities to make, keep 

current, and/or preserve. The objective 

of these rules—taken as a whole—is to 

assist the Commission in monitoring 

and examining for compliance with 

substantive Exchange Act requirements 

applicable to SBS Entities (e.g., capital 

and margin requirements) as well as to 

promote the prudent operation of these 

firms.131 The Commission preliminarily 

believes the comparable EU and German 

recordkeeping rules achieve these 

outcomes with respect to compliance 

with substantive EU and German 

requirements for which preliminary 

positive substituted compliance 

determinations are being made in this 

proposed Amended Order (e.g., the 

preliminary positive substituted 

compliance determinations with respect 

to the Exchange Act capital and margin 

requirements). At the same time, the 

recordkeeping rules address different 

categories of records through distinct 

requirements within the rules. Each 

requirement with respect to a specific 

category of records (e.g., paragraph (a)(2) 

of Exchange Act rule 18a–5 addressing 

ledgers (or other records) reflecting all 

assets and liabilities, income and 

expense and capital accounts) can be 

viewed in isolation as a distinct 

recordkeeping rule. Therefore, it may be 

appropriate to make substituted 

compliance determinations at this level 

of Exchange Act rules 18a–5 and 18a– 

6. 

As discussed in more detail below, 

the Commission’s preliminary view is 

that substituted compliance is 

appropriate for most of the requirements 

within the recordkeeping, reporting, and 

notification rules. However, certain of 

the discrete requirements in these rules 

are fully or partially linked to 

substantive Exchange Act requirements 

for which substituted compliance is not 

available or for which a positive 

substituted compliance determination 

would not be made under the proposed 

Amended Order. In these cases, a 

preliminary positive substituted 

compliance determination would not be 

made for the requirement that is fully 

linked to the substantive requirement or 

to the part of the requirement that is 

linked to the substantive requirement. 

In particular, a preliminary positive 

substituted compliance determination 

would not be made, in full or in part, 

for recordkeeping, reporting, or 

notification requirements linked to the 

following Exchange Act rules for which 

substituted compliance is not available 

or a positive substituted compliance 

determination would not be made: (1) 

Exchange Act rule 15Fh–4 (‘‘Rule 15Fh– 

4 Exclusion’’); (2) Exchange Act rule 

15Fh–5 (‘‘Rule 15Fh–5 Exclusion’’); (3) 

Exchange Act rule 15Fh–6 (‘‘Rule 15Fh– 

6 Exclusion’’); (4) Exchange Act rule 

18a–2 (‘‘Rule 18a–2 Exclusion’’); (5) 

Exchange Act rule 18a–4 (‘‘Rule 18a–4 

Exclusion’’); (6) Regulation SBSR 

(‘‘Regulation SBSR Exclusion’’); and (7) 

Form SBSE and its variations (‘‘Form 

SBSE Exclusion’’). This proposed 

approach is consistent with the 

approach taken by the Commission in 

the French and UK Orders.132

In addition, certain of the 

requirements in the recordkeeping, 

reporting, and notification rules are 

expressly linked to substantive 

Exchange Act requirements where a 

preliminary positive substituted 

compliance determination would be 

made under the proposed Amended 

Order. In these cases, substituted 

compliance with the linked requirement 

in the recordkeeping, reporting, or 

notification rule would be conditioned 

on the Covered Entity applying 

substituted compliance to the linked 

substantive Exchange Act requirement. 

This would be the case regardless of 

whether the requirement is fully or 

partially linked to the substantive 

Exchange Act requirement. The 

recordkeeping, reporting, and 

notification requirements that are linked 

to a substantive Exchange Act 

requirement are designed and tailored to 

assist the Commission in monitoring 

and examining an SBS Entity’s 

compliance with the substantive 

Exchange Act requirement. EU and 

German recordkeeping, reporting, and 

notification requirements are designed 

to perform a similar role with respect to 

the substantive EU and German 

requirements to which they are linked. 

Consequently, this condition would be 

designed to ensure that the records, 

reports, and notifications of a Covered 

Entity align with the substantive 

Exchange Act or EU or German 

requirement to which they are linked. 

For these reasons, under the proposed 

Amended Order, substituted 

compliance for recordkeeping, 


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133See French Order, 86 FR 41650; UK Order, 86 

FR 43361. 

134See French Order, 86 FR 41650; UK Order, 86 

FR 43361. 

135See paras. (a)(1) through (18) of Exchange Act 

rule 18a–5. 

136See paras. (b)(1) through (14) of Exchange Act 

rule 18a–6. 

137See para. (f)(1) of the proposed Amended 

Order. 

138A positive preliminary substituted compliance 

determination would not be made for the following 

requirements of Exchange Act rule 18a–5 because 

they are linked to a substantive Exchange Act 

requirement for which the proposed Amended 

Order would not provide substituted compliance: 

(1) The portion of Exchange Act rule 18a–5(a)(9) 

that relates to Exchange Act rule 18a–2 would be 

subject to the Rule 18a–2 Exclusion; (2) Exchange 

Act rules 18a–5(a)(13) and (14) and (b)(9) and (10) 

are fully linked to Exchange Act rule 18a–4 and, 

therefore, would be subject to the Rule 18a–4 

Exclusion; (3) the portions of Exchange Act rules 

18a–5(a)(16) and (b)(12) that relate to Exchange Act 

rule 15Fh–6 would be subject to the Rule 15Fh–6 

Exclusion; (4) the portions of Exchange Act rules 

18a–5(a)(17) and (b)(13) that relate to Exchange Act 

rule 15Fh–4 would be subject to the Rule 15Fh–4 

Exclusion; and (5) the portions of Exchange Act 

rules 18a–5(a)(17) and (b)(13) that relate to 

Exchange Act rule 15Fh–5 would be subject to the 

15Fh–5 Exclusion. 

139Substituted compliance with the following 

requirements of Exchange Act rule 18a–5 would be 

conditioned on the Covered Entity applying 

substituted compliance to the linked substantive 

Exchange Act requirement: (1) Exchange Act rules 

18a–5(a)(6), (a)(15), (b)(6) and (b)(11) are linked to 

Exchange Act rule 15Fi–2 and, therefore, would be 

subject to the Rule 15Fi–2 Condition; (2) Exchange 

Act rule 18a–5(a)(9) is linked to Exchange Act rule 

18a–1 and, therefore, would be subject to the Rule 

18a–1 Condition; (3) Exchange Act rule 18a–5(a)(12) 

is linked to Exchange Act rule 18a–3 and, therefore, 

would be subject to the Rule 18a–3 Condition; (4) 

Exchange Act rules 18a–5(a)(17) and (b)(13) are 

linked to Exchange Act rule 15Fh–3 and, therefore, 

would be subject to the Rule 15Fh–3 Condition; (5) 

Exchange Act rules 18a–5(a)(17) and (b)(13) are 

linked to Exchange Act rule 15Fk–1 and, therefore, 

would be subject to the Rule 15Fk–1 Condition; (6) 

Exchange Act rules 18a–5(a)(18)(i) and (ii) and 

(b)(14)(i) and (ii) are linked to Exchange Act rule 

15Fi–3 and, therefore, would be subject to the Rule 

15Fi–3 Condition; and (7) Exchange Act rules 18a– 

5(a)(18)(iii) and (b)(14)(iii) are linked to Exchange 

Act rule 15Fi–4 and, therefore, would be subject to 

the Rule 15Fi–4 Condition. 

140Substituted compliance with the requirements 

of Exchange Act rules 18a–5(a)(1), (2), (3), (4), (5), 

(7), (8), and (9) would be conditioned on the 

Covered Entity applying substituted compliance to 

Exchange Act rule 18a–1. 

reporting, and notification requirements 

linked to the following Exchange Act 

rules would be conditioned on the 

Covered Entity applying substituted 

compliance to the linked substantive 

Exchange Act rule: (1) Exchange Act 

rule 15Fh–3 (‘‘Rule 15Fh–3 Condition’’); 

(2) Exchange Act rule 15Fi–2 (‘‘Rule 

15Fi–2 Condition’’); (3) Exchange Act 

rule 15Fi–3 (‘‘Rule 15Fi–3 Condition’’); 

(4) Exchange Act rule 15Fi–4 (‘‘Rule 

15Fi–4 Condition’’); (5) Exchange Act 

rule 15Fi–5 (‘‘Rule 15Fi–5 Condition’’); 

(6) Exchange Act rule 15Fk–1 (‘‘Rule 

15Fk–1 Condition’’); (7) Exchange Act 

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

Exchange Act rule 18a–3 (‘‘Rule 18a–3 

Condition’’); (9) Exchange Act rule 18a– 

5 (‘‘Rule 18a–5 Condition’’) and (10) 

Exchange Act rule 18a–7 (‘‘Rule 18a–7 

Condition’’). This proposed approach is 

consistent with the approach taken by 

the Commission in the French and UK 

Orders.133

Moreover, while certain 

recordkeeping and reporting 

requirements are not expressly linked to 

Exchange Act rule 18a–1, they would be 

important to the Commission’s ability to 

monitor or examine for compliance with 

the capital requirements of this rule. 

The records also would assist the firm 

in monitoring its net capital position 

and, therefore, in complying with 

Exchange rule 18a–1. Therefore, 

substituted compliance with respect to 

these recordkeeping and reporting 

requirements would be subject to the 

condition that the Covered Entity 

applies substituted compliance with 

respect to Exchange Act rule 18a–1 (i.e., 

the ‘‘Rule 18a–1 Condition’’). This 

approach would be designed to ensure 

that, if the Covered Entity does not 

apply substituted compliance with 

respect to Exchange Act rule 18a–1, it 

makes and preserves records and files 

reports that the Commission uses to 

monitor and examine for compliance 

with the Exchange Act rule 18a–1, and 

that the firm makes and preserves 

records to assist it in complying with 

these rules. 

Additionally, substituted compliance 

with respect to paragraphs (a)(1), (b), 

and (c) through (h) of Exchange Act rule 

18a–7 would be subject to the additional 

condition that the Covered Entity 

applies substituted compliance with 

respect to Exchange Act rule 18a– 

6(b)(1)(viii) (the ‘‘Rule 18a–6(b)(1)(viii) 

Condition’’). This record preservation 

requirement is directly linked to the 

financial and operational reporting 

requirements of paragraphs (a)(1), (b), 

and (c) through (h) of Exchange Act rule 

18a–7 and this additional condition 

would be designed to provide clarity as 

to the Covered Entity’s obligations 

under this record preservation 

requirement when applying substituted 

compliance with respect to paragraphs 

(a)(1), (b), and (c) through (h) of 

Exchange Act rule 18a–7 pursuant to 

this proposed Amended Order. This 

proposed approach is consistent with 

the approach taken by the Commission 

in the French and UK Orders.134

2. Exchange Act Rule 18a–5 

Exchange Act rule 18a–5 requires SBS 

Entities to make and keep current 

various types of records. The 

requirements for SBS Entities without a 

prudential regulator are set forth in 

paragraph (a) of the rule.135 The 

requirements for SBS Entities with a 

prudential regulator are set forth in 

paragraph (b) of the rule.136 The Order 

makes substituted compliance available 

for the requirements of paragraph (b) of 

Exchange Act rule 18a–5 (subject to 

conditions and limitations). The 

Commission is making a preliminary 

positive substituted compliance 

determination for many of the 

requirements of paragraph (a) of 

Exchange Act rule 18a–5 and making 

preliminary positive substituted 

compliance determinations with respect 

to paragraph (b) in a more granular 

manner than the Order.137

However, certain of the requirements 

in these paragraphs are linked to 

substantive Exchange Act requirements 

for which substituted compliance is not 

available or a positive substituted 

compliance would not be made under 

the proposed Amended Order. In these 

cases, a positive substituted compliance 

determination would not be made for 

the linked requirement in Exchange Act 

rule 18a–5 or the portion of the 

requirement in Exchange Act rule 18a– 

5 that is linked to the substantive 

Exchange Act requirement.138

In addition, certain of the 

requirements in Exchange Act rule 18a– 

5 are fully or partially linked to 

substantive Exchange Act requirements 

where a preliminary positive substituted 

compliance determination would be 

made under the proposed Amended 

Order. In these cases, substituted 

compliance with the requirement in 

Exchange Act rule 18a–5 would be 

conditioned on the Covered Entity 

applying substituted compliance to the 

linked substantive Exchange Act 

requirement.139

Moreover, there are certain 

requirements in Exchange Act rule 18a– 

5 that are not expressly linked to 

Exchange Act rule 18a–1, but that 

would be important records in terms of 

the Commission’s ability to examine for 

compliance with that rule, and the 

Covered Entity’s ability to monitor its 

net capital position. Therefore, 

substituted compliance with respect to 

these requirements of Exchange Act rule 

18a–5 would be subject to the condition 

that the Covered Entity applies 

substituted compliance for Exchange 

Act rule 18a–1 (i.e., the Rule 18a–1 

Condition).140

In addition, the proposed Amended 

Order would allow a Covered Entity to 

apply substituted compliance on a 

transaction-by-transaction basis to the 

Commission’s recordkeeping 


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141See para. (f)(1)(ii)(B) of the proposed Amended 

Order. 

142See para. (f)(1)(ii)(A) of the proposed 

Amended Order. The Order includes this condition 

for a Covered Entity with a prudential regular to 

apply substituted compliance for Exchange Act rule 

18a–5. The proposed Amended Order would extend 

the scope of this condition to address Covered 

Entities without a prudential regulator applying 

substituted compliance for the requirements of 

Exchange Act rule 18a–5. 

143The table does not include the proposed 

conditions for applying substituted compliance to 

Exchange Act rule 18a–5; namely that the Covered 

Entity: (1) Must be subject to and comply with 

specified requirements of foreign law; and (2) as 

discussed below, must promptly furnish to a 

representative of the Commission upon request an 

English translation of a record. See para. (f)(8) of the 

proposed Amended Order (setting forth the English 

translation requirement). 

requirements that are linked with the 

counterparty protection requirements of 

Exchange Act rule 15Fh–3.141 This 

approach would align with the 

proposed Amended Order allowing 

Covered Entities to apply substituted 

compliance on a transaction-bytransaction basis for the Commission’s 

counterparty protection requirements. 

Under the proposed Amended Order, 

substituted compliance in connection 

with the record making requirements of 

Exchange Act rule 18a–5 would be 

subject to the condition that the Covered 

Entity: (1) Preserves all of the data 

elements necessary to create the records 

required by Exchange Act rules 18a– 

5(a)(1), (2), (3), (4), and (7) (if not 

prudentially regulated) or Exchange Act 

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

prudentially regulated); and (2) upon 

request furnishes promptly to 

representatives of the Commission the 

records required by those rules (‘‘SEC 

Format Condition’’).142 This proposed 

condition is modeled on the alternative 

compliance mechanism in paragraph (c) 

of Exchange Act rule 18a–5. In effect, a 

Covered Entity applying substituted 

compliance with respect to these 

requirements of Exchange Act rule 18a– 

5 would need to comply with the 

comparable EU and German 

requirements. However, under the SEC 

Format Condition, the Covered Entity 

would need to produce a record that is 

formatted in accordance with the 

requirements of Exchange Act rule 18a– 

5 at the request of Commission staff. 

The objective would be to require—on 

a very limited basis—the production of 

a record that consolidates the 

information required by Exchange Act 

rules 18a–5(a)(1), (2), (3), (4), and (7) (if 

not prudentially regulated) or Exchange 

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

prudentially regulated) in a single 

record and, as applicable, in a blotter or 

ledger format. This would assist the 

Commission staff in reviewing the 

information on the record. 

The following table summarizes the 

Commission’s preliminary positive 

substituted compliance determinations 

with respect to requirements of 

Exchange Act rule 18a–5 by listing in 

each row: (1) The paragraph of the 

proposed Amended Order that sets forth 

the preliminary determination; (2) the 

paragraph(s) of Exchange Act rule 18a– 

5 to which the preliminary 

determination applies; (3) a brief 

description of the records required by 

the paragraph(s); and (4) a brief 

description of any additional conditions 

to applying substituted compliance to 

the requirements, including any partial 

exclusions because portions of the 

requirements are linked to substantive 

Exchange Act requirements for which 

the proposed Amended Order would 

not provide substituted compliance.143

EXCHANGE ACT RULE 18a–5 

[Record making] 

Order paragraph Rule paragraph Rule description Additional conditions and 

partial exclusions 

(f)(1)(i)(A) ............. (a)(1) ........................ (b)(1) ........................ Trade blotters ........................... (1) SEC Format Condition. 

(2) Rule 18a–1 Condition for ¶ (a)(1). 

(f)(1)(i)(B) ............. (a)(2) ........................ .................................. General ledger .......................... (1) SEC Format Condition. 

(2) Rule 18a–1 Condition for ¶ (a)(2). 

(f)(1)(i)(C) ............. (a)(3) ........................ (b)(2) ........................ Account ledgers ........................ (1) SEC Format Condition. 

(2) Rule 18a–1 Condition for ¶ (a)(3). 

(f)(1)(i)(D) ............. (a)(4) ........................ (b)(3) ........................ Stock record ............................. (1) SEC Format Condition. 

(2) Rule 18a–1 Condition for ¶ (a)(4). 

(f)(1)(i)(E) ............. .................................. (b)(4) ........................ Memoranda of brokerage orders.N/A. 

(f)(1)(i)(F) .............. (a)(5) ........................ (b)(5) ........................ Memoranda of proprietary orders.Rule 18a–1 Condition for ¶ (a)(5). 

(f)(1)(i)(G) ............. (a)(6) ........................

(a)(15) ......................

(b)(6) ........................

(b)(11) ......................

Confirmations, trade verification Rule 15Fi–2 Condition. 

(f)(1)(i)(H) ............. (a)(7) ........................ (b)(7) ........................ Accountholder information ........ (1) SEC Format Condition. 

(2) Rule 18a–1 Condition for ¶ (a)(7). 

(f)(1)(i)(I) ............... (a)(8) ........................ .................................. Options positions ...................... Rule 18a–1 Condition. 

(f)(1)(i)(J) .............. (a)(9) ........................ .................................. Trial balances, computation of 

net capital and tangible net 

worth.

(1) Rule 18a–1 Condition. 

(2) Rule 18a–2 Exclusion. 

(f)(1)(i)(K) ............. (a)(10) ...................... (b)(8) ........................ Associated person’s employment application.N/A. 

(f)(1)(i)(L) .............. (a)(12) ...................... .................................. Non-cleared margin rule calculations.Rule 18a–3 Condition. 

(f)(1)(i)(M) ............. (a)(17) ...................... (b)(13) ...................... Compliance with business conduct requirements.(1) Rule 15Fh–3 Condition. 

(2) Rule 15Fk–1 Condition. 

(3) Rule 15Fh–4 Exclusion. 

(4) Rule 15Fh–5 Exclusion. 

(f)(1)(i)(N) ............. (a)(18)(i) ...................

(a)(18)(ii) ..................

(b)(14)(i) ...................

(b)(14)(ii) ..................

Portfolio reconciliation .............. Rule 15Fi–3 Condition. 

(f)(1)(i)(O) ............. (a)(18)(iii) ................. (b)(14)(iii) ................. Portfolio compression ............... Rule 15Fi–4 Condition. 


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144See 17 CFR 240.18a–6. 

145Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of 

Exchange Act rule 18a–6 apply to SBS Entities 

without a prudential regulator. Paras. (a)(2), (b)(2), 

(d)(2)(ii), and (d)(3)(ii) of Exchange Act rule 18a– 

6 apply to SBS Entities with a prudential regulator. 

Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act 

rule 18a–6 apply to SBS Entities irrespective of 

whether they have a prudential regulator. 

146A positive substituted compliance 

determination would not be made for the following 

requirements of Exchange Act rule 18a-6 because 

they are linked to a substantive Exchange Act 

requirement for which the proposed Amended 

Order would not provide substituted compliance: 

(1) The portion of Exchange Act rule 18a–6(b)(1)(v) 

relating to Exchange Act rule 18a–2 would be 

subject to the Rule 18a–2 Exclusion; (2) Exchange 

Act rule 18a–6(b)(1)(viii)(L) is fully linked to 

Exchange Act Rule 18a–4 and, therefore, would be 

subject to the Rule 18a–4 Exclusion; (3) the portion 

of Exchange Act rule 18a–6(b)(1)(viii)(M) relating to 

Exchange Act rule 18a–2 would be subject to the 

Rule 18a–2 Exclusion; (4) Exchange Act rules 18a– 

6(b)(1)(xi) and (b)(2)(vi) are fully linked to 

Regulation SBSR and, therefore, would be subject 

to the Regulation SBSR Exclusion; (5) Exchange Act 

rules 18a–6(b)(1)(xiii) and 18a–6(b)(2)(viii) are fully 

linked to Exchange Act rules 15Fh–4 and, therefore, 

would be subject to the Rule 15Fh–4 Exclusion; (6) 

Exchange Act rules 18a–6(b)(1)(xiii) and 18a– 

6(b)(2)(viii) are fully linked to Exchange Act rule 

15Fh–5 and, therefore, would be subject to the Rule 

15Fh–5 Exclusion; (7) Exchange Act rule 18a– 

6(b)(2)(v) is fully linked to Exchange Act rule 18a– 

4 and, therefore, would be subject to the Rule 18a– 

4 Exclusion; and (8) the portion of Exchange Act 

rule 18a–6(c) relating to Form SBSE and its 

variations would be subject to the Form SBSE 

Exclusion. 

147Substituted compliance with the following 

requirements of Exchange Act rule 18a–6 would be 

conditioned on the Covered Entity applying 

substituted compliance to the linked substantive 

Exchange Act requirement: (1) Exchange Act rule 

18a–6(b)(1)(v) is linked to Exchange Act rule 18a– 

1 and, therefore, would be subject to the Rule 18a– 

1 Condition; (2) Exchange Act rules 18a–6(b)(1)(viii) 

and (b)(2)(v) are linked to Exchange Act rule 18a– 

7 and, therefore, would be subject to the Rule 18a– 

7 Condition; (3) Exchange Act rule 18a–6(b)(1)(viii) 

is linked to Exchange Act rule 18a–1 and, therefore, 

would be subject to the Rule 18a–1 Condition; (4) 

Exchange Act rule 18a–6(b)(1)(ix) is linked to 

Exchange Act rule 18a–1 and, therefore, would be 

subject to the Rule 18a–1 Condition; (5) Exchange 

Act rule 18a–6(b)(1)(x) is linked to Exchange Act 

rule 18a–1 and, therefore, would be subject to the 

Rule 18a–1 Condition; (6) Exchange Act rules 18a– 

6(b)(1)(xii) and (b)(2)(vii) are linked to Exchange 

Act rule 15Fh–3 and, therefore, would be subject to 

the Rule 15Fh–3 Condition; (7) Exchange Act rules 

18a–6(b)(1)(xii) and (b)(2)(vii) are linked to 

Exchange Act rule 15Fk–1 and, therefore, would be 

subject to the Rule 15Fk–1 Condition; (8) Exchange 

Act rules 18a–6(d)(4) and (d)(5) are linked to 

Exchange Act rule 15Fi–3 and, therefore, would be 

subject to the Rule 15Fi–3 Condition; (9) Exchange 

Act rules 18a–6(d)(4) and (d)(5) are linked to 

Exchange Act rule 15Fi–4 and, therefore, would be 

subject to the Rule 15Fi–4 Condition; and (10) 

Exchange Act rules 18a–6(d)(4) and (d)(5) are linked 

to Exchange Act rule 15Fi–3 and, therefore, would 

be subject to the Rule 15Fi–5 Condition. 

148Substituted compliance with the requirements 

of Exchange Act rules 18a–6(b)(1)(ii), (b)(1)(iii), 

(b)(1)(vi), (b)(1)(vii), (d)(2)(i), and (d)(3)(i) would be 

conditioned on the Covered Entity applying 

substituted compliance to Exchange Act rule 18a– 

1. 

The following table summarizes the 

Commission’s preliminary 

determinations with respect to 

requirements of Exchange Act rule 18a– 

5 for which a positive substituted 

compliance determination would not be 

made because they are fully linked to 

substantive Exchange Act requirements 

for which the proposed Amended Order 

would not provide substituted 

compliance by listing in each row: (1) 

The paragraph of the proposed 

Amended Order that sets forth the 

determination; (2) the paragraphs of 

Exchange Act rule 18a–5 to which the 

determination applies; (3) a brief 

description of the records required by 

the paragraphs; and (4) a brief 

description of why the requirement is 

excluded from substituted compliance. 

EXCHANGE ACT RULE 18a–5 

[Record making] 

Order paragraph Rule paragraph Rule description Exclusion 

(f)(1)(ii)(C) ............ (a)(13) ...................... (b)(9) ........................ Possession or control records .. Rule 18a–4 Exclusion. 

(f)(1)(ii)(C) ............ (a)(14) ...................... (b)(10) ...................... Reserve computations .............. Rule 18a–4 Exclusion. 

(f)(1)(ii)(C) ............ (a)(16) ...................... (b)(12) ...................... Political contribution records .... Rule 15Fh–6 Exclusion. 

3. Exchange Act Rule 18a–6 

Exchange Act rule 18a–6 requires an 

SBS Entity to preserve certain types of 

records if it makes or receives them (in 

addition to the records the SBS Entity 

is required to make and keep current 

pursuant to Exchange Act rule 18a– 

5).144 Exchange Act rule 18a–6 also 

prescribes the time period that these 

additional records and the records 

required to be made and kept current 

pursuant to Exchange Act rule 18a–5 

must be preserved and the manner in 

which they must be preserved. 

Paragraphs (a) through (d) of 

Exchange Act rule 18a–6 identify the 

records that an SBS Entity must retain 

if it makes or receives them and 

prescribes the retention periods for 

these records as well as for the records 

that must be made and kept current 

pursuant to Exchange Act rule 18a–5. 

Certain of these paragraphs prescribe 

requirements separately for SBS Entities 

without a prudential regulator and SBS 

Entities with a prudential regulator.145

The Order makes substituted 

compliance available for the 

requirements of these paragraphs 

applicable to SBS Entities with a 

prudential regulator. As discussed 

below, the Commission is making a 

preliminary positive substituted 

compliance determination for many of 

the requirements of these paragraphs 

applicable to SBS Entities without a 

prudential regulator. Further, the 

Commission is making preliminary 

positive substituted compliance 

determinations for many of the 

requirements of these paragraphs 

applicable to SBS Entities with a 

prudential regulator in a more granular 

manner than the Order. 

However, certain of these 

requirements are fully or partially 

linked to substantive Exchange Act 

requirements for which a positive 

substituted compliance determination 

would not be made under the proposed 

Amended Order. In these cases, a 

positive substituted compliance 

determination would not be made for 

the linked requirement in Exchange Act 

rule 18a–6.146

In addition, certain of the 

requirements in Exchange Act rule 18a– 

6 are fully or partially linked to 

substantive Exchange Act requirements 

where a positive substituted compliance 

determination would be made under the 

proposed Amended Order. In these 

cases, substituted compliance with the 

requirement in Exchange Act rule 18a– 

6 would be conditioned on the Covered 

Entity applying substituted compliance 

to the linked substantive Exchange Act 

requirement.147

Moreover, there are certain 

requirements in Exchange Act rule 18a– 

6 that are not expressly linked to 

Exchange Act rule 18a–1, but that 

would be important records in terms of 

the Commission’s ability to examine for 

compliance with that rule, and the 

Covered Entity’s ability to monitor its 

net capital position. Therefore, under 

the proposed Amended Order, 

substituted compliance for these 

requirements of Exchange Act rule 18a– 

6 would be subject to the Rule 18a–1 

Condition.148

Paragraph (e) of Exchange Act rule 

18a–6 sets forth the requirements for 


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149See paras. (f)(2)(i)(Q) and (R) of the proposed 

Amended Order. 

150The table does not include the proposed 

conditions for applying substituted compliance to 

Exchange Act rule 18a–6; namely that the Covered 

Entity: (1) Must be subject to and complies with the 

requirements of foreign law; and (2) must promptly 

furnish to a representative of the Commission upon 

request an English translation of a record. See para. 

(f)(8) of the proposed Amended Order (setting forth 

the English translation requirement). 

preserving records electronically. 

Paragraph (f) sets forth requirements for 

when records are prepared or 

maintained by a third party. The Order 

makes substituted compliance available 

for the requirements of paragraphs (e) 

and (f) of Exchange Act rule 18a–6 if the 

Covered Entity has a prudential 

regulator. The proposed Amended 

Order would extend this treatment to 

Covered Entities without a prudential 

regulator.149

Paragraph (g) of Exchange Act rule 

18a–6 requires an SBS Entity to furnish 

promptly to a representative of the 

Commission legible, true, complete, and 

current copies of those records of the 

SBS Entity that are required to be 

preserved under Exchange Act rule 18a– 

6, or any other records of the SBS Entity 

that are subject to examination or 

required to be made or maintained 

pursuant to section 15F of the Exchange 

Act that are requested by a 

representative of the Commission. The 

Order does not make substituted 

compliance available for the 

requirements of paragraph (g) of 

Exchange Act rule 18a–6 because there 

is no comparable requirement in the EU 

or Germany to produce these records to 

a representative of the Commission. The 

proposed Amended Order similarly 

would not make substituted compliance 

available for paragraph (g) of Exchange 

Act rule 18a–6. 

The following table summarizes the 

Commission’s preliminary positive 

substituted compliance determinations 

with respect to requirements of 

Exchange Act rule 18a–6 by listing in 

each row: (1) The paragraph of the 

proposed Amended Order that sets forth 

the determination; (2) the paragraph(s) 

of Exchange Act rule 18a–6 to which the 

determination applies; (3) a brief 

description of the records required by 

the paragraph(s); and (4) a brief 

description of any additional conditions 

to applying substituted compliance to 

the requirements, including any partial 

exclusions because portions of the 

requirements are linked to substantive 

Exchange Act requirements for which 

the proposed Amended Order would 

not provide substituted compliance.150

EXCHANGE ACT RULE 18a–6 

[Record preservation] 

Order paragraph Rule paragraph Rule description Conditions and partial exclusions 

(f)(2)(i)(A) ............. (a)(1) ........................ (a)(2) ........................ 6 year record preservation ....... N/A. 

(f)(2)(i)(B) ............. (b)(1)(i) ..................... (b)(2)(i) ..................... 3 year record preservation ....... N/A. 

(f)(2)(i)(C) ............. (b)(1)(ii) ....................

(b)(1)(iii) ...................

.................................. Bank records, bills .................... Rule 18a–1 Condition. 

(f)(2)(i)(D) ............. (b)(1)(iv) ................... (b)(2)(ii) .................... Communications ....................... N/A. 

(f)(2)(i)(E) ............. (b)(1)(v) .................... .................................. Trial balances ........................... (1) Rule 18a–1 Condition. 

(2) Rule 18a–2 Exclusion. 

(f)(2)(i)(F) .............. (b)(1)(vi) ................... (b)(2)(iii) ................... Account documents .................. Rule 18a–1 Condition for ¶ (b)(1)(vi). 

(f)(2)(i)(G) ............. (b)(1)(vii) .................. (b)(2)(iv) ................... Written agreements .................. Rule 18a–1 Condition for ¶ (b)(1)(vii). 

(f)(2)(i)(H) ............. (b)(1)(viii) ................. .................................. Information supporting financial 

reports.

(1) Rule 18a–7 Condition. 

(2) Rule 18a–4 Exclusion for 

¶ (b)(1)(viii)(L). 

(3) Rule 18a–2 Exclusion for 

¶ (b)(1)(viii)(M). 

(f)(2)(i)(I) ............... (b)(1)(ix) ................... .................................. Rule 15c3–4 risk management 

records.

Rule 18a–1 Condition. 

(f)(2)(i)(J) .............. (b)(1)(x) .................... .................................. Credit risk determinations ......... Rule 18a–1 Condition. 

(f)(2)(i)(K) ............. (b)(1)(xii) .................. (b)(2)(vii) .................. Business conduct standard 

records.

(1) Rule 15Fh–3 Condition. 

(2) Rule 15Fk–1 Condition. 

(f)(2)(i)(L) .............. (c) Corporate documents ............... Form SBSE Exclusion. 

(f)(2)(i)(M) ............. (d)(1) Associated person’s employment application.N/A. 

(f)(2)(i)(N) ............. (d)(2)(i) ..................... (d)(2)(ii) .................... Regulatory authority reports ..... Rule 18a–1 Condition for ¶ (d)(2)(i). 

(f)(2)(i)(O) ............. (d)(3)(i) ..................... (d)(3)(ii) .................... Compliance, supervisory, and 

procedures manuals.

Rule 18a–1 Condition for ¶ (d)(3)(i). 

(f)(2)(i)(P) ............. (d)(4) Portfolio reconciliation .............. (1) Rule 15Fi–3 Condition. 

(d)(5) (2) Rule 15Fi–4 Condition. 

(3) Rule 15Fi–5 Condition. 

(f)(2)(i)(Q) ............. (e) Electronic storage system ........ N/A. 

(f)(2)(i)(R) ............. (f) Third-party recordkeeper .......... N/A. 

The following table summarizes the 

Commission’s preliminary 

determinations with respect to 

requirements of Exchange Act rule 18a– 

6 for which a positive substituted 

compliance determination would not be 

made because they are fully linked to 

substantive Exchange Act requirements 

for which the proposed Amended Order 

would not provide substituted 

compliance by listing in each row: (1) 

The paragraph of the proposed 

Amended Order that sets forth the 

determination; (2) the paragraph(s) of 

Exchange Act rule 18a–6 to which the 


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151See Order Designating Financial Industry 

Regulatory Authority, Inc., to Receive Form X–17A– 

5 (FOCUS Report) from Certain Security-Based 

Swap Dealers and Major Security-Based Swap 

Participants, Exchange Act Release No. 88866 (May 

14, 2020). 

152Under the Order, Covered Entities with a 

prudential regulator must present the information 

reported in the FOCUS Report in accordance with 

GAAP that the firm uses to prepare publicly 

available or available to be issued general purpose 

financial statements in its home jurisdiction instead 

of U.S. GAAP if other GAAP, such as International 

Financial Reporting Standards (IFRS) as issued by 

the International Accounting Standards Board 

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

publicly available or available to be issued general 

purpose financial statements in Germany. 

153See para. (f)(3)(i) of the proposed Amended 

Order. 

154 In addition to the Order, the Manner and 

Format condition is included in the French and UK 

Orders. See French Order, 86 FR 41651; UK Order, 

86 FR 43361–62. 

155See para. (f)(3)(i) of the proposed Amended 

Order. 

156See para. (f)(3)(i)(C) of the proposed Amended 

Order. See part VII.B.1, supra (discussing how 

certain recordkeeping and reporting requirements 

are expressly linked to or important for examining 

compliance with Rule 18a–1 condition). 

157See para. (f)(3)(i)(D) of the proposed Amended 

Order. 

158See 17 CFR 240.18a–7(a)(3). 

determination applies; (3) a brief 

description of the records required by 

the paragraph(s); and (4) a brief 

description of why the requirement is 

excluded from substituted compliance. 

EXCHANGE ACT RULE 18a–6 

[Preservation] 

Order paragraph Rule paragraph Rule description Exclusion 

(f)(2)(ii) ................. (b)(1)(xi) ................... (b)(2)(vi) ................... Regulation SBSR information ... Regulation SBSR Exclusion. 

(f)(2)(i)(H) ............. .................................. (b)(2)(v) .................... Information supporting financial 

reports.

Rule 18a–4 Exclusion. 

(f)(2)(ii) ................. (b)(1)(xiii) ................. (b)(2)(viii) ................. Special entity documents ......... (1) Rule 15Fh–4 Exclusion. 

(2) Rule 15Fh–5 Exclusion. 

4. Exchange Act Rule 18a–7 

Exchange Act rule 18a–7 requires SBS 

Entities, on a monthly basis (if not 

prudentially regulated) or on a quarterly 

basis (if prudentially regulated), to file 

an unaudited financial and operational 

report on the FOCUS Report Part II (if 

not prudentially regulated) or Part IIC (if 

prudentially regulated). The 

Commission will use the FOCUS 

Reports filed by the SBS Entities to both 

monitor the financial and operational 

condition of individual SBS Entities and 

to perform comparisons across SBS 

Entities. The FOCUS Report Part IIC 

elicits less information than the FOCUS 

Report Part II because the Commission 

does not have responsibility for 

overseeing the capital and margin 

requirements applicable to these 

entities. 

The FOCUS Report Parts II and IIC are 

standardized forms that elicit specific 

information through numbered line 

items. This facilitates cross-firm 

analysis and comprehensive monitoring 

of all SBS Entities registered with the 

Commission. Further, the Commission 

has designated the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’) to 

receive the FOCUS Reports from SBS 

Entities.151 Broker-dealers registered 

with the Commission currently file their 

FOCUS Reports with FINRA through the 

eFOCUS system it administers. Using 

FINRA’s eFOCUS system will enable 

broker-dealers, security-based swap 

dealers, and major security-based swap 

participants to file FOCUS Reports on 

the same platform using the same 

preexisting templates, software, and 

procedures. 

Paragraph (a)(2) of Exchange Act rule 

18a–7 requires SBS Entities with a 

prudential regulator to file the FOCUS 

Report Part IIC on a quarterly basis. The 

Order provides substituted compliance 

for this requirement subject to the 

condition that the Covered Entity file 

with the Commission periodic 

unaudited financial and operational 

information in the manner and format 

specified by the Commission by order or 

rule (‘‘Manner and Format Condition’’) 

and present the financial information in 

accordance with GAAP that the firm 

uses to prepare general purpose publicly 

available or available to be issued 

financial statements in Germany 

(‘‘German GAAP Condition’’).152 The 

proposed Amended Order would 

continue to provide Covered Entities 

with a prudential regulator substituted 

compliance for paragraph (a)(2) of 

Exchange Act rule 18a–7, subject to the 

Manner and Format and German GAAP 

Conditions.153 The Commission 

continues to believe that it would be 

appropriate to condition substituted 

compliance with respect to Exchange 

Act rule 18a–7 on the Covered Entity 

filing unaudited financial and 

operational information in a manner 

and format that facilitates cross-firm 

analysis and comprehensive monitoring 

of all SBS Entities registered with the 

Commission.154 For example, the 

Commission could by order or rule 

require SBS Entities to file the financial 

and operational information with 

FINRA using the FOCUS Report Part II 

(if not prudentially regulated) or Part IIC 

(if prudentially regulated) but permit 

the information input into the form to 

be the same information the SBS Entity 

reports to EU and German authorities. 

Paragraph (a)(1) of Exchange Act rule 

18a–7 requires SBS Entities without a 

prudential regulator to file the FOCUS 

Report Part II on a monthly basis. The 

proposed Amended Order would 

provide Covered Entities without a 

prudential regulator substituted 

compliance for paragraph (a)(1) of 

Exchange Act rule 18a–7 subject to the 

Manner and Format and German GAAP 

conditions.155 However, there would 

two additional conditions. First, for the 

reasons discussed above, the Covered 

Entity would need to apply substituted 

compliance for Exchange Act Rule 18a– 

1 (i.e., substituted compliance would be 

subject to the Rule 18a–1 Condition).156

Second, the Covered Entity would need 

to apply substituted compliance with 

respect to Exchange Act rule 18a– 

6(b)(1)(viii) (a record preservation 

requirement) (‘‘Rule 18a–6(b)(1)(viii) 

Condition’’).157 This record preservation 

requirement is directly linked to the 

financial and operational reporting 

requirements of Exchange Act rule 18a– 

7(a)(1). 

Paragraph (a)(3) of Exchange Act rule 

18a–7 requires SBS Entities without a 

prudential regulator that have been 

authorized by the Commission to 

compute net capital under Exchange Act 

rule 18a–1 using models to file certain 

monthly or quarterly information 

related to their use of models.158

Paragraph (b) of Exchange Act rule 18a– 

7 requires SBS Entities that are not 

prudentially regulated to make certain 

financial information available on their 


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159See 17 CFR 240.18a–7(b). 160See 17 CFR 240.18a–7(c) through (h). 161See 17 CFR 240.18a–7(i). 162See 17 CFR 240.18a–7(i). 163Substituted compliance with the following 

requirements of Exchange Act rule 18a–7 would be 

conditioned on the Covered Entity applying 

substituted compliance to the linked substantive 

Exchange Act requirement: (1) Exchange Act rule 

18a–7(a)(1) is linked to Exchange Act rules 18a–1 

and 18a–6(b)(1)(viii) and, therefore, would be 

subject to the Rule 18a–1 Condition and the Rule 

18a–6(b)(1)(viii) Condition; (2) Exchange Act rule 

18a–7(a)(3) is linked to Exchange Act rule 18a–1 

and, therefore, would be subject to the Rule 18a– 

1 Condition; (3) Exchange Act rule 18a–7(b) is 

linked to Exchange Act rule 18a–6(b)(1)(viii) and, 

therefore, would be subject to the Rule 18a– 

6(b)(1)(viii) Condition; and (4) Exchange Act rules 

18a–7(c), (d), (e), (f), (g) and (h) taken as a whole 

are linked to Exchange Act rules 18a–1 and 18a– 

6(b)(1)(viii) and, therefore, would be subject to the 

Rule 18a–1 Condition and the Rule 18a–6(b)(1)(viii) 

Condition. 

164See para. (f)(3)(iv)(B) to the proposed 

Amended Order. 

165The Commission views this as a limited 

exclusion from the availability of substituted 

compliance for these requirements because the 

proposed Amended Order would permit these 

reports relating Exchange Act rule 18a–4 to be 

included with the German regulatory reports the 

Covered Entities will file with the Commission and 

because the reports could be prepared in 

accordance with German GAAS (as discussed 

below). 

166The limited compliance report would not need 

to address Exchange Act rule 18a–9 if the Covered 

Entity is applying substituted compliance to this 

requirement. Further, as discussed above, 

substituted compliance with paras. (c) through (h) 

of Exchange Act rule 18a–7 is conditioned on the 

Covered Entity applying substituted compliance to 

Exchange Act rule 18a–1. Therefore, the Covered 

Entity would not need to address that rule in the 

compliance report. Finally, the Covered Entity 

would not need to address an account statement 

rule of a self-regulatory organization. 

websites.159 Paragraphs (c), (d), (e), (f), 

(g), and (h) of Exchange Act rule 18a– 

7 set forth requirements for SBS Entities 

that are not prudentially regulated to 

annually file financial statements and 

certain reports, as well as reports 

covering those statements and reports 

prepared by an independent public 

accountant.160 Paragraph (i) of Exchange 

Act rule 18a–7 requires SBS Entities 

that do not have a prudential regulator 

to notify the Commission when they 

change their fiscal year.161 Finally, 

Paragraph (j) of Exchange Act rule 18a– 

7 sets forth requirements with respect to 

the reports that must be filed with the 

Commission under the rule.162

The Commission preliminarily is 

making a positive substituted 

compliance determination for 

paragraphs (b) through (j) of Exchange 

Act rule 18a–7. As discussed below, 

substituted compliance with respect to 

these paragraphs of Exchange Act rule 

18a–7 would be subject to certain 

conditions and limitations. 

First, certain of the requirements in 

Exchange Act rule 18a–7 are fully or 

partially linked to substantive Exchange 

Act requirements for which a positive 

substituted compliance determination 

would be made under the proposed 

Amended Order. In these cases, 

substituted compliance with the 

requirement in Exchange Act rule 18a– 

7 would be conditioned on the Covered 

Entity applying substituted compliance 

to the linked substantive Exchange Act 

requirement.163

Second, under the proposed 

Amended Order, substituted 

compliance in connection with the 

requirement that Covered Entities 

without a prudential regulator file 

audited annual reports under Exchange 

Act rule 18a–7 would be subject to six 

conditions.164 The first condition would 

be that the Covered Entity 

simultaneously sends a copy of the 

financial statements the Covered Entity 

is required to file with EU or German 

authorities, including a report of an 

independent public accountant covering 

the financial statements, to the 

Commission in the manner specified on 

the Commission’s website (‘‘SEC Filing 

Condition’’). Because EU and German 

laws would not otherwise require the 

financial statements and report of the 

independent public accountant covering 

the financial statements to be filed with 

the Commission, the purpose of this 

condition would be to provide the 

Commission with the financial 

statements and report to more 

effectively supervise and monitor 

Covered Entities. 

The second condition would be that 

the Covered Entity include with the 

transmission of the annual financial 

statements and report the contact 

information of an individual who can 

provide further information about the 

financial statements and reports 

(‘‘Contact Information Condition’’). This 

would assist the Commission staff in 

promptly contacting an individual at the 

Covered Entity who can respond to 

questions that information on the 

financial statements or report may raise 

about the Covered Entity’s financial or 

operational condition. 

The third condition would be that the 

Covered Entity includes with the 

transmission the report of an 

independent public accountant required 

by Exchange Act rule 18a–7(c)(1)(i)(C) 

covering the annual financial statements 

if EU and German laws do not require 

the Covered Entity to engage an 

independent public accountant to 

prepare a report covering the annual 

financial statements (‘‘Accountant’s 

Report Condition’’). The third condition 

further would provide that the report of 

the independent public accountant may 

be prepared in accordance with 

generally accepted auditing standards 

(‘‘GAAS’’) in Germany that are used to 

perform audit and attestation services 

and the accountant complies with 

German independence requirements. 

According to the BaFin Application, 

German laws only require certain 

investment firms (depending on their 

size) to have their financial statements 

audited, so this condition would be 

designed to ensure that all SBS Entities 

subject to the requirement in rule 18a– 

7 to file audited annual reports are 

required to have their financial 

statements audited. 

The fourth condition would be that a 

Covered Entity that is a security-based 

swap dealer would need to file the 

reports required by Exchange Act rule 

18a–7(c)(1)(i)(B) and (C) addressing the 

statements identified in Exchange Act 

rule 18a–7(c)(3) or (c)(4), as applicable, 

that relate to Exchange Act rule 18a–4 

(‘‘Rule 18a–4 Limited Exclusion’’).165

These reports are designed to provide 

the Commission with information about 

an SBS Entity’s compliance with Rule 

18a–4. Substituted compliance is not 

available for Exchange Act rule 18a–4 

and, therefore, this condition is 

designed to provide the Commission 

with similar compliance information. 

Under this condition, Covered Entities 

would need to file a limited compliance 

report that includes the statements 

relating to Rule 18a–4 166 or an 

exemption report if the Covered Entity 

claims an exemption from Rule 18a–4. 

The Covered Entity also would need to 

file the report of an independent public 

accountant covering the limited 

compliance report or exemption report. 

The fourth condition further would 

provide that the report of the 

independent public accountant may be 

prepared in accordance with GAAS in 

Germany that are used to perform audit 

and attestation services and the 

accountant complies with German 

independence requirements. 

The fifth condition would be that a 

Covered Entity that is a major securitybased swap participant would need to 

file the supporting schedules required 

by Exchange Act rule 18a–7(c)(1)(i)(A) 

and (C) addressing the statements 

identified in Exchange Act rules 18a– 

7(c)(2)(ii) and (iii) that relate to 

Exchange Act rule 18a–2 for which the 

proposed Amended Order would not 

provide substituted compliance. These 

supporting schedules are the 

Computation of Tangible Net Worth. 

The sixth condition would be that a 

Covered Entity that is a security-based 

swap dealer would need to file the 

supporting schedules required by 

Exchange Act rule 18a–7(c)(1)(i)(A) and 

(C) addressing the statements identified 


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167The chart below does not include the 

proposed conditions for applying substituted 

compliance to Exchange Act rule 18a–7; namely 

that the Covered Entity: (1) Must be subject to and 

comply with specified requirements of foreign law; 

and (2) must promptly furnish to a representative 

of the Commission upon request an English 

translation of a report. See para. (f)(8) of the 

proposed Amended Order (setting forth the English 

translation requirement). 

168See 17 CFR 240.18a–8. 

in Exchange Act rules 18a–7(c)(2)(ii) 

and (iii) that relate to Exchange Act rule 

18a–4 and 18a–4a if the Covered Entity 

is not exempt from Exchange Act rule 

18a–4 (i.e., the Rule 18a–4 Limited 

Exclusion). These supporting schedules 

are the Computation for Determination 

of Security-Based Swap Customer 

Reserve Requirements and the 

Information Relating to the Possession 

or Control Requirements for SecurityBased Swap Customers, which are 

designed to provide the Commission 

with information about an SBS Entity’s 

compliance with Rule 18a–4. 

Substituted compliance for Exchange 

Act rule 18a–4 is not available. 

The following table summarizes the 

Commission’s proposed preliminary 

positive substituted compliance 

determinations with respect to 

requirements of Exchange Act rule 18a– 

7 by listing in each row: (1) The 

paragraph of the proposed Amended 

Order that sets forth the determination; 

(2) the paragraph(s) of Exchange Act 

rule 18a–7 to which the determination 

applies; (3) a brief description of the 

records required by the paragraph(s); 

and (4) a brief description of any 

additional conditions to applying 

substituted compliance to the 

requirements, including any partial 

exclusions because portions of the 

requirements are linked to substantive 

Exchange Act requirements for which 

the proposed Amended Order would 

not provide substituted compliance.167

EXCHANGE ACT RULE 18a–7 

[Reporting] 

Order paragraph Rule paragraph Rule description Conditions and partial exclusions 

(f)(3)(i) .................. (a)(1) ........................ (a)(2) ........................ File FOCUS Reports ................ (1) Manner and Format Condition. 

(2) German GAAP Condition. 

(3) Rule 18a–1 Condition for ¶ (a)(1). 

(4) Rule 18a–6(b)(1)(viii) Condition for 

¶ (a)(1). 

(f)(3)(ii) ................. (a)(3) ........................ .................................. Information related to capital 

models.

(1) Rule 18a–1 Condition. 

(f)(3)(iii) ................. (b) ............................ .................................. Publish certain financial information.(1) Rule 18a–6(b)(1)(viii) Condition. 

(f)(3)(iv) ................ (c) ............................

(d) ............................

(e) ............................

(f) .............................

(g) ............................

(h) ............................

.................................. File annual audited reports ....... (1) SEC Filing Condition. 

(2) Contact Information Condition. 

(3) Accountant’s Report Condition. 

(4) Rule 18a–4 Limited Exclusion. 

(5) Supporting Schedules Condition. 

(6) Rule 18a–1 Condition. 

(7) Rule 18a–6(b)(1)(viii) Condition. 

5. Exchange Act Rule 18a–8 

Exchange Act rule 18a–8 requires SBS 

Entities to send notifications to the 

Commission if certain adverse events 

occur.168 The Order provides 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

8 applicable to SBS Entities with a 

prudential regulator (subject to 

conditions and limitations). In 

particular, the requirements of: (1) 

Paragraph (c) of Exchange Act rule 18a– 

8 that an SBS Entity that is a securitybased swap dealer and that files a notice 

of adjustment to its reported capital 

category with a U.S. prudential 

regulator must transmit a copy of the 

notice to the Commission; (2) paragraph 

(d) of the rule that an SBS Entity 

provide notification to the Commission 

if it fails to make and keep current 

books and records under Exchange Act 

rule 18a–5 and to transmit a subsequent 

report on steps being taken to correct 

the situation; (3) and paragraph (h) of 

the rule setting forth how to make the 

notifications required by Exchange Act 

18a–8. 

Under the Order, substituted 

compliance in connection with the 

notification requirements of Exchange 

Act rule 18a–8 are subject to the 

conditions that the Covered Entity: (1) 

Simultaneously sends a copy of any 

notice required to be sent by EU or 

German notification laws to the 

Commission in the manner specified on 

the Commission’s website (i.e., the ‘‘SEC 

Filing Condition’’); and (2) includes 

with the transmission the contact 

information of an individual who can 

provide further information about the 

matter that is the subject of the notice 

(i.e., the ‘‘Contact Information 

Condition’’). The purpose of these 

conditions is to alert the Commission to 

financial or operational problems that 

could adversely affect the firm—the 

objective of Exchange Act rule 18a–8. In 

addition, the Order does not provide 

substituted compliance for paragraph (g) 

of Exchange Act rule 18a–8 that an SBS 

Entity that is a security-based swap 

dealer provide notification if it fails to 

make a required deposit into its special 

reserve account for the exclusive benefit 

of security-based swap customers under 

Exchange Act rule 18a–4. Substituted 

compliance is not available for 

Exchange Act rule 18a–4. 

The proposed Amended Order would 

continue to provide Covered Entities 

with a prudential regulator substituted 

compliance for the notification 

requirements of Exchange Act rule 18a– 

8 discussed above subject to the 

conditions and limitations. However, 

the substituted compliance 

determinations would be made on a 

more granular basis. Further, the 

proposed Amended Order would 

provide Covered Entities without a 

prudential regulator substituted 

compliance for these notification 

requirements (also on a granular basis), 

subject to the SEC Filing and Contact 

Information Conditions. The proposed 

Amended Order also would apply the 

limitation with respect to the 

notification requirements linked to 

Exchange Act rule 18a–4 to Covered 

Entities without a prudential regulator. 


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169A positive substituted compliance 

determination would not be made for the following 

requirements of Exchange Act rule 18a–8 because 

they are linked to a substantive Exchange Act 

requirement for which a positive substituted 

compliance determination is not being made: (1) 

Exchange Act rules 18a–8(a)(3) and (b)(3) are fully 

linked to Exchange Act rule 18a–2 and, therefore, 

would be subject to the Rule 18a–2 Exclusion; (2) 

the portion of Exchange Act rule 18a–8(e) that 

relates to Exchange Act rule 18a–2 would be subject 

to the Rule 18a–2 Exclusion; (3) the portion of 

Exchange Act rule 18a–8(e) that relates to Exchange 

Act rule 18a–4 would be subject to the Rule 18a– 

4 Exclusion; and (4) Exchange Act rule 18a–8(g) is 

fully linked to Exchange act rule 18a–4 and, 

therefore, would be subject to the Rule 18a–4 

Exclusion. 

170Substituted compliance with the following 

requirements of Exchange Act rule 18a–8 would be 

conditioned on the Covered Entity applying 

substituted compliance to the linked substantive 

Exchange Act requirement: (1) Exchange Act rules 

18a–8(a)(1)(i) and (ii), (b)(1), (b)(2), and (b)(4) are 

linked to Exchange Act rule 18a–1 and, therefore, 

would be subject to the Rule 18a–1 Condition; and 

(2) Exchange Act rule 18a–8(d) is linked to 

Exchange Act rule 18a–5 and, therefore, would be 

subject to the Rule 18a–5 Condition with respect to 

any category of records required to made and kept 

current by that rule. With respect to Exchange Act 

rule 18a–8(d), if the Covered Entity does not apply 

substituted compliance with respect to a category 

of record required to be made and kept current by 

Exchange Act rule 18a–5, the Covered Entity would 

need to provide the notification required by 

Exchange Act rule 18a–8(d) if it fails to make and 

keep current that category of record. 

171The chart below does not include the 

proposed conditions for applying substituted 

compliance to Exchange Act rule 18a–8; namely 

that the Covered Entity: (1) Must be subject to and 

comply with specified requirements of foreign law; 

and (2) must promptly furnish to a representative 

of the Commission upon request an English 

translation of a notification. See para. (f)(8) of the 

proposed Amended Order (setting forth the English 

translation requirement). 

Exchange Act rule 18a–8 has 

notification requirements that apply 

exclusively to Covered Entities without 

a prudential regulator. In particular, 

paragraphs (a)(1)(i), (a)(1)(ii), (b)(1), 

(b)(2), and (b)(4) of Exchange Act rule 

18a–8 require an SBS Entity that is a 

security-based swap dealer and that 

does not have a prudential regulator to 

provide notifications related to the 

capital requirements of Exchange Act 

rule 18a–1. Paragraphs (a)(2) and (b)(3) 

of Exchange Act rule 18a–8 require an 

SBS Entity that is a major security-based 

swap participant and that does not have 

a prudential regulator to provide 

notifications related to the capital 

requirements of Exchange Act rule 18a– 

2. Paragraph (e) of Exchange Act rule 

18a–8, in pertinent part, requires an SBS 

Entity that is a security-based swap 

dealer and that does not have a 

prudential regulator to provide 

notification if it has a material weakness 

under Exchange Act rule 18a–7 and to 

transmit a subsequent report on the 

steps being taken to correct the 

situation. 

The Commission is preliminarily 

making a positive substituted 

compliance determination for a number 

of the notification requirements set forth 

in these paragraphs, subject to the SEC 

Filing and Contact Information 

Conditions. However, certain of these 

requirements are linked to substantive 

Exchange Act requirements for which 

the proposed Amended Order would 

not provide substituted compliance. In 

these cases, a positive substituted 

compliance determination would not be 

made for the linked requirement in 

Exchange Act rule 18a–8 or the portion 

of the requirement in Exchange Act rule 

18a–8 that is linked to the substantive 

Exchange Act requirement.169

In addition, certain of the 

requirements in Exchange Act rule 18a– 

8 are fully or partially linked to 

substantive Exchange Act requirements 

where a positive substituted compliance 

determination would be made under the 

proposed Amended Order. In these 

cases, substituted compliance with the 

requirement in Exchange Act rule 18a– 

8 would be conditioned on the SBS 

Entity applying substituted compliance 

to the linked substantive Exchange Act 

requirement.170

The following table summarizes the 

Commission’s proposed preliminary 

positive substituted compliance 

determinations with respect to 

requirements of Exchange Act rule 18a– 

8 by listing in each row: (1) The 

paragraph of the proposed Amended 

Order that sets forth the determination; 

(2) the paragraph(s) of Exchange Act 

rule 18a–8 to which the determination 

applies; (3) a brief description of the 

notifications required by the 

paragraph(s); and (4) a brief description 

of any additional conditions to applying 

substituted compliance to the 

requirements, including any partial 

exclusions because portions of the 

requirements are linked to substantive 

Exchange Act requirements for which 

the proposed Amended Order would 

not provide substituted compliance.171

EXCHANGE ACT RULE 18a–8 

[Notification] 

Order paragraph Rule paragraph Rule description Conditions and partial exclusions 

(f)(4)(i)(A) ............. (a)(1)(i) .....................

(a)(1)(ii) 

(b)(1) 

(b)(2) 

(b)(4) 

.................................. Capital notices .......................... (1) Rule 18a–1 Condition. 

(2) SEC Filing Condition. 

(3) Contact Information Condition. 

(f)(4)(i)(B) ............. (c) ............................ .................................. Prudential regulator capital category adjustment notices.(1) SEC Filing Condition. 

(2) Contact Information Condition. 

(f)(4)(i)(C) ............. (d) ............................ .................................. Books and records notices ....... (1) Rule 18a–5 Condition. 

(2) SEC Filing Condition. 

(3) Contact Information Condition. 

(f)(4)(i)(D) ............. (e) ............................ .................................. Material weakness notices ....... (1) Rule 18a–1 Condition. 

(2) Rule 18a–2 Exclusion. 

(3) Rule 18a–4 Limited Exclusion. 

(4) SEC Filing Condition. 

(5) Contact Information Condition. 

The following table summarizes the 

Commission’s preliminary 

determinations with respect to 

requirements of Exchange Act rule 18a– 

8 for which a positive substituted 

compliance determination would not be 

made because they are fully linked to 

substantive Exchange Act requirements 

for which the proposed Amended Order 

would not provide substituted 

compliance by listing in each row: (1) 

The paragraph of the proposed 

Amended Order that sets forth the 

determination; (2) the paragraph(s) of 

Exchange Act rule 18a–8 to which the 


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172See 17 CFR 240.18a–9. 

173See EMIR article 11(1)(b); EMIR RTS articles 

12 and 13; WpHG section 84; HGB sections 316 and 

325; and WpHG section 89 (1) sentence 1 no. 1. 

174See para. (f)(5) to the proposed Amended 

Order. 

175See 15 U.S.C. 78o–10(g). 

176See WpHG section 83 para. 1; and MiFID Org 

Reg article 21(1)(f), 21(4), and 72(1) 

177See para. (f)(6) to the proposed Amended 

Order. 

178See Exchange Act section 15F(f); Exchange Act 

rule 18a–6(g). The French and UK Orders do not 

extend substituted compliance to these 

requirements. See French Order, 86 FR 41650; UK 

Order, 86 FR 43361. 179See para. (f)(7) to the proposed Amended 

Order. 

180See para. (f)(8) to the proposed Amended 

Order. 

181See French Order, 86 FR 41651; UK Order, 86 

FR 43361. 

determination applies; (3) a brief 

description of the records required by 

the paragraph(s); and (4) the exclusion 

from substituted compliance. 

EXCHANGE ACT RULE 18a–8 

[Notification] 

Order paragraph Rule paragraph Rule description Exclusion 

(f)(4)(ii)(B) ............. (a)(2) ........................ (b)(3) ........................ MSBSP capital notices ............. Rule 18a–2 Exclusion. 

(f)(4)(ii)(C) ............ (g) ............................ .................................. Reserve account notices .......... Rule 18a–4 Exclusion. 

6. Exchange Act Rule 18a–9 

Exchange Act rule 18a–9 requires SBS 

Entities that are security-based swap 

dealers without a prudential regulator to 

examine and count the securities they 

physically hold, account for the 

securities that are subject to their 

control or direction but are not in their 

physical possession, verify the locations 

of securities under certain 

circumstances, and compare the results 

of the count and verification with their 

records.172 The Commission 

preliminarily believes EU and German 

laws produce a comparable result in 

terms of securities count 

requirements.173 Accordingly, the 

Commission preliminarily is making a 

positive substituted compliance 

determination for this rule.174

7. Exchange Act Section 15F(g) 

Exchange Act Section 15F(g) requires 

SBS Entities to maintain daily trading 

records.175 The Commission 

preliminarily believes EU and German 

laws produce a comparable result in 

terms of daily trading recordkeeping 

requirements.176 Accordingly, the 

Commission preliminarily is making a 

positive substituted compliance 

determination for the self-executing 

requirements in this statute.177

8. Examination and Production of 

Records 

The Order does not extend to, and 

Covered Entities remain subject to, the 

requirement of Exchange Act section 

15F(f) to keep books and records open 

to inspection by any representative of 

the Commission and the requirement of 

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

promptly to a representative of the 

Commission legible, true, complete, and 

current copies of those records of the 

Covered Entity that are required to be 

preserved under Exchange Act rule 18a– 

6, or any other records of the Covered 

Entity that are subject to examination or 

required to be made or maintained 

pursuant to Exchange Act section 15F 

that are requested by a representative of 

the Commission.178 The proposed 

Amended Order similarly would not 

extend substituted compliance to these 

inspection and production 

requirements.179

Consequently, every Covered Entity 

registered with the Commission, 

whether complying directly with 

Exchange Act requirements or relying 

on substituted compliance as a means of 

complying with the Exchange Act, is 

required to satisfy the inspection and 

production requirements imposed on 

such entities under the Exchange Act. 

Covered Entities may make, keep, and 

preserve records, subject to the 

conditions described above, in a manner 

prescribed by applicable EU and 

German requirements. BaFin has 

provided the Commission with adequate 

assurances that no law or policy would 

impede the ability of any entity that is 

directly supervised by the authority and 

that may register with the Commission 

to provide prompt access to the 

Commission to such entity’s books and 

records or to submit to onsite inspection 

or examination by the Commission. 

Consistent with those assurances and 

the requirements that apply to all 

Covered Entities under the Exchange 

Act, Covered Entities operating under 

the proposed Amended Order would 

need to keep books and records open to 

inspection by any representative of the 

Commission and to furnish promptly to 

a representative of the Commission 

legible, true, complete, and current 

copies of those records of the firm that 

these entities are required to preserve 

under Exchange Act rule 18a–6 (which 

would include records for which a 

positive substituted compliance 

determination is being made with 

respect to Exchange Act rule 18a–6 

under the Order), or any other records 

of the firm that are subject to 

examination or required to be made or 

maintained pursuant to Exchange Act 

section 15F that are requested by a 

representative of the Commission. 

9. English Translations 

The proposed Amended Order 

provides that to the extent documents 

are not prepared in the English 

language, Covered Entities would need 

to furnish to a representative of the 

Commission upon request an English 

translation of any record, report, or 

notification of the Covered Entity that is 

required to be made, preserved, filed, or 

subject to examination pursuant to 

Exchange Act section 15F or the German 

Order.180 This proposed condition 

would be designed to addresses 

difficulties that Commission 

examinations staff would have 

examining Covered Entities that furnish 

documents in a foreign language. The 

English translations would need to be 

provided promptly. This condition is 

included in the French and UK 

Orders.181

VIII. Additional Considerations 

Regarding Supervisory and 

Enforcement Effectiveness Related to 

Capital and Margin 

A. General Considerations 

Exchange Act rule 3a71–6 provides 

that the Commission’s assessment of the 

comparability of the requirements of the 

foreign financial regulatory system take 

into account ‘‘the effectiveness of the 

supervisory program administered, and 

the enforcement authority exercised’’ by 

the foreign financial regulatory 

authority. This prerequisite accounts for 

the understanding that substituted 

compliance determinations should 

reflect the reality of the foreign 

regulatory framework, in that rules that 

appear high-quality on paper 

nonetheless should not form the basis 


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182See generally Business Conduct Adopting 

Release, 81 FR 30079. 183Order, 85 FR 84697. 184The factors described in this section are in 

addition to the factors described in the German 

Substituted Compliance Notice and Proposed 

Order. See Exchange Act Release No. 90378 (Nov. 

9, 2020), 85 FR 72726, 72739–40 (Nov. 13, 2020) 

(‘‘German Substituted Compliance Notice and 

Proposed Order’’). 

185 Information on the ECB supervision was 

obtained from the SSM Supervisory Manual, March 

2018, available at: https://

www.bankingsupervision.europa.eu/ecb/pub/pdf/ 

ssm.supervisorymanual201803.

en.pdf?42da4200dd38971a82c2d15b9ebc0e65. 

for substituted compliance if—in 

practice—market participants are 

permitted to fall short of their regulatory 

obligations. This prerequisite, however, 

also recognizes that differences among 

the supervisory and enforcement 

regimes should not be assumed to 

reflect flaws in one regime or 

another.182

In the substituted compliance Order 

for Germany the Commission concluded 

that ‘‘the relevant supervisory and 

enforcement considerations in Germany 

are consistent with substituted 

compliance.’’ 183 In its amended 

application, BaFin provided the 

Commission with additional 

information on the supervision and 

enforcement framework for compliance 

with capital and margin requirements 

applicable to significant credit 

institutions. For purposes of the 

supervision of capital and margin by 

Germany, the Commission preliminary 

believes that the relevant supervisory 

and enforcement considerations for 

capital and margin in Germany are 

consistent with substituted compliance. 

In preliminarily concluding that the 

relevant supervisory and enforcement 

considerations are consistent with 

substituted compliance, the 

Commission has considered the 

supervision and enforcement framework 

described in the Order as well as the 

following factors:184

B. Supervisory and Enforcement 

Framework in Germany 

The ECB, through its single 

supervisory mechanism (‘‘SSM’’) and 

executed by joint supervisory teams 

(‘‘JSTs’’), supervises firms for 

compliance with the CRD and CRR, 

including all capital requirements. The 

JSTs comprise of ECB staff, BaFin staff, 

and staff from other countries in the EU 

where the significant institution has a 

subsidiary or branch.185 For each firm, 

the JST conducts a Supervisory Review 

and Evaluation Process (‘‘SREP’’), which 

measures the risks for each bank. The 

SREP shows where a firm stands in 

terms of capital requirements and the 

way it handles risks. To develop the 

SREP, supervisors review the 

sustainability of each firm’s business 

model, governance and risk 

management by the firm, capital risks 

(credit, market, operational, rate in the 

banking book and equity risks), and 

liquidity and funding risks. Once the 

SREP is developed, the firm will receive 

a letter setting forth specific measures 

that must be implemented the following 

year based on the firm’s individual 

profile. For example, the SREP may ask 

the firm to hold additional capital or set 

forth qualitative requirements related to 

the firm’s governance structure or 

management. After these supervisory 

measures are imposed, the JST will 

monitor the credit institutions to ensure 

that it establishes compliance with the 

regulatory framework and supervisory 

measures taken. If a credit institution 

does not comply with such measures, 

additional actions are considered. 

Available actions for the JST range from 

informal communication with the 

supervised entity to enforcement 

measures or sanctions. 

Misconduct detected by the JSTs is 

addressed primarily by the ECB. The 

ECB has the power to enforce violations 

and to impose fines on supervised 

entities for breaches of directly 

applicable European Union law. The 

ECB can also ask national competent 

authorities (such as BaFin) to open 

proceedings that may lead to the 

imposition of certain pecuniary and 

non-pecuniary penalties. 

IX. Request for Comment 

A. Nonbank Capital and Margin 

1. Capital 

The Commission further requests 

comment regarding the comparability 

analysis of EU and German capital 

requirements with Exchange Act capital 

requirements for security-based swap 

dealers without a prudential regulator. 

Commenters particularly are invited to 

address the basis for substituted 

compliance in connection with those 

requirements, and the proposed 

conditions and limitations connected to 

substituted compliance for those 

requirements. Does EU and German law 

taken as a whole produce regulatory 

outcomes that are comparable to those 

of Exchange Act rule 18a–1? Are there 

any additional conditions that should be 

applied to substituted compliance for 

these capital requirements to promote 

comparable regulatory outcomes, as a 

supplement or alternative to those in the 

proposed Amended Order? 

The Commission requests comment 

on the proposed capital condition that 

is designed to bridge the gap between 

the Basel capital standard and the net 

liquid assets test imposed by Exchange 

Act rule 18a–1. Under this condition, a 

Covered Entity would need to: (1) 

Maintain liquid assets (as defined in the 

proposed condition) that have an 

aggregate market value that exceeds the 

amount of the Covered Entity’s total 

liabilities by at least $100 million before 

applying the deduction specified in the 

proposed condition, and by at least $20 

million after applying the deduction 

specified in the proposed condition; (2) 

make and preserve for three years a 

quarterly record that: (a) Identifies and 

values the liquid assets maintained as 

defined in the proposed condition, (b) 

compares the amount of the aggregate 

value the liquid assets maintained 

pursuant to the proposed condition to 

the amount of the Covered Entity’s total 

liabilities and shows the amount of the 

difference between the two amounts 

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

(c) shows the amount of the deduction 

specified in the proposed condition and 

the amount that deduction reduces the 

excess liquid assets amount; (3) notify 

the Commission in writing within 24 

hours in the manner specified on the 

Commission’s website if the Covered 

Entity fails to meet the requirements of 

the proposed condition and include in 

the notice the contact information of an 

individual who can provide further 

information about the failure to meet the 

requirements; and (4) include its most 

recent statement of financial condition 

filed with its local supervisor (whether 

audited or unaudited) with its initial 

written notice to the Commission of its 

intent to rely on substituted compliance. 

The Commission requests comment on 

each prong of this condition. Please 

identify any regulatory or operational 

issues in connection with adhering to 

each prong of this condition. The 

Commission requests comment on how 

this proposed condition would compare 

to the liquidity requirements a Covered 

Entity is subject to under the Basel 

capital standard. 

For the purposes of this additional 

capital condition, ‘‘liquid assets’’ would 

be defined as: (1) Cash and cash 

equivalents; (2) collateralized 

agreements; (3) customer and other 

trading related receivables; (4) trading 

and financial assets; and (5) initial 

margin posted by the Covered Entity to 

a counterparty or third-party, subject to 

certain conditions. Are these definitions 

of the categories of liquid assets 

sufficiently clear? For example, should 

the definitions provide more detail 

about the types of assets that could be 

included within a category? If so, please 

explain. Should the condition use 

different definitions? If so, please 


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explain why and suggest an alternative 

definition. 

For the purposes of this additional 

capital condition, the deduction 

(haircut) would be determined by 

dividing the amount of the Covered 

Entity’s risk-weighted assets by 12.5 

(i.e., the reciprocal of 8%). Is this an 

appropriate method of calculating the 

deduction? If not, explain why and 

suggest an alternative method. Would 

this deduction be comparable to the 

haircuts under Exchange Act rule 18a– 

1? If not, explain why. More generally, 

is the term ‘‘risk-weighted assets’’ 

understood by market participants? If 

not, please explain why. 

Under this proposed capital 

condition, the Covered Entity would be 

required to maintain an excess of liquid 

assets over total liabilities that equals or 

exceeds $100 million before the 

deduction (derived from the firm’s riskweighted assets) and $20 million after 

the deduction. Is ‘‘total liabilities’’ an 

appropriate metric for this condition? 

The $100 million requirement is 

modeled on the minimum tentative net 

capital requirement of Exchange Act 

rule 18a–1 and $20 million requirement 

is modeled on the minimum fixeddollar net capital requirement of the 

rule. Are these appropriate requirements 

for the proposed condition? If not, 

explain why and suggest alternative 

requirements. For example, should the 

amount before applying the proposed 

deduction be $50, $75, $125, or $150 

million or some other amount, or should 

the amount after the proposed 

deductions be $10, $30, or $50 million 

or some other amount? If so, explain 

why. 

The Commission requests comment 

on the proposed capital condition that 

would require the Covered Entity to 

apply substituted compliance with 

respect to Exchange Act rules 18a– 

5(a)(9) (a record making requirement), 

18a–6(b)(1)(x) (a record preservation 

requirement), and 18a–8(a)(1)(i), 

(a)(1)(ii), (b)(1), (b)(2), and (b)(4) 

(notification requirements). Is this 

proposed capital condition appropriate? 

If not, explain why. Would the proposed 

capital condition provide clarity as to 

the Covered Entity’s obligations under 

these recordkeeping and notification 

requirements when applying substituted 

compliance with respect to Exchange 

Act rule 18a–3? If not, please explain 

why. 

The Commission requests comment 

on the potential benefits and costs of the 

potential capital conditions. Would the 

conditions promote comparable 

regulatory outcomes between the capital 

requirements applied to Covered 

Entities in Germany and capital 

requirements under Exchange Act rule 

18a–1? If so, explain why. If not, explain 

why not. The Commission is mindful 

that compliance with these capital 

conditions would require Covered 

Entities applying substituted 

compliance to Exchange Act rule 18a– 

1 to supplement their existing capital 

calculations and practices, as well as to 

incur additional time and cost burdens 

to implement the potential conditions 

and integrate them into existing 

business operations. The Commission 

requests comment and supporting data 

on these potential time and cost 

burdens, including quantitative 

information about the amount of the 

burdens. The Commission also requests 

comment on any potential operational 

or regulatory issues or burdens 

associated with adhering to the 

proposed capital conditions. 

The Commission requests comment 

on the potential impacts the capital 

conditions would have on competition. 

For example, how would they impact 

competition between Covered Entities 

applying substituted compliance with 

respect to Exchange Act rule 18a–1 and 

SBS Entities that will comply with 

Exchange Act rule 18a–1? Would the 

conditions eliminate or mitigate 

potential competitive advantages that 

Covered Entities adhering to the Basel 

capital standard might have over SBS 

Entities adhering to the more stringent 

net liquid assets test standard of 

Exchange Act rule 18a–1? Alternatively, 

would the conditions create competitive 

disadvantages for Covered Entities 

applying substituted compliance with 

respect to Exchange Act rule 18a–1 

compared to SBS Entities complying 

with Exchange Act rule 18a–1? Please 

describe the competitive advantages or 

disadvantages and explain their impact. 

Please identify and describe any 

potential impacts the proposed capital 

conditions would have on the way 

Covered Entities currently conduct their 

business. 

The first proposed capital condition 

for substituted compliance with 

Exchange Act rule 18a–1 requires the 

Covered Entity to be subject to and 

comply with specific EU and German 

capital and liquidity requirements. 

Under Articles 7 and 8 of the CRR, 

supervisory authorities can grant a 

Covered Entity a waiver from these EU 

and German capital and/or liquidity 

requirements if its parent is subject to 

them. The Bafin’s Amended Application 

requests substituted compliance for 

Covered Entities operating pursuant to 

these waivers. The proposed Amended 

Order requires the Covered Entity (i.e., 

the registrant itself) to be subject to the 

specified EU and German capital and 

liquidity requirements. Accordingly, it 

would not provide substituted 

compliance for Exchange Act rule 18a– 

1 to a Covered Entity operating pursuant 

to these waivers. 

However, the Commission requests 

comment on whether a positive 

substituted compliance determination 

(subject to conditions and limitations) 

could be made with respect to a Covered 

Entity operating pursuant to a waiver 

from compliance with the Basel capital 

and liquidity requirements when its 

immediate holding company is subject 

to those requirements. Are there 

additional conditions that could be 

imposed on a Covered Entity operating 

pursuant to these waivers that could 

produce a comparable regulatory 

outcome to Exchange Act rule 18a–1? If 

so, describe the conditions and explain 

how they would produce a comparable 

regulatory outcome. For example, 

should the Commission consider 

imposing additional conditions on 

either the Covered Entity and/or its 

immediate holding company? In this 

regard, should the Covered Entity and 

its immediate holding company be 

subject to the proposed four-pronged 

capital condition that is designed to 

bridge the gap between the Basel capital 

standard and the net liquid assets test of 

Exchange Act rule 18a–1? Further, 

should substituted compliance be 

conditioned on the Covered Entity 

maintaining a pool of liquid and 

unencumbered assets to meet potential 

cash outflows over a 30-day (or longer 

or shorter) stress period? Should the 

pool of unencumbered liquid assets be 

sized based on an alternative metric? 

Should the Commission further 

condition substituted compliance in this 

fact pattern on the Covered Entity 

complying with paragraph (f) under 

Exchange Act rule 18a–4 (i.e., the 

exemption from segregation 

requirements) in order to limit its 

business activities? Are there other 

limits that should be placed on the 

Covered Entity’s activities that would 

mitigate the risk of the firm not being 

directly subject to EU and German 

capital and liquidity requirements? If so, 

please describe them. 

The Commission further requests 

comment on whether any investment 

firms that may be relying on the 

Commission’s proposed substituted 

compliance determination with respect 

to Exchange Act rule 18a–1 would 

potentially be covered under the new 

prudential rules for investment firms in 

the EU and Germany. If so, should the 

Commission make a positive substituted 

compliance determination with respect 

to these capital requirements? If so, 

explain how they are comparable to the 


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186See French Order, 86 FR 41658–59; UK Order, 

86 FR 43371–71. 

187See French Order, 86 FR 41659; UK Order, 86 

FR 43372. 

capital requirements of Exchange Act 

rule 18a–1. 

Commenters also are invited to 

address any differences between 

German requirements and the French 

and UK requirements that formed the 

basis for the Commission’s conditional 

grants of substituted compliance for 

capital in the French and UK Orders.186

Are there reasons to take a different 

approach with respect to substituted 

compliance in a final German amended 

order than was taken in the French and 

UK Orders with respect to capital? If so, 

identify the differences and explain why 

they should result in a different 

approach. 

The Commission further requests 

comment on whether there would be 

major security-based swap participants 

without a prudential regulator in 

Germany that would seek substituted 

compliance with respect to Exchange 

Act rule 18a–2. 

2. Margin 

The Commission further requests 

comment regarding the Commission’s 

preliminary view that the EU and 

German margin requirements are 

comparable to Exchange Act rule 18a– 

3, subject to additional conditions to 

address differences in counterparty 

exceptions. Commenters particularly are 

invited to address the basis for 

substituted compliance in connection 

with those requirements. Does EU and 

German law taken as a whole produce 

regulatory outcomes that are comparable 

to those of Exchange Act rule 18a–3? 

Are there any additional conditions that 

should be applied to substituted 

compliance for these margin 

requirements to promote comparable 

regulatory outcomes, as a supplement or 

alternative to those in the proposed 

Amended Order? 

The Commission further requests 

comment on whether the haircuts 

required under the EMIR Margin RTS 

are comparable to the collateral haircuts 

required under paragraph (c)(3) of 

Exchange Act rule 18a–3. The 

Commission also requests comment on 

whether the standardized grid for 

computing initial margin under the 

EMIR Margin RTS is comparable to the 

standardized approach for computing 

initial margin under paragraph (d)(1) of 

Exchange Act rule 18a–3. 

The Commission requests comment 

and supporting data on the proposed 

margin conditions that are designed to 

address differences in the counterparty 

exceptions between Exchange Act rule 

18a–3 and German and EU margin 

requirements. The first proposed 

additional margin condition would 

require a Covered Entity to collect 

variation margin, as defined in the EMIR 

Margin RTS, from a counterparty with 

respect to a transaction in a non-cleared 

security-based swap, unless the 

counterparty would qualify for an 

exception under Exchange Act rule 18a– 

3 from the requirement to deliver 

variation margin to the Covered Entity. 

The second proposed additional margin 

condition would require a Covered 

Entity to collect initial margin, as 

defined in the EMIR Margin RTS, from 

a counterparty with respect to a 

transaction in a non-cleared securitybased swap, unless the counterparty 

would qualify for an exception under 

Exchange Act rule 18a–3 from the 

requirement to deliver initial margin to 

the Covered Entity. Do these proposed 

margin conditions accomplish the goal 

of closing the gap between the 

counterparty exceptions of Exchange 

Act rule 18a–3 and the EU and German 

margin requirements? If so, please 

explain. If not, please explain why. 

Would the proposed margin conditions 

impact any particular type of 

counterparty more than another? If so, 

please explain. Does the fact that the EU 

and German margin requirements have 

a final phase-in date for implementation 

of initial margin requirements of 

September 1, 2022 impact the ability of 

Covered Entities to implement the 

proposed margin conditions? If so, 

please explain. 

The Commission also requests 

comment on the proposed margin 

condition that a Covered Entity apply 

substituted compliance for the 

requirements of Exchange Act rule 18a– 

5(a)(12) (a record making requirement). 

Is this proposed margin condition 

appropriate? If not, explain why. Would 

the proposed margin condition provide 

clarity as to the Covered Entity’s 

obligations under this record making 

requirement when applying substituted 

compliance with respect to Exchange 

Act rule 18a–3? If not, please explain 

why. 

The Commission requests comment 

on the potential benefits and costs of the 

potential margin conditions. Would the 

conditions promote comparable 

regulatory outcomes between the margin 

requirements applied to Covered 

Entities in the EU and Germany and the 

margin requirements of Exchange Act 

rule 18a–3? If so, explain why. If not, 

explain why not. The Commission is 

mindful that compliance with the 

proposed margin conditions would 

require Covered Entities applying 

substituted compliance to Exchange Act 

rule 18a–3 to supplement their existing 

margin processes and documentation, as 

well as to incur additional time and cost 

burdens to implement the potential 

margin conditions and integrate them 

into existing business operations. The 

Commission requests comment and 

supporting data on these potential time 

and cost burdens, including quantitative 

information about the amount of the 

burdens. The Commission also requests 

comment on any potential operational 

or regulatory issues or burdens 

associated with adhering to the 

proposed margin conditions. 

The Commission requests comment 

on the potential impacts the margin 

conditions would have on competition. 

For example, how would they impact 

competition between Covered Entities 

applying substituted compliance with 

respect to Exchange Act rule 18a–3 and 

SBS Entities that will comply with 

Exchange Act rule 18a–3? Would the 

conditions eliminate or mitigate 

potential competitive advantages that 

Covered Entities complying with EU 

and German margin requirements might 

have over SBS Entities complying with 

the margin requirements of Exchange 

Act rule 18a–3? Alternatively, would 

the proposed margin conditions create 

competitive disadvantages for Covered 

Entities applying substituted 

compliance with respect to Exchange 

Act rule 18a–3 compared to SBS Entities 

complying with Exchange Act rule 18a– 

3? Please describe the competitive 

advantages or disadvantages and 

explain their impact. 

Please identify and describe any 

potential impacts on the way Covered 

Entities currently conduct their business 

with respect to implementing the 

proposed margin conditions. 

Commenters also are invited to 

address any differences between 

German requirements and the French 

and UK requirements that formed the 

basis for the Commission’s conditional 

grants of substituted compliance for 

margin in the French and UK Orders.187

Are there reasons to take a different 

approach with respect to substituted 

compliance in a final German amended 

order than was taken in the French and 

UK Orders with respect to margin? If so, 

identify the differences and explain why 

they should result in a different 

approach. 

B. Trade Acknowledgment and 

Verification, and Trading Relationship 

Documentation 

Commenters are invited to address all 

aspects of the proposed amendments 

related to trade acknowledgment and 


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verification, and trading relationship 

documentation. In this regard 

commenters are invited to address the 

efficacy of the proposed EMIR-related 

general conditions. Commenters also are 

invited to address the proposed removal 

of MiFID conditions in connection with 

substituted compliance for the trade 

acknowledgment and verification 

requirements and trading relationship 

documentation requirements. 

C. Recordkeeping, Reporting, 

Notification, and Securities Count 

Requirements 

The Commission requests comment 

regarding the proposed grant of 

substituted compliance in connection 

with requirements under the Exchange 

Act related to recordkeeping, reporting, 

notification, and securities counts 

applicable to SBS Entities without a 

prudential regulator as well as the 

requirements of Exchange Act section 

15F(g) applicable to all SBS Entities. 

Commenters particularly are invited to 

address the basis for substituted 

compliance in connection with those 

requirements, and the proposed 

conditions and limitations connected to 

substituted compliance for those 

requirements. Do EU and German 

requirements taken as a whole produce 

regulatory outcomes that are comparable 

to those of Exchange Act section 15F(g) 

and Exchange Act rules 18a–5, 18a–6, 

18a–7, 18a–8, and 18a–9? In this regard, 

commenters are invited to address the 

EU and German laws cited for each 

substituted compliance determination 

with respect to the distinct requirements 

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

6, 18a–7, and 18a–8 (i.e., the rules for 

which a more granular approach to 

substituted compliance is being taken). 

With respect to each substituted 

compliance determination, the 

Commission seeks comment on the 

following matters: (1) Will the EU and 

German laws cited for the determination 

result in a comparable regulatory 

outcome; (2) are there additional or 

alternative EU and German laws that 

should be cited to achieve a comparable 

regulatory outcome; and (3) are any of 

the EU and German laws cited for the 

determination unnecessary to achieve a 

comparable regulatory outcome? 

Commenters particularly are invited 

to address the proposed condition with 

respect to Exchange Act rule 18a–5 that 

a Covered Entity without a prudential 

regulator preserve all of the data 

elements necessary to create the records 

required by Exchange Act rules 18a– 

5(a)(1), (2), (3), (4), and (7). Do the 

relevant EU and German laws require 

Covered Entities without a prudential 

regulator to retain the data elements 

necessary to create the records required 

by these rules? If not, please identify 

which data elements are not preserved 

pursuant to the relevant EU and German 

laws. Further, how burdensome would 

it be for a Covered Entity without a 

prudential regulator to format the data 

elements into the records required by 

these rules (e.g., a blotter, ledger, or 

securities record, as applicable) if the 

firm was requested to do so? In what 

formats do Covered Entities without a 

prudential regulator in the Germany 

produce this information to EU and 

German authorities? How do those 

formats differ from the formats required 

by Exchange Act rules 18a–5(a)(1), (2), 

(3), (4), and (7)? 

Is it appropriate to structure the 

Commission’s substituted compliance 

determinations in the proposed 

Amended Order with respect to the 

recordkeeping, reporting and 

notification rules to provide Covered 

Entities with greater flexibility to select 

which distinct requirements within the 

broader recordkeeping, reporting, and 

notification rules for which they want to 

apply substituted compliance? Explain 

why or why not. For example, would it 

be more efficient for a Covered Entity to 

comply with certain Exchange Act 

requirements within a given 

recordkeeping or reporting rule (rather 

than apply substituted compliance) 

because it can utilize systems that its 

affiliated broker-dealer has 

implemented to comply with them? If 

so, explain why. If not, explain why not. 

Is it appropriate to permit Covered 

Entities to take a more granular 

approach to the requirements within 

these recordkeeping rules? For example, 

would this approach make it more 

difficult for the Commission to get a 

comprehensive understanding of the 

Covered Entity’s security-based swap 

activities and financial condition? 

Explain why or why not. Would it be 

overly complex for the Covered Entity to 

administer a firm-wide recordkeeping 

system under this approach? Explain 

why or why not. 

Certain of the Commission’s 

recordkeeping, reporting, and 

notification requirements are fully or 

partially linked to substantive Exchange 

Act requirements for which a 

preliminary positive substituted 

compliance determination would not be 

made under the proposed Amended 

Order. In these cases, should the 

Commission not make a positive 

substituted compliance determination 

for the fully linked requirement in the 

recordkeeping, reporting, and 

notification rules or to the portion of the 

requirement that is linked to a 

substantive Exchange Act requirement? 

Explain why or why not. 

Certain of the requirements in the 

Commission’s recordkeeping, reporting, 

and notification rules are linked to 

substantive Exchange Act requirements 

where a preliminary positive substituted 

compliance determination would be 

made under the proposed Amended 

Order. In these cases, should a positive 

substituted compliance determination 

for the linked requirement in the 

recordkeeping, reporting, or notification 

rule be conditioned on the Covered 

Entity applying substituted compliance 

to the linked substantive Exchange Act 

requirement? If not, explain why. 

Should this be the case regardless of 

whether the requirement is fully or 

partially linked to the substantive 

Exchange Act requirement? If not, 

explain why. 

While certain recordkeeping and 

reporting requirements are not expressly 

linked to Exchange Act rule 18a–1, they 

would be important to the 

Commission’s ability to monitor or 

examine for compliance with the capital 

requirements under this rule. The 

records also would assist the firm in 

monitoring its net capital position and, 

therefore, in complying with Exchange 

rule 18a–1 and its appendices. Should 

a positive substituted compliance 

determination with respect to these 

recordkeeping and reporting 

requirements be subject to the condition 

that the Covered Entity applies 

substituted compliance with respect to 

Exchange Act rule 18a–1 and its 

appendices? If not, explain why. 

Commenters also are invited to 

address the proposal that a positive 

substituted compliance determination 

with respect to Exchange Act rule 18a– 

7 would be conditioned on the Covered 

Entity without a prudential regulator 

filing financial and operational 

information with the Commission in the 

manner and format specified by the 

Commission by order or rule. In 

addition to requesting comment about 

how Covered Entities without a 

prudential regulator should meet the 

Manner and Format Condition, the 

Commission continues to seek comment 

on the how Covered Entities with a 

prudential regulator should meet this 

condition. With respect to the FOCUS 

Report Part II, not all of the line items 

on the report may be as pertinent to a 

Covered Entity without a prudential 

regulator if a positive substituted 

compliance determination is made with 

respect to capital or margin. With 

respect to the FOCUS Report Part IIC, 

because the Commission does not have 

responsibility to administer capital and 

margin requirements for prudentially 


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188See French Order, 86 FR 41648–57; UK Order, 

86 FR 43359–69. 189 17 CFR 200.30–3(a)(89). 

regulated Covered Entities, the FOCUS 

Report Part IIC elicits much less 

information than the FOCUS Report Part 

II or the financial reports Covered 

Entities file with EU and/or German 

authorities. Should the Commission 

require Covered Entities to file the 

financial and operational information 

using the FOCUS Report Part II (if not 

prudentially regulated) or Part IIC (if 

prudentially regulated)? Are there line 

items on the FOCUS Report Part II or 

Part IIC that elicit information that is 

not included in the reports Covered 

Entities file with EU and/or German 

authorities? If so, do Covered Entities 

record that information in their required 

books and records? Please identify any 

information that is elicited in the 

FOCUS Report Part II (if not 

prudentially regulated) or Part IIC (if 

prudentially regulated) that is not: (1) 

Included in the financial reports filed by 

Covered Entities with EU and/or 

German authorities; or (2) recorded in 

the books and records required of 

Covered Entities. With respect to the 

FOCUS Report Part IIC, would the 

answer to these questions change if 

references to FFIEC Form 031 were not 

included in the FOCUS Report Part IIC? 

If so, how? 

As a preliminary matter, as a 

condition of substituted compliance 

should Covered Entities file a limited 

amount of financial and operational 

information on the FOCUS Report Part 

II (if not prudentially regulated) or Part 

IIC (if prudentially regulated) for a 

period of two years to further evaluate 

the burden of requiring all applicable 

line items to be filled out? If so, which 

line items should be required? To the 

extent that Covered Entities otherwise 

report or record information that is 

responsive to the FOCUS Report Part II 

or Part IIC, how could the information 

on these reports be integrated into a 

database of filings the Commission or its 

designee will maintain for filers of the 

FOCUS Report Parts II and IIC (e.g., the 

eFOCUS system) to achieve the 

objective of being able to perform crossform analysis of information entered 

into the uniquely numbered line items 

on the forms? 

Commenters also are invited to 

address the proposed conditions to 

applying substituted compliance for the 

requirement of Exchange Act rule 18a– 

7 that Covered Entities without a 

prudential regulator file annual audited 

reports. For example, comment is 

sought on the first and third conditions 

that the Covered Entity simultaneously 

transmit to the Commission a copy of 

the financial statements the Covered 

Entity is required to file annually with 

EU and/or German authorities, and, if 

not already required, that the Covered 

Entity engage an independent public 

accountant to prepare a report covering 

the annual financial statements. Are 

there any concerns with the 

Commission accepting financial 

statements that are prepared in 

accordance with EU or German GAAP 

and audited by an independent public 

accountant in accordance with EU or 

German GAAS? In addition, are there 

any concerns with the public 

accountant being independent in 

accordance with EU or German 

requirements? Further, the third 

proposed condition would require 

Covered Entities that are not required 

under German law to file a report of an 

independent public accountant covering 

their financial statements to file such an 

accountant’s report. This proposed 

condition is based on the fact that 

German law only requires certain 

investment firms (depending on their 

size) to have their financial statements 

audited. Do the firms in Germany that 

are not subject to the requirement to file 

audited financial reports engage in 

security-based swap activities? If so, are 

they likely to register with the 

Commission as a non-prudentially 

regulated security-based swap dealer or 

major security-based swap participant? 

Commenters also are invited to 

address any differences between 

German requirements and the French 

and UK requirements that formed the 

basis for the Commission’s conditional 

grants of substituted compliance for 

recordkeeping, reporting, notification, 

and securities count requirements in the 

French and UK Orders.188 Are there 

reasons to take a different approach 

with respect to substituted compliance 

in a final German amended order than 

was taken in the French and UK Orders 

with respect to these requirements? If 

so, identify the differences and explain 

why they should result in a different 

approach. 

D. Additional Aspects of the Proposal 

Commenters further are invited to 

address the proposed amendments to 

the Order related to written notice of a 

Covered Entity’s intent to rely on 

substituted compliance, regarding the 

incorporation of references to MiFIR 

into the general condition related to EU 

cross-border issues, and the additional 

MOU condition. Commenters are also 

invited to address the changes to the 

requirements for CCO reports, and the 

provisions added and deleted from the 

sections on risk control, internal 

supervision and counterparty protection 

requirements. 

In addition, commenters are invited to 

address how the Commission should 

weigh considerations related to 

supervisory and enforcement 

effectiveness related to capital and 

margin, including considerations 

regarding relevant EU and German 

supervisory and enforcement authority, 

practices and tools related to capital and 

margin. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority,189

J. Matthew DeLesDernier, 

Assistant Secretary. 

Attachment A 

It Is Hereby Determined and Ordered, 

pursuant to rule 3a71–6 under the Exchange 

Act, that a Covered Entity (as defined in 

paragraph (g)(1) of this Order) may satisfy the 

requirements under the Exchange Act that 

are addressed in paragraphs (b) through (f) of 

this Order so long as the Covered Entity is 

subject to and complies with relevant 

requirements of the Federal Republic of 

Germany and the European Union and with 

the conditions of this Order, as amended or 

superseded from time to time. 

(a) General Conditions 

This Order is subject to the following 

general conditions, in addition to the 

conditions specified in paragraphs (b) 

through (f): 

(1) Activities as MiFID ‘‘investment services 

or activities.’’ For each condition in 

paragraphs (b) through (f) of this Order that 

requires the application of, and the Covered 

Entity’s compliance with, provisions of 

MiFID, provisions of WpHG that implement 

MiFID, and/or other EU and German 

requirements adopted pursuant to those 

provisions, the Covered Entity’s relevant 

security-based swap activities constitute 

‘‘investment services’’ or ‘‘investment 

activities,’’ as defined in MiFID article 4(1)(2) 

and in WpHG section 2(8), and fall within 

the scope of the Covered Entity’s 

authorization from BaFin to provide 

investment services and/or perform 

investment activities in the Federal Republic 

of Germany. 

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

each condition in paragraphs (b) through (f) 

of this Order that requires the application of, 

and the Covered Entity’s compliance with, 

provisions of MiFID, provisions of WpHG 

that implement MiFID and/or other EU and 

German requirements adopted pursuant to 

those provisions, the relevant counterparty 

(or potential counterparty) to the Covered 

Entity is a ‘‘client’’ (or potential ‘‘client’’), as 

defined in MiFID article 4(1)(9) and in WpHG 

section 67(1). 

(3) Security-based swaps as MiFID 

‘‘financial instruments.’’ For each condition 

in paragraphs (b) through (f) of this Order 

that requires the application of, and the 

Covered Entity’s compliance with, provisions 


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of MiFID, provisions of WpHG that 

implement MiFID and/or other EU and 

German requirements adopted pursuant to 

those provisions, the relevant security-based 

swap is a ‘‘financial instrument,’’ as defined 

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

section 2(4). 

(4) Covered Entity as CRD/CRR 

‘‘institution.’’ For each condition in 

paragraphs (b) through (f) of this Order that 

requires the application of, and the Covered 

Entity’s compliance with, the provisions of 

CRD, provisions of KWG that implement 

CRD, CRR and/or other EU and German 

requirements adopted pursuant to those 

provisions, the Covered Entity is an 

‘‘institution,’’ as defined in CRD article 

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

section 1(1b). 

(5) Counterparties as EMIR 

‘‘counterparties.’’ For each condition in 

paragraphs (b) through (f) of this Order that 

requires the application of, and the Covered 

Entity’s compliance with, provisions of 

EMIR, EMIR RTS, EMIR Margin RTS and/or 

other EU requirements adopted pursuant to 

those provisions, if the relevant provision 

applies only to the Covered Entity’s activities 

with specified types of counterparties, and if 

the counterparty to the Covered Entity is not 

any of the specified types of counterparty, 

the Covered Entity complies with the 

applicable condition of this Order: 

(i) As if the counterparty were the specified 

type of counterparty; in this regard, if the 

Covered Entity reasonably determines that 

the counterparty would be a financial 

counterparty if it were established in the EU 

and authorized by an appropriate EU 

authority, it must treat the counterparty as if 

the counterparty were a financial 

counterparty; and 

(ii) Without regard to the application of 

EMIR article 13. 

(6) Security-based swap status under EMIR. 

For each condition in paragraphs (b) through 

(f) of this Order that requires the application 

of, and the Covered Entity’s compliance with, 

provisions of EMIR and/or other EU 

requirements adopted pursuant to those 

provisions, either: 

(i) The relevant security-based swap is an 

‘‘OTC derivative’’ or ‘‘OTC derivative 

contract,’’ as defined in EMIR article 2(7), 

that has not been cleared by a central 

counterparty and otherwise is subject to the 

provisions of EMIR article 11, EMIR RTS 

articles 11–15, and EMIR Margin RTS article 

2; or 

(ii) The relevant security-based swap has 

been cleared by a central counterparty that is 

authorized or recognized to clear derivatives 

contracts by a relevant authority in the EU. 

(7) Memorandum of Understanding with 

BaFin. The Commission and BaFin have a 

supervisory and enforcement memorandum 

of understanding and/or other arrangement 

addressing cooperation with respect to this 

Order at the time the Covered Entity 

complies with the relevant requirements 

under the Exchange Act via compliance with 

one or more provisions of this Order. 

(8) Memorandum of Understanding 

Regarding ECB-Owned Information. The 

Commission and the ECB have a supervisory 

and enforcement memorandum of 

understanding and/or other arrangement 

addressing cooperation with respect to this 

Order as it pertains to information owned by 

the ECB at the time the Covered Entity 

complies with the relevant requirements 

under the Exchange Act via compliance with 

one or more provisions of this Order. 

(9) Notice to Commission. A Covered 

Entity relying on this Order must provide 

notice of its intent to rely on this Order by 

notifying the Commission in writing. Such 

notice must be sent to the Commission in the 

manner specified on the Commission’s 

website. The notice must include the contact 

information of an individual who can 

provide further information about the matter 

that is the subject of the notice. The notice 

must also identify each specific substituted 

compliance determination within paragraphs 

(b) through (f) of the Order for which the 

Covered Entity intends to apply substituted 

compliance. A Covered Entity must promptly 

provide an amended notice if it modifies its 

reliance on the substituted compliance 

determinations in this Order. 

(10) European Union Cross-Border Matters. 

(i) If, in relation to a particular service 

provided by a Covered Entity, responsibility 

for ensuring compliance with any provision 

of MiFID or MiFIR or any other EU or 

German requirement adopted pursuant to 

MiFID or MiFIR listed in paragraphs (b) 

through (f) of this Order is allocated to an 

authority of the Member State of the 

European Union in whose territory a Covered 

Entity provides the service, BaFin must be 

the authority responsible for supervision and 

enforcement of that provision or requirement 

in relation to the particular service. 

(ii) If responsibility for ensuring 

compliance with any provision of MAR or 

any other EU requirement adopted pursuant 

to MAR listed in paragraphs (b) through (f) 

of this Order is allocated to one or more 

authorities of a Member State of the 

European Union, one of such authorities 

must be BaFin. 

(11) Notification Requirements Related to 

Changes in Capital. A Covered Entity that is 

prudentially regulated relying on this Order 

must apply substituted compliance with 

respect to the requirements of Exchange Act 

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

Exchange Act rule 18a–8(h) as applied to 

Exchange Act rule 18a–8(c). 

(b) Substituted Compliance in Connection 

With Risk Control Requirements 

This Order extends to the following 

provisions related to risk control: 

(1) Internal risk management. The 

requirements of Exchange Act section 

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

rule 15Fh–3(h)(2)(iii)(I), provided that the 

Covered Entity is subject to and complies 

with the requirements of: MiFID articles 16 

and 23; WpHG sections 63, 80, 83 and 84; 

MiFID Org Reg articles 21–37, 72–76 and 

Annex IV; CRD articles 74, 76 and 79–87, 

88(1), 91(1)–(2), 91(7)–(9) and 92, 94 and 95; 

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

25c(2)), 25d (other than 25d(3) and 25d(11)), 

25e and 25f; CRR articles 286–88 and 293; 

and EMIR Margin RTS article 2. 

(2) Trade acknowledgement and 

verification. The requirements of Exchange 

Act rule 15Fi–2, provided that the Covered 

Entity is subject to and complies with the 

requirements of EMIR article 11(1)(a) and 

EMIR RTS article 12. 

(3) Portfolio reconciliation and dispute 

reporting. The requirements of Exchange Act 

rule 15Fi–3, provided that: 

(i) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 11(1)(b) and EMIR RTS articles 13 and 

15; and 

(ii) The Covered Entity provides the 

Commission with reports regarding disputes 

between counterparties on the same basis as 

it provides those reports to competent 

authorities pursuant to EMIR RTS article 

15(2). 

(4) Portfolio compression. The 

requirements of Exchange Act rule 15Fi–4, 

provided that the Covered Entity is subject to 

and complies with the requirements of EMIR 

RTS article 14. 

(5) Trading relationship documentation. 

The requirements of Exchange Act rule 15Fi– 

5, other than paragraph (b)(5) to that rule 

when the counterparty is a U.S. person, 

provided that the Covered Entity is subject to 

and complies with the requirements of EMIR 

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

EMIR Margin RTS article 2. 

(c) Substituted Compliance in Connection 

With Capital and Margin 

(1) Capital. The requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1, and 18a–1a through d, provided that: 

(i) The Covered Entity is subject to and 

complies with: CRR, Part One (General 

Provisions) Article 6(1), Part Two (Own 

Funds), Part Three (Capital Requirements), 

Part Four (Large Exposures), Part Five 

(Exposures to Transferred Credit Risk), Part 

Six (Liquidity), and Part Seven (Leverage); 

MiFID Org Reg article 23; BRRD, articles 

45(6) and 81(1); CRD, articles 73, 79, 86, 129, 

129(1), 130, 130(1), 130(5), 131, 133, 133(1), 

133(4), 141, 142(1) and (2); EMIR Margin 

RTS, articles 2, 3(b), 7, and 19(1)(d) and (e), 

(3) and (8); KWG, sections 10b–10h, 10i(2)– 

(9), 25a(1) sentence 3 no. 2 and no. 3 b), 33(1) 

sentence 1c); SAG, section 49(2), 49d, 62(1), 

138(1); and SolvV, section 37; 

(ii) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rules 18a–5(a)(9), 18a–6(b)(1)(x), and 

18a–8(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and 

(b)(4) pursuant to this Order; and 

(iii)(A) The Covered Entity: 

(1) Maintains liquid assets as defined in 

paragraph (c)(1)(iii)(B) that have an aggregate 

market value that exceeds the amount of the 

Covered Entity’s total liabilities by at least 

$100 million before applying the deduction 

specified in paragraph (c)(1)(iii)(C) and by at 

least $20 million after applying the 

deduction specified in paragraph 

(c)(1)(iii)(C); 

(2) Makes and preserves for three years a 

quarterly record that: 

(a) Identifies and values the liquid assets 

maintained pursuant to paragraph 

(c)(1)(iii)(A)(1); 

(b) Compares the amount of the aggregate 

value the liquid assets maintained pursuant 

to paragraph (c)(1)(iii)(A)(1) to the amount of 

the Covered Entity’s total liabilities and 


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shows the amount of the difference between 

the two amounts (‘‘the excess liquid assets 

amount’’); and 

(c) Shows the amount of the deduction 

specified in paragraph (c)(1)(iii)(C) and the 

amount that deduction reduces the excess 

liquid assets amount; 

(3) The Covered Entity notifies the 

Commission in writing within 24 hours in 

the manner specified on the Commission’s 

website if the Covered Entity fails to meet the 

requirements of paragraph (c)(iii)(A)(1) and 

includes in the notice the contact 

information of an individual who can 

provide further information about the failure 

to meet the requirements; and 

(4) Includes its most recent statement of 

financial condition filed with its local 

supervisor (whether audited or unaudited) 

with its initial written notice to the 

Commission of its intent to rely on 

substituted compliance under condition 

(a)(9) above. 

(B) For the purposes of paragraph 

(c)(1)(iii)(A)(1), liquid assets are: 

(1) Cash and cash equivalents; 

(2) Collateralized agreements; 

(3) Customer and other trading related 

receivables; 

(4) Trading and financial assets; and 

(5) Initial margin posted by the Covered 

Entity to a counterparty or a third-party 

custodian, provided: 

(a) The initial margin requirement is 

funded by a fully executed written loan 

agreement with an affiliate of the Covered 

Entity; 

(b) The loan agreement provides that the 

lender waives re-payment of the loan until 

the initial margin is returned to the Covered 

Entity; and 

(c) The liability of the Covered Entity to the 

lender can be fully satisfied by delivering the 

collateral serving as initial margin to the 

lender. 

(C) The deduction required by paragraph 

(c)(1)(iii)(A) is the amount of the Covered 

Entity’s risk-weighted assets calculated for 

the purposes of the capital requirements 

identified in paragraph (c)(1)(i) divided by 

12.5. 

(2) Margin. The requirements of Exchange 

Act section 15F(e) and Exchange Act rule 

18a–3, provided that: 

(i) The Covered Entity is subject to and 

complies with the requirements of: EMIR 

article 11; EMIR Margin RTS; CRR articles 

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

286(7), 290, 295, 296(2)(b), 297(1), 297(3), 

and 298(1); MiFID Org Reg article 23(1); CRD 

articles 74 and 79(b); and KWG section 

25a(1); 

(ii) The Covered Entity collects variation 

margin, as defined in EMIR Margin RTS, 

from a counterparty with respect to 

transactions in non-cleared security-based 

swaps, unless the counterparty would qualify 

for an exception from the collateral collection 

requirements under paragraph (c)(1)(iii) or 

(c)(2)(iii) of Exchange Act 18a–3; 

(iii) The Covered Entity collects initial 

margin, as defined in the EMIR Margin RTS, 

from a counterparty with respect to 

transactions in non-cleared security-based 

swaps, unless the counterparty would qualify 

for an exception from the collateral collection 

requirements under paragraph (c)(1)(iii) of 

Exchange Act rule 18a–3; and 

(iv) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rule 18a–5(a)(12) pursuant to this Order. 

(d) Substituted Compliance in Connection 

With Internal Supervision and Compliance 

Requirements and Certain Exchange Act 

Section 15F(j) Requirements 

This Order extends to the following 

provisions related to internal supervision and 

compliance and Exchange Act section 15F(j) 

requirements: 

(1) Internal supervision. The requirements 

of Exchange Act rule 15Fh–3(h) and 

Exchange Act sections 15F(j)(4)(A) and (j)(5), 

provided that: 

(i) The Covered Entity is subject to and 

complies with the requirements identified in 

paragraph (d)(3) of this Order; 

(ii) The Covered Entity complies with 

paragraph (d)(4) of this Order; and 

(iii) This paragraph (d) does not extend to 

the requirements of paragraph (h)(2)(iii)(I) to 

rule 15Fh–3 to the extent those requirements 

pertain to compliance with Exchange Act 

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

to the general and supporting provisions of 

paragraph (h) to rule 15Fh–3 in connection 

with those Exchange Act sections. 

(2) Chief compliance officers. The 

requirements of Exchange Act section 15F(k) 

and Exchange Act rule 15Fk–1, provided 

that: 

(i) The Covered Entity is subject to and 

complies with the requirements identified in 

paragraph (d)(3) of this Order; 

(ii) All reports required pursuant to MiFID 

Org Reg article 22(2)(c) must also: 

(A) Be provided to the Commission at least 

annually, and in the English language; 

(B) Include a certification signed by the 

chief compliance officer or senior officer (as 

defined in Exchange Act rule 15Fk–1(e)(2)) of 

the Covered Entity that, to the best of the 

certifier’s knowledge and reasonable belief 

and under penalty of law, the report is 

accurate and complete in all material 

respects; 

(C) Address the Covered Entity’s 

compliance with: 

(i) Applicable requirements under the 

Exchange Act; and 

(ii) The other applicable conditions of this 

Order in connection with requirements for 

which the Covered Entity is relying on this 

Order; 

(D) Be provided to the Commission no later 

than 15 days following the earlier of: 

(i) The submission of the report to the 

Covered Entity’s management body; or 

(ii) The time the report is required to be 

submitted to the management body; and 

(E) Together cover the entire period that 

the Covered Entity’s annual compliance 

report referenced in Exchange Act section 

15F(k)(3) and Exchange Act rule 15Fk–1(c) 

would be required to cover. 

(3) Applicable supervisory and compliance 

requirements. Paragraphs (d)(1) and (d)(2) are 

conditioned on the Covered Entity being 

subject to and complying with the following 

requirements: MiFID articles 16 and 23; 

WpHG sections 63, 80, 83 and 84; MiFID Org 

Reg articles 21–37, 72–76 and Annex IV; CRD 

articles 74, 76, 79–87, 88(1), 91(1)–(2), 91(7)– 

(9) and 92, 94 and 95; and KWG sections 25a, 

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

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

articles 286–88 and 293; and EMIR Margin 

RTS article 2. 

(4) Additional condition to paragraph 

(d)(1). Paragraph (d)(1) further is conditioned 

on the requirement that the Covered Entity 

complies with the provisions specified in 

paragraph (d)(3) as if those provisions also 

require compliance with: 

(i) Applicable requirements under the 

Exchange Act; and 

(ii) The other applicable conditions of this 

Order in connection with requirements for 

which the Covered Entity is relying on this 

Order. 

(e) Substituted Compliance in Connection 

With Counterparty Protection Requirements 

This Order extends to the following 

provisions related to counterparty protection: 

(1) Disclosure of information regarding 

material risks and characteristics. The 

requirements of Exchange Act rule 15Fh–3(b) 

relating to disclosure of material risks and 

characteristics of one or more security-based 

swaps subject thereto, provided that the 

Covered Entity, in relation to that securitybased swap, is subject to and complies with 

the requirements of MiFID article 24(4), 

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

Org Reg articles 48–50. 

(2) Disclosure of information regarding 

material incentives or conflicts of interest. 

The requirements of Exchange Act rule 

15Fh–3(b) relating to disclosure of material 

incentives or conflicts of interest that a 

Covered Entity may have in connection with 

one or more security-based swaps subject 

thereto, provided that the Covered Entity, in 

relation to that security-based swap, is 

subject to and complies with the 

requirements of either: 

(i) MiFID article 23(2)–(3); WpHG section 

63(2); and MiFID Org Reg articles 33–35; 

(ii) MiFID article 24(9); WpHG section 70; 

and MiFID Delegated Directive article 11(5); 

or 

(iii) MAR article 20(1) and MAR 

Investment Recommendations Regulation 

articles 5 and 6. 

(3) ‘‘Know your counterparty.’’ The 

requirements of Exchange Act rule 15Fh– 

3(e), as applied to one or more security-based 

swap counterparties subject thereto, provided 

that the Covered Entity, in relation to the 

relevant security-based swap counterparty, is 

subject to and complies with the 

requirements of MiFID article 16(2); WpHG 

section 80(1); MiFID Org Reg articles 21–22, 

25–26 and applicable parts of Annex I; CRD 

articles 74(1) and 85(1); KWG section 25a; 

MLD articles 11 and 13; GwG sections 10–11; 

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

internal policies, controls and procedures 

regarding recordkeeping of customer due 

diligence activities; and GwG section 6(1)–(2) 

as applied to vigilance measures regarding 

recordkeeping of customer due diligence 

activities. 

(4) Suitability. The requirements of 

Exchange Act rule 15Fh–3(f), as applied to 

one or more recommendations of a securitybased swap or trading strategy involving a 


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security-based swap subject thereto, provided 

that: 

(i) The Covered Entity, in relation to the 

relevant recommendation, is subject to and 

complies with the requirements of MiFID 

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

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

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

54 and 55; and 

(ii) The counterparty to which the Covered 

Entity makes the recommendation is a 

‘‘professional client’’ mentioned in MiFID 

Annex II section I and WpHG section 67(2) 

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

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

Exchange Act rule 15Fh–2(d). 

(5) Fair and balanced communications. 

The requirements of Exchange Act rule 

15Fh–3(g), as applied to one or more 

communications subject thereto, provided 

that the Covered Entity, in relation to the 

relevant communication, is subject to and 

complies with the requirements of: 

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

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

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

(ii) MiFID articles 24(4)–(5); WpHG 

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

articles 46–48; MAR articles 12(1)(c), 15 and 

20(1); and MAR Investment 

Recommendations Regulation articles 3 and 

4. 

(6) Daily mark disclosure. The 

requirements of Exchange Act rule 15Fh– 

3(c), as applied to one or more security-based 

swaps subject thereto, provided that the 

Covered Entity is required to reconcile, and 

does reconcile, the portfolio containing the 

relevant security-based swap on each 

business day pursuant to EMIR articles 

11(1)(b) and 11(2) and EMIR RTS article 13. 

(f) Substituted Compliance in Connection 

With Recordkeeping, Reporting, Notification, 

and Securities Count Requirements 

This Order extends to the following 

provisions that apply to a Covered Entity 

related to recordkeeping, reporting, 

notification and securities counts: 

(1)(i) Make and keep current certain 

records. The requirements of the following 

provisions of Exchange Act rule 18a–5, 

provided that the Covered Entity complies 

with the relevant conditions in this 

paragraph (f)(1)(i) and with the applicable 

conditions in paragraph (f)(1)(ii): 

(A) The requirements of Exchange Act rule 

18a–5(a)(1) or (b)(1), as applicable, provided 

that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 74, 75, and Annex IV; and MiFIR 

article 25(1); and 

(2) With respect to the requirements of 

Exchange Act rule 18a–5(a)(1), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order. 

(B) The requirements of Exchange Act rule 

18a–5(a)(2), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRD 

article 73; MiFID Delegated Directive article 

2; MiFID Org Reg articles 72, 74 and 75; 

EMIR article 39(4); KWG section 10a; and 

WpHG section 84; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(C) The requirements of Exchange Act rule 

18a–5(a)(3) or (b)(2), as applicable, provided 

that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID 

Delegated Directive article 2; MiFID Org Reg 

articles 72, 74 and 75; EMIR article 39(4); and 

WpHG section 84; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–5(a)(3), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(D) The requirements of Exchange Act rule 

18a–5(a)(4) or (b)(3), as applicable, provided 

that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

article 103; MiFID articles 16(6), 25(5), and 

25(6); MiFID Org Reg articles 59, 74, 75 and 

Annex IV; MiFIR article 25(1); EMIR articles 

9(2) and 11(1)(a); WpHG sections 63 and 64; 

and 

(2) With respect to the requirements of 

Exchange Act rule 18a–5(a)(4), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(E) The requirements of Exchange Act rule 

18a–5(b)(4) provided that the Covered Entity 

is subject to and complies with the 

requirements of MiFID Org Reg article 59; 

EMIR articles 9(2) and 11(1)(a); MiFID 

articles 16(6), 25(5), and 25(6); and WpHG 

sections 63, 64, and 83 paragraphs 1 and 2; 

(F) The requirements of Exchange Act rule 

18a–5(a)(5) or (b)(5), as applicable, provided 

that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 74, 75 and Annex IV; and MiFIR 

article 25(1); and 

(2) With respect to the requirements of 

Exchange Act rule 18a–5(a)(5), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(G) The requirements of Exchange Act 

rules 18a–5(a)(6) and (a)(15) or (b)(6) and 

(b)(11), as applicable, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 103, 105(3), and 105(10); CRD article 

73; MiFID articles 16(6), 25(5), 25(6); MiFID 

Delegated Directive article 2; MiFID Org Reg 

articles 59, 74, 75, and Annex IV; MiFIR 

article 25(1); EMIR articles 9(2), 11(1)(a), and 

39(4); KWG section 10a; and WpHG sections 

63, 64, 83 paragraphs 1 through 2, and 84; 

and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rule 15Fi–2 pursuant to this Order; 

(H) The requirements of Exchange Act rule 

18a–5(a)(7) or (b)(7), as applicable, provided 

that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFIR 

article 25(1); MLD4 articles 11 and 13; MiFID 

article 25(2); WpHG section 64 paragraph 3; 

and GWG sections 10 and 11; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–5(a)(7), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(I) The requirements of Exchange Act rule 

18a–5(a)(8), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 103, 105(3), and 105(10); MiFID Org 

Reg articles 59, 74, 75 and Annex IV; MiFIR 

article 25(1); EMIR articles 9(2), 11(1)(a), and 

39(4); MiFID articles 16(6), 25(5), and 25(6); 

CRD article 73; MiFID Delegated Directive 

article 2; WpHG sections 63, 64, 83 

paragraphs 1 through 2, and 84; and KWG 

section 10a; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this 

Order.; 

(J) The requirements of Exchange Act rule 

18a–5(a)(9), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRD 

article 73; MiFID Delegated Directive article 

2; EMIR article 39(4); MiFID Org Reg articles 

72, 74, and 75; KWG section 10a; and WpHG 

Section 84; 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

and 

(3) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

5(a)(9) relating to Exchange Act rule 18a–2; 

(K) The requirements of Exchange Act rule 

18a–5(a)(10) and (b)(8), provided that the 

Covered Entity is subject to and complies 

with the requirements of MiFID Org Reg 

articles 21(1)(d), 35; CRD articles 88, 91(1), 

91(8); MiFID article 9(1) and 16(3); KWG 

sections 15, 25a(1), 25c(1) through (3), 

25c(4a), 25d(1) through (3), 25d(7), 25d(11), 

and 36; and WpHG sections 81(1) and 84; 

(L) The requirements of Exchange Act rule 

18a–5(a)(12), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 103, 105(3) and 105(10); MiFID Org 

Reg. articles 72, 74 and 75; CRD article 73; 

MiFID Delegated Directive article 2; KWG 

section 10a; and WpHG section 84; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rule 

18a–3 pursuant to this Order; 

(M) The requirements of Exchange Act rule 

18a–5(a)(17) and (b)(13), as applicable, 

regarding one or more provisions of 

Exchange Act rules 15Fh–3 or 15Fk–1 for 

which substituted compliance is available 

under this Order, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 72, 73, and Annex I; MiFID 

articles 16(6) and 25(2); MLD articles 11 and 

13; EMIR article 39(5); WpHG sections 64 

paragraph 3 and 83 paragraph 1; and GWG 

sections 10 and 11, in each case with respect 

to the relevant security-based swap or 

activity; 


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(2) With respect to the portion of Exchange 

Act rule 18a–5(a)(17) and (b)(13) that relates 

to Exchange Act rule 15Fh–3, the Covered 

Entity applies substituted compliance for 

such business conduct standard(s) of 

Exchange Act rule 15Fh–3 pursuant to this 

Order, as applicable, with respect to the 

relevant security-based swap or activity; and 

(3) With respect to the portion of Exchange 

Act rule 18a–5(a)(17) and (b)(13) that relates 

to Exchange Act rule 15Fk–1, the Covered 

Entity applies substituted compliance for 

Exchange Act section 15F(k) and Exchange 

Act rule 15Fk–1 pursuant to this Order; 

(N) The requirements of Exchange Act rule 

18a–5(a)(18)(i) and (ii) or (b)(14)(i) and (ii), as 

applicable, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

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

15(1)(a); and 

(2) The Covered Entity applies substituted 

compliance for Exchange Act rule 15Fi–3 

pursuant to this Order; and 

(O) The requirements of Exchange Act rule 

18a–5(a)(18)(iii) or (b)(14)(iii), as applicable, 

provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

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

15(1)(a), in each case with respect to such 

security-based swap portfolio(s); and 

(2) The Covered Entity applies substituted 

compliance for Exchange Act rule 15Fi–4 

pursuant to this Order. 

(ii) Paragraph (f)(1)(i) is subject to the 

following further conditions: 

(A) Paragraphs (f)(1)(i)(A) through (D) and 

(H) are subject to the condition that the 

Covered Entity preserves all of the data 

elements necessary to create the records 

required by the applicable Exchange Act 

rules cited in such paragraphs and upon 

request furnishes promptly to representatives 

of the Commission the records required by 

those rules; 

(B) A Covered Entity may apply the 

substituted compliance determination in 

paragraph (f)(1)(i)(M) to records of 

compliance with Exchange Act rule 15Fh– 

3(b), (c), (e), (f) and (g) in respect of one or 

more security-based swaps or activities 

related to security-based swaps; and 

(C) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

5(a)(13), (a)(14), (a)(16), (b)(9), (b)(10) or 

(b)(12). 

(2)(i) Preserve certain records. The 

requirements of the following provisions of 

Exchange Act rule 18a–6, provided that the 

Covered Entity complies with the relevant 

conditions in this paragraph (f)(2)(i) and with 

the applicable conditions in paragraph 

(f)(2)(ii): 

(A) The requirements of Exchange Act rule 

18a–6(a)(1) or (a)(2), as applicable, provided 

that the Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 72, 74, 75, and Annex IV; CRR 

article 103; MiFIR article 25(1); EMIR article 

9(2); MiFID articles 16(6) and 69(2); CRD 

article 73; MiFID Delegated Directive article 

2; WpHG sections 6, 7, 83 paragraph 1, and 

84; and KWG section 10a; 

(B) The requirements of Exchange Act rule 

18a–6(b)(1)(i) or (b)(2)(i), as applicable, 

provided that the Covered Entity is subject to 

and complies with the requirements of MiFID 

Org Reg articles 72, 74, 75, and Annex IV; 

CRR article 103; MiFIR article 25(1); EMIR 

article 9(2); MiFID articles 16(6) and 69(2); 

CRD article 73; MiFID Delegated Directive 

article 2; WpHG sections 6, 7, 83 paragraph 

1, and 84; and KWG section 10a; 

(C) The requirements of Exchange Act rule 

18a–6(b)(1)(ii) and (iii), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 72, 74 and 75; EMIR article 9(2); 

CRD article 73; MiFID Delegated Directive 

article 2; MiFID 16(6); KWG section 10a; and 

WpHG sections 83 paragraph 1, and 84; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(D) The requirements of Exchange Act rule 

18a–6(b)(1)(iv) or (b)(2)(ii), as applicable, 

provided that the Covered Entity is subject to 

and complies with the requirements of CRR 

article 103; MiFID Org Reg articles 72, 73, 74, 

75, 76, Annex I and Annex IV; MiFIR article 

25(1); EMIR article 9(2); CRD article 73; 

MiFID articles 16(6), 16(7); MiFID Delegated 

Directive article 2; KWG section 10a; and 

WpHG sections 83 paragraphs 1 and 3 

through 8, and 84; 

(E) The requirements of Exchange Act rule 

18a–6(b)(1)(v), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); CRR articles 99, 294, 394, 415, 

430 and Part Six: Title II and Title III; CRR 

Reporting ITS article 14 and annexes I–V and 

VIII–XIII; and MiFID Org Reg article 72(1); 

(2) With respect to the requirements of 

Exchange Act rule 18a–6(b)(1)(v), the 

Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant this Order; 

and 

(3) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(v) relating to Exchange Act rule 18a– 

2; 

(F) The requirements of Exchange Act rule 

18a–6(b)(1)(vi) or (b)(2)(iii), as applicable, 

provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); MiFID Org Reg articles 72(1) and 

73; MiFID article 16(6); and WpHG section 83 

paragraph 1; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–6(b)(1)(vi), the 

Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(G) The requirements of Exchange Act rule 

18a–6(b)(1)(vii) or (b)(2)(iv), as applicable, 

provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 72(1) and 73; MiFIR article 25(1); 

EMIR article 9(2); MiFID article 16(6); and 

WpHG section 83 paragraph 1; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–6(b)(1)(vii), the 

Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(H) The requirements of Exchange Act rule 

18a–6(b)(1)(viii), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 99, 294, 394, 415, 430 and Part Six: 

Title II and Title III; CRR Reporting ITS 

article 14 and annexes I–V and VIII–XIII, as 

applicable; and MiFID Org Reg article 72(1); 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rule 18a–7(a)(1), (b), (c) through (h), and 

Exchange Act rule 18a–7(j) as applied to 

these requirements pursuant to this Order; 

(3) With respect to the requirements of 

Exchange Act rule 18a–6(b)(1)(viii), the 

Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(4) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii)(L); and 

(5) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii)(M) relating to Exchange Act rule 

18a–2. 

(I) The requirements of Exchange Act rule 

18a–6(b)(1)(ix), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 22(3)(c), 23, 24, 25(2), 26, 

29(2)(c), 35 and 72(1); CRR articles 176, 286 

and 293(1)(d); EMIR RTS; EMIR article 9(2); 

MiFID articles 16(2), 16(3), 16(5), 24(9); 

MiFID Delegated Directive article 11; CRD 

article 73, 75–87; WpHG sections 64 

paragraph 3, 70, 80 paragraph 6, and 84; 

WpDVerOV section 6; and KWG sections 10a, 

25a, 25c(3)(3), 25c(3)(4), 25c(4a), 25d(6), 

25(8); and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(J) The requirements of Exchange Act rule 

18a–6(b)(1)(x), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); MiFID Org Reg article 72(1); CRD 

article 73; MiFID article 16(6); KWG section 

10a; and WpHG section 83 paragraph 1; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(K) The requirements of Exchange Act rule 

18a–6(b)(1)(xii) or (b)(2)(vii), as applicable, 

regarding one or more provisions of 

Exchange Act rules 15Fh–3 or 15Fk–1 for 

which substituted compliance is available 

under this Order, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); MLD4 articles 11 and 13; MiFID 

Org Reg article 72(1); MiFID article 16(6); 

GWG sections 10 and 11; and WpHG section 

83 paragraph 1, in each case with respect to 

the relevant security-based swap or activity; 

(2) With respect to the portion of Exchange 

Act rule 18a–6(b)(1)(xii) or (b)(2)(vii) that 

relates to Exchange Act rule 15Fh–3, the 

Covered Entity applies substituted 

compliance for such business conduct 

standard(s) of Exchange Act rule 15Fh–3 


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pursuant to this Order, as applicable, with 

respect to the relevant security-based swap or 

activity; and 

(3) With respect to the portion of Exchange 

Act rule 18a–6(b)(1)(xii) or (b)(2)(vii), as 

applicable, that relates to Exchange Act rule 

15Fk–1, the Covered Entity applies 

substituted compliance for Exchange Act 

section 15F(k) and Exchange Act rule 

15Fk–1 pursuant to this Order; 

(L) The requirements of Exchange Act rule 

18a–6(c), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 21(1)(f) and 72(1); MiFID article 

16(6); and WpHG section 83 paragraph 1; and 

(2) This Order does not extend to the 

requirements of Exchange act rule 18a–6(c) 

relating to Forms SBSE, SBSE–A, SBSE–C, 

SBSE–W, all amendments to these forms, and 

all other licenses or other documentation 

showing the registration of the Covered 

Entity with any securities regulatory 

authority or the U.S. Commodity Futures 

Trading Commission; 

(M) The requirements of Exchange Act rule 

18a–6(d)(1), provided that the Covered Entity 

is subject to and complies with the 

requirements of MiFID Org Reg articles 35 

and 72(1); CRD articles 88, 91(1), 91(8); 

MiFID article 9(1), 16(3), 16(6); KWG sections 

25c(1) through (3), 25d(1) through (3), and 

36; and WpHG sections 81(1), 83 paragraph 

1, and 84; 

(N) The requirements of Exchange Act rule 

18a–6(d)(2), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); MiFID Org Reg articles 72(1) and 

72(3); MiFID article 16(6); and WpHG section 

83 paragraph 1; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–6(d)(2)(i), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(O) The requirements of Exchange Act rule 

18a–6(d)(3), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of MiFID Org 

Reg articles 21(1)(f), 72, 73, and Annex I; 

MiFID article 16(6); and WpHG section 83 

paragraph 1; and 

(2) With respect to the requirements of 

Exchange Act rule 18a–6(d)(3)(i), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; 

(P) The requirements of Exchange Act rule 

18a–6(d)(4) and (d)(5), provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 9(2); MiFID Org Reg articles 24, 25(2), 

72(1) and 73; MiFID articles 16(2), 16(6), and 

25(5); and WpHG sections 64 paragraph 3 

and 83 paragraphs 1 and 2; and 

(2) The Covered Entity applies substituted 

compliance for Exchange Act rules 15Fi–3, 

15Fi–4, and 15Fi–5 pursuant to this Order; 

(Q) The requirements of Exchange Act rule 

18a–6(e), provided that the Covered Entity is 

subject to and complies with the 

requirements of MiFID Org Reg articles 21(2), 

58, 72(1) and 72(3); MiFID articles 16(5), 

16(6); and WpHG sections 80 paragraph 6, 

and 83 paragraph 1; and 

(R) The requirements of Exchange Act rule 

18a–6(f), provided that the Covered Entity is 

subject to and complies with the 

requirements of MiFID Org Reg article 31(1); 

MiFID article 16(5); and WpHG section 80 

paragraph 6. 

(ii) Paragraph (f)(2)(i) is subject to the 

following further conditions: 

(A) A Covered Entity may apply the 

substituted compliance determination in 

paragraph (f)(2)(i)(K) to records related to 

Exchange Act rule 15Fh–3(b), (c), (e), (f) and 

(g) in respect of one or more security-based 

swaps or activities related to security-based 

swaps; and 

(B) This Order does not extend to the 

requirements of Exchange Act rule 18a– 

6(b)(1)(xi), (b)(1)(xiii), (b)(2)(v), (b)(2)(vi), or 

(b)(2)(viii). 

(3) File Reports. The requirements of the 

following provisions of Exchange Act rule 

18a–7, provided that the Covered Entity 

complies with the relevant conditions in this 

paragraph (f)(3): 

(i) The requirements of Exchange Act rule 

18a–7(a)(1) or (a)(2), as applicable, and the 

requirements of Exchange Act rule 18a–7(j) 

as applied to the requirements of Exchange 

Act rule 18a–7(a)(1) or (a)(2), as applicable, 

provided that: 

(A) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 99, 394, 430 and Part Six: Title II and 

Title III; CRR Reporting ITS annexes I, II, III, 

IV, V, VIII, IX, X, XI, XII and XIII, as 

applicable; 

(B) The Covered Entity files periodic 

unaudited financial and operational 

information with the Commission or its 

designee in the manner and format required 

by Commission rule or order and presents the 

financial information in the filing in 

accordance with generally accepted 

accounting principles that the Covered Entity 

uses to prepare general purpose publicly 

available or available to be issued financial 

statements in Germany; 

(C) With respect to the requirements of 

Exchange Act rule 18a–7(a)(1), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act section 15F(e) 

and Exchange Act rules 18a–1 through 18a– 

1d pursuant to this Order; and 

(D) With respect to the requirements of 

Exchange Act rule 18a–7(a)(1), the Covered 

Entity applies substituted compliance for the 

requirements of Exchange Act rule 18a– 

6(b)(1)(viii) pursuant to this Order; 

(ii) The requirements of Exchange Act rule 

18a–7(a)(3) and the requirements of Exchange 

Act rule 18a–7(j) as applied to the 

requirements of Exchange Act rule 18a– 

7(a)(3), provided that: 

(A) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 99, 394, 431, 433, 452, 454, and 455; 

CRR Reporting ITS annexes I, II, VIII and IX, 

as applicable; and 

(B) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(iii) The requirements of Exchange Act rule 

18a–7(b), provided that: 

(A) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 431 through 455; and HGB sections 

316 and 325; and 

(B) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rule 18a–6(b)(1)(viii) pursuant to this 

Order. 

(iv) The requirements of Exchange Act rule 

18a–7(c), (d), (e), (f), (g) and (h) and the 

requirements of Exchange Act rule 18a–7(j) 

as applied to the requirements of paragraphs 

(c), (d), (e), (f), (g) and (h) of Exchange Act 

rule 18a–7, provided that: 

(A) The Covered Entity is subject to and 

complies with the requirements of CRR 

articles 26(2), 132(5), 154, 191, 321, 325bi, 

350, 353, 368, 418; HGB sections 316 and 

325; WpHG section 24 and 84, and 89 (1) 

sentence 1 no. 1; and KWG section 26a(1); 

(B) With respect to financial statements the 

Covered Entity is required to file annually 

with the German BaFin, including a report of 

an independent public accountant covering 

the financial statements, the Covered Entity: 

(1) Simultaneously sends a copy of such 

annual financial statements and the report of 

the independent public accountant covering 

the annual financial statements to the 

Commission in the manner specified on the 

Commission’s website; 

(2) Includes with the transmission the 

contact information of an individual who can 

provide further information about the 

financial statements and report; 

(3) Includes with the transmission the 

report of an independent public accountant 

required by Exchange Act rule 18a– 

7(c)(1)(i)(C) covering the annual financial 

statements if German laws do not require the 

Covered Entity to engage an independent 

public accountant to prepare a report 

covering the annual financial statements; 

provided, however, that such report of the 

independent public accountant may be 

prepared in accordance with generally 

accepted auditing standards in Germany that 

the independent public accountant uses to 

perform audit and attestation services and 

the accountant complies with German 

independence requirements; 

(4) Includes with the transmission the 

reports required by Exchange Act rule 18a– 

7(c)(1)(i)(B) and (C) addressing the statements 

identified in Exchange Act rule 18a–7(c)(3) or 

(c)(4), as applicable, that relate to Exchange 

Act rule 18a–4; provided, however, that the 

report of the independent public accountant 

required by Exchange Act rule 18a– 

7(c)(1)(i)(C) may be prepared in accordance 

with generally accepted auditing standards in 

Germany that the independent public 

accountant uses to perform audit and 

attestation services and the accountant 

complies with German independence 

requirements; and 

(5) Includes with the transmission the 

supporting schedules and reconciliations, as 

applicable, required by Exchange Act rules 

18a–7(c)(2)(ii) and (iii), respectively, relating 

to Exchange Act rule 18a–2; and 

(6) Includes with the transmission the 

supporting schedules and reconciliations, as 

applicable, required by Exchange Act rules 

18a–7(c)(2)(ii) and (iii), respectively, relating 

to Exchange Act rules 18a–4 and 18a–4a; 


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(C) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

and 

(D) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act rule 18a–6(b)(1)(viii) pursuant to this 

Order. 

(4)(i) Provide Notification. The 

requirements of the following provisions of 

Exchange Act rule 18a–8, provided that the 

Covered Entity complies with the relevant 

conditions in this paragraph (f)(4)(i) and with 

the applicable conditions in paragraph 

(f)(4)(ii): 

(A) The requirements of paragraphs 

(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) of 

Exchange Act rule 18a–8 and the 

requirements of Exchange Act rule 18a–8(h) 

as applied to the requirements of paragraphs 

(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) of 

Exchange Act rule 18a–8, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of CRR 

article 366(5); KWG section 25a (1) sentence 

6 no. 3; and FinDAG section 4d; and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(B) The requirements of Exchange Act rule 

18a–8(c) and the requirements of Exchange 

Act rule 18a–8(h) as applied to the 

requirements of Exchange Act rule 18a–8(c), 

provided that the Covered Entity is subject to 

and complies with the requirements of KWG 

section 25a(1) sentence 6 no. 3; and FinDAG 

section 4d; 

(C) The requirements of Exchange Act rule 

18a–8(d) and the requirements of Exchange 

Act rule 18a–8(h) as applied to the 

requirements of Exchange Act rule 18a–8(d), 

provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of KWG 

section 25a(1) sentence 6 no. 3; and FinDAG 

section 4d; and 

(2) This Order does not extend to the 

requirements of Exchange Act rule 18a–8(d) 

to give notice with respect to books and 

records required by Exchange Act rule 18a– 

5 for which the Covered Entity does not 

apply substituted compliance pursuant to 

this Order; 

(D) The requirements of Exchange Act rule 

18a–8(e) and the requirements of Exchange 

Act rule 18a–8(h) as applied to the 

requirements of Exchange Act rule 18a–8(e), 

provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of KWG 

section 25a(1) sentence 6 no. 3; and FinDAG 

section 4d; 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order; 

(3) This Order does not extend to the 

requirements of Exchange act rule 18a–8(e) 

relating to Exchange Act rule 18a–2 or to the 

requirements of Exchange Act rule 18a–8(h) 

as applied to the requirements of Exchange 

act rule 18a–8(e) relating to Exchange Act 

rule 18a–2; and 

(4) This Order does not extend to the 

requirements of Exchange act rule 18a–8(e) 

relating to Exchange Act rule 18a–4 or to the 

requirements of Exchange Act rule 18a–8(h) 

as applied to the requirements of Exchange 

Act rule 18a–8(e) relating to Exchange Act 

rule 18a–4; 

(ii) Paragraph (f)(4)(i) is subject to the 

following further conditions: 

(A) The Covered Entity: 

(1) Simultaneously sends a copy of any 

notice required to be sent by German law 

cited in this paragraph of the Order to the 

Commission in the manner specified on the 

Commission’s website; and 

(2) Includes with the transmission the 

contact information of an individual who can 

provide further information about the matter 

that is the subject of the notice; 

(B) This Order does not extend to the 

requirements of paragraphs (a)(2) and (b)(3), 

and of Exchange Act rule 18a–8 relating to 

Exchange Act rule 18a–2 or to the 

requirements of Exchange Act rule 18a–8(h) 

as applied to the requirements of Exchange 

Act rule 18a–8 relating to Exchange Act rule 

18a–2; 

(C) This Order does not extend to the 

requirements or to the requirements of 

Exchange Act rule 18a–8(h) as applied to the 

requirements of paragraph (g) of rule 18a–8. 

(5) Securities Counts. The requirements of 

Exchange Act rule 18a–9, provided that: 

(1) The Covered Entity is subject to and 

complies with the requirements of EMIR 

article 11(1)(b); EMIR RTS articles 12 and 13; 

WpHG section 84; HGB sections 316 and 325; 

and WpHG section 89 (1) sentence 1 no. 1; 

and 

(2) The Covered Entity applies substituted 

compliance for the requirements of Exchange 

Act section 15F(e) and Exchange Act rules 

18a–1 through 18a–1d pursuant to this Order. 

(6) Daily Trading Records. The 

requirements of Exchange Act section 15F(g), 

provided that the Covered Entity is subject to 

and complies with the requirements of 

WpHG section 83 paragraph 1; and MiFID 

Org Reg article 21(1)(f), 21(4), and 72(1). 

(7) Examination and Production of 

Records. Notwithstanding the forgoing 

provisions of paragraph (f) of this Order, this 

Order does not extend to, and Covered 

Entities remain subject to, the requirement of 

Exchange Act section 15F(f) to keep books 

and records open to inspection by any 

representative of the Commission and the 

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

furnish promptly to a representative of the 

Commission legible, true, complete, and 

current copies of those records of the 

Covered Entity that are required to be 

preserved under Exchange Act rule 18a–6, or 

any other records of the Covered Entity that 

are subject to examination or required to be 

made or maintained pursuant to Exchange 

Act section 15F that are requested by a 

representative of the Commission. 

(8) English Translations. Notwithstanding 

the forgoing provisions of paragraph (f) of 

this Order, to the extent documents are not 

prepared in the English language, Covered 

Entities must promptly furnish to a 

representative of the Commission upon 

request an English translation of any record, 

report, or notification of the Covered Entity 

that is required to be made, preserved, filed, 

or subject to examination pursuant to 

Exchange Act section 15F of this Order. 

(g) Definitions. 

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

(i) Is a security-based swap dealer or major 

security-based swap participant registered 

with the Commission; 

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

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

Exchange Act; and 

(iii) Is an investment firm and/or credit 

institution that is authorized by BaFin to 

provide investment services or perform 

investment activities in Germany and is 

supervised by the ECB (or has a licensing 

application pending with the ECB as of 

August 12, 2021) as a significant institution. 

(2) ‘‘MiFID’’ means the ‘‘Markets in 

Financial Instruments Directive,’’ Directive 

2014/65/EU, as amended from time to time. 

(3) ‘‘WpHG’’ means Germany’s 

‘‘Wertpapierhandelsgesetz’’, as amended or 

superseded from time to time. 

(4) ‘‘MiFID Org Reg’’ means Commission 

Delegated Regulation (EU) 2017/565, as 

amended from time to time. 

(5) ‘‘MiFID Delegated Directive’’ means 

Commission Delegated Directive (EU) 2017/ 

593, as amended from time to time. 

(6) ‘‘MLD’’ means Directive (EU) 2015/849, 

as amended from time to time. 

(7) ‘‘GwG’’ means Germany’s 

‘‘Geldwa ̈schegesetz,’’ as amended from time 

to time. 

(8) ‘‘MiFIR’’ means Regulation (EU) 600/ 

2014, as amended from time to time. 

(9) ‘‘EMIR’’ means the ‘‘European Market 

Infrastructure Regulation,’’ Regulation (EU) 

648/2012, as amended from time to time. 

(10) ‘‘EMIR RTS’’ means Commission 

Delegated Regulation (EU) 149/2013, as 

amended from time to time. 

(11) ‘‘EMIR Margin RTS’’ means 

Commission Delegated Regulation (EU) 2016/ 

2251, as amended from time to time. 

(12) ‘‘CRR Reporting ITS’’ means 

Commission Implementing Regulation (EU) 

680/2014, as amended from time to time. 

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

as amended from time to time. 

(14) ‘‘KWG’’ means Germany’s 

‘‘Kreditwesengesetz,’’ as amended from time 

to time. 

(15) ‘‘CRR’’ means Regulation (EU) 575/ 

2013, as amended from time to time. 

(16) ‘‘MAR’’ means the ‘‘Market Abuse 

Regulation,’’ Regulation (EU) 596/2014, as 

amended from time to time. 

(17) ‘‘MAR Investment Recommendations 

Regulation’’ means Commission Delegated 

Regulation (EU) 2016/958, as amended from 

time to time. 

(18) ‘‘FinDAG’’ means Germany’s 

‘‘Finanzdienstleistungsaufsichtsgesetz,’’ as 

amended from time to time. 

(19) ‘‘BaFin’’ means the Bundesanstalt fu ̈r 

Finanzdienstleistungsaufsicht. 

(20) ‘‘ECB’’ means the European Central 

Bank. 

(21) ‘‘WpDVerOV’’ means Germany’s 

‘‘Wertpapierdienstleistungs-Verhaltens- und 

-Organisationsverordnung,’’ as amended from 

time to time. 

(22) ‘‘SAG’’ means Germany’s ‘‘Sanierungsund Abwicklungsgesetz,’’ as amended from 

time to time. 


jbell on DSKJLSW7X2PROD with NOTICES3
46534 Federal Register / Vol. 86, No. 157 / Wednesday, August 18, 2021 / Notices 

(23) ‘‘SolvV’’ means Germany’s 

‘‘Solvabilita ̈tsverordnung,’’ as amended from 

time to time. 

[FR Doc. 2021–17644 Filed 8–17–21; 8:45 am] 

BILLING CODE 8011–01–P 


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