insolvency regime set forth under Title II of the Dodd-Frank Act or
the Federal Deposit Insurance Act. Documentation requirements under
applicable UK law would not be expected to address the disclosure of
information related to insolvency procedures under U.S. law.
    \134\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18383. Under the Exchange Act requirement, SBS Entities
must promptly report, to the Commission, valuation disputes in
excess of $20 million that have been outstanding for three or five
business days (depending on counterparty types). UK requirements
provide that firms must report at least monthly, to the FCA,
disputes between counterparties in excess of [euro]15 million and
outstanding for at least 15 business days.

---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

    After considering commenters' recommendations regarding the risk
control requirements, the Commission is making positive substituted
compliance determinations in connection with internal risk management,
trade acknowledgment and verification, portfolio reconciliation and
dispute reporting, portfolio compression, and trading relationship
documentation requirements. As discussed below, the final Order has
been changed from the proposed Order in certain respects in response to
comments.\135\
---------------------------------------------------------------------------

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

    One commenter expressed general support for the proposed approach
toward substituted compliance for the risk control provisions.\136\
Another commenter stated that UK requirements are not sufficiently
comparable to Exchange Act requirements.\137\ The Commission continues
to conclude that, taken as a whole, applicable requirements under UK
law subject Covered Entities to risk mitigation and documentation
practices that are appropriate to the risks associated with their
security-based swap businesses, and thus help to produce regulatory
outcomes that are comparable to the outcomes associated with the
relevant risk control requirements under the Exchange Act. Although the
Commission recognizes that there are differences between the approaches
taken by the relevant risk control requirements under the Exchange Act
and relevant UK requirements, the Commission continues to believe that
those differences on balance should not preclude substituted compliance
for these requirements, as the relevant UK requirements taken as a
whole help to produce comparable regulatory outcomes.
---------------------------------------------------------------------------

    \136\ See SIFMA 5/3/2021 Letter at 9. The commenter also
requested that the Commission not require a Covered Entity to be
subject to and comply with some of the UK risk control requirements
listed in the proposed Order. See SIFMA 5/3/2021 Letter at 9 and
Appendix A part (b). The Commission addresses those requests in the
relevant sections of this part IV below.
    \137\ See Better Markets Letter at 2. The commenter also stated
that, if the Commission nevertheless makes a positive substituted
compliance determination, it must at a minimum ensure that the
conditions in the proposed Order ``are applied with full force and
without exceptions or dilution.'' The Commission addresses that
comment in the relevant sections of this part IV below.
---------------------------------------------------------------------------

    To help ensure the comparability of outcomes, substituted
compliance for risk control requirements is subject to certain
conditions. Substituted compliance for internal risk management, trade
acknowledgment and verification, portfolio reconciliation and dispute
reporting, portfolio compression, and trading relationship
documentation requirements is conditioned on the Covered Entity being
subject to, and complying with, relevant UK requirements.\138\ In
addition, consistent with the proposed Order, substituted compliance
for portfolio reconciliation and dispute reporting requirements is
conditioned on the Covered Entity providing the Commission with reports
regarding disputes between counterparties on the same basis as the
Covered Entity provides those reports to the FCA pursuant to UK
law.\139\ Finally, consistent with the proposed Order, substituted
compliance for trading relationship documentation does not extend to
disclosures regarding legal and bankruptcy status that are required by
Exchange Act rule 15Fi-5(b)(5) when the counterparty is a U.S.
person.\140\ A Covered Entity that is unable to comply with an
applicable condition--and thus is not eligible to use substituted
compliance for the particular set of Exchange Act risk control
requirements related to that condition--nevertheless may use
substituted compliance for another set of Exchange Act requirements
addressed in the Order if it complies with the conditions to the
relevant parts of the Order.
---------------------------------------------------------------------------

    \138\ See paras. (b)(1) through (b)(5) of the Order.
    \139\ See paras. (b)(3)(ii) of the Order. This condition
promotes comparability with the Exchange Act rule requiring reports
to the Commission regarding significant valuation disputes, while
leveraging UK reporting provisions to avoid the need for Covered
Entities to create additional reporting frameworks. When it proposed
the condition to report valuation disputes, the Commission
recognized that valuation inaccuracies may lead to uncollateralized
credit exposure and the potential for loss in the event of default.
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621
(Feb. 15, 2019). It thus is important that the Commission be
informed regarding valuation disputes affecting SBS Entities. The
principal difference between the Exchange Act and UK valuation
dispute reporting requirements concerns the timing of notices.
Exchange Act rule 15Fi-3 requires SBS Entities to report promptly to
the Commission valuation disputes in excess of $20 million that have
been outstanding for three or five business days (depending on the
counterparty type). UK EMIR RTS article 15(2) requires financial
counterparties to report to the FCA at least monthly any disputes
between counterparties in excess of [euro]15 million and outstanding
for at least 15 business days. The Commission is mindful that the UK
provision does not provide for notice as quickly as rule 15Fi-3, but
in the Commission's view on balance this difference would not be
inconsistent with the conclusion that the two sets of requirements,
taken as a whole, promote comparable regulatory outcomes.
    \140\ See para. (b)(5) of the Order. The Exchange Act rule 15Fi-
5 disclosures address information regarding (1) the status of the
SBS Entity or its counterparty as an insured depository institution
or financial counterparty and (2) the possibility that in certain
circumstances the SBS Entity or its counterparty may be subject to
the insolvency regime set forth in Title II of the Dodd-Frank Wall
Street Reform and Consumer Protection Act or the Federal Deposit
Insurance Act, which may affect rights to terminate, liquidate, or
net security-based swaps. See Exchange Act Release No. 87782 (Dec.
18, 2019), 85 FR 6359, 6374 (Feb. 4, 2020) (``Risk Mitigation
Adopting Release''). Documentation requirements under applicable UK
law do not address the disclosure of information related to
insolvency procedures under U.S. law. However, the absence of such
disclosures would not appear to preclude a comparable regulatory
outcome when the counterparty is not a U.S. person, as the
insolvency-related consequences that are the subject of the
disclosure would not apply to non-U.S. counterparties in most cases.
Moreover, UK EMIR Margin RTS article 2 requires counterparties to
establish, apply, and document risk management procedures providing
for or specifying the terms of agreements entered into by the
counterparties, including applicable governing law for non-centrally
cleared derivatives. When counterparties enter into a netting or
collateral exchange agreement, they also must perform an independent
legal review of the enforceability of those agreements.
---------------------------------------------------------------------------

    Under the Order, substituted compliance for risk control
requirements (relating to internal risk management, trade
acknowledgment and verification, portfolio reconciliation and dispute
reporting, portfolio compression, and trading relationship
documentation) is not subject to a condition that the Covered Entity
apply substituted compliance for related recordkeeping requirements in
Exchange Act rules 18a-5 and 18a-6. A Covered Entity that applies
substituted compliance for one or more risk control requirements, but
does not apply substituted compliance for the related recordkeeping
requirements in Exchange Act rules 18a-5 and 18a-6, will remain subject
to the relevant provisions of Exchange Act rules 18a-5 and 18a-6. Those
rules require the Covered Entity to make and preserve records of its
compliance with Exchange Act risk control requirements and of its
security-based swap activities required or governed by those
requirements. A Covered Entity that applies substituted compliance for
a risk control requirement, but complies directly with related
recordkeeping requirements in rules 18a-5 and 18a-6, therefore must
make and preserve records of its compliance with the relevant
conditions to the Order and of its security-based swap activities
required or governed by those conditions and/or referenced in the
relevant parts of rules 18a-5 and 18a-6.
    The Commission details below its consideration of comments on the
proposed Order.
1. Internal Risk Management
    Exchange Act section 15F(j)(2) requires a registered SBS Entity to
establish robust and professional risk

management systems adequate for managing its day-to-day business. In
addition, Exchange Act rule 15Fh-3(h)(2)(iii)(I) \141\ requires an SBS
Entity to establish and maintain a system to supervise, and to
diligently supervise, its business and the activities of its associated
persons. This system of internal supervision must include, in relevant
part, the establishment, maintenance, and enforcement of written
policies and procedures reasonably designed, taking into consideration
the nature of the SBS Entity's business, to comply with its duty under
Exchange Act section 15F(j)(2) to establish an internal risk management
system.
---------------------------------------------------------------------------

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

    The Commission continues to believe that UK internal risk
management requirements promote regulatory outcomes comparable to
Exchange Act requirements, and is making a positive substituted
compliance determination for internal risk management requirements that
is consistent with the proposed Order except for the addition of
certain risk management requirements. A commenter requested that the
Commission not require a Covered Entity to be subject to and comply
with certain of the UK requirements specified in the proposed
Order.\142\ By contrast, another commenter stated that, if the
Commission makes a positive substituted compliance determination, it
must at a minimum ensure that the conditions in the proposed Order
``are applied with full force and without exceptions or dilution.''
\143\ The Commission details below its consideration of comments
received.
---------------------------------------------------------------------------

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

    A commenter stated that the Commission should delete from the Order
the provisions of FCA IFPRU, FCA BIPRU, and FCA SYSC 19A listed in
paragraphs (b)(1)(i) and (b)(1)(iv) of the proposed Order. These
provisions apply only to IFPRU investment firms, and the commenter
stated that it expects only ``banks and PRA-designated investment
firms'' will register as SBS Entities.\144\ For the reasons described
in part III.B.2.e above, the Commission is retaining the references to
these provisions.
---------------------------------------------------------------------------

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

    Similarly, the commenter stated that the Commission should delete
from the Order the provisions of FSMA and FCA COND listed in paragraph
(b)(1)(v) of the proposed Order that apply to firms regulated only by
the FCA, rather than to firms dually regulated by both the FCA and the
PRA.\145\ The commenter again stated that it expects only dually
regulated ``banks and PRA-designated investment firms'' will register
as SBS Entities.\146\ The proposed Order would not require a Covered
Entity that is a dually regulated firm to be subject to and comply with
these provisions. Rather, paragraph (b)(1)(v) of the proposed Order
would require the Covered Entity to be subject to and comply with
either the provisions of FSMA and FCA COND that apply to solo-regulated
firms or analogous provisions that apply to dually regulated firms.
Accordingly, the Commission is retaining the references to these
provisions.
---------------------------------------------------------------------------

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

    The commenter also recommended that the Commission delete from the
Order the following provisions because they do not correspond to and go
beyond Exchange Act internal risk management requirements: \147\
---------------------------------------------------------------------------

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

     PRA Internal Capital Adequacy Assessment Rules 4.1 through
4.4, which implement CRD article 79, address a Covered Entity's
management of credit and counterparty risk. PRA Internal Capital
Adequacy Assessment Rule 5.1, which implements CRD article 80,
addresses a Covered Entity's management of residual risk. PRA Internal
Capital Adequacy Assessment Rule 6.1, which implements CRD article 81,
addresses a Covered Entity's management of concentration risk. PRA
Internal Capital Adequacy Assessment Rules 7.1 and 7.2, which implement
CRD article 82, address a Covered Entity's management of securitization
risk. PRA Internal Capital Adequacy Assessment Rules 8.1 through 8.5,
which implement CRD article 83, address a Covered Entity's management
of market risk. PRA Internal Capital Adequacy Assessment Rule 9.1,
which implements CRD article 84, addresses a Covered Entity's
management of interest rate risk. PRA Internal Capital Adequacy
Assessment Rules 10.1 and 10.2, which implement CRD article 85, address
a Covered Entity's management of operational risk. PRA Internal
Liquidity Adequacy Assessment Rules 3.1 through 3.3, 4.1, 7.2, 8.1,
9.2, 11.1, 11.2, 11.4, 12.1, 12.3, and 12.4, which implement CRD
article 86, address a Covered Entity's management of liquidity risk and
funding risk. PRA Internal Capital Adequacy Assessment Rules 11.1
through 11.3, which implement CRD article 87, address a Covered
Entity's management of risk from excessive leverage.
     FCA SYSC 4.1.1R, which implements a portion of CRD article
74(1), requires a Covered Entity to have robust governance
arrangements, including effective processes to identify, manage,
monitor, and report the risks it is or might be exposed to. FCA SYSC
4.1.2R and PRA General Organisational Requirement Rule 2.2, which
implement CRD article 74(2), requires these arrangements and processes
to be comprehensive and proportionate to the nature, scale, and
complexity of the risks of the Covered Entity's business and
activities. FCA SYSC 7.1.4R, 7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R,
7.1.20R, 7.1.21R, and 7.1.22R and PRA Risk Control Rules 2.3, 2.7, and
3.1 through 3.5, which implement CRD article 76, address the Covered
Entity's internal governance structures for risk management.
     FCA SYSC 19D.2.1R and PRA Remuneration Rule 6.2 require a
Covered Entity to establish and maintain a remuneration policy,
practices, and procedures that are consistent with and that promote
sound and effective risk management.\148\
---------------------------------------------------------------------------

    \148\ The FCA also recommended that the Commission delete from
the Order the requirement for a Covered Entity to be subject to and
comply with provisions of FCA SYSC 19D and PRA Remuneration Rule 6.2
(along with corollary provisions of FCA SYSC 19A applicable to IFPRU
firms) as a condition to substituted compliance for internal risk
management requirements. See FCA Comments (stating that ``these
provisions appear in excess of what is strictly required for
substituted compliance with the US provision'').
---------------------------------------------------------------------------

     FSMA schedule 6 part 3C and FCA COND 2.4.1C, which address
issues similar to MiFID articles 16(4) and (5), require the Covered
Entity's non-financial resources to be appropriate in relation to its
regulated activities, taking into account factors such as the nature
and scale of the business, the risks to the continuity of the Covered
Entity's services, the Covered Entity's membership in a group or any
effect that membership may have, the skills and experience of those
managing the Covered Entity's affairs, and whether the Covered Entity's
non-financial resources are sufficient to enable it to comply with
applicable requirements of the FCA. FSMA schedule 6 part 5D, which also
addresses issues similar to MiFID articles 16(4) and (5), requires the
Covered Entity's business to be conducted in a prudent manner, which
requires the Covered Entity to have appropriate financial and non-
financial resources, taking into account factors such as the nature and
complexity of the

Covered Entity's regulated activities, the nature and scale of the
business, and the risks to the continuity of the Covered Entity's
services. To have appropriate non-financial resources, the Covered
Entity in particular must have resources to identify, monitor, measure,
and take action to remove or reduce risks to the accuracy of the
Covered Entity's valuation of its assets and liabilities, be managed to
a reasonable standard of effectiveness and have non-financial resources
sufficient to enable it to comply with applicable requirements of the
PRA. PRA Fundamental Rules 3 through 6 similarly require the Covered
Entity to act in a prudent manner, maintain adequate financial
resources at all times, have effective risk strategies and risk
management systems and organize and control its affairs responsibly and
effectively.
     UK CRR article 286 requires a Covered Entity to establish
and maintain a counterparty credit risk management framework, including
policies, processes, and systems to ensure the identification,
measurement, approval, and internal reporting of counterparty credit
risk and procedures for ensuring that those policies, processes, and
systems are complied with. UK CRR article 287 addresses the internal
governance of risk control and collateral management functions for
Covered Entities that use internal models to calculate capital
requirements. UK CRR article 288 requires the Covered Entity to conduct
regular, independent reviews of its counterparty credit risk management
systems and any risk control and collateral management functions
required by UK CRR article 287. UK CRR article 293 addresses internal
governance of the Covered Entity's internal risk management systems and
validation of risk models that the Covered Entity uses.
     UK EMIR Margin RTS article 2 requires counterparties to
non-centrally cleared OTC derivative contracts to establish, apply, and
document risk management procedures for the exchange of collateral.
     UK MiFID Org Reg article 21 \149\ addresses a Covered
Entity's systems, internal controls, and arrangements for management of
a variety of risk areas, including internal decision-making,
allocation, proper discharge of responsibilities, compliance with
decisions and internal procedures, employment of personnel able to
discharge their responsibilities, internal reporting and communication
of information, adequate and orderly recordkeeping, safeguarding
information, business continuity, and accounting policies and
procedures, as well as regular evaluation of the adequacy and
effectiveness of those systems, internal controls, and arrangements. UK
MiFID Org Reg article 22 addresses a Covered Entity's policies and
procedures for detecting and minimizing risk of failure to comply with
its obligations under UK provisions that implement MiFID, as well as
the Covered Entity's independent compliance function that monitors and
assesses the adequacy and effectiveness of those policies and
procedures. UK MiFID Org Reg article 24 addresses a Covered Entity's
internal audit function that evaluates the adequacy and effectiveness
of the Covered Entity's systems, internal controls, and arrangements.
---------------------------------------------------------------------------

    \149\ The commenter stated that these requirements are more
appropriately addressed in connection with substituted compliance
for internal supervision and chief compliance officer requirements.
As discussed below, the Commission believes that these UK
requirements are relevant to substituted compliance for Exchange Act
internal risk management requirements.
---------------------------------------------------------------------------

    Taken as a whole, these UK requirements help to produce regulatory
outcomes comparable to Exchange Act requirements to establish robust
and professional internal risk management systems adequate for managing
the Covered Entity's day-to-day business. The comparability analysis
requires consideration of Exchange Act requirements as a whole against
analogous UK requirements as a whole, recognizing that U.S. and non-
U.S. regimes may follow materially different approaches in terms of
specificity and technical content. This ``as a whole'' approach--which
the Commission is following in lieu of requiring requirement-by-
requirement similarity--further means that the conditions to
substituted compliance should encompass all UK requirements that
establish comparability with the applicable regulatory outcome, and
helps to avoid ambiguity in the application of substituted compliance.
It would be inconsistent with the holistic approach to excise relevant
requirements and leave only the residual UK provisions that most
closely resemble the analogous Exchange Act requirements.\150\
Moreover, because Exchange Act internal risk management requirements
serve the purpose of establishing internal systems to manage the
Covered Entity's risks, including risks of non-compliance with
applicable laws, it would be paradoxical to conclude that an SBS Entity
that fails to implement requisite internal supervision practices
nonetheless may be considered to be following internal risk management
standards that are sufficient to meet the regulatory outcomes required
under the Exchange Act; an internal supervision-related failure
necessarily also constitutes a risk management failure. For these
reasons, the Commission concludes that these UK provisions
appropriately constitute part of the substituted compliance conditions
for internal risk management requirements and is retaining the
references to these provisions. In reaching this conclusion, the
Commission emphasizes the importance of ensuring that substituted
compliance is grounded on the comparability of regulatory outcomes.
Retaining the conditions of the Order related to these UK provisions
also should address another commenter's concern that any substituted
compliance determination not weaken the internal risk management
conditions in the proposed Order.\151\
---------------------------------------------------------------------------

    \150\ The Commission further believes that those conditions to
substituted compliance do not expand the scope of Exchange Act
requirements because substituted compliance is an option available
to non-U.S. person SBS Entities--not a mandate.
    \151\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    In addition, the Commission is adding a requirement for a Covered
Entity using substituted compliance for internal risk management
requirements to be subject to and comply with provisions that implement
MiFID articles 16 and 23, provisions of UK MiFID Org Reg related to
MiFID articles 16 and 23, and provisions that implement CRD articles
88(1), 91(1), (2), and (7) through (9), 92, 94, and 95.\152\ These
provisions address additional aspects of a Covered Entity's management
of the risks posed by internal governance and organization, business
operations, conflicts of interest with and between clients, and senior
staff remuneration policies. In deciding to make a positive substituted
compliance determination for UK internal risk management requirements,
the Commission considers that the Order's condition requiring a Covered
Entity to be subject to and comply with all of the UK internal risk
management requirements listed in paragraph (b)(1) of the Order help to
produce regulatory outcomes comparable to Exchange Act internal risk
management requirements. In deciding to make a positive substituted
compliance determination for UK internal risk management requirements,
the Commission considers that the Order's condition requiring a Covered
Entity to be subject to and comply with all of the UK requirements
listed in paragraph (b)(1)

of the Order help to produce regulatory outcomes comparable to Exchange
Act internal risk management requirements. The Commission recognizes
that some of the UK requirements related to internal risk management
follow a more granular approach than the high-level approach of
Exchange Act internal risk management requirements, but these UK
requirements, taken as a whole, are crafted to promote a Covered
Entity's risk management. Within the requisite outcomes-oriented
approach for analyzing comparability, the Commission concludes that a
Covered Entity's failure to comply with any of those UK internal risk
management requirements would be inconsistent with a Covered Entity's
obligations under Exchange Act internal risk management requirements
and that compliance with the full set of UK internal risk management
requirements listed in paragraph (b)(1) of the Order would promote
comparable regulatory outcomes.
---------------------------------------------------------------------------

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

2. Trade Acknowledgement and Verification
    The Commission continues to believe that UK trade acknowledgment
and verification requirements promote regulatory outcomes comparable to
Exchange Act requirements, and is making a positive substituted
compliance determination for trade acknowledgment and verification
requirements consistent with the proposed Order. The Commission details
below its consideration of comments received.
    One commenter stated that the Commission inappropriately attempted
to compensate for inadequate UK trade acknowledgment and verification
requirements by relying on guidance.\153\ The same commenter stated
that, if the Commission nevertheless makes a positive substituted
compliance determination, it must at a minimum ensure that the
conditions in the proposed Order ``are applied with full force and
without exceptions or dilution.'' \154\ The commenter misinterpreted
the role of guidance in the Commission's comparability analysis.
---------------------------------------------------------------------------

    \153\ See Better Markets Letter at 5-6 (arguing that the
Commission's reliance ``on multiple layers of non-binding guidance,
one of which is issued by a jurisdiction the UK does not belong to,
one of which is so vague as to border on useless, would be an
abdication of the SEC's responsibility to protect the U.S. financial
system'').
    \154\ See Better Markets Letter at 2.
---------------------------------------------------------------------------

    UK EMIR article 11 requires ``financial counterparties'' and ``non-
financial counterparties'' to ensure appropriate procedures and
arrangements are in place to achieve timely confirmation of the terms
of an OTC derivative contract.\155\ Similarly, UK EMIR RTS article 12
requires non-centrally cleared OTC derivative contracts between
``financial counterparties'' and ``non-financial counterparties'' to be
confirmed.\156\ These counterparty categories do not include entities
organized outside the UK, such as U.S. persons.\157\ Confirmation means
the documentation of the agreement of the counterparties to all the
terms of the OTC derivative contract.\158\ The UK requirements as a
whole thus require a Covered Entity \159\ to provide a confirmation
that serves as a trade acknowledgment, without regard to where its
counterparty is organized, and also require the Covered Entity's
counterparty, when it is a financial counterparty or non-financial
counterparty, to provide a confirmation that serves as the trade
verification, and the Commission considers these requirements to
promote regulatory outcomes comparable to Exchange Act trade
acknowledgment and verification requirements for those counterparties.
The UK requirements in most instances do not require a Covered Entity's
counterparty that is organized outside the UK to provide a confirmation
that serves as the Exchange Act trade verification,\160\ though they do
require the Covered Entity to confirm the transaction.\161\
Confirmation is defined as documenting the agreement of the Covered
Entity and its counterparty to all the terms of the OTC derivative
contract.\162\
---------------------------------------------------------------------------

    \155\ See UK EMIR article 11(1)(a).
    \156\ See UK EMIR RTS articles 12(1) and (2).
    \157\ See UK EMIR article 2(8) (definition of ``financial
counterparty''); UK EMIR article 2(9) (definition of ``non-financial
counterparty'').
    \158\ See UK EMIR RTS article 1(c).
    \159\ The Order defines a Covered Entity to include a MiFID
investment or a third country investment firm. A MiFID investment
firm is included in the definition of ``financial counterparty,'' so
a Covered Entity that is a MiFID investment firm is also a financial
counterparty and thus is ``subject to'' UK EMIR article 11 and
related provisions of UK EMIR RTS and UK EMIR Margin RTS for
purposes of the Order. A third country investment firm is not
included in the definitions of ``financial counterparty'' or ``non-
financial counterparty,'' but may nevertheless be ``subject to'' UK
EMIR article 11 and related provisions of UK EMIR RTS and UK EMIR
Margin RTS for purposes of the Order if its OTC derivative contract
would be subject to those obligations if it were established in the
UK and either the contract has a direct, substantial, and
foreseeable effect within the UK or applying UK EMIR article 11 is
necessary or appropriate to prevent evasion of UK EMIR. See UK EMIR
article 11(12).
    \160\ See UK EMIR article 2(8) (definition of ``financial
counterparty'' limited to entities defined or authorized in a manner
that in most instances is reserved for UK-established entities); UK
EMIR article 2(9) (definition of ``non-financial counterparty''
limited to UK-established entities); UK EMIR article 11(1)(a),
11(12) (confirmation requirement applies to financial
counterparties, non-financial counterparties, and third-country
entities that would be subject to the confirmation requirement if
established in the UK and either the relevant contract has a direct,
substantial, and foreseeable effect in the UK or the obligation is
necessary or appropriate to prevent the evasion of any provision of
UK EMIR).
    \161\ Paragraph (b)(2) of the Order requires the Covered Entity
to be subject to and comply with UK EMIR-based trade acknowledgment
and verification requirements. A Covered Entity will be subject to
those requirements only if it is a financial counterparty, non-
financial counterparty, or third-country entity that would be
subject to the confirmation requirement if established in the UK and
either the relevant contract has a direct, substantial, and
foreseeable effect in the UK or the obligation is necessary or
appropriate to prevent the evasion of any provision of UK EMIR. See
UK EMIR article 11(1)(a), 11(12).
    \162\ See UK EMIR RTS article 1(c).
---------------------------------------------------------------------------

    To confirm that the Commission's analysis of the UK requirements
for OTC derivatives contracts with non-UK-organized counterparties is
consistent with the FCA's view of these requirements, the Commission
considered the requirements together with guidance on this exact point
from the FCA and ESMA.\163\ In interpreting EU confirmation
requirements that are identical to the relevant UK requirements, ESMA's
guidance provides that ``when an EU counterparty is transacting with a
third country entity, the EU counterparty would be required to ensure
that the requirements for . . . timely confirmation . . . are met for
the relevant . . . transactions even though the third country entity
would not itself be subject to EMIR.'' \164\ That guidance also
provides that compliance with the EMIR confirmation requirements means
``reach[ing] a legally binding agreement to all the terms of an OTC
derivative contract.'' \165\ The FCA has published guidance indicating
that ESMA's guidance ``will remain relevant [after the UK's exit from
the EU] to the FCA and market participants in their compliance with
regulatory requirements.'' \166\ This

guidance thus is consistent with the Commission's analysis of the
legally binding UK requirements discussed above, and provides the
Commission additional comfort that its analysis of complex UK
requirements is consistent with the FCA's view of those requirements.
For these reasons, the Commission disagrees with the commenter and
believes that the UK trade acknowledgment and verification requirements
promote regulatory outcomes comparable to Exchange Act requirements.
---------------------------------------------------------------------------

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

    The Commission agrees with the comments in the Better Markets
Letter that the proposed conditions to substituted compliance for trade
acknowledgment and verification requirements should be retained. To
further ensure that a Covered Entity using substituted compliance for
trade acknowledgment and verification requirements will be required to
document the agreement of the counterparties to all the terms of the
relevant transaction, the Commission is issuing the Order as proposed
with general conditions that will require the Covered Entity to treat
its counterparty as a counterparty with whom UK trade acknowledgment
and verification requirements require the Covered Entity to reach an
agreement to all the terms of the OTC derivative contract and to ensure
that the relevant security-based swap is either non-centrally cleared
and subject to UK EMIR or centrally cleared by a UK central
counterparty.\167\
---------------------------------------------------------------------------

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

    Another commenter expressed general support for the proposed
approach toward substituted compliance for the risk control provisions,
but requested that the Commission not require a Covered Entity to be
subject to and comply with UK EMIR RTS article 12(4) because it does
not relate to and goes beyond Exchange Act trade acknowledgment and
verification requirements.\168\ As part of the UK's framework for trade
acknowledgment and verification, UK EMIR RTS article 12(4) requires a
Covered Entity to have the necessary procedure to report on a monthly
basis to the FCA the number of unconfirmed, non-centrally cleared OTC
derivative transactions that have been outstanding for more than five
business days. Though Exchange Act rule 15Fi-2 does not have a similar
requirement to report unconfirmed trades, the Commission considers that
UK EMIR RTS article 12(4)'s requirement to report unconfirmed trades to
the FCA is an inseparable part of the UK's framework for trade
acknowledgment and verification, as those reports support the UK
framework's mandate to confirm transactions. Requiring a Covered Entity
to be subject to and comply with UK EMIR RTS article 12(4) thus is
consistent with a holistic approach for comparing regulatory outcomes
that reflects the whole of a jurisdiction's relevant requirements.
Accordingly, the Order retains as a condition to substituted compliance
for trade acknowledgment and verification requirements the requirement
that the Covered Entity be subject to and comply with the entirety of
UK EMIR RTS article 12.
---------------------------------------------------------------------------

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

    In summary, the Commission continues to believe that UK
requirements promote the goal of avoiding legal and operational risks
through requirements for written records of transactions and procedures
to avoid disagreements regarding the meaning of transaction terms, in a
manner that is comparable to the purpose of Exchange Act rule 15Fi-2.
The Commission is retaining the proposed conditions to substituted
compliance for trade acknowledgment and verification, consistent with
the approach advocated by a commenter.\169\ While the Commission
recognizes the differences between UK requirements and Exchange Act
trade acknowledgment and verification requirements, in the Commission's
view those differences on balance would not preclude substituted
compliance, particularly as requirement-by-requirement similarity is
not needed for substituted compliance. The commenter's request for a
``well-supported, evidence-based determination'' has been met here in
the context of the requisite holistic analysis,\170\ and the
commenter's suggestion that there is a need for analysis regarding
protection of the American financial system has been addressed
above.\171\
---------------------------------------------------------------------------

    \169\ See Better Markets Letter at 2.
    \170\ See Better Markets Letter at 4 (requesting the Commission
make a ``well-supported, evidence-based determination''). As
discussed in part II.C.1 above, the Commission believes that the
present approach toward comparability analyses--which are based on a
close reading of relevant foreign requirements and careful
consideration of regulatory outcomes--appropriately reflects the
holistic comparability approach and the rejection of requirement-by-
requirement similarity.
    \171\ See Better Markets Letter at 3-4 (stating that the
Commission must provide analysis that the substituted compliance
determination would protect the American financial system). As
discussed in part II.C.1 above, the Commission believes that
additional conditions related to protection of the American
financial system would not be useful.
---------------------------------------------------------------------------

3. Portfolio Reconciliation and Dispute Reporting
    One commenter expressed general support for the proposed approach
toward substituted compliance for the risk control provisions.\172\
Another commenter stated that, if the Commission makes a positive
substituted compliance determination, it must at a minimum ensure that
the conditions in the proposed Order ``are applied with full force and
without exceptions or dilution.'' \173\ The Commission continues to
believes that UK portfolio reconciliation and dispute reporting
requirements promote regulatory outcomes comparable to Exchange Act
requirements, by subjecting Covered Entities to risk mitigation
practices that are appropriate to the risks associated with their
security-based swap businesses, and is making a positive substituted
compliance determination for portfolio reconciliation and dispute
reporting requirements consistent with the proposed Order.\174\
Substituted compliance in connection with the dispute reporting
requirements is conditioned in part on the Covered Entities providing
the Commission with reports regarding disputes between counterparties
on the same basis as the entities provide those reports to competent
authorities pursuant to UK law, to allow the Commission to obtain
notice regarding key information in a manner that makes use of existing
obligations under UK law.\175\
---------------------------------------------------------------------------

    \172\ See SIFMA 5/3/2021 Letter at 9.
    \173\ See Better Markets Letter at 2.
    \174\ See para. (b)(3) of the Order.
    \175\ See para. (b)(3)(ii) of the Order. The Commission
recognizes the differences between the two sets of requirements--
under which Exchange Act rule 15Fi-3 requires SBS Entities to report
valuation disputes in excess of $20 million that have been
outstanding for three or five business days (depending on
counterparty types), while UK EMIR RTS article 15(2) requires firms
to report disputes between counterparties in excess of [euro]15
million and outstanding for at least 15 business days. In the
Commission's view, the two requirements produce comparable
regulatory outcomes notwithstanding those differences.
---------------------------------------------------------------------------

4. Portfolio Compression
    One commenter expressed general support for the proposed approach
toward substituted compliance for the risk control provisions.\176\
Another commenter stated that, if the Commission makes a positive
substituted compliance determination, it must at a minimum ensure that
the conditions in the proposed Order ``are applied with full force and
without exceptions or dilution.'' \177\ The

Commission continues to believe that UK portfolio compression
requirements promote regulatory outcomes comparable to Exchange Act
requirements, by subjecting Covered Entities to risk mitigation
practices that are appropriate to the risks associated with their
security-based swap businesses, and is making a positive substituted
compliance determination for portfolio compression requirements
consistent with the proposed Order.\178\
---------------------------------------------------------------------------

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

5. Trading Relationship Documentation
    The Commission continues to believe that UK trading relationship
documentation requirements promote regulatory outcomes comparable to
Exchange Act requirements, and is making a positive substituted
compliance determination for trading relationship documentation
requirements consistent with the proposed Order. The Commission details
below its consideration of comments received.
    One commenter stated that the Commission inappropriately attempted
to compensate for inadequate UK trading relationship documentation
requirements by relying on guidance.\179\ The same commenter stated
that, if the Commission nevertheless makes a positive substituted
compliance determination, it must at a minimum ensure that the
conditions in the proposed Order ``are applied with full force and
without exceptions or dilution.'' \180\ The commenter misinterpreted
the role of guidance in the Commission's comparability analysis. The
proposed Order would require a Covered Entity to be subject to and
comply with UK EMIR article 11(1)(a), UK EMIR RTS article 12, and UK
EMIR Margin RTS article 2. The Commission highlights the special
importance of UK EMIR Margin RTS article 2, which addresses risk
management procedures related to the exchange of collateral, including
procedures related to the terms of all necessary agreements to be
entered into by counterparties (e.g., payment obligations, netting
conditions, events of default, calculation methods, transfers of rights
and obligations upon termination, and governing law). Those obligations
are denoted as being connected to collateral exchange obligations, and
the Commission believes that they are necessary to help produce a
regulatory outcome that mitigates risk in a manner that is comparable
to the outcome associated with the Exchange Act trading relationship
documentation requirements. To bridge any gap left by UK EMIR Margin
RTS article 2, the Commission is also requiring compliance with UK EMIR
article 11(1)(a) and UK EMIR RTS article 12, which, as discussed in
part IV.B.2 above, require the Covered Entity to confirm the
transaction, with confirmation defined as documentation of the
agreement of the counterparties to all the terms of the OTC derivative
contract. Also as discussed in part IV.B.2 above, the Commission
consulted guidance from the FCA and ESMA to confirm that the
Commission's analysis of those complex UK requirements was consistent
with the FCA's view of those requirements.\181\ The Commission thus
agrees with the commenter that the proposed conditions to substituted
compliance for trading relationship documentation requirements should
be retained. To further ensure that a Covered Entity using substituted
compliance for trading relationship documentation requirements will be
required to document the agreement of the counterparties to all the
terms of the relevant transaction, the Commission is issuing the Order
as proposed with two general conditions that will require the Covered
Entity to treat its counterparty as a financial counterparty or non-
financial counterparty when complying UK trade acknowledgment and
verification requirements.\182\
---------------------------------------------------------------------------

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

    Another commenter expressed general support for the proposed
approach toward substituted compliance for the risk control provisions,
but requested that the Commission not require a Covered Entity to be
subject to and comply with UK EMIR RTS article 12(4) because it does
not relate to and goes beyond Exchange Act trading relationship
documentation requirements.\183\ For the reasons described in part
IV.B.2 above, the Commission is retaining the reference to this
provision.
---------------------------------------------------------------------------

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

    Accordingly, the Commission continues to believe that UK
requirements promote regulatory outcomes comparable to Exchange Act
trading relationship documentation requirements. While the Commission
recognizes that these and certain other differences between UK
requirements and Exchange Act trading relationship documentation
requirements, in the Commission's view those differences on balance
would not preclude substituted compliance, particularly as requirement-
by-requirement similarity is not needed for substituted compliance.

V. Substituted Compliance for Capital and Margin Requirements

A. Proposed Approach

    The FCA Application in part requested substituted compliance in
connection with capital and margin requirements relating to:
     Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 and its appendices
(collectively ``Exchange Act rule 18a-1'') applicable to certain SBS
Entities.\184\ Exchange Act rule 18a-1 helps to ensure the SBS Entity
maintains at all times sufficient liquid assets to promptly satisfy its
liabilities, and to provide a cushion of liquid assets in excess of
liabilities to cover potential market, credit, and other risks. The
rule's net liquid assets test standard protects customers and
counterparties and mitigates the consequences of an SBS Entity's
failure by promoting the ability of the firm to absorb financial shocks
and, if necessary, to self-liquidate in an orderly manner.\185\ As part
of the capital requirements, security-based swap dealers without a
prudential regulator also must comply with the internal risk management
control requirements of Exchange Act

rule 15c3-4 with respect to certain activities.\186\
---------------------------------------------------------------------------

    \184\ 17 CFR 240.18a-1 through 18a-1d. Exchange Act rule 18a-1
applies to security-based swap dealers that: (1) Do not have a
prudential regulator and (2) are either: (a) Not dually registered
with the Commission as a broker-dealer; or (b) are dually registered
with the Commission as a special purpose broker-dealer known as an
OTC derivatives dealer. Security-based swap dealers that are dually
registered with the Commission as a full-service broker-dealer are
subject to the capital requirements of Exchange Act rule 15c3-1 (17
CFR 240.15c3-1) for which substituted compliance is not available.
See 17 CFR 240.3a71-6(d)(4)(i) (making substituted compliance
available only with respect to the capital requirements of Exchange
Act section 15F(e) and Exchange Act rule 18a-1).
    \185\ See Exchange Act Release No. 86175 (June 21, 2019), 84 FR
43872, 43879-83 (Aug. 22, 2019) (``Capital and Margin Adopting
Release''). The capital standard of Exchange Act rule 18a-1 is based
on the net liquid assets test of Exchange Act rule 15c3-1 applicable
to broker-dealers. See Capital and Margin Adopting Release, 84 FR
43872, 43879-83. The net liquid assets test seeks to promote
liquidity by requiring that a firm maintain sufficient liquid assets
to meet all liabilities, including obligations to customers,
counterparties, and other creditors, and, in the event a firm fails
financially, to have adequate additional resources to wind-down its
business in an orderly manner without the need for a formal
proceeding. See Capital and Margin Adopting Release, 84 FR at 43879.
See FCA Application Appendix B, Annex V (Side Letter Addressing
Capital Requirements).
    \186\ See 17 CFR 240.15c3-4 and 18a-1(f).
---------------------------------------------------------------------------

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

    \187\ 17 CFR 240.18a-3.
    \188\ See Capital and Margin Adopting Release, 84 FR at 43947,
43949 (``Obtaining collateral is one of the ways OTC derivatives
dealers manage their credit risk exposure to OTC derivatives
counterparties. Prior to the financial crisis, in certain
circumstances, counterparties were able to enter into OTC
derivatives transactions without having to deliver collateral. When
``trigger events'' occurred during the financial crisis, those
counterparties faced significant liquidity strains when they were
required to deliver collateral'').
---------------------------------------------------------------------------

    Taken as a whole, these capital and margin requirements help to
promote market stability by mandating that SBS Entities follow
practices to manage the market, credit, liquidity, solvency,
counterparty, and operational risks associated with their security-
based swap businesses.
    In proposing to provide conditional substituted compliance in
connection with this part of the FCA Application, the Commission
preliminarily concluded that substituted compliance with respect to the
Exchange Act capital requirements would be subject to certain
additional conditions.\189\ The conditions were designed to help ensure
the comparability of regulatory outcomes between Exchange Act rule 18a-
1 (which imposes a net liquid assets test) and the capital requirements
applicable to nonbank security-based swap dealers in the UK that are
expected to register with the Commission. Those capital requirements
are based on the international capital standard for banks (``Basel
capital standard'').\190\
---------------------------------------------------------------------------

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

    In proposing to provide conditional substituted compliance in
connection with this part of the FCA Application, the Commission
preliminarily concluded that relevant UK margin requirements would
produce regulatory outcomes that are comparable to those associated
with the Exchange Act margin requirements.\191\
---------------------------------------------------------------------------

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

    Finally, the proposed Order would permit a Covered Entity to apply
substituted compliance for the capital and/or margin requirements.\192\
Thus, a Covered Entity could apply substituted compliance for Exchange
Act margin requirements by complying with UK margin requirements but
comply with Exchange Act capital requirements (rather than applying
substituted compliance to those requirements) and vice versa. However,
as to the various requirements within the capital and margin rules, the
Commission found the rules to be entity-level when adopting amendments
to Exchange Act rule 3a71-6 to make substituted compliance available
with respect to them. Consequently, under the proposed Order, a Covered
Entity must apply substituted compliance with respect to capital and
margin requirements at an entity level.
---------------------------------------------------------------------------

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

B. Commenter Views and Final Provisions

1. Capital
    Consistent with the proposed Order, the first capital condition
requires the covered entity to be subject to and comply with certain
identified UK capital requirements.\193\ As discussed at the end of
this section, the Commission made some modifications to the UK laws and
regulations cited in this condition.\194\ For the reasons discussed
below, there are two additional conditions to applying substituted
compliance with respect to Exchange Act rule 18a-1.
---------------------------------------------------------------------------

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

    For the reasons discussed above in part III.B.2.k of this release,
the first additional capital condition is that the Covered Entity
applies substituted compliance with respect to Exchange Act rules 18a-
5(a)(9) (a record making requirement), 18a-6(b)(1)(x) (a record
preservation requirement), and 18a-8(a)(1)(i), (a)(1)(ii), (b)(1),
(b)(2), and (b)(4) (notification requirements).\195\ These
recordkeeping and notification requirements are directly linked to the
capital requirements of Exchange Act rule 18a-1. The proposed Order
conditioned substituted compliance with respect to these recordkeeping
and notification requirements on the Covered Entity applying
substituted compliance with respect to Exchange Act rule 18a-1.\196\
This additional capital condition is designed to provide clarity as to
the Covered Entity's obligations under these recordkeeping and
notification requirements when applying substituted compliance with
respect to Exchange Act rule 18a-1 pursuant this Order.
---------------------------------------------------------------------------

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

    The second additional capital condition builds on and modifies the
proposed capital condition that was designed to address potential
different regulatory outcomes between Exchange Act rule 18a-1and the UK
capital requirements. In particular, the Commission proposed a four
pronged condition with respect to applying substituted compliance to
the capital requirements of Exchange Act rule 18a-1.\197\ The first
prong would require a Covered Entity to maintain an amount of assets
that are allowable under Exchange Act rule 18a-1, after applying
applicable haircuts under the Basel capital standard, that equals or
exceeds the Covered Entity's current liabilities coming due in the next
365 days.\198\ The second prong was linked to the first prong as it
would require that a Covered Entity make a quarterly record listing:
(1) The assets maintained pursuant to the first prong, their value, and
the amount of their applicable haircuts; and (2) the aggregate amount
of the liabilities coming due in the next 365 days. The third prong
would require the Covered Entity to maintain at least $100 million of
equity capital composed of highly liquid assets as defined in the Basel
capital standard. The fourth prong would require the Covered Entity to
include its most recently filed statement of financial condition
whether audited or unaudited with its initial notice to the Commission
of its intent to rely on substituted compliance.
---------------------------------------------------------------------------

    \197\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18387-89 (discussing the additional conditions).
    \198\ As used in this part V.B.1. of the release, the term
``Covered Entity'' refers to a security-based swap dealer located in
the UK that does not have a prudential regulator.
---------------------------------------------------------------------------

    One commenter recommended that the Commission consider denying
substituted compliance for capital requirements on the basis that the
UK's capital requirements do not produce comparable regulatory
outcomes.\199\ This commenter stated that ``granting substituted
compliance with multiple conditions intended to mimic the Commission's
capital requirements would seem to undermine the entire point of
substituted compliance in the first place; namely, protecting the
stability of the U.S. financial system by allowing substituted
compliance only

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

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

    In describing the differences in the capital frameworks between the
net liquid assets test and the Basel capital standard, this commenter
highlighted the treatment of initial margin posted to a
counterparty.\201\ Specifically, the commenter stated that in the UK
initial margin posted to a counterparty counts as capital for that
entity, while in the U.S. initial margin only counts as capital if the
security-based swap dealer has a special loan agreement with an
affiliate. The commenter stated that the U.S. requirement is intended
to mitigate counterparty credit risk with respect to the return of the
initial margin. The commenter argued that the result is that, not only
are the UK requirements different from the Commission's in both form
and substance, but the regulatory outcome is not comparable.
---------------------------------------------------------------------------

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

    This commenter also stated that if a positive substituted
compliance determination is made regarding capital, the Commission
should not weaken the proposed additional capital condition in response
to industry commenters, because these market participants are primarily
concerned with reducing their own operational costs, without any regard
to the systemic risk that would doing so would pose.\202\ This
commenter also stated that any determination to find the UK's capital
requirements comparable to and as comprehensive as the Commission's
capital framework without conditions at least as strong as proposed
would not only contravene the Commission's own conception of
substituted compliance ``but expose the U.S. financial system to very
risks Dodd-Frank instructed the SEC to contain.'' \203\
---------------------------------------------------------------------------

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

    Another commenter supported the proposed additional capital
condition.\204\ This commenter stated that the Commission should
require Covered Entities to comply with the net liquid assets test
under Exchange Act rule 18a-1, rather than the Basel capital
standards.\205\ The commenter stated that the net liquid assets test
``appropriately limits uncollateralized lending, fixed assets, and
other illiquid assets such as real estate which have been proven
repeatedly to be unreliable forms of capital but are currently
counted'' as allowable capital under the Basel capital standard.\206\
This commenter also agreed with the Commission that ``the initial
margin that is posted is not available for other purposes and
therefore, under the Basel standard, could swiftly result in less
balance sheet liquidity than the standards under the Exchange Act's
Rule 18a-1.'' \207\
---------------------------------------------------------------------------

    \204\ See Letter from Americans for Financial Reform Education
Fund (May 3, 2021) (``Americans for Financial Reform Education Fund
Letter'') at 1.
    \205\ See Americans for Financial Reform Education Fund Letter
at 1 (``We support the Commission's proposal to require foreign
security-based swap dealers and participants (``Covered Entities'')
to abide by capital and initial margin requirements that reflect
Exchange Act rule 18a-1 standards appropriate for broker-dealers, as
opposed to Basel capital requirements for banks that permit illiquid
assets to count toward capital minimums.'').
    \206\ See Americans for Financial Reform Education Fund Letter
at 1.
    \207\ See Americans for Financial Reform Education Fund Letter
at 2.
---------------------------------------------------------------------------

    A commenter supported the Commission's proposed Order to grant
substituted compliance in connection with the Exchange Act capital
requirements.\208\ This commenter, however, opposed the proposed
additional four pronged capital condition. The commenter stated that it
was unnecessary, unduly rushed, and highly likely to be costly and
disruptive to market participants and inconsistent with the
Commission's substituted compliance framework.\209\ More specifically,
this commenter stated that the proposed capital condition was
unnecessary because Covered Entities transact predominantly in
securities and derivatives, do not extensively engage in unsecured
lending or other activities more typical of banks, and are already
subject to extensive liquidity requirements.\210\ The commenter also
expressed concern that the proposed capital condition was inconsistent
with the Commission's substituted compliance framework in that it was
duplicative of and would contradict the liquidity requirements
established by the PRA.\211\ This commenter stated that the imposition
of the proposed capital condition would effectively substitute the
Commission's judgment for the PRA's in terms of the best way to address
liquidity risk, and may lead other regulators to refuse to extend
deference to the Commission's regulatory determinations.\212\
---------------------------------------------------------------------------

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

    With respect to the using the concept of ``allowable'' and
``nonallowable'' assets under Exchange Act rule 18a-1, the commenter
stated that the first and second prongs of the capital condition do not
define these terms and there is no analogous concept in the capital
framework applicable in the UK.\213\ The commenter stated this would
require firms to re-categorize every asset on their balance sheets,
which would not be feasible in the near term.\214\ Further, this
commenter asked the Commission to clarify what it means by ``haircuts''
with respect to the first and second prongs, since the Basel capital
standard does not apply ``haircuts'' to assets, but instead applies a
risk-weighted approach.\215\
---------------------------------------------------------------------------

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

    This commenter also stated that the third prong of the proposed
additional capital condition requiring ``at least $100 million of
equity capital composed of `highly liquid assets' as defined in the
Basel capital standard,'' includes concepts that require
clarification.\216\ For example, this commenter stated that is unclear
how a firm would calculate the amount of its ``equity capital'' that is
``composed of highly liquid assets,'' since ``equity'' generally refers
to a firm's paid-in capital, retained earnings, and other items on the
liabilities/shareholders' equity side of the balance sheet.\217\
Finally, this commenter asserted that because it is approximately three
months until the August 6th counting date, and firms may encounter
significant operational challenges to meet the proposed or revised
capital condition, the proposed condition may cause firms to exit the
U.S. security-based swap market, or hope that the conditions are
modified and delayed in a manner that will make it feasible to satisfy
them.\218\
---------------------------------------------------------------------------

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

    Overall, this commenter stated that the Commission should take a
more incremental and deliberative approach to additional capital
conditions, and specifically recommended that the Commission: (1)
Delete the first prong of the capital condition; (2) replace the second
prong with a requirement that a nonbank Covered Entity provide the same
reports concerning liquidity metrics that the Covered Entity provides
to the PRA; (3) modify the third prong to require a nonbank Covered
Entity to maintain at least $100 million of high quality liquid assets,
as defined in the Basel capital standard; and (4) issue an order on
October 6, 2024, determining whether to maintain, delete, modify, or
supplement the condition, based on consideration of the liquidity of
nonbank Covered Entities, and after publishing a notice of any such
changes

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

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

    The Commission agrees with the commenters who point out the
differences between the capital standard of Exchange Act rule 18a-1
(i.e., the net liquid assets test) and the Basel capital standard
applicable to Covered Entities, and who therefore believe that--at a
minimum--additional conditions are necessary to achieve comparable
regulatory outcomes.\220\ As the Commission explained when proposing
the additional capital condition, the net liquid assets test is
designed to promote liquidity.\221\ In particular, Exchange Act rule
18a-1 allows an SBS Entity to engage in activities that are part of
conducting a securities business (e.g., taking securities into
inventory) but in a manner that places the firm in the position of
holding at all times more than one dollar of highly liquid assets for
each dollar of unsubordinated liabilities (e.g., money owed to
customers, counterparties, and creditors).\222\ For example, Exchange
Act rule 18a-1 allows securities positions to count as allowable net
capital, subject to standardized or internal model-based haircuts. The
rule, however, does not permit most unsecured receivables to count as
allowable net capital. This aspect of the rule limits the ability of
SBS Entities to engage in activities, such as uncollateralized lending,
that generate unsecured receivables. The rule also does not permit
fixed assets or other illiquid assets to count as allowable net
capital, which creates disincentives for SBS Entities to own real
estate and other fixed assets that cannot be readily converted into
cash. For these reasons, Exchange Act rule 18a-1 incentivizes SBS
Entities to confine their business activities and devote capital to
security-based swap activities.
---------------------------------------------------------------------------

    \220\ See Americans for Financial Reform Education Fund Letter
at 1-2; Better Markets Letter at 7-8.
    \221\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18387 (explaining the differences between Exchange Act rule
18a-1 and the Basel capital standard).
    \222\ See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967),
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was
adopted to provide safeguards for public investors by setting
standards of financial responsibility to be met by brokers and
dealers. The basic concept of the rule is liquidity; its object
being to require a broker-dealer to have at all times sufficient
liquid assets to cover his current indebtedness.'') (footnotes
omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774
(June 26, 1973) (Commission release of a letter from the Division of
Market Regulation) (``The purpose of the net capital rule is to
require a broker or dealer to have at all times sufficient liquid
assets to cover its current indebtedness. The need for liquidity has
long been recognized as vital to the public interest and for the
protection of investors and is predicated on the belief that
accounts are not opened and maintained with broker-dealers in
anticipation of relying upon suit, judgment and execution to collect
claims but rather on a reasonable demand one can liquidate his cash
or securities positions.''); Exchange Act Release No. 15426 (Dec.
21, 1978), 44 FR 1754 (Jan. 8, 1979) (``The rule requires brokers or
dealers to have sufficient cash or liquid assets to protect the cash
or securities positions carried in their customers' accounts. The
thrust of the rule is to insure that a broker or dealer has
sufficient liquid assets to cover current indebtedness.''); Exchange
Act Release No. 26402 (Dec. 28, 1988), 54 FR 315 (Jan. 5, 1989)
(``The rule's design is that broker-dealers maintain liquid assets
in sufficient amounts to enable them to satisfy promptly their
liabilities. The rule accomplishes this by requiring broker-dealers
to maintain liquid assets in excess of their liabilities to protect
against potential market and credit risks.'') (footnote omitted).
---------------------------------------------------------------------------

    The net liquid assets test is imposed through how an SBS Entity is
required to compute net capital pursuant to Exchange Act rule 18a-1.
The first step is to compute the SBS Entity's net worth under U.S.
generally accepted accounting principles (``GAAP''). Next, the SBS
Entity must make certain adjustments to its net worth to calculate net
capital, such as deducting illiquid assets and taking other capital
charges and adding qualifying subordinated loans.\223\ The amount
remaining after these deductions is defined as ``tentative net
capital.'' Exchange Act rule 18a-1 prescribes a minimum tentative net
capital requirement of $100 million for SBS Entities approved to use
models to calculate net capital. An SBS Entity that is meeting its
minimum tentative net capital requirement will be in the position where
each dollar of unsubordinated liabilities is matched by more than a
dollar of highly liquid assets.\224\ The final step in computing net
capital is to take prescribed percentage deductions (standardized
haircuts) or model-based deductions from the mark-to-market value of
the SBS Entity's proprietary positions (e.g., securities, money market
instruments, and commodities) that are included in its tentative net
capital. The amount remaining is the firm's net capital, which must
exceed the greater of $20 million or a ratio amount.
---------------------------------------------------------------------------

    \223\ See 17 CFR 240.15c3-1(c)(2).
    \224\ The highly liquid assets under Exchange Act rule 18a-1 are
otherwise known as ``allowable assets'' because they are not
deducted when computing net capital. See Exchange Act Release No.
87005 (Sept. 19, 2019), 84 FR 68673, 68673-74, 68677-80 (Dec. 19,
2019) (``Books and Records Adopting Release'')(the sections of the
amended Part II of the FOCUS Report setting forth the assets side of
the balance sheet and the net capital computation). Illiquid assets
otherwise known as ``non-allowable assets'' are deducted when
computing net capital. See Books and Records Adopting Release, 84 FR
at 68673-74, 68677-80. Allowable assets include cash, certain
unsecured receivables from broker-dealers and clearing
organizations, reverse repurchase agreements, securities borrowed,
fully secured customer margin loans, and proprietary securities,
commodities, and swaps positions. See Books and Records Adopting
Release, 84 FR at 68673-74, 68677-80. The term ``high quality liquid
assets'' or ``HQLA'' are defined under the Basel capital standard's
liquidity coverage ratio (``LCR'') and generally consist of cash and
specific classes of liquid securities. See BCBS, LCR30 under the
Basel capital standards, available at: https://www.bis.org/basel_framework/chapter/LCR/30.htm?tldate=20191231&inforce=2019121.
Generally, cash and securities that qualify as HQLA under the LCR
would be allowable assets under Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    In comparison, Covered Entities in the UK are subject to the Basel
capital standard. The Basel capital standard counts as capital assets
that Exchange Act rule 18a-1 would exclude (e.g., loans and most other
types of uncollateralized receivables, furniture and fixtures, real
estate). The Basel capital standard accommodates the business of
banking: making loans (including extending unsecured credit) and taking
deposits. While the Covered Entities that will apply substituted
compliance with respect to Exchange Act rule 18a-1 will not be banks,
the Basel capital standard allows them to count illiquid assets such as
real estate and fixtures as capital. It also allows them to treat
unsecured receivables related to activities beyond dealing in security-
based swaps as capital notwithstanding the illiquidity of these assets.
    Further, one critical example of the difference between the
requirements of Exchange Act rule 18a-1 and the Basel capital standard
relates to the treatment of initial margin with respect to security-
based swaps and swaps. Under the UK margin requirements, Covered
Entities will be required to post initial margin to counterparties
unless an exception applies.\225\ Under Exchange Act rule 18a-1, an SBS
Entity cannot count as capital the amount of initial margin posted to a
counterparty unless it enters into a special loan agreement with an
affiliate.\226\ The special loan agreement requires the affiliate to
fund the initial margin amount and the agreement must be structured so
that the affiliate--rather than the SBS Entity--bears the risk that the
counterparty may default on the obligation to return the initial
margin. The reason for this restrictive approach to initial margin
posted away is that it ``would not be available [to the SBS Entity] for
other purposes, and, therefore, the firm's liquidity would be
reduced.'' \227\ Under the Basel capital standard, a Covered Entity can
count initial margin posted

away as capital without the need to enter into a special loan
arrangement with an affiliate. Consequently, because of the ability to
include illiquid assets and margin posted away as capital, Covered
Entities subject to the Basel capital standard may have less balance
sheet liquidity than SBS Entities subject to Exchange Act rule 18a-1.
---------------------------------------------------------------------------

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

    For these reasons, the Commission disagrees with the commenter who
stated that additional capital conditions were unnecessary and
inconsistent with the Commission's substituted compliance
framework.\228\ As discussed above, there are key differences between
the net liquid assets test of Exchange Act rule 18a-1 and the Basel
capital standard applicable to Covered Entities. Those differences in
terms of the types of assets that count as regulatory capital and how
regulatory capital is calculated lead to different regulatory
outcomes.\229\ In particular, the net liquid assets test produces a
regulatory outcome in which the SBS Entity has more than one dollar of
highly liquid assets for each dollar of unsubordinated
liabilities.\230\ The Basel capital standard--while having measures
designed to promote liquidity--does not produce this regulatory
outcome.\231\ Therefore, an additional capital condition is needed to
bridge the gap between these two capital standards and thereby achieve
more comparable regulatory outcomes in terms of promoting liquid
balance sheets for SBS Entities and Covered Entities.
---------------------------------------------------------------------------

    \228\ SIFMA 5/3/2021 Letter at 10.
    \229\ See Better Markets Letter at 6-7 (comparing the
differences between Exchange Act rule 18a-1 and the Basel capital
standard and stating that ``not only are the UK's capital
requirements different from the SEC's in both form and substance,
but the regulatory outcome is not comparable'').
    \230\ As discussed above, highly liquid assets under Exchange
Act rule 18a-1 are also known as ``allowable assets'' and generally
are consistent the LCR's HQLA.
    \231\ The Basel capital standard does not preclude a firm from
having more than a dollar of highly liquid assets for each dollar of
unsubordinated liabilities. Thus, a firm operating pursuant to the
standard may structure its assets and liabilities in a manner that
achieves this result. However, the standard does not mandate this
result. Rather, it will accommodate a firm that seeks to maintain
this level of liquidity on its own accord.
---------------------------------------------------------------------------

    However, in seeking to bridge this regulatory gap, the additional
condition should take into account that Covered Entities are or will be
subject to UK laws and measures designed to promote liquidity. As a
commenter stated, Covered Entities are or will be subject to: (1)
Requirements to hold an amount of HQLA to meet expected payment
obligations under stressed conditions for thirty days (``LCR
requirement''); \232\ (2) requirements to hold a diversity of stable
funding instruments sufficient to meet long-term obligations under both
normal and stressed conditions (``NSFR requirements''); \233\ (3)
requirements to perform liquidity stress tests and manage liquidity
risk (``internal liquidity assessment requirements''); \234\ and (4)
regular PRA reviews of a Covered Entity's liquidity risk management
processes (``PRA liquidity review process'').\235\ These UK laws and
measures will require Covered Entities to hold significant levels of
liquid assets. However, the laws and measures on their own, do not
impose a net liquid assets test. Therefore, an additional condition is
necessary to supplement these requirements.
---------------------------------------------------------------------------

    \232\ See Liquidity Coverage Requirement--UK Designated
Investment Firms part of PRA Rulebook.
    \233\ See UK CRR, Article 413; see also PRA, Consultation Paper
CP5/21, Implementation of Basel
    Standards (February 2021) (proposed to take effect on January 1,
2022).
    \234\ See Internal Liquidity Adequacy Assessment part of the PRA
Rulebook.
    \235\ See SIFMA 5/3/2021 Letter at 12-15.
---------------------------------------------------------------------------

    The Commission has taken into account the UK liquidity laws and
measures discussed above in making a substituted compliance
determination with respect to Exchange Act rule 18a-1, and in tailoring
additional capital conditions designed to achieve comparable regulatory
outcomes. The LCR, NSFR, and internal liquidity assessment requirements
collectively will require Covered Entities to maintain pools of
unencumbered HQLA to cover potential cash outflows during a 30-day
stress period, to fund long-term obligations with stable funding
instruments, and to manage liquidity risk. These requirements--coupled
with the PRA's supervisory reviews of the liquidity risk management
practices of Covered Entities--will require Covered Entities to hold
significant levels of liquid assets. These requirements and measures in
combination with the other capital requirements applicable to Covered
Entities provide a starting foundation for making a positive
substituted compliance determination with respect to the capital
requirements of Exchange Act section 15F(e) and Exchange Act rule 18a-
1.\236\ However, more is needed to achieve a comparable regulatory
outcome to the net liquid assets test of Exchange Act rule 18a-1.
---------------------------------------------------------------------------

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

    For these reasons, the Order includes an additional capital
condition that will impose a simplified net liquid assets test.\237\
This simplified test will require the Covered Entity to hold more than
one dollar of liquid assets for each dollar of liabilities. The
simplified net liquid assets test--when coupled with the PRA capital
requirements,\238\ LCR requirements, NSFR requirements, internal
liquidity assessment requirements, and PRA liquidity review process--is
designed to produce a regulatory outcome that is comparable to the net
liquid assets test of Exchange Act rule 18a-1 (i.e., sufficient
liquidity to cover liabilities and to promote the maintenance of highly
liquid balance sheets).
---------------------------------------------------------------------------

    \237\ See Americans for Financial Reform Education Fund Letter
at 1 (``The Commission should require that SBS entities who want to
operate in the U.S. comply with the Net Liquid Assets test under the
Exchange Act rule 18a-1 rather than the Basel capital standards
applicable under UK and EU regulations.'').
    \238\ See, e.g., CRR, Part 1 (Own Funds, including Tier 1
capital) and Part 2 (Capital Requirements).
---------------------------------------------------------------------------

    In response to comments, the Commission has modified the first
three prongs of the additional capital condition from the proposed
Order.\239\ In particular, the first and third prongs are being
combined into a single prong of the second additional capital
condition.\240\ Under this prong, the Covered Entity must maintain
liquid assets (as defined in the capital condition) that have an
aggregate market value that exceeds the amount of the Covered Entity's
total liabilities by at least: (1) $100 million before applying a
deduction (specified in the capital condition); and (2) $20 million
after applying the deduction.\241\ Thus, the condition increases the
scope of the liquid assets requirement so that it must

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

    \239\ See Americans for Financial Reform Education Fund Letter
at 1 (``The Commission should require that SBS entities who want to
operate in the U.S. comply with the Net Liquid Assets test under the
Exchange Act rule 18a-1 rather than the Basel capital standards'');
SIFMA 5/3/2021 Letter at 17 (raising concerns that the use of the
concept of ``allowable'' assets under Exchange Act rule 18a-1 in the
first condition would require Covered Entities to re-categorize
every asset on their balance sheets, which also pertains to the
second condition, and seeking clarification on to how to calculate
``equity capital'' and allocate it to highly liquid assets equal to
or greater than $100 million).
    \240\ The first prong of the proposed capital condition would
have required a Covered Entity to maintain an amount of assets that
are allowable under Exchange Act rule 18a-1, after applying
applicable haircuts under the Basel capital standard, that equals or
exceeds the Covered Entity's current liabilities coming due in the
next 365 days. The second prong would have required the Covered
Entity to make a quarterly record related to the first prong. The
third prong would have required the Covered Entity to maintain at
least $100 million of equity capital composed of highly liquid
assets as defined in the Basel capital standard. See UK Substituted
Compliance Notice and Proposed Order, 86 FR at 18387-88.
    \241\ See para. (c)(1)(iii)(A)(1) of the Order. The definition
of ``liquid assets'' and the method of calculating the deductions
are discussed below.
---------------------------------------------------------------------------

    These modifications align the first prong more closely to the $100
million tentative net capital requirement of Exchange Act rule 18a-1
applicable to SBS Entities approved to use models. As discussed above,
Exchange Act rule 18a-1 requires SBS Entities that have been approved
to use models to maintain at least $100 million in tentative net
capital. And, tentative net capital is the amount that an SBS Entity's
liquid assets exceed its total unsubordinated liabilities before
applying haircuts. The first prong will require the Covered Entity to
subtract total liabilities from total liquid assets. The amount
remaining will need to equal or exceed $100 million. The modifications
also align the condition more closely to the $20 million fixed-dollar
minimum net capital requirement of Exchange Act rule 18a-1. As
discussed above, net capital is calculated by applying haircuts
(deductions) to tentative net capital and the fixed-dollar minimum
requires that net capital must equal or exceed $20 million. The first
prong will require the Covered Entity to subtract total liabilities
from total liquid assets and then apply the deduction to the
difference. The amount remaining after the deduction will need to equal
or exceed $20 million.
    For the purposes of the first prong of the second additional
capital condition, ``liquid assets'' are defined as: (1) Cash and cash
equivalents; (2) collateralized agreements; (3) customer and other
trading related receivables; (4) trading and financial assets; and (5)
initial margin posted by the Covered Entity to a counterparty or third-
party (subject to certain conditions discussed below).\242\ These
categories of liquid assets are designed to align with assets that are
considered allowable assets for purposes of calculating net capital
under Exchange Act rule 18a-1.\243\ Further, the first four categories
of liquid assets also are designed to align with how Covered Entities
categorize liquid assets on their financial statements.\244\ In
addition, a commenter submitted a table summarizing categories of
liquid assets on the balance sheets of six UK dealers (``Balance Sheet
Table'') that the commenter expects will register with the Commission
as security-based swap dealers, and that do not have a prudential
regulator and therefore would be subject to Exchange Act rule 18a-
1.\245\
---------------------------------------------------------------------------

    \242\ See para. (c)(1)(iii)(B) of the Order.
    \243\ See supra notes 224 and 230 (describing allowable assets
under Exchange Act rule 18a-1).
    \244\ The Bank of England publishes a list of the investment
firms that have been designated to the PRA (``PRA-designated
investment firms''). This list is available at: https://www.bankofengland.co.uk/prudential-regulation/authorisations/which-firms-does-the-pra-regulate. As part of the application process, the
FCA has stated that the only nonbank (i.e., non-prudentially
regulated) UK dealers that will register with the Commission as
security-based swap dealers are PRA-designated investment firms. The
commenter that provided the table showing the balance sheets of six
UK investment firms makes the same statement. See SIFMA 5/3/2021
Letter Appendix A (``We expect all covered entities to be banks or
PRA-designated investment firms''). According to the Bank of
England, the following dealers are PRA-designated investment firms
(as of January 4, 2021): Barclays Capital Securities Limited,
Citigroup Global Markets Limited, Credit Suisse Securities (Europe)
Ltd, Goldman Sachs International, Merrill Lynch International, MUFG
Securities EMEA plc, Morgan Stanley & Co. International Plc, and
Nomura International Plc. These PRA-designated investment firms
publish annual audited financial statements. See, e.g., Barclays
Capital Securities Limited 2020 Annual Report, available at: https://find-and-update.company-information.service.gov.uk/company/01929333/filing-history; Citigroup Global Markets Limited 2019
Annual Report, available at: https://find-and-update.company-information.service.gov.uk/company/01763297/filing-history; Credit
Suisse Securities (Europe) Limited Annual Report 2020, available at:
https://www.credit-suisse.com/ch/en/investment-banking/financial-regulatory/european-financials.html; Goldman Sachs International
Annual Report 2020, available at: https://www.goldmansachs.com/investor-relations/financials/current/subsidiary-financial-info/gsi/12-31-20-financial-statements.pdf; Merrill Lynch International 2020
Annual Report, available at: https://d1io3yog0oux5.cloudfront.net/_9d85f1cf3d21160d5542784492310fed/bankofamerica/db/914/9397/pdf/Merrill+Lynch+International+2020+Financial+Statements.pdf; MUFG
Securities EMEA plc 2020 Annual Report, available at: https://www.mufgemea.com/images/mufg/MUS_EMEA_Financial_Statement_2020.pdf;
Morgan Stanley & Co. International Plc 2020 Annual Report, available
at: https://www.morganstanley.com/about-us-ir/pdf/MSIP_Group_Accounts_31_December_2020.pdf; and Nomura International
Plc 2020 Annual Report, available at: https://find-and-update.company-information.service.gov.uk/company/01550505/filing-history.
    \245\ See SIFMA 5/3/2021 Letter at 10-11, Appendix C. The
categories of liquid assets identified in the Balance Sheet Table
are: (1) ``Cash/Cash Equivalents; (2) ``Collateralised Agreements;''
(3) ``Trade/Other Receivables; cash collateral pledged;'' and (4)
``Trading/Financial Assets.'' SIFMA 5/3/2021 Letter Appendix C.
---------------------------------------------------------------------------

    The first category of liquid assets is cash and cash
equivalents.\246\ These assets consist of cash and demand deposits at
banks (net of overdrafts) and highly liquid investments with original
maturities of three months or less that are readily convertible into
known amounts of cash and subject to insignificant risk of change in
value.\247\ The second category of liquid assets is collateralized
agreements.\248\ These assets consist of secured financings where
securities serve as collateral such as repurchase agreements and
securities loaned transactions.\249\ The third category of liquid
assets is customer and other trading related receivables.\250\ These
assets consist of customer margin loans, receivables from broker-
dealers, receivables related to fails to deliver, and receivables from
clearing organizations.\251\ The fourth category of liquid assets is
trading and financial assets.\252\ These assets consist of cash market
securities positions and listed and over-the-counter derivatives
positions.\253\
---------------------------------------------------------------------------

    \246\ See para. (c)(1)(iii)(B)(1) of the Order.
    \247\ See, e.g., International Financial Reporting Standards
Foundation (``IFRS''), IAS 7 Statement of Cash Flows (defining
``cash'' as comprising cash on hand and demand deposits and ``cash
equivalents'' as short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value). See also Books and
Records Adopting Release, 84 FR at 68673-74 (the section of the
amended Part II of the FOCUS Report setting forth the assets side of
the balance sheet and identifying cash as an allowable asset in Box
200).
    \248\ See para. (c)(1)(iii)(B)(2) of the Order.
    \249\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying
securities borrowed as an allowable asset in Boxes 240 and 250 and
securities purchased under agreements to resell as an allowable
asset in Box 360).
    \250\ See para. (c)(1)(iii)(B)(3) of the Order.
    \251\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying fails to
deliver as allowable assets in Boxes 220 and 230, receivables from
clearing organizations as allowable assets in Boxes 280 and 290, and
receivables from customers as allowable assets in Boxes 310, 320,
and 330).
    \252\ See para. (c)(1)(iii)(B)(4) of the Order.
    \253\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying
securities, commodities, and swaps positions as allowable assets in
Box 12019).
---------------------------------------------------------------------------

    As discussed above, initial margin posted to a counterparty is
treated differently under Exchange Act rule 18a-1 and the Basel capital
standard, and commenters highlighted this difference.\254\ The fifth
category of liquid assets is initial margin posted by the Covered
Entity to a counterparty or a third-party custodian, provided: (1) The
initial margin requirement is funded by a fully executed written loan
agreement with an affiliate of the Covered Entity; (2) the loan
agreement provides that the lender waives re-payment of the loan until
the initial margin is returned to the Covered Entity; and (3) the
liability of the Covered Entity to the lender can be fully satisfied by
delivering the collateral serving as initial margin to the

lender.\255\ As discussed above, one critical difference between
Exchange Act rule 18a-1 and the Basel capital standard is that an SBS
Entity cannot count as capital the amount of initial margin posted to a
counterparty or third-party custodian unless it enters into a special
loan agreement with an affiliate.\256\ Under the Basel capital
standard, a Covered Entity can count initial margin posted away as
capital without the need to enter into a special loan arrangement with
an affiliate. Consequently, to count initial margin posted away as a
liquid asset for purposes of the second additional capital condition,
the Covered Entity must enter into the same type of special agreement
that an SBS Entity must execute to count initial margin as an allowable
asset for purposes of Exchange Act rule 18a-1.\257\
---------------------------------------------------------------------------

    \254\ See Better Markets Letter at 7; Americans for Financial
Reform Education Fund Letter at 2. See also UK Substituted
Compliance Notice and Proposed Order, 86 FR at 18387 (discussing the
different treatment of initial margin posted to a counterparty).
    \255\ See para. (c)(1)(iii)(B)(5) of the Order.
    \256\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
    \257\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
---------------------------------------------------------------------------

    If an asset does not fall within one of the five categories of
``liquid assets'' as defined in the Order,\258\ it will be considered
non-liquid, and could not be treated as a liquid asset for purposes of
the second additional capital condition in the Order. For example, one
commenter listed the following categories of non-liquid assets on the
Balance Sheet Table: (1) ``Investments;'' (2) ``Loans;'' and (3)
``Other Assets.'' \259\ These categories of assets generally could not
be treated as liquid asset. The non-liquid ``investment'' category
would include the Covered Entity's ownership interests in subsidiaries
or other affiliates. The non-liquid ``loans'' category would include
unsecured loans and advances. The non-liquid ``other'' assets category
refers to assets that do not fall into any of the other categories of
liquid or non-liquid assets. These non-liquid ``other'' assets would
include furniture, fixtures, equipment, real estate, property,
leasehold improvements, deferred tax assets, prepayments, and
intangible assets.
---------------------------------------------------------------------------

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

    As discussed above, the first prong of the second additional
capital condition will require the Covered Entity to subtract total
liabilities from total liquid assets and then apply a deduction
(haircut) to the difference.\260\ The amount remaining after the
deduction will need to equal or exceed $20 million. The method of
calculating the amount of the deduction relies on the calculations
Covered Entities must make under the Basel capital standard.\261\ In
particular, under the Basel capital standard, Covered Entities must
risk-weight their assets. This involves adjusting the nominal value of
each asset based on the inherent risk of the asset. Less risky assets
are adjusted to lower values (i.e., have less weight) than more risky
assets. As a result, Covered Entities must hold lower levels of
regulatory capital for less risky assets and higher levels of capital
for riskier assets. Similarly, under Exchange Act rule 18a-1, less
risky assets incur lower haircuts than riskier assets and, therefore,
require less net capital to be held in relation to them. Consequently,
the process of risk-weighting assets under the Basel capital standard
provides a method to account for the inherent risk in an asset held by
a Covered Entity similar to how the haircuts under the Exchange Act
rule 18a-1 account for the risk of assets held by SBS Entities. For
these reasons, it is appropriate to use the process of risk-weighting
assets under the Basel capital standard to determine the amount of the
deduction (haircuts) under the first prong of the second additional
capital condition.
---------------------------------------------------------------------------

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

    Under the Basel capital standard, Covered Entities must hold
regulatory capital equal to at least 8% of the amount of their risk-
weighted assets.\262\ Therefore, the deduction (haircut) required for
purposes of the first prong of the second additional capital condition
is determined by dividing the amount of the Covered Entity's risk-
weighted assets by 12.5 (i.e., the reciprocal of 8%).\263\ In sum, the
Covered Entity must maintain an excess of liquid assets over total
liabilities that equals or exceeds $100 million before the deduction
(derived from the firm's risk-weighted assets) and $20 million after
the deduction.\264\
---------------------------------------------------------------------------

    \262\ See BCBS, Risk-based capital requirements (RBC20).
    \263\ See para. (c)(1)(iii)(C) of the Order. The Commission
acknowledges that a Covered Entity's risk-weighted assets will
include components in addition to market and credit risk charges
(e.g., operational risk charges). However, the Commission expects
the combined market and credit risk charges will make up the
substantial majority of the risk-weighted assets. In addition, the
Commission believes that this method of calculating the deduction in
the first prong of the second additional capital condition is a
reasonable approach in that it addresses market and credit risk
similar to the process used by security-based swap dealers
authorized to use internal models to compute market and credit risk
deductions under Exchange Act rule 18a-1. See, e.g., Exchange Act
rule 18a-1(e) (prescribing requirements to calculate market and
credit risk charges, including use of an 8% multiplication factor
for calculating the credit risk charges).
    \264\ For example, assume a Covered Entity has total assets of
$600 million (of which $595 million are liquid and $5 million are
illiquid) and total liabilities of $450 million. In this case, the
Covered Entity's liquid assets would exceed total liabilities by
$145 million ($590 million minus $450 million) and, therefore, the
Covered Entity would have excess liquid assets greater than $100
million as required by the first prong of the second additional
capital condition. Assume further that the Covered Entity's risk-
weighted assets under the Basel capital standard equal $400 million.
In this case, the Covered Entity's deduction would equal $32 million
($400 million divided by 12.5). Subtracting $32 million from $145
million leaves $113 million, which exceeds $20 million. Therefore,
the Covered Entity would meet the second requirement of the first
prong of the second additional capital condition.
---------------------------------------------------------------------------

    The second prong of the second additional capital condition
requires the Covered Entity to make and preserve for three years a
quarterly record that: (1) Identifies and values the liquid assets
maintained pursuant to the first prong; (2) compares the amount of the
aggregate value the liquid assets maintained pursuant to the first
prong to the amount of the Covered Entity's total liabilities and shows
the amount of the difference between the two amounts (``the excess
liquid assets amount''); and (3) shows the amount of the deduction
required under the first prong and the amount that deduction reduces
the excess liquid assets amount.\265\ This prong has been modified from
the proposed Order to conform to the modifications to the first and
third prongs of the proposed capital condition discussed above (i.e.,
combining them into a single prong that imposes a simplified net liquid
assets test). Under the Order, the quarterly record will include
details showing whether the Covered Entity is meeting the $100 million
and $20 million requirements of the first prong.
---------------------------------------------------------------------------

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

    The third prong of the second additional capital condition requires
the Covered Entity to notify the Commission in writing within 24 hours
in the manner specified on the Commission's website if the Covered
Entity fails to meet the requirements of the first prong and include in
the notice the contact information of an individual who can provide
further information about the failure to meet the requirements.\266\ As
discussed above, the first additional capital condition requires the
Covered Entity to apply substituted compliance with respect to
notification requirements of Exchange Act rule 18a-8 relating to
capital.\267\ A Covered Entity applying substituted compliance with
respect to Exchange

Act rule 18a-8 must simultaneously submit to the Commission any
notifications relating to capital that it must submit to the UK
authorities. However, UK notification requirements do not address a
failure to adhere to the simplified net liquid assets test required by
the first prong of the second additional capital condition. Moreover,
due to the differences between Exchange Act rule 18a-1 and the Basel
capital standard discussed above, a Covered Entity could fall out of
compliance with the requirements of the first prong but still remain in
compliance with the requirements of the Basel capital standard.
Accordingly, the third prong requires the Covered Entity to notify the
Commission if the firm fails to meet the requirements of the first
prong. This will alert the Commission of potential issues with the
Covered Entity's financial condition that could pose risks to the
firm's customers and counterparties.
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    \266\ See para. (c)(1)(iii)(A)(3) of the Order.
    \267\ See para. (c)(1)(ii) of the Order.
---------------------------------------------------------------------------

    The fourth prong of the additional capital condition in the
proposed Order would have required the Covered Entity to include its
most recently filed statement of financial condition (whether audited
or unaudited) with its initial notice to the Commission of its intent
to rely on substituted compliance. No commenters raised specific
concerns with this condition and the Order includes it as proposed, but
now it is the fourth prong of the second additional capital
condition.\268\
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    \268\ See para. (c)(1)(iii)(A)(4) of the Order. As discussed
above, a commenter objected to the capital conditions generally and
provided specific comments with respect to the first three
conditions, but not the fourth condition. See SIFMA 5/3/2021 Letter
at 9-20. This commenter did support the fourth condition as part of
its recommended incremental approach to implementing the capital
conditions. See SIFMA 5/3/2021 Letter at 19-20.
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    The commenter who opposed additional capital conditions stated that
their burdens would be disruptive to market participants and could
cause Covered Entities to exit the U.S. security-based swap
market.\269\ However, as discussed below, based on other comments and
staff analysis of the balance sheets of the PRA-designated firms, this
may not be case. For example, the commenter stated that the Covered
Entities expected to register with the Commission transact
predominantly in securities and derivatives and do not extensively
engage in unsecured lending or other activities more typical of
banks.\270\ The commenter based this statement on a high-level review
of public information about the balance sheets of six Covered Entities
undertaken to create the Balance Sheet Table.\271\ Based on this
review, the commenter stated that the ``vast majority of each firm's
total assets consists of cash and cash equivalents, collateralized
agreements, trade and other receivables, and other trading and
financial assets. The commenter characterized these assets as being
``liquid.'' The commenter stated further that the amount of illiquid
assets held by these firms as a proportion of their balance sheets is
comparable to the proportion of illiquid assets held by U.S. broker-
dealers. The commenter also stated that the long-term debt,
subordinated debt, and equity of the Covered Entities, as a proportion
of their total liabilities and equity, also was comparable to U.S.
broker-dealers. Moreover, based on the Balance Sheet Table and the
staff's analysis of the public financial reports of the PRA-designated
investment firms, these firms report total liquid assets that exceed
total liabilities and, in most cases, substantially in excess of $100
million.
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    \269\ See SIFMA 5/3/2021 Letter at 19.
    \270\ SIFMA 5/3/2021 Letter at 10-11.
    \271\ See SIFMA 5/3/2021 Letter at 10-11, Appendix C.
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    This information suggests that Covered Entities may be able to meet
the second additional capital condition without having to significantly
adjust their assets, liabilities, and equity. Moreover, the
modifications to the second additional capital condition that
incorporate how Covered Entities categorize liquid and illiquid assets
and calculate risk-weighted assets, will allow them to use existing
processes to derive the measures needed to adhere to the condition.
Therefore, while the condition imposes a simplified net liquid assets
test and associated recordkeeping requirement, it may not cause Covered
Entities to withdraw from the U.S. security-based swap market.
Nonetheless, it is possible that the simplified net liquid assets test
and associated recordkeeping burden could cause a Covered Entity to
withdraw from the U.S. security-based swap market. However, as
discussed above, this additional capital condition is designed to
produce a comparable regulatory outcome with respect to SBS Entities
subject to Exchange Act rule 18a-1 and Covered Entities applying
substituted compliance with respect to that rule.
    In response to a specific request for comment in the proposed
Order, a commenter stated that the capital conditions would not be
necessary if the balance sheets of the Covered Entities seeking to
apply substituted compliance with respect to Exchange Act rule 18a-1
were similar to the balance sheets of U.S. broker-dealers.\272\
However, the Commission also sought comment on whether the capital
conditions would serve to ensure that these firms do not engage in non-
securities business activities that could impair their liquidity.\273\
Two commenters expressed support for the capital conditions.\274\ The
fact that today certain Covered Entities have liquid balance sheets
does not mean this will hold true in the future or with respect to
other potential registrants. For these reasons, it is appropriate to
include the additional capital condition with respect to applying
substituted compliance to Exchange Act rule 18a-1.
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    \272\ See SIFMA 5/3/2021 Letter at 10; UK Substituted Compliance
Notice and Proposed Order, 86 FR at 18407.
    \273\ UK Substituted Compliance Notice and Proposed Order, 86 FR
at 18407.
    \274\ See Better Markets Letter at 7; Americans for Financial
Reform Education Fund Letter at 1-2.
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    It would not be appropriate to take a more incremental approach to
the additional capital conditions as suggested by a commenter.\275\
Substituted compliance is premised on comparable regulatory outcomes.
As discussed above, the additional capital condition is designed to
supplement the UK capital laws in order to achieve a comparable
regulatory outcome in terms of the net liquid assets test of Exchange
Act rule 18a-1. Delaying the implementation of the additional capital
condition would mean that Covered Entities are operating as registered
security-based swap dealers under a capital standard that does impose
the net liquid assets test. This would be inconsistent with the
objective of substituted compliance and could increase risk to the U.S.
security-based swap markets and participants in those markets.
Moreover, the modifications to the capital condition discussed above
may ease the implementation burdens.
---------------------------------------------------------------------------

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

    In addition, the Commission does not believe a commenter's
suggestion for an alternative capital condition requiring a Covered
Entity to maintain $100 million of HQLA as defined in the LCR
requirements would be adequate in terms of achieving comparable
regulatory outcomes with Exchange Act rule 18a-1.\276\ The Balance
Sheet Table indicates that Covered Entities have total liabilities of
many billions of dollars.\277\ A condition requiring $100 million in
HQLA would not cover these liabilities and would not impose a net
liquid assets test.
---------------------------------------------------------------------------

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

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

section of the Order in response to comment and further analysis.\278\
In response to comments, the capital section of the Order does not cite
``recitals'' because they are not part of a legally binding
regulation.\279\ A commenter recommended that citations to FCA IFPRU
and BIPRU rules be deleted since it is likely that only PRA-designated
investment firms will rely on the substituted compliance determination
for capital.\280\ The FCA similarly indicated that the only firms that
will rely on a substituted compliance determination for capital are
PRA-designated investment firms. PRA-designated firms are not subject
to FCA IFPRU and BIPRU firm requirements.\281\ Further, investment
firms that are not PRA-designated (i.e., that are MiFID investment
firms prudentially regulated by the FCA in the UK) will be subject in
the near term to a new capital regime that is not based on the Basel
Capital Standard, and is not addressed by the FCA's comparability
analysis for capital in the FCA Application.\282\
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    \278\ SIFMA 5/3/2021 Letter at 10-11, Appendix A.
    \279\ See Better Markets Letter at 5-6.
    \280\ SIFMA 5/3/2021 Letter at Appendix A.
    \281\ See SIFMA 5/3/2021 Letter at Appendix A.
    \282\ FCA Application Annex V (Side Letter for Capital
Requirements) at 367 (``For the purposes of this application, we
address the currently applicable UK Capital Framework--i.e., based
on CRR (as amended by the currently effective elements of CRR II)
and CRD IV.4.'').
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    A commenter recommended that the citations to FCA PRIN and CASS be
deleted.\283\ The Commission agrees it is appropriate to delete
references to FCA PRIN since the entities relying on substituted
compliance for capital in the UK will be PRA-designated investment
firms. These firms are subject to the PRA Fundamental Rules. Therefore
the Commission is deleting the references to FCA PRIN in the Order and
replacing them with references to PRA Fundamental Rules 2.3 and 2.4.
These rules require that firms must at all times maintain adequate
financial resources, and have effective risk strategies and risk
management systems. Further, the Commission also agrees that it is
appropriate to delete references to FCA CASS in the Order because they
relate to customer protection requirements, and not capital
requirements, and Covered Entities also are subject to the Commission's
segregation requirements under Exchange Act rule 18a-4,\284\ as well as
the segregation provisions under the UK EMIR Margin RTS.\285\
Substituted compliance is not available for segregation requirements
under Exchange Act rule 18a-4.\286\
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    \283\ See SIFMA 5/3/2021 Letter Appendix A.
    \284\ 17 CFR 240.18a-4.
    \285\ The Commission also is retaining the references to the UK
EMIR Margin RTS in the final order as part of the capital condition.
These standards require a Covered Entity to segregate initial margin
from the firm's assets by either placing it with a third-party
holder or custodian or via other legally binding arrangements,
making the initial margin remote in the case of the firm's default
or insolvency. FCA Application Annex V (Side Letter for Capital
Requirements) at 369.
    \286\ See Capital and Margin Adopting Release, 84 FR at 43950-
51.
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    In addition, in response to a recommendation to delete references
to the UK EMIR margin requirements, the Commission is retaining the
references to the UK Margin RTS requirements as the UK Application
states ``if liquidation did occur, UK regulations also protect
counterparties and promote continued market liquidity through margin
requirements.''\287\ The Commission agrees with the commenter that the
scope of the PRA Notifications Rule is overly broad and, in response,
is narrowing the references to those citations included in the
comparability analysis of Exchange Act rule 18a-8.\288\ Further, the
Commission agrees with the commenter that some of the citations do not
relate to requirements imposed on Covered Entities, but generally
relate to the powers of relevant authorities. In these cases, citations
in the ordering language have been deleted or modified to reference
requirements that a Covered Entity is subject to and must comply
with.\289\
---------------------------------------------------------------------------

    \287\ FCA Application Annex V (Side Letter for Capital
Requirements) at 378.
    \288\ 17 CFR 240.18a-8. Therefore, the references to the PRA
Notifications Rule will be modified in the final order to read PRA
Notifications Rule 2.1, 2.4 through 2.6, 2.8, 2.9.
    \289\ More specifically, in the final order, the Commission is
deleting references to the Banking Act of 2009, Capital Requirements
Regulations 2013, Capital Requirements (Capital Buffers and Macro-
prudential Measures) Regulations 2014, Part 8 of the Bank Recovery
and Resolution (No 2) Order 2014, Bank of England Act 1998 (Macro-
prudential Measures) (No 2) Order 2015, and Parts 4A and 12A of
FSMA.
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    The Commission agrees with the comments that the specific
provisions to the UK CRR cited in the proposed Order are not
comprehensive.\290\ In response, the Commission has modified the final
ordering language to use more comprehensive citations to the UK CRR
(including the specific UK CRR provisions cited in the proposed Order),
as the capital analysis includes only discussion of entities that are
fully subject to UK CRR and CRD IV.\291\ In addition, this commenter
recommended that the Commission modify the final ordering language to
qualify the citations to the UK CRR with a reference to waivers and
permissions.\292\ In response, the specific provisions in the UK CRR
referenced in the capital comparability analysis were analysed without
reference to waivers or permissions, and the condition states that the
Covered Entity must be subject to and comply with these specific
capital requirements. Therefore, the more comprehensive references to
the UK CRR in the final order are cited without reference to waivers or
permissions. Finally, the references to the UK CRR and the final
references in the capital ordering language contribute to the
conclusion that UK law produces a comparable regulatory outcome to the
capital requirements under the Exchange Act.
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    \290\ See SIFMA 5/3/2021 Letter Appendix A.
    \291\ See FCA Application Annex V (Side Letter for Capital
Requirements) at 366, n.400. More specifically, in the final order,
the Commission is including references to the UK CRR to read: UK
CRR, Part One (General Provisions) Article 6(1), Part Two (Own
Funds), Part Three (Capital Requirements), Part Four (Large
Exposures), Part Five (Exposures to Transferred Credit Risk), Part
Six (Liquidity), and Part Seven (Leverage).
    \292\ See SIFMA 5/3/2021 Letter Appendix A.
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2. Margin
    The Commission's preliminary view, based on the FCA Application and
the Commission's review of applicable UK laws, was that relevant UK
margin requirements would produce regulatory outcomes that are
comparable to those associated with Exchange Act margin requirements
without the need for additional conditions.\293\ For example, in
adopting final margin requirements for non-cleared security-based
swaps, the Commission modified the rule to more closely align it with
the margin rules of the Commodity Futures Trading Commission and the
U.S. prudential regulators and, in doing so, with the recommendations
made by the BCBS and the Board of the International Organization of
Securities Commissions (``IOSCO'') with respect to margin requirements
for non-centrally cleared derivatives.\294\
---------------------------------------------------------------------------

    \293\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18386.
    \294\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18386, n.82.
---------------------------------------------------------------------------

    Exchange Act rule 18a-3 and the UK margin rules require firms to
collect liquid collateral from a counterparty to cover variation and/or
initial margin requirements.\295\ Both sets of rules also require firms
to deliver liquid collateral to a counterparty to cover variation
margin requirements. Under both sets of rules, the fair market value of
collateral used to meet a margin requirement must be reduced by a
haircut.\296\ Further, both

sets rules permit the use of a model (including a third party model
such as ISDA's SIMM\TM\ model) to calculate initial margin.\297\ The
initial margin model under both sets of rules must meet certain minimum
qualitative and quantitative requirements, including that the model
must use a 99 percent, one-tailed confidence level with price changes
equivalent to a 10-day movement in rates and prices.\298\ Both sets of
rules have common exceptions to the requirements to collect and/or post
initial or variation margin, including exceptions for certain
commercial end users, the Bank for International Settlements, and
certain multilateral development banks.\299\ Both sets of rules also
permit a threshold below which initial margin is not required to be
collected and incorporate a minimum transfer amount.\300\