Document ID: SEC-2021-0470-0001
Agency: sec
Document Type: Notice
Title: Conditional Substituted Compliance Order: Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the French Republic
Posted Date: 2021-04-08T04:00Z

[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Notices]
[Pages 18341-18349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07254]

[[Page 18341]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91477; File No. S7-22-20]

Reopening of Comment Period for Order Proposing Conditional 
Substituted Compliance in Connection With Certain Requirements 
Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-
Based Swap Participants Subject to Regulation in the French Republic

AGENCY: Securities and Exchange Commission.

ACTION: Reopening of comment period.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period for its proposed conditional substituted 
compliance order, published in the Federal Register on December 29, 
2020, in connection with certain requirements applicable to non-U.S. 
security-based swap dealers and major security-based swap participants 
subject to regulation in the French Republic (``Proposed Order''). The 
reopening of the comment period is intended to allow interested persons 
time to analyze and comment upon potential changes to the Proposed 
Order and additional questions related to the Proposed Order.

DATES: The comment period is re-opened until May 3, 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);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-22-20; or
     Use the Federal Rulemaking portal (http://www.regulations.gov). Follow the instructions for submitting comments.

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 S7-22-20. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. We 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 NE, Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 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; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director 
Office of Derivatives Policy, Division of Trading and Markets, at (202) 
551-5870, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Background

    The French Autorit[eacute] des March[eacute]s Financiers (``AMF'') 
and the Autorit[eacute] de Contr[ocirc]le Prudentiel et de 
R[eacute]solution (``ACPR''), the French financial authorities, have 
submitted a ``substituted compliance'' application requesting that the 
Commission determine, pursuant to the Securities Exchange Act of 1934 
(``Exchange Act'') rule 3a71-6, that security-based swap dealers and 
major security-based swap participants (``SBS Entities'') subject to 
regulation in France conditionally may satisfy requirements under the 
Exchange Act by complying with comparable French and European Union 
(``EU'') requirements.\1\ In their application, the AMF and the ACPR 
(``French Authorities'') sought substituted compliance in connection 
with certain Exchange Act requirements related to risk control, capital 
and margin, internal supervision and compliance, counterparty 
protection, recordkeeping, reporting and notification. The application 
incorporated comparability analyses regarding applicable French and EU 
law, as well as information regarding French supervisory and 
enforcement frameworks.
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    \1\ See Letter from Robert Oph[egrave]le, Chairman, AMF, and 
Denis Beau, Chairman, ACPR, to Vanessa Countryman, Secretary, 
Commission, dated Nov. 6, 2020 (``French Authorities' 
Application''). The application is available on the Commission's 
website at: https://www.sec.gov/files/full-french-application.pdf.
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    On December 22, 2020, the Commission published a notice of the 
French Authorities' completed application, accompanied by a Proposed 
Order to conditionally grant substituted compliance in connection with 
the application.\2\ The Proposed Order incorporated a number of 
conditions to tailor the scope of substituted compliance consistent 
with the prerequisite that relevant French and EU requirements produce 
regulatory outcomes that are comparable to relevant requirements under 
the Exchange Act.
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    \2\ Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR 85720 
(Dec. 29, 2020) (``French Substituted Compliance Notice and Proposed 
Order'').
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II. Reopening of Comment Period

    As a result of comments received \3\ and upon further reflection, 
the Commission is reopening the comment period for the Proposed Order 
until May 3, 2021. Commenters may submit, and the Commission will 
consider, comments on any aspect of the Proposed Order. In addition to 
the questions raised in the Proposed Order, the Commission specifically 
seeks comments on the issues below and potential changes to the 
Proposed Order (defined terms can be found in the Proposed Order). 
Commenters should also consider the approaches taken in connection with 
the application and proposed order for substituted compliance for the 
United Kingdom \4\ when answering these questions.
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    \3\ See Letter from Kyle Brandon, Managing Director, Head of 
Derivative Policy, SIFMA (Jan. 25, 2021) (``SIFMA Letter''), letter 
from Wim Mijs, Chief Executive Officer, European Banking Federation 
(Jan. 25, 2021) (``EBF Letter'') (generally supporting the SIFMA 
letter), and Letter from Etienne Barel, Deputy Chief Executive 
Officer, French Banking Federation (Jan. 25, 2021) (``FBF Letter''). 
Comments may be found on the Commission's website at: https://www.sec.gov/comments/s7-22-20/s72220.htm.
    \4\ See Notice of Substituted Compliance Application Submitted 
by the United Kingdom Financial Conduct Authority in Connection with 
Certain Requirements Applicable to Security-Based Swap Dealers and 
Major Security-Based Swap Participants Subject to Regulation in the 
United Kingdom; Proposed Order, Exchange Act Release No. 91476 (Apr. 
5, 2021) (``Proposed UK Order'').
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A. EMIR-Related General Conditions

    Commenters raised concerns regarding the proposed conditions 
associated with substituted compliance for trade acknowledgement and 
verification requirements and trading relationship documentation 
requirements.\5\ They particularly requested that those parts of the 
final Order not incorporate proposed conditions requiring compliance 
with certain provisions under MiFID, arguing that those MiFID-related 
conditions in practice would prevent SBS Entities with branches in 
other EU countries from relying on substituted compliance for those 
requirements, and that compliance with proposed EMIR conditions would 
be sufficient to

[[Page 18342]]

produce the requisite regulatory outcomes.\6\
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    \5\ See SIFMA Letter at 3-6, FBF Letter at 2.
    \6\ Id. Under the proposal, substituted compliance for trade 
acknowledgment and for trading relationship documentation in part 
would require that relevant SBS Entities (``Covered Entities'' as 
defined in the proposed Order) comply with certain requirements 
under MiFID (``Markets in Financial Instruments Directive,'' 
Directive 2014/65/EU) and the French implementation of MiFID, and 
also comply with certain requirements under EMIR (``European Market 
Infrastructure Regulation,'' Regulation (EU) 648/2012). See paras. 
(a)(2) and (a)(5) to the proposed Order.
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    As discussed below, the Commission believes that based on the 
issues raised by those commenters, it may be appropriate for the 
portions of the final Order related to trade acknowledgment and 
verification and to trading relationship documentation not to include 
the MiFID-related conditions and instead to rely solely on EMIR 
conditions. Any such heightened reliance on EMIR, however, highlights 
the need for safeguards to ensure that there will be no opportunity for 
gaps that may prevent the EMIR provisions in practice from producing 
regulatory outcomes consistent with those of the Exchange Act rules.
    Accordingly, upon further consideration, the Commission believes 
that it may be useful for the final Order to incorporate two additional 
general conditions to promote certainty that EMIR will apply and help 
preclude gaps between the regulatory outcomes associated with Exchange 
Act requirements and those associated with the relevant EMIR 
provisions.\7\
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    \7\ Addition of two new EMIR-related general conditions 
potentially would necessitate renumbering of certain of the extant 
proposed general conditions, and the addition of technical 
clarifying language to the captions for certain of the other 
proposed general conditions (e.g., recaptioning proposed general 
conditions (a)(1) through (a)(3) to the Proposed Order so they 
specifically refer to MiFID, and recaptioning of proposed general 
condition (a)(4) so it specifically refers to CRD/CRR).
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    Potential counterparty-related EMIR condition. First, it may be 
useful for the final Order to incorporate a new general condition to 
address the fact that the ``financial counterparty'' and ``non-
financial counterparty'' definitions that trigger the application of 
the relevant EMIR provisions in part are predicated on the Covered 
Entity and its counterparty being either subject to certain 
authorizations consistent with its activities or a legal entity 
established in the EU.\8\ To help ensure that the relevant EMIR 
requirements would produce the requisite regulatory outcomes regardless 
of a counterparty's status under those definitions, the Commission is 
considering adding a general condition to provide that, for each part 
of the final Order that requires compliance with EMIR-related 
requirements, if the Covered Entity's relevant security-based swap 
counterparty does not fall within the relevant ``financial 
counterparty'' or ``non-financial counterparty'' definitions, the 
Covered Entity must comply with the applicable condition as if the 
counterparty were a ``financial counterparty'' or ``non-financial 
counterparty'' consistent with the counterparty's business.\9\
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    \8\ See EMIR art. 2(8) (defining ``financial counterparty'' by 
reference to certain investment firms, insurers and other types of 
institutions authorized pursuant to various EU directives), 2(9) 
(defining ``non-financial counterparty'' as an ``undertaking'' 
established in the EU that is not a financial counterparty).
    \9\ In other words, the Covered Entity would be subject to the 
relevant requirements under EMIR even if the counterparty is not 
authorized pursuant to EU law as anticipated by the EMIR art. 2(8) 
``financial counterparty'' definition, or 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), as 
anticipated by the EMIR art. 2(9) ``non-financial counterparty'' 
definition. This approach 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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    Potential product-related conditions. It may also be useful for the 
final Order to account for the facts 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. As a 
result, instruments that have been cleared at an EU-authorized or EU-
recognized central counterparty neither would be excluded from the 
application of those Exchange Act rules nor would be subject to the 
EMIR requirements that otherwise would underpin substituted 
compliance--making direct compliance problematic but compliance with 
the conditions of a positive substituted compliance order unworkable. 
To bridge that gap and help ensure that substituted compliance is not 
precluded in connection with instruments that have been cleared in the 
EU, the Commission is considering adding a new general condition that, 
for each part of the final Order that requires compliance with EMIR-
related conditions: (i) The relevant security-based swap must either be 
an ``OTC derivative'' or ``OTC derivative contract'' for purposes of 
EMIR \10\ that has not been cleared and otherwise is subject to the 
provisions of the relevant requirements under EMIR, or (ii) the 
relevant security-based swap has been cleared by a central counterparty 
that has been authorized or recognized to clear derivatives contracts 
in the EU.\11\
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    \10\ See EMIR art. 2(7) (defining those terms by reference to 
``a derivative contract the execution of which'' does not take place 
on a regulated market or certain third-party market as defined in 
the 2004 iteration of MiFID).
    \11\ Prong (i) to this potential new condition would require 
uncleared instruments to fall within the ambit of the EMIR 
requirements at issue. The alternative prong (ii) would be satisfied 
when cleared 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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    Commenters are invited to address whether additional general 
conditions of this nature are appropriate to help ensure that EMIR-
related conditions to the final Order will apply in an appropriate 
scope, particularly in connection with trade acknowledgment and 
verification requirements and trading relationship documentation 
requirements. Would general conditions of the type discussed above be 
appropriate to help foreclose substituted compliance when there are 
gaps inconsistent with the comparability of regulatory outcomes? Would 
different approaches be more effective at achieving that goal? If so, 
please describe.

B. Risk Control Requirements

    The proposal in part would condition substituted compliance for 
Exchange Act rule 15Fi-2 trade acknowledgment and verification 
requirements and rule 15Fi-5 trading relationship documentation 
requirements on firms complying with certain requirements under MiFID 
article 25 (including the French implementation of those MiFID 
requirements) and under EMIR. Commenters expressed the view that the 
EMIR-based requirements standing

[[Page 18343]]

alone would be sufficient to produce regulatory outcomes that are 
comparable to those associated with the Exchange Act rules, and that 
the conditions should not incorporate references to MiFID 
provisions.\12\
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    \12\ See SIFMA Letter at 2-6, FBF Letter at 2. Under the 
Proposed Order, substituted compliance in connection with trade 
acknowledgment and verification requirements in part would be 
conditioned on an entity's compliance with EMIR article 11(1)(a) and 
EMIR RTS article 12, which jointly set forth a bilateral 
confirmation requirement. Substituted compliance in connection with 
trading relationship requirements in part would be conditioned on 
compliance with EMIR Margin RTS article 2, which addresses risk 
management procedures related to the exchange of collateral, 
including procedures related to the terms of all necessary 
agreements to be entered into by counterparties (e.g., payment 
obligations, netting conditions, events of default, calculation 
methods, transfers of rights and obligations upon termination, and 
governing law).
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    The commenter concern regarding the application of MiFID arises 
from application of a proposed cross-border condition providing that if 
responsibility for ensuring compliance with any provision of MiFID (or 
EU or French implementing requirement) that is listed as 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, 
the AMF or ACPR must be the authority responsible for supervision and 
enforcement of that provision.\13\ In the commenter's view, this EU 
cross-border condition means that conditioning substituted compliance 
on Covered Entities also having to comply with MiFID confirmation and 
documentation requirements in practice would undermine the availability 
of substituted compliance for Covered Entities that have branches in EU 
Member States for which the Commission has not entered into an 
applicable substituted compliance memorandum of understanding.\14\
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    \13\ See paragraph (a)(8) to the proposed Order (``EU cross-
border condition''). 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.
    \14\ See SIFMA Letter at 2-6. 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 
at 3. The commenter further explained 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 [ ] in each of these Member 
States.'' The same problem does not arise in connection with 
requirements under EMIR, which would not allocate oversight of a 
French entity's compliance to authorities in other EU Member States.
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    In light of those commenters' concerns that substituted compliance 
for trade acknowledgment and verification and for trading relationship 
documentation as proposed would be curtailed as a result of the 
interplay between the MiFID provisions and the EU cross-border 
condition, the Commission is considering whether the EMIR requirements 
standing alone produce comparable results such that the Commission 
appropriately may remove those MiFID provisions as prerequisites to 
substituted compliance in connection with the trade acknowledgment and 
verification and trading relationship documentation requirements under 
the Exchange Act.\15\
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    \15\ For trade acknowledgment and verification, proposed 
paragraph (b)(2) in part particularly would require compliance with 
MiFID article 25(6) (requiring that investment firms provide certain 
reports to clients), and MiFID Org Reg articles 59-61 (addressing 
contents of reports with specificity). EMIR article 11(1)(a) and 
EMIR RTS article 12, in contrast, specify more general conformation 
requirements applicable to both counterparties to a transaction. For 
trading relationship documentation requirements, proposed paragraph 
(b)(5) in part particularly would require compliance with MiFID Org 
Reg article 25(5) (requiring investment firms to establish a record 
regarding the rights and obligations of parties and other terms of 
service), and MiFID Org Reg articles 24, 58, 73 and applicable parts 
of Annex I (addressing internal audit, client agreements and 
recordkeeping). EMIR Martin RTS article 2, in contrast, encompasses 
collateral-related risk management procedures that in part require 
counterparties to specify the terms of all necessary agreements to 
be entered into by counterparties.
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    Under such an approach, substituted compliance in connection with 
Exchange Act rule 15Fi-2 trade acknowledgment and verification 
requirements would be conditioned solely on compliance with the 
confirmation provisions of EMIR article 11(1)(a) and EMIR RTS article 
12.
    Moreover, under such an approach, substituted compliance in 
connection with Exchange Act rule 15Fi-5 trading relationship 
documentation requirements in part would be conditioned on compliance 
with the collateral-related risk management procedure provisions of 
EMIR Margin RTS article 2 (as proposed). In addition, to further 
promote comparability with the rule 15Fi-5(b)(2) provisions requiring 
that trading relationship documentation incorporate trade 
acknowledgements and verification, substituted compliance under such an 
approach also may be conditioned on compliance with the confirmation 
provisions of EMIR article 11(1)(a) and EMIR RTS article 12.
    Commenters are invited to address whether MiFID requirements should 
be removed from the conditions for substituted compliance in connection 
with trade acknowledgment and verification requirements and trading 
relationship documentation requirements. Would the proposed EMIR 
conditions (and the potential additional EMIR condition related to 
trading relationship documentation) be sufficient to produce regulatory 
outcomes that are comparable to those associated with the Exchange Act 
rules, particularly if the new general conditions addressed in part 
II.A above also are incorporated as part of the final Order? If so, 
please explain. If not, please explain.

C. Capital

    The Proposed Order did not contain any proposed conditions for 
substituted compliance with respect to the capital requirements of 
Exchange Act section 15F(e) and Exchange Act rule 18a-1 and its 
appendices (collectively ``Exchange Act rule 18a-1'').\16\ In the 
Proposed Order, the Commission, however, requested comment on whether 
there are any conditions that should be applied to substituted 
compliance for these capital requirements to promote comparable 
regulatory outcomes.\17\ The Commission also requested comment on 
whether it should consider conditions related to: (1) Maintaining a 
minimum amount of liquid assets; (2) imposing a specific liquidity 
requirement; and (3) maintaining minimum equity capital at least equal 
to the minimum fixed-dollar capital requirements under Exchange Act 
rule 18a-1.\18\ In addition, the Commission requested comment on the 
types of firms in France that would be relying on substituted 
compliance for capital, and whether the balance sheets of these 
entities were primarily composed of liquid or illiquid assets.\19\
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    \16\ See Proposed Order, 85 FR at 85726.
    \17\ See Proposed Order, 85 FR at 85737.
    \18\ Id.
    \19\ Id.
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    Commenters supported the proposed approach of making a positive 
substituted compliance determination with respect to Exchange Act rule 
18a-1. Commenters, however, stated that imposing any conditions on 
applying substituted compliance to Exchange Act rule 18a-1 was neither 
necessary nor appropriate.\20\ For example, one commenter expressed 
concern that requiring a Covered Entity to maintain a minimum amount of 
liquid assets

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would impose unnecessary burdens.\21\ This commenter believed that 
imposing additional liquidity conditions would be duplicative of, and 
(depending on their design) inconsistent with applicable EU and French 
capital requirements, since these Covered Entities are already subject 
to the liquidity coverage ratio (``LCR''), the net stable funding ratio 
(``NSFR''), and an internal liquidity adequacy assessment process 
(``liquidity assessment process'').\22\ This commenter also noted that 
Covered Entities are subject to bank-style resolution regimes, which 
the commenter believed makes their liquidity risks less significant 
than other SBS Entities.\23\ This commenter also noted that certain 
Covered Entities will have access to short-term liquidity through 
relevant EU Member State central banks.\24\ This commenter also 
expressed concern, that absent an additional comment period, any 
definitions contained in a final substituted compliance determination 
would be adopted without the benefit of public comment.\25\ Finally, 
this commenter also stated that imposing a liquidity condition would be 
similar to the Commission imposing a net liquid assets test on Covered 
Entities, in contrast to EU policy makers applying a risk-based 
approach to capital. The commenter believed this would potentially 
change the ways these entities conduct business in a manner that may be 
inconsistent with their home country regulation.\26\
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    \20\ See SIFMA Letter at 11; EBF Letter at 4; FBF Letter at 4.
    \21\ See SIFMA Letter at 11.
    \22\ See SIFMA Letter at 12.
    \23\ See SIFMA Letter at 12.
    \24\ See SIFMA Letter at 12.
    \25\ Id.
    \26\ See SIFMA Letter at 12-13.
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    The Commission continues to consider whether it would be 
appropriate to impose additional conditions with respect to applying 
substituted compliance to Exchange Act rule 18a-1. In this regard, the 
Commission is seeking further comment about the concerns raised by the 
commenters and potential capital conditions. The reasons why the 
Commission continues to consider additional capital conditions are 
discussed below.
    As a commenter noted, 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. The net 
liquid assets test is designed to promote liquidity. 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).\27\ 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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    \27\ 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, 1989), 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).
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    The net liquid assets test is imposed through the mechanics of 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. 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.\28\ 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. 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. An SBS Entity that 
is meeting its minimum 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.
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    \28\ See 17 CFR 240.15c3-1(c)(2).
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    In comparison, Covered Entities in France are subject to capital 
requirements applicable to prudentially regulated entities based on the 
international capital standard for banks (the ``Basel capital 
standard'').\29\ The Basel capital standard counts as capital assets 
that Exchange Act rule 18a-1 would exclude (e.g., loans and most other 
types of uncollateralized receivables, furniture and fixtures, real 
estate). The Basel capital standard accommodates the business of 
banking: Making loans (including extending unsecured credit) and taking 
deposits. While the Covered Entities that will apply substituted 
compliance with respect to Exchange Act rule 18a-1 will not be banks, 
the Basel capital standard allows them to count illiquid assets such as 
real estate and fixtures as capital. It also allows them to treat 
unsecured receivables related to activities beyond dealing in security-
based swaps as capital notwithstanding the illiquidity of these assets.
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    \29\ See BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
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    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 French margin requirements, Covered 
Entities will be required to post initial margin to counterparties 
unless an

[[Page 18345]]

exception applies.\30\ 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.\31\ 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.'' \32\ 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.
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    \30\ Exchange Act rule 18a-3 does not require SBS Entities to 
post initial margin (though it does not prohibit the practice).
    \31\ See 84 FR at 43887-88.
    \32\ See id. at 43887.
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    To address this potential liquidity difference, the Commission is 
seeking comment on whether substituted compliance with respect to 
Exchange Act rule 18a-1 should be subject to the conditions that a 
Covered Entity: (1) Maintains an amount of assets that are allowable 
under Exchange Act rule 18a-1, after applying applicable haircuts under 
the Basel capital standard, that equals or exceeds the Covered Entity's 
current liabilities coming due in the next 365 days; (2) makes a 
quarterly record listing: (a) The assets maintained pursuant to the 
first condition, their value, and the amount of their applicable 
haircuts; and (b) the aggregate amount of the liabilities coming due in 
the next 365 days; (3) maintains at least $100 million of equity 
capital composed of highly liquid assets, as defined in the Basel 
capital standard; and (4) includes its most recent statement of 
financial condition (i.e., balance sheet) filed with its local 
supervisor whether audited or unaudited with its written notice to the 
Commission of its intent to rely on substituted compliance. This 
potential approach to substituted compliance is illustrated in the 
Proposed UK Order.\33\
---------------------------------------------------------------------------

    \33\ See para. (c)(1)(ii) of the Proposed UK Order.
---------------------------------------------------------------------------

    The purpose of the potential conditions would be to address the 
concern that, while the Basel capital standard may contain requirements 
designed to address liquidity such as the LCR and NSFR, the Basel 
capital standard does not impose a net liquid assets test that requires 
a Covered Entity to maintain more than one dollar of highly liquid 
assets for each dollar of unsubordinated liabilities. The Commission 
requests comment on how the liquidity provisions in the Basel capital 
standard (the LCR, NSFR, and liquidity assessment process) impact the 
liquidity of Covered Entities that would apply substituted compliance 
with respect to Exchange Act rule 18a-1 (i.e., nonbanks). Do these 
requirements in practice result in Covered Entities maintaining more 
than one dollar of highly liquid assets for each dollar of 
unsubordinated liabilities? If so, explain why. If not, explain why 
not.
    A commenter stated that certain non-bank entities in the European 
Union have access to short-term liquidity through relevant Central 
Banks.\34\ The Commission requests comment on whether Covered Entities 
that are not banks have access to short-term liquidity through Central 
Bank facilities in France or Europe that are available to banks. Please 
identify and describe each facility that is available to nonbank 
Covered Entities, including any limitations on their ability to access 
the facility.
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    \34\ See SIFMA Letter at 12.
---------------------------------------------------------------------------

    The Commission also requests comment on how the potential 
additional capital conditions compare to any existing capital 
requirements under the Basel capital standards. For example, are there 
differences in the frequency or nature of calculations under the Basel 
capital standards?
    The Commission continues to request comment on and seek information 
about the assets, liabilities, and capital of the Covered Entities that 
would apply substituted compliance with respect to Exchange Act rule 
18a-1. What are the primary business lines engaged in by these entities 
and what types of assets and liabilities do they typically carry on 
their balance sheets? Are the balance sheets of these entities 
primarily composed of liquid or illiquid assets? The Commission would 
use this information to analyze the liquidity of these entities in the 
context of considering the potential additional capital conditions. For 
example, do the Covered Entities that would apply substituted 
compliance with respect to Exchange rule 18a-1 engage primarily in a 
securities business? If so, are their balance sheets similar to those 
of U.S. broker-dealers that deal in securities in terms of holding 
highly liquid assets? If their balance sheets are similar to U.S. 
broker-dealers, are the additional capital conditions discussed above 
necessary? Alternatively, would the additional capital conditions serve 
to ensure that these firms do not engage in non-securities business 
activities that could impair their liquidity? Should the Commission 
consider the relevance of a Covered Entity's business model in 
determining whether to impose any potential capital conditions? For 
example, should the Commission take into account the fact that a 
Covered Entity does not engage in unsecured lending and other 
activities more typical of banks?
    The first potential additional capital condition would require a 
Covered Entity to maintain an amount of assets that are allowable under 
Exchange Act rule 18a-1, after applying applicable haircuts under the 
Basel capital standard \35\ that equals or exceeds the Covered Entity's 
current liabilities coming due in the next 365 days. The objective of 
this condition is to require a Covered Entity to maintain sufficient 
liquidity to meet near-term liabilities through a simple computation, 
as compared to the net capital computation required by Exchange Act 
rule 18a-1. Generally, current liabilities are understood to mean those 
liabilities coming due within one year as distinct from long-term 
liabilities that mature in more than a year. The potential 365-day 
period is designed to align with that distinction between short-term 
and long-term liabilities to facilitate compliance with the condition. 
Because the condition does not address long-term liabilities, it would 
not necessarily leave the Covered Entity in position where each dollar 
of unsubordinated liabilities is matched by more than a dollar of 
highly liquid assets (as is the case with the net liquid assets test of 
Exchange Act rule 18a-1). However, it would provide a pool of highly 
liquid assets that can be used by the Covered Entity to avoid a near-
term liquidity strain that could imperil its ability to remain a going 
concern.\36\ The

[[Page 18346]]

condition's use of the Basel capital standard haircuts (as opposed to 
Exchange Act rule 18a-1 haircuts) is designed to tailor the condition 
to the Basel capital standard consistent with substituted compliance.
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    \35\ See standard supervisory haircuts under the Basel capital 
standards. BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
    \36\ See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 
43872, 43881 (Aug. 22, 2019) (``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.'').
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    The second potential additional capital condition would require 
that a Covered Entity make a quarterly record listing: (1) The assets 
maintained pursuant to the first potential additional capital 
condition, their value, and the amount of their applicable haircuts; 
and (2) the aggregate amount of the liabilities coming due in the next 
365 days. The requirement to create this record would enable the 
Commission or Commission staff to monitor compliance with the potential 
condition and facilitate examination of the Covered Entity with regard 
to substituted compliance. The quarterly interval between making this 
record (as opposed to a daily, weekly, or monthly interval) is designed 
to facilitate exams while minimizing the burden of the condition. 
Should the Commission require a shorter interval such as daily, weekly, 
or monthly or a longer one such as semi-annually or annually? Please 
explain.
    In considering these two potential conditions, the Commission 
recognizes that the LCR requires Covered Entities to maintain an amount 
of high quality liquid assets equal to or greater than their projected 
total net cash outflows over a prospective 30 calendar-day period. As 
discussed above, the first potential additional condition requires 
sufficient liquidity to address liabilities coming due over the next 
365 days. The longer period in the condition is designed to cover a 
greater amount of liabilities in order to further enhance the Covered 
Entity's liquidity to achieve an outcome more in line with the 
liquidity that results from the net liquid assets test of Exchange Act 
rule 18a-1. The Commission requests comment on how these conditions 
would compare to the LCR.
    The Commission requests comment and supporting data on the 
potential first two capital conditions. Is the term ``current 
liabilities'' understood by market participants? If not, please explain 
why and suggest alternative language. Is 365 days an appropriate number 
of days to use in connection with covering ``current liabilities''? If 
not, please explain why and suggest an alternative number of days. For 
example, would a period of 60, 90, 120, 150, 180, 210, 240, 270, 300, 
330, 420, 510 days or some other period of days be more appropriate in 
terms of enhancing the liquidity of Covered Entities applying 
substituted compliance to Exchange Act rule 18a-1? If so, explain why. 
If the Commission determines to use a number of days that is less than 
365, should the Commission use a term other than ``current 
liabilities'' such as ``short-term liabilities''? If so, explain why. 
The Commission requests comment on whether the haircuts under the Basel 
capital standard are the appropriate haircuts to apply under the 
proposed capital condition. If so, please explain why. Are they 
comparable to the haircuts under Exchange Act rule 18a-1? Would it 
impose a significant burden on Covered Entities to apply the haircuts 
under Exchange Act rule 18a-1 rather than under the Basel capital 
standard? If so, please explain why. Please identify any regulatory or 
operational issues in connection with these proposed capital 
conditions, including with maintaining a quarterly record.
    The third potential additional capital condition is that the 
Covered Entity maintain at least $100 million of equity capital 
composed of highly liquid assets as defined in the Basel capital 
standard. This potential condition is based on the $100 million 
tentative net capital requirement of Exchange Act rule 18a-1 for SBS 
Entities authorized to use models. The condition would be designed to 
ensure that Covered Entities applying substituted compliance with 
respect to Exchange Act rule 18a-1 have a minimum level of capital to 
absorb financial losses. Further, the LCR defines ``highly liquid 
assets'' and the use of that definition is designed to tailor the 
condition to the Basel capital standard consistent with the substituted 
compliance.
    The Commission requests comment and supporting data on the third 
potential additional capital condition. How would this potential 
minimum capital amount compare with the amounts of equity capital 
currently maintained by Covered Entities that would apply substituted 
compliance to Exchange Act rule 18a-1? Should the condition require a 
different amount of equity capital? For example, should the amount be 
$50, $75, $125, or $150 million or some other amount? If so, explain 
why. Are the terms ``highly liquid assets'' and ``equity capital'' 
understood by market participants? If not, please explain why and 
suggest alternative terms.
    The fourth potential additional capital condition is that the 
Covered Entity 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. 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 will file with 
the Commission to monitor the appropriateness of the capital condition 
if it is included in the final 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.
    The Commission requests comment on the fourth potential additional 
capital condition. Are there other means for the Commission to 
efficiently obtain this information? If so, explain how. Is the 
information presented in these reports prepared in accordance with the 
GAAP that the firm uses to prepare publicly available or available to 
be issued general purpose financial statements in its home 
jurisdiction?
    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 France 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.\37\ The Commission

[[Page 18347]]

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 potential additional capital conditions.
---------------------------------------------------------------------------

    \37\ Additional time and costs burdens may include employee 
costs and time to program software and computer systems to add an 
additional capital calculation into an existing system and firm 
processes and procedures, as well as ongoing time and expenses to 
monitor the calculations on an ongoing basis. Further, additional 
time and expense may be incurred with respect to any additional 
controls implemented to ensure compliance with the potential 
additional 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 as compared to SBS 
Entities complying with Exchange Act rule 18a-1? Please describe and 
explain.
    The Commission also requests comment on how the potential 
additional capital conditions compare to any existing capital 
requirements under the Basel capital standards (e.g., LCR, NSFR). For 
example, are there differences in the frequency or nature of 
calculations under the Basel capital standards?
    Please identify and describe any potential impacts on the way 
Covered Entities currently conduct their business with respect to 
implementing the potential additional capital conditions.
    The Commission further requests comment on whether the Commission 
should consider other potential conditions with respect to applying 
substituted compliance to Exchange Act rule 18a-1. Should the 
Commission consider imposing a potential capital condition that is more 
consistent with Exchange Act rule 18a-1? Please explain why or why not. 
Should the Commission consider a capital condition that includes higher 
requirements for a Covered Entity that holds a significant amount of 
illiquid assets? For example, if 20%, 30%, 40%, 50%, or some other 
percent of the Covered Entity's assets would not be allowable under 
Exchange Act rule 18a-1, should the firm be required to hold an amount 
of allowable assets to cover liabilities coming due over a longer 
period of time than a firm that does not exceed the percent threshold? 
If so, explain why and identify the appropriate percent threshold. 
Should the Commission consider including a condition prescribing a 
percent threshold of non-allowable assets under Exchange Act rule 18a-1 
held by the Covered Entity over which substituted compliance with 
respect to capital would not be permitted? If so, explain why and 
identify the appropriate percent threshold.
    The Commission requests comment on whether the Commission should 
consider imposing other potential capital conditions (or no conditions) 
if a Covered Entity's business with U.S. persons falls below a certain 
notional threshold, such as $8 billion, $20 billion, $50 billion, or 
some other threshold. Please explain which threshold may be appropriate 
or suggest an alternative.

D. Recordkeeping, Reporting, Notification, and Securities Count

    The Commission received comment asking it to eliminate conditions 
requiring a Covered Entity to be subject to and comply with EU or 
French requirements that either do not apply to the Covered Entity on 
an entity-wide basis or are not supervised by the Covered Entity's home 
regulator.\38\ The same commenter suggested as a possible solution that 
SBS Entities be permitted to elect to comply directly with U.S. law 
instead of EU or French requirements with respect to distinct 
requirements of the recordkeeping and reporting rules.
---------------------------------------------------------------------------

    \38\ SIFMA Letter at 2-4.
---------------------------------------------------------------------------

    Would it be appropriate to structure the Commission's substituted 
compliance determinations in the Order with respect to the 
recordkeeping and reporting rules to provide Covered Entities with 
greater flexibility to select which distinct requirements within the 
broader recordkeeping, reporting, notification, and securities count 
rules for which they want to apply substituted compliance? This 
approach of making substituted compliance determinations with respect 
to certain distinct requirements within the recordkeeping and reporting 
rules is illustrated in the proposed UK Order.\39\
---------------------------------------------------------------------------

    \39\ See paras. (f)(1) through (3) of the Proposed UK Order.
---------------------------------------------------------------------------

    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of 
providing greater flexibility would result in substituted compliance 
determinations with respect to the different categories of records 
these rules require SBS Entities to make, keep current, and/or 
preserve. 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) would be viewed in isolation 
as a distinct recordkeeping rule. This approach is illustrated in the 
Proposed UK Order.\40\ Would permitting Covered Entities to take a more 
granular approach to the requirements within these recordkeeping rules 
be appropriate for the final French Order? 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. Would 
this approach address commenters' concerns with respect to the proposed 
French Order? If so, explain why. If not, explain why not.
---------------------------------------------------------------------------

    \40\ See paras. (f)(1) and (2) of the Proposed UK Order.
---------------------------------------------------------------------------

    The EU cross-border condition was intended to address concerns that 
are relevant not only to certain requirements under MiFID and MAR as 
noted in the Proposed Order, but also to certain requirements under 
MiFIR (and other EU and French requirements adopted pursuant to MiFIR). 
Just as is true for certain requirements under MiFID and MAR, EU law 
allocates the responsibility for supervising and enforcing certain 
MiFIR requirements to authorities of the Member State where a Covered 
Entity provides certain services. If the Commission adopts the granular 
approach to recordkeeping, reporting, notification and securities count 
requirements suggested above, should it expand the EU cross-border 
condition described above in Section B to apply to the relevant 
requirements under MiFIR? Explain why or why not.
    Commenters suggested that the Commission distinguish between EU and 
French laws that are conditions to substituted compliance for non-
prudentially regulated SBS Entities versus prudentially regulated SBS 
Entities.\41\ Would this request be addressed if the Commission granted 
substituted compliance on a more granular level as described above and 
illustrated in the Proposed UK Order? If so, explain why. If not, 
explain why not.
---------------------------------------------------------------------------

    \41\ See SIFMA Letter at 8; FBF Letter at 2.
---------------------------------------------------------------------------

    Certain of the Commission's recordkeeping, reporting, and 
notification requirements are fully or partially linked to substantive 
Exchange Act requirements for which a positive

[[Page 18348]]

substituted compliance determination is preliminarily not being made 
under the proposed Order. In these cases, should the Commission not 
make a positive substituted compliance determination for the fully 
linked requirement in the recordkeeping or reporting rules or to the 
portion of the requirement that is linked to substantive Exchange Act 
requirements? In particular, should the Commission not make a positive 
substituted compliance determination for recordkeeping, reporting, or 
notification requirements linked to the following Exchange Act rules 
for which a positive substituted compliance determination is 
preliminarily not being made: (1) Exchange Act rule 10b-10; (2) 
Exchange Act rule 15Fh-4; (3) Exchange Act rule 15Fh-5; (4) Exchange 
Act rule 15Fh-6; (5) Exchange Act rule 18a-2; (6) Exchange Act rule 
18a-4; and (7) Regulation SBSR? This approach is illustrated in the 
Proposed UK Order.\42\ Is this approach appropriate for the final 
French Order? If not, explain why.
---------------------------------------------------------------------------

    \42\ See paras. (f)(1) through (4) of the Proposed UK Order.
---------------------------------------------------------------------------

    Certain of the requirements in the Commission's recordkeeping, 
reporting, and notification rules are linked to substantive Exchange 
Act requirements where a positive substituted compliance determination 
is being made under the proposed 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. In particular, should substituted compliance for 
recordkeeping, reporting, and notification requirements linked to the 
following Exchange Act rules be conditioned on the SBS Entity applying 
substituted compliance to the linked substantive Exchange Act rule: (1) 
Exchange Act rule 15Fh-3; (2) Exchange Act rule 15Fi-2; (3) Exchange 
Act rule 15Fi-3; (4) Exchange Act rule 15Fi-4; (5) Exchange Act rule 
15Fi-5; (6) Exchange Act rule 15Fk-1; (7) Exchange Act rule 18a-1; (8) 
Exchange Act rule 18a-3; (8) Exchange Act rule 18a-5; and (9) Exchange 
Act rule 18a-7? This approach is illustrated in the Proposed UK 
Order.\43\ Is this approach appropriate for the final French Order? If 
not, explain why.
---------------------------------------------------------------------------

    \43\ See paras. (f)(1) through (4) of the Proposed UK Order.
---------------------------------------------------------------------------

    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 will 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. This 
approach is illustrated in the Proposed UK Order.\44\ Is this approach 
appropriate for the final French Order? If not, explain why.
---------------------------------------------------------------------------

    \44\ See paras. (f)(1) through (5) of the Proposed UK Order.
---------------------------------------------------------------------------

    French credit institutions and finance companies are generally 
required to close their financial year on December 31.\45\ Moreover, 
the French substituted compliance application does not identify French 
laws that are comparable to Exchange Act rule 18a-7(i) (notice of 
change of fiscal year end). Consequently, is there a basis and a need 
for the Commission to make a positive substituted compliance 
determination with respect to the requirements in Exchange Act rule 
18a-7(i)? If so, explain why? Should the Commission condition a 
positive substituted compliance determination with respect to Exchange 
Act rule 18a-7(i) on the Covered Entity simultaneously transmitting to 
the Commission a copy of any comparable notice required to be sent by 
applicable French law, and including with the transmission the contact 
information of an individual who can provide further information about 
the matter that is the subject of the notice. If so, explain why. If 
not, explain why not.
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    \45\ See French Monetary and Financial Code article R. 511-6.
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E. Covered Entity Definition

    As discussed in the Proposed Order, Exchange Act rule 3a71-6 
provides that the Commission's assessment of the comparability of the 
requirements of the foreign financial regulatory system must account 
for the effectiveness of foreign authority's supervisory and 
enforcement frameworks.\46\ 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 for 
substituted compliance if--in practice--market participants are 
permitted to fall short of their regulatory obligations.
---------------------------------------------------------------------------

    \46\ See French Substituted Compliance Notice and Proposed 
Order, 85 FR at 85721 (citing Exchange Act rule 3a71-6(a)(2)(i)).
---------------------------------------------------------------------------

    The French Authorities' Application provided information about the 
AMF's and ACPR's supervisory framework. With respect to the AMF's 
supervision, the information related to Tier 1 firms. The Commission is 
therefore considering revising the definition of Covered Entity to be 
limited to credit institutions and investment firms that are supervised 
by the AMF under the Tier 1 framework through the single supervisory 
mechanism.
    Commenters are invited to address whether the change in the 
definition of Covered Entity is appropriate. Would the change result in 
the exclusion of any entities likely to register as SBS Entities in 
France from reliance on the substituted compliance order?

F. Internal Supervision and Compliance

    Finally, the Commission is considering revising paragraph (d)(3) to 
the proposal, which sets forth conditions to substituted compliance in 
connection with internal supervision and compliance. Under the 
potential revision, substituted compliance for internal supervision and 
compliance would encompass two additional sets of prerequisites (in 
addition to the other provisions identified in proposed paragraph 
(d)(3)): CRR articles 286-88 and 293, which address counterparty credit 
risk and risk management generally; and EMIR Margin RTS article 2, 
which addresses collateral-related risk management procedures. Those 
provisions, which also are incorporated within the proposed 
prerequisites to substituted compliance for internal risk management 
(proposed paragraph (b)(1)), promote analogous compliance goals as the 
other requirements identified within proposed paragraph (d)(3).\47\ 
Commenters are invited to address the appropriateness of this potential 
revision, particularly with regard to the goal of promoting regulatory 
outcomes that are comparable to those associated with the internal 
supervision and compliance requirements under the Exchange Act.
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    \47\ The Proposed UK Order similarly encompasses those 
provisions as part of the proposed prerequisites to substituted 
compliance for internal supervision and compliance requirements.

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[[Page 18349]]

    All comments received to date on the Proposed Order will be 
---------------------------------------------------------------------------
considered and need not be resubmitted.

    By the Commission.

    Dated: April 5, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-07254 Filed 4-7-21; 8:45 am]
BILLING CODE 8011-01-P