Document ID: SEC-2021-1122-0001
Agency: sec
Document Type: Notice
Title: Application: Security-Based Swap Entities Subject to Regulation in the Federal Republic of Germany; Amendment of Substituted Compliance Determination; Proposed Amendments to Order:
Posted Date: 2021-08-18T04:00Z

[Federal Register Volume 86, Number 157 (Wednesday, August 18, 2021)]
[Notices]
[Pages 46500-46534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17644]

[[Page 46499]]

Vol. 86

Wednesday,

No. 157

August 18, 2021

Part IV

Securities and Exchange Commission

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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; Notice

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

[[Page 46500]]

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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.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
soliciting public comment on an application by the Bundesanstalt 
f[uuml]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\
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    \1\ Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR 85686, 
85687 (Dec. 29, 2020) (``Order'').
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    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\
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    \2\ Id. at 85689-97.
    \3\ Section 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'').
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    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

[[Page 46501]]

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.
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    \4\ Exchange 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'').
    \5\ Exchange 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'').
    \6\ See, 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.
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    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\
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    \7\ Letter from Thorsten P[ouml]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-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap.
    \8\ The 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).
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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 security-based swap business and 
to comply directly with the Exchange Act (or comply with another 
applicable substituted compliance order) for other parts of its 
security-based swap business.
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    \9\ The 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.
    \11\ Transaction-level requirements are the counterparty 
protection requirements and the books and records requirements 
related to those counterparty protection requirements.
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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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    \12\ See 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).
    \13\ See 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 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.

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[[Page 46502]]

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.
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    \14\ See para. (a)(11) of the proposed Amended Order. See also 
French Order, 86 FR 41620-22; UK Order, 86 FR 43330-31.
    \15\ See French Order, 86 FR 41621; UK Order, 86 FR 43330.
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    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).
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    \16\ See 17 CFR 240.18a-8(c).
    \17\ See 17 CFR 240.18a-8(h).
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    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.
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    \18\ These 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.
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    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).
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    \19\ See 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).
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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\
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    \20\ See part III.A, infra.
    \21\ See 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).
    \22\ See article (a)(10) of the proposed Amended Order.
    \23\ See para. (a)(10) of the French Order.
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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'')

[[Page 46503]]

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.
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    \24\ See para. (a)(8) of the proposed Amended Order.
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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\
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    \25\ See paras. (b)(2) and (b)(5) of the proposed Amended Order.
    \26\ See 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.
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    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\
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    \27\ See SIFMA letter I at 5-6.
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    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.
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    \28\ SBS 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).
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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\
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    \29\ The proposed addition of two new EMIR-related 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).
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    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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    \30\ EMIR article 2(8) defines ``financial counterparty'' to 
encompass investment firms, credit institutions, insurers and 
certain other types of businesses that have been authorized in 
accordance with 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.
    \31\ See 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 non-EU 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 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).

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[[Page 46504]]

    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 EU-
recognized 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 EMIR-
related 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\
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    \33\ See 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.
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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.
---------------------------------------------------------------------------

    \34\ See para. (b)(2) of the French Order.
    \35\ See para. (b)(2) of the proposed Amended Order.
---------------------------------------------------------------------------

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

    \36\ See Exchange Act rule 15Fi-5(b)(2).
    \37\ These proposed changes are consistent with the French 
Order. See paras. (a)(5) and (a)(6) of the French Order.
---------------------------------------------------------------------------

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\
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    \38\ See para. (b)(1) of the proposed Amended Order.
    \39\ See para. (d)(3) of the proposed Amended Order.
    \40\ See paras. (b)(1) and (d)(3) of the French Order.
    \41\ See paras. (b)(1) and (d)(3) of the proposed Amended Order.
---------------------------------------------------------------------------

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:

[[Page 46505]]

     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 self-liquidate 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\
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    \42\ Exchange Act rule 18a-1 applies to security-based swap 
dealers that: (1) Do not have a prudential regulator; and (2) are 
either (a) not dually registered with the Commission as a broker-
dealer or (b) are dually registered with the Commission as a special 
purpose broker-dealer known as an OTC derivatives dealer. Security-
based swap dealers that are dually registered with the Commission as 
a full-service broker-dealer are subject to the capital requirements 
of Exchange Act rule 15c3-1 (17 CFR 240.15c3-1) for which 
substituted compliance is not available. See 17 CFR 240.3a71-
6(d)(4)(i) (making substituted compliance available only with 
respect to the capital requirements of Exchange Act section 15F(e) 
and Exchange Act rule 18a-1).
    \43\ See 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).
    \44\ See 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 broker-
dealers. 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).
    \45\ See 17 CFR 240.15c3-4 and 18a-1(f).
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     Margin--Margin requirements pursuant to Exchange Act 
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially 
regulated SBS Entities.\46\ The margin requirements are designed to 
protect SBS Entities from the consequences of a counterparty's 
default.\47\
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    \46\ 17 CFR 240.18a-3.
    \47\ See 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).
---------------------------------------------------------------------------

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

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

    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.
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    \49\ See 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.
    \50\ See paras. (f)(1)(i)(J), (f)(2)(i)(J), and (f)(4)(i)(A) of 
the proposed Amended Order.
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    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

[[Page 46506]]

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 
security-based swap activities.
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    \51\ See 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/.
    \52\ See, 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 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.'').
    \53\ See 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 self-sufficiency (in other words, to account for the lack of 
inexpensive funding sources that are available to banks, such as 
deposits and central bank support).'').
    \54\ See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967), 
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was 
adopted to provide safeguards for public investors by setting 
standards of financial responsibility to be met by brokers and 
dealers. The basic concept of the rule is liquidity; its object 
being to require a broker-dealer to have at all times sufficient 
liquid assets to cover his current indebtedness.'') (footnotes 
omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774 
(June 26, 1973) (Commission release of a letter from the Division of 
Market Regulation) (``The purpose of the net capital rule is to 
require a broker or dealer to have at all times sufficient liquid 
assets to cover its current indebtedness. The need for liquidity has 
long been recognized as vital to the public interest and for the 
protection of investors and is predicated on the belief that 
accounts are not opened and maintained with broker-dealers in 
anticipation of relying upon suit, judgment and execution to collect 
claims but rather on a reasonable demand one can liquidate his cash 
or securities positions.''); Exchange Act Release No. 15426 (Dec. 
21, 1978), 44 FR 1754 (Jan. 8, 1979) (``The rule requires brokers or 
dealers to have sufficient cash or liquid assets to protect the cash 
or securities positions carried in their customers' accounts. The 
thrust of the rule is to insure that a broker or dealer has 
sufficient liquid assets to cover current indebtedness.''); Exchange 
Act Release No. 26402 (Dec. 28, 1988), 54 FR 315 (Jan. 5, 1989) 
(``The rule's design is that broker-dealers maintain liquid assets 
in sufficient amounts to enable them to satisfy promptly their 
liabilities. The rule accomplishes this by requiring broker-dealers 
to maintain liquid assets in excess of their liabilities to protect 
against potential market and credit risks.'') (footnote omitted).
---------------------------------------------------------------------------

    The net liquid assets test is imposed through how an SBS Entity is 
required to compute net capital pursuant to Exchange Act rule 18a-1. 
The first step is to compute the SBS Entity's net worth under 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 mark-to-market value of the SBS Entity's 
proprietary positions (e.g., securities, money market instruments, and 
commodities) that are included in its tentative net capital. The amount 
remaining is the firm's net capital, which must exceed the greater of 
$20 million or a ratio amount.
---------------------------------------------------------------------------

    \55\ See 17 CFR 240.15c3-1(c)(2).
    \56\ The highly liquid assets under Exchange Act Rule 18a-1 are 
otherwise known as ``allowable assets'' because they are not 
deducted when computing net capital. See 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.
---------------------------------------------------------------------------

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

    \57\ Exchange Act rule 18a-3 does not require SBS Entities to 
post initial margin (though it does not prohibit the practice).
    \58\ See Capital and Margin Adopting Release, 84 FR 43887-88.
    \59\ See id. at 43887.
---------------------------------------------------------------------------

    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

[[Page 46507]]

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

    \60\ As 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.
    \61\ The Basel capital standard does not preclude a firm from 
having more than a dollar of highly liquid assets for each dollar of 
unsubordinated liabilities. Thus, a firm operating pursuant to the 
standard may structure its assets and liabilities in a manner that 
achieves this result. However, the standard does not mandate this 
result. Rather, it would accommodate a firm that seeks to maintain 
this level of liquidity on its own accord.
---------------------------------------------------------------------------

    However, in seeking to bridge this regulatory gap, the additional 
condition should take into account that Covered Entities are or will be 
subject to 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.
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    \62\ See CRR, Article 412(1).
    \63\ See CRR, Articles 413, 428a and 428az.
    \64\ See KWG, Article 25a(1), sentence 3 no. 3b).
    \65\ See KWG, Article 6b(2) no.7.
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    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).
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    \66\ See 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.
    \67\ See, e.g., CRR, Part 1 (Own Funds, including Tier 1 
capital) and Part 2 (Capital Requirements).
---------------------------------------------------------------------------

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

    \68\ See 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.
---------------------------------------------------------------------------

    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

[[Page 46508]]

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

    \69\ See 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.
---------------------------------------------------------------------------

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

    \70\ See para. (c)(1)(iii)(B) of the proposed Amended Order.
    \71\ See supra notes 56 and 60 (describing allowable assets 
under Exchange Act rule 18a-1).
---------------------------------------------------------------------------

    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-the-counter derivatives positions.\79\
---------------------------------------------------------------------------

    \72\ See para. (c)(1)(iii)(B)(1) of the proposed Amended Order.
    \73\ See, e.g., International Financial Reporting Standards 
Foundation (``IFRS''), IAS 7 Statement of Cash Flows (defining 
``cash'' as comprising cash on hand and demand deposits and ``cash 
equivalents'' as short-term, highly liquid investments that are 
readily convertible to known amounts of cash and which are subject 
to an insignificant risk of changes in value). See also Books and 
Records Adopting Release, 84 FR 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).
    \74\ See para. (c)(1)(iii)(B)(2) of the proposed Amended Order.
    \75\ See 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).
    \76\ See para. (c)(1)(iii)(B)(3) of the proposed Amended Order.
    \77\ See 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).
    \78\ See para. (c)(1)(iii)(B)(4) of the proposed Amended Order.
    \79\ See 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).
---------------------------------------------------------------------------

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

    \80\ See para. (c)(1)(iii)(B)(5) of the proposed Amended Order.
    \81\ See Capital and Margin Adopting Release, 84 FR 43887-88.
    \82\ Id.
---------------------------------------------------------------------------

    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 non-liquid, 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 non-liquid 
``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.
---------------------------------------------------------------------------

    \83\ See para. (c)(1)(iii)(B) of the proposed Amended Order.
---------------------------------------------------------------------------

    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,

[[Page 46509]]

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

    \84\ See para. (c)(1)(iii)(A)(1) of the proposed Amended Order.
    \85\ See BCBS, Risk-based capital requirements (RBC20), 
available at: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20191215&published=20191215.
---------------------------------------------------------------------------

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

    \86\ Id.
    \87\ See 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).
    \88\ For example, assume a Covered Entity has total assets of 
$600 million (of which $595 million are liquid and $5 million are 
illiquid) and total liabilities of $450 million. In this case, the 
Covered Entity's liquid assets would exceed total liabilities by 
$145 million ($590 million minus $450 million) and, therefore, the 
Covered Entity would have excess liquid assets greater than $100 
million as required by the first prong of this capital condition. 
Assume further that the Covered Entity's risk-weighted assets under 
the Basel capital standard equal $400 million. In this case, the 
Covered Entity's deduction would equal $32 million ($400 million 
divided by 12.5). Subtracting $32 million from $145 million leaves 
$113 million, which exceeds $20 million. Therefore, the Covered 
Entity would meet the second requirement of the first prong of this 
capital condition.
---------------------------------------------------------------------------

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

    \89\ See para. (c)(1)(iii)(A)(2) of the proposed Amended Order.
---------------------------------------------------------------------------

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

    \90\ See para. (c)(1)(iii)(A)(3) of the proposed Amended Order.
    \91\ See para. (c)(1)(ii) of the proposed Amended Order.
---------------------------------------------------------------------------

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

    \92\ See para. (c)(1)(iii)(A)(4) of the proposed Amended Order.
    \93\ See part VII.B.4, infra (discussing proposed reporting 
conditions with respect to applying substituted compliance for 
Exchange Act rule 18a-7).
---------------------------------------------------------------------------

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

[[Page 46510]]

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 SIMM\TM\ 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\
---------------------------------------------------------------------------

    \94\ See 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.
    \95\ See 17 CFR 240.18a-3(c)(1)(ii) and the Amended Application 
Annex A category 4 at 28-31.
    \96\ See 17 CFR 240.18a-3(c)(1)(ii) and the Amended Application 
Annex A category 4 at 38-39.
    \97\ See 17 CFR 240.18a-3(d)(2)(i) and the Amended Application 
Annex A category 4 at 12-18.
    \98\ See 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).
    \99\ See 17 CFR 240.18a-3(c)(1)(iii) and the Amended Application 
Annex A category 4 at 54-63.
    \100\ See 17 CFR 240.18a-3(c)(1)(iii) and the Amended 
Application Annex A category 4 at 64-66.
    \101\ See 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.
---------------------------------------------------------------------------

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

    \102\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers; Proposed 
Rule, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214, 
70258 (Nov. 23, 2012).
    \103\ See 17 CFR 240.3a71-6(d)(5)(i) and (ii).
    \104\ See 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.
---------------------------------------------------------------------------

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

    \105\ See 17 CFR 240.18a-3(c)(ii)(A)(1) and (2).
    \106\ See the Amended Application Annex A category 4 at 60-61.
    \107\ See 17 CFR 240.18a-3(c)(ii)(B).
    \108\ See 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.
---------------------------------------------------------------------------

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

    \109\ The 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 non-centrally cleared derivatives exceeds a 
certain threshold on a group basis. In contrast, Exchange Act rule 
18a-3 does not require (but permits) a nonbank security-based swap 
dealer to collect initial margin from counterparties that are 
financial market intermediaries. 17 CFR 240.18a-3(c)(1)(iii)(B). The 
comparability analysis, however, focuses on determining whether the 
EU and German margin rules are comparable to Exchange Act rule 18a-
3.
---------------------------------------------------------------------------

    The first additional condition is designed to address differences 
in the counterparty exceptions with respect to

[[Page 46511]]

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

    \110\ See 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.
---------------------------------------------------------------------------

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

    \111\ See 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.
---------------------------------------------------------------------------

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

    \112\ See 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.
    \113\ See para. (f)(1)(i)(L) of the 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\
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    \114\ Exchange Act rule 15Fk-1(c)(2)(ii)(D); see also Exchange 
Act rule 15Fk-1(e)(2) (defining ``senior officer'' as ``the chief 
executive officer or other equivalent officer'').
    \115\ See para. (d)(2) of the Order.
    \116\ See French Order, 86 FR 41659.
    \117\ See 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.
---------------------------------------------------------------------------

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\
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    \118\ See French Order, 86 FR 41659.
    \119\ See para. (d)(2)(D) of the proposed Amended Order.
    \120\ See para. (d)(2)(E) of the proposed Amended Order.
---------------------------------------------------------------------------

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

[[Page 46512]]

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

    \121\ See para. (e)(2)(iii) of the proposed Amended Order.
    \122\ See para. (e)(5) of the Order.
    \123\ See para. (d)(2) of the Order.
---------------------------------------------------------------------------

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\
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    \124\ See 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.
---------------------------------------------------------------------------

     Record Preservation--Exchange Act rule 18a-6 requires 
preservation of records.\125\
---------------------------------------------------------------------------

    \125\ See 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.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain 
reports.\126\
---------------------------------------------------------------------------

    \126\ See 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.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires 
notification to the Commission when certain financial or operational 
problems occur.\127\
---------------------------------------------------------------------------

    \127\ See 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.
---------------------------------------------------------------------------

     Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a 
quarterly securities count.\128\
---------------------------------------------------------------------------

    \128\ See 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.
---------------------------------------------------------------------------

     Daily Trading Records--Exchange Act section 15F(g) 
requires SBS Entities to maintain daily trading records.\129\
---------------------------------------------------------------------------

    \129\ See 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.
---------------------------------------------------------------------------

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

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

[[Page 46513]]

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

    \130\ See French Order, 86 FR 41649; UK Order, 86 FR 43360.
---------------------------------------------------------------------------

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

    \131\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014), 
79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------

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

    \132\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

    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,

[[Page 46514]]

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

    \133\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

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

    \134\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

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

    \135\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
    \136\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
    \137\ See para. (f)(1) of the proposed Amended Order.
---------------------------------------------------------------------------

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

    \138\ A 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.
---------------------------------------------------------------------------

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

    \139\ Substituted 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.
---------------------------------------------------------------------------

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

    \140\ Substituted 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.
---------------------------------------------------------------------------

    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

[[Page 46515]]

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-by-transaction basis for 
the Commission's counterparty protection requirements.
---------------------------------------------------------------------------

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

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

    \142\ See 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.
---------------------------------------------------------------------------

    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\
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    \143\ The 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).

                                             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        N/A.
                                                                      brokerage orders.
(f)(1)(i)(F)..............  (a)(5).............  (b)(5)............  Memoranda of        Rule 18a-1 Condition
                                                                      proprietary         for ] (a)(5).
                                                                      orders.
(f)(1)(i)(G)..............  (a)(6).............  (b)(6)............  Confirmations,      Rule 15Fi-2 Condition.
                            (a)(15)............  (b)(11)...........   trade
                                                                      verification.
(f)(1)(i)(H)..............  (a)(7).............  (b)(7)............  Accountholder       (1) SEC Format
                                                                      information.        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,     (1) Rule 18a-1
                                                                      computation of      Condition.
                                                                      net capital and    (2) Rule 18a-2
                                                                      tangible net        Exclusion.
                                                                      worth.
(f)(1)(i)(K)..............  (a)(10)............  (b)(8)............  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
(f)(1)(i)(L)..............  (a)(12)............  ..................  Non-cleared margin  Rule 18a-3 Condition.
                                                                      rule calculations.
(f)(1)(i)(M)..............  (a)(17)............  (b)(13)...........  Compliance with     (1) Rule 15Fh-3
                                                                      business conduct    Condition.
                                                                      requirements.      (2) Rule 15Fk-1
                                                                                          Condition.
                                                                                         (3) Rule 15Fh-4
                                                                                          Exclusion.
                                                                                         (4) Rule 15Fh-5
                                                                                          Exclusion.
(f)(1)(i)(N)..............  (a)(18)(i).........  (b)(14)(i)........  Portfolio           Rule 15Fi-3 Condition.
                            (a)(18)(ii)........  (b)(14)(ii).......   reconciliation.
(f)(1)(i)(O)..............  (a)(18)(iii).......  (b)(14)(iii)......  Portfolio           Rule 15Fi-4 Condition.
                                                                      compression.
----------------------------------------------------------------------------------------------------------------

[[Page 46516]]

    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       Rule 18a-4 Exclusion.
                                                                      control records.
(f)(1)(ii)(C).............  (a)(14)............  (b)(10)...........  Reserve             Rule 18a-4 Exclusion.
                                                                      computations.
(f)(1)(ii)(C).............  (a)(16)............  (b)(12)...........  Political           Rule 15Fh-6 Exclusion.
                                                                      contribution
                                                                      records.
----------------------------------------------------------------------------------------------------------------

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

    \144\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------

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

    \145\ Paras. (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.
---------------------------------------------------------------------------

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

    \146\ A 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.
---------------------------------------------------------------------------

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

    \147\ Substituted 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.
---------------------------------------------------------------------------

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

    \148\ Substituted 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.
---------------------------------------------------------------------------

    Paragraph (e) of Exchange Act rule 18a-6 sets forth the 
requirements for

[[Page 46517]]

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

    \149\ See paras. (f)(2)(i)(Q) and (R) of the proposed Amended 
Order.
---------------------------------------------------------------------------

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

    \150\ The 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).

                                             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       N/A.
                                                                      preservation.
(f)(2)(i)(B)..............  (b)(1)(i)..........  (b)(2)(i).........  3 year record       N/A.
                                                                      preservation.
(f)(2)(i)(C)..............  (b)(1)(ii).........  ..................  Bank records,       Rule 18a-1 Condition.
                            (b)(1)(iii)........                       bills.
(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         (1) Rule 18a-7
                                                                      supporting          Condition.
                                                                      financial reports. (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    Rule 18a-1 Condition.
                                                                      management
                                                                      records.
(f)(2)(i)(J)..............  (b)(1)(x)..........  ..................  Credit risk         Rule 18a-1 Condition.
                                                                      determinations.
(f)(2)(i)(K)..............  (b)(1)(xii)........  (b)(2)(vii).......  Business conduct    (1) Rule 15Fh-3
                                                                      standard records.   Condition.
                                                                                         (2) Rule 15Fk-1
                                                                                          Condition.
                           -----------------------------------------
(f)(2)(i)(L)..............                    (c)                    Corporate           Form SBSE Exclusion.
                                                                      documents.
                           -----------------------------------------
(f)(2)(i)(M)..............                   (d)(1)                  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
                           -----------------------------------------
(f)(2)(i)(N)..............  (d)(2)(i)..........  (d)(2)(ii)........  Regulatory          Rule 18a-1 Condition
                                                                      authority reports.  for ] (d)(2)(i).
(f)(2)(i)(O)..............  (d)(3)(i)..........  (d)(3)(ii)........  Compliance,         Rule 18a-1 Condition
                                                                      supervisory, and    for ] (d)(3)(i).
                                                                      procedures
                                                                      manuals.
                           -----------------------------------------
(f)(2)(i)(P)..............                   (d)(4)                  Portfolio           (1) Rule 15Fi-3
                                                                      reconciliation.     Condition.
                                             (d)(5)                                      (2) Rule 15Fi-4
                                                                                          Condition.
                                                                                         (3) Rule 15Fi-5
                                                                                          Condition.
                           -----------------------------------------
(f)(2)(i)(Q)..............                    (e)                    Electronic storage  N/A.
                                                                      system.
(f)(2)(i)(R)..............                    (f)                    Third-party         N/A.
                                                                      recordkeeper.
----------------------------------------------------------------------------------------------------------------

    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

[[Page 46518]]

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     Regulation SBSR
                                                                      information.        Exclusion.
(f)(2)(i)(H)..............  ...................  (b)(2)(v).........  Information         Rule 18a-4 Exclusion.
                                                                      supporting
                                                                      financial reports.
(f)(2)(ii)................  (b)(1)(xiii).......  (b)(2)(viii)......  Special entity      (1) Rule 15Fh-4
                                                                      documents.          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.
---------------------------------------------------------------------------

    \151\ See 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).
---------------------------------------------------------------------------

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

    \152\ Under 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.
    \153\ See 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.
---------------------------------------------------------------------------

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

    \155\ See para. (f)(3)(i) of the proposed Amended Order.
    \156\ See 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).
    \157\ See para. (f)(3)(i)(D) of the proposed Amended Order.
---------------------------------------------------------------------------

    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

[[Page 46519]]

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

    \158\ See 17 CFR 240.18a-7(a)(3).
    \159\ See 17 CFR 240.18a-7(b).
    \160\ See 17 CFR 240.18a-7(c) through (h).
    \161\ See 17 CFR 240.18a-7(i).
    \162\ See 17 CFR 240.18a-7(i).
---------------------------------------------------------------------------

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

    \163\ Substituted 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.
---------------------------------------------------------------------------

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

    \164\ See para. (f)(3)(iv)(B) to the proposed Amended Order.
---------------------------------------------------------------------------

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

    \165\ The 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).
    \166\ The 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.
---------------------------------------------------------------------------

    The fifth condition would be that a Covered Entity that is a major 
security-based 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

[[Page 46520]]

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 Security-Based 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\
---------------------------------------------------------------------------

    \167\ The 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).

                                             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         (1) Rule 18a-1
                                                                      related to          Condition.
                                                                      capital models.
(f)(3)(iii)...............  (b)................  ..................  Publish certain     (1) Rule 18a-
                                                                      financial           6(b)(1)(viii)
                                                                      information.        Condition.
(f)(3)(iv)................  (c)................  ..................  File annual         (1) SEC Filing
                            (d)................                       audited reports.    Condition.
                            (e)................                                          (2) Contact Information
                            (f)................                                           Condition.
                            (g)................                                          (3) Accountant's Report
                            (h)................                                           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 security-based 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.
---------------------------------------------------------------------------

    \168\ See 17 CFR 240.18a-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.

[[Page 46521]]

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

    \169\ A 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.
---------------------------------------------------------------------------

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

    \170\ Substituted 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.
---------------------------------------------------------------------------

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

    \171\ The 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
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Conditions and partial
                                                                                          exclusions
----------------------------------------------------------------------------------------------------------------
(f)(4)(i)(A)..............  (a)(1)(i)..........  ..................  Capital notices...  (1) Rule 18a-1
                            (a)(1)(ii).........                                           Condition.
                            (b)(1).............                                          (2) SEC Filing
                            (b)(2).............                                           Condition.
                            (b)(4).............                                          (3) Contact Information
                                                                                          Condition.
(f)(4)(i)(B)..............  (c)................  ..................  Prudential          (1) SEC Filing
                                                                      regulator capital   Condition.
                                                                      category           (2) Contact Information
                                                                      adjustment          Condition.
                                                                      notices.
(f)(4)(i)(C)..............  (d)................  ..................  Books and records   (1) Rule 18a-5
                                                                      notices.            Condition.
                                                                                         (2) SEC Filing
                                                                                          Condition.
                                                                                         (3) Contact Information
                                                                                          Condition.
(f)(4)(i)(D)..............  (e)................  ..................  Material weakness   (1) Rule 18a-1
                                                                      notices.            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

[[Page 46522]]

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       Rule 18a-2 Exclusion.
                                                                      notices.
(f)(4)(ii)(C).............  (g)................  ..................  Reserve account     Rule 18a-4 Exclusion.
                                                                      notices.
----------------------------------------------------------------------------------------------------------------

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

    \172\ See 17 CFR 240.18a-9.
    \173\ See 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.
    \174\ See para. (f)(5) to the proposed Amended Order.
---------------------------------------------------------------------------

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

    \175\ See 15 U.S.C. 78o-10(g).
    \176\ See WpHG section 83 para. 1; and MiFID Org Reg article 
21(1)(f), 21(4), and 72(1)
    \177\ See para. (f)(6) to the proposed Amended Order.
---------------------------------------------------------------------------

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

    \178\ See 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.
    \179\ See para. (f)(7) to the proposed Amended Order.
---------------------------------------------------------------------------

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

    \180\ See para. (f)(8) to the proposed Amended Order.
    \181\ See French Order, 86 FR 41651; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

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

[[Page 46523]]

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

    \182\ See generally Business Conduct Adopting Release, 81 FR 
30079.
---------------------------------------------------------------------------

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

    \183\ Order, 85 FR 84697.
---------------------------------------------------------------------------

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

    \184\ The 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'').
---------------------------------------------------------------------------

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

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

    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

[[Page 46524]]

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 risk-weighted 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 fixed-dollar 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

[[Page 46525]]

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

    \186\ See French Order, 86 FR 41658-59; UK Order, 86 FR 43371-
71.
---------------------------------------------------------------------------

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

    \187\ See French Order, 86 FR 41659; UK Order, 86 FR 43372.
---------------------------------------------------------------------------

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

[[Page 46526]]

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

[[Page 46527]]

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 cross-form 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.
---------------------------------------------------------------------------

    \188\ See French Order, 86 FR 41648-57; UK Order, 86 FR 43359-
69.
---------------------------------------------------------------------------

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

    \189\ 17 CFR 200.30-3(a)(89).

    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

[[Page 46528]]

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

[[Page 46529]]

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 security-based 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 security-based 
swap or trading strategy involving a

[[Page 46530]]

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;

[[Page 46531]]

    (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

[[Page 46532]]

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;

[[Page 46533]]

    (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 ``Geldw[auml]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 f[uuml]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 ``Sanierungs- und 
Abwicklungsgesetz,'' as amended from time to time.

[[Page 46534]]

    (23) ``SolvV'' means Germany's ``Solvabilit[auml]tsverordnung,'' 
as amended from time to time.

[FR Doc. 2021-17644 Filed 8-17-21; 8:45 am]
BILLING CODE 8011-01-P