[Federal Register Volume 86, Number 206 (Thursday, October 28, 2021)]
[Notices]
[Pages 59776-59797]
[FR Doc No: 2021-23444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93412; File No. S7-09-21]

Order Granting Conditional Substituted Compliance in Connection
With Certain Requirements Applicable to Non-U.S. Security-Based Swap
Dealers and Major Security-Based Swap Participants Subject to
Regulation in the Kingdom of Spain

October 22, 2021.

I. Overview

    The Spanish Comisi[oacute]n Nacional del Mercado de Valores
(``CNMV'') has submitted a ``substituted compliance'' application
requesting that the Securities and Exchange Commission (``Commission'')
determine, pursuant to the Securities Exchange Act of 1934 (``Exchange
Act'') rule 3a71-6,\1\ that security-based swap dealers and major
security-based swap participants (``SBS Entities'') subject to
regulation in the Kingdom of Spain (``Spain'') conditionally may
satisfy requirements under the Exchange Act by complying with
comparable Spanish and European Union (``EU'') requirements.\2\ The
CNMV sought substituted compliance in connection with certain Exchange
Act requirements related to risk control, internal supervision, chief
compliance officer, antitrust, counterparty protection, recordkeeping,
reporting, and notification.\3\ The CNMV Application incorporated
comparability analyses between the relevant requirements in Exchange
Act section 15F \4\ and the rules and regulations thereunder and
applicable Spanish and EU law, as well as information regarding Spanish
and EU supervisory and enforcement frameworks.
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    \1\ 17 CFR 240.3a71-6.
    \2\ See Letter from Rodrigo Buenaventura, Chair, CNMV, dated
August 20, 2021 (``CNMV Application''). The CNMV Application is
available on the Commission's website at: https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisidction-applications-security-based-swap.
    \3\ Risk control requirements include requirements related to
internal risk management, trade acknowledgement and verification,
portfolio reconciliation and dispute resolution, portfolio
compression, and trading relationship documentation; internal
supervision, chief compliance officer, and antittrust requirements
include requirements related to diligent supervision, conflicts of
interest, information gathering, chief compliance officers, and
antitrust considerations; counterparty protection requirements
include requirements related to disclosure of material risks and
characteristics, disclosure of material incentives or conflicts of
interest, ``know your counterparty,'' suitability of
recommendations, fair and balanced communications, disclosure of
daily marks, and disclosure of clearing rights; and recordkeeping,
reporting, and notification requirements include requirements
related to making and keeping current certain prescribed records,
preservation of records, reporting, and notificiation.
    \4\ 15 U.S.C. 78o-10.
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    On August 20, 2021, the Commission issued a notice of the CNMV
Application, accompanied by a proposed order to grant substituted
compliance with conditions in connection with the CNMV Application
(``proposed Order'').\5\ The proposed Order incorporated a number of
conditions to tailor the scope of substituted compliance consistent
with the prerequisite that relevant Spanish and EU requirements produce
regulatory outcomes that are comparable to relevant requirements under
the Exchange Act.
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    \5\ See Exchange Act Release No. 92716 (Aug. 20, 2021), 86 FR
47668 (Aug. 26, 2021) (``Spanish Substituted Compliance Notice and
Proposed Order'').
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    As discussed below, the Commission is adopting a final order
(``Order'') that has been modified from the proposal in certain
respects to address commenter concerns and to make clarifying changes.

II. Substituted Compliance Framework and Prerequisites

A. Substituted Compliance Framework and Purpose

    As the Commission has discussed previously,\6\ Exchange Act rule
3a71-6 provides a framework whereby non-U.S. SBS Entities may satisfy
certain requirements under Exchange Act section 15F by complying with
comparable regulatory requirements of a foreign jurisdiction.\7\
Because substituted compliance does not constitute exemptive relief,
but instead provides an alternative method by which non-U.S. SBS
Entities may comply with applicable Exchange Act requirements, the non-
U.S. SBS Entities would remain subject to the relevant requirements
under section 15F. The Commission accordingly will retain the authority
to inspect, examine, and supervise those SBS Entities' compliance and
take enforcement action as appropriate. Under the substituted
compliance framework, failure to comply with the applicable foreign
requirements and other conditions to a substituted compliance order
would lead to a violation of the applicable requirements under the
Exchange Act and potential enforcement action by the Commission (as
opposed to automatic revocation of the substituted compliance order).
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    \6\ See, e.g., Exchange Act Release No. 90378 (Nov. 9, 2020), 85
FR 72726 (Nov. 13, 2020) (``German Substituted Compliance Notice and
Proposed Order''); Exchange Act Release No. 90765 (Dec. 22, 2020),
85 FR 85686 (Dec. 29, 2020) (``German Substituted Compliance
Order'') Exchange Act Release No. 92647 (Aug. 12, 2021), 86 FR 46500
(Aug. 18, 2021) (``German Substituted Compliance Notice and Proposed
Amended Order''); Exchange Act Release No. 93411 (Oct. 22, 2021)
(``German Amended Substituted Compliance Order''); Exchange Act
Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020)
(``French Substituted Compliance Notice and Proposed Order'');
Exchange Act Release No. 91477 (Apr. 5, 2021), 86 FR 18341 (Apr. 8,
2021) (``French Substituted Compliance Re-Opening Release'');
Exchange Act Release No. 92484 (July 23, 2021), 86 FR 41612 (Aug. 2,
2021) (``French Substituted Compliance Order''); Exchange Act
Release No. 91476 (Apr. 5, 2021), 86 FR 18378 (Apr. 8, 2021) (``UK
Substituted Compliance Notice and Proposed Order''); Exchange Act
Release No. 92529 (July 30, 2021), 86 FR 43318 (August 6, 2021),
``UK Substituted Compliance Order''); Exchange Act Release No. 92632
(Aug. 10, 2021), 86 FR 45770 (Aug. 16, 2021) (``Swiss Substituted
Compliance Notice and Proposed Order''); Exchange Act Release No.
93284 (Oct. 8, 2021), 86 FR 57455 (Oct. 15, 2021) (``Swiss
Substituted Compliance Order''); Spanish Substituted Compliance
Notice and Proposed Order, 86 FR 47668.
    \7\ See Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR
29960, 30079 (May 13, 2016) (``Business Conduct Adopting Release'').
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    Under rule 3a71-6, substituted compliance potentially is available
in connection with certain section 15F requirements,\8\ but is not
available in connection with antifraud prohibitions and certain other
requirements under the Federal securities laws.\9\ SBS

Entities in Spain accordingly must comply directly with those
requirements notwithstanding the availability of substituted compliance
for other requirements.
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    \8\ 17 CFR 240.3a71-6(d).
    \9\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47669 n.10 (addressing unavailability under Rule 3a71-6
of substituted compliance for information-related requirements under
Exchange Act section 15F, as well as for provisions related to anti-
fraud, transactions with counterparties that are not eligible
contract participants, segregation of customer assets, required
clearing upon counterparty election, regulatory reporting and public
dissemination, SBS Entity registration, and registration of
offerings).
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    The substituted compliance framework reflects the cross-border
nature of the security-based swap market, and is intended to promote
efficiency and competition by helping to address potential duplication
and inconsistency between relevant U.S. and foreign requirements.\10\
In practice, substituted compliance may be expected to help SBS
Entities leverage their existing systems and practices to comply with
relevant Exchange Act requirements in conjunction with their compliance
with relevant foreign requirements. Market participants began to count
security-based swap transactions towards the thresholds for
registration with the Commission as an SBS Entity on August 6, 2021.
Security-based swap dealers and major security-based swap participants
who met or exceeded one of the relevant de minimis thresholds for
registration by the end of August are required to be registered with
the Commission by November 1, 2021, or December 1, 2021,
respectively.\11\ Substituted compliance should assist relevant non-
U.S. security-based swap market participants in preparing for
registration.
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    \10\ See generally Business Conduct Adopting Release, 81 FR
30073 (stating that the cross-border nature of the security-based
swap market poses special regulatory challenges, in that relevant
U.S. requirements ``have the potential to lead to requirements that
are duplicative of or in conflict with applicable foreign business
conduct requirements, even when the two sets of requirements
implement similar goals and lead to similar results'').
    \11\ See ``Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants,'' available at
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
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B. Specific Prerequisites

1. Comparability of Regulatory Outcomes
    Rule 3a71-6, adopted by the Commission in 2016, describes the
requirements for the Commission to make a substituted compliance
determination. Under the rule, the Commission must determine that the
analogous foreign requirements are comparable to otherwise applicable
requirements under the Exchange Act (i.e., the relevant requirements in
the Exchange Act and the rules and regulations thereunder), after
accounting for factors such as ``the scope and objectives of the
relevant foreign regulatory requirements'' and ``the effectiveness of
the supervisory compliance program administered, and the enforcement
authority exercised'' by the foreign authority.\12\ The comparability
assessments are to be based on a ``holistic approach'' that ``will
focus on the comparability of regulatory outcomes rather than
predicating substituted compliance on requirement-by-requirement
similarity.'' \13\
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    \12\ Exchange Act rule 3a71-6(a)(2)(i).
    \13\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47670; see also Business Conduct Adopting Release, 81
FR 30078-79 (recognizing that ``different regulatory systems may be
able to achieve some or all of those regulatory outcomes by using
more or fewer specific requirements than the Commission, and that in
assessing comparability the Commission may need to take into account
the manner in which other regulatory systems are informed by
business and market practices in those jurisdictions''). The
Commission's assessment of a foreign authority's supervisory and
enforcement effectiveness--as part of the broader comparability
analysis--would be expected to consider not only overall oversight
activities, but also oversight specifically directed at conduct and
activity relevant to the substituted compliance determination. ``For
example, it would be difficult for the Commission to make a
comparability determination in support of substituted compliance if
oversight is directed solely at the local activities of foreign
security-based swap dealers, as opposed to the cross-border
activities of such dealers.'' Business Conduct Adopting Release, 81
FR 30079 (footnote omitted). In the Spanish Substituted Compliance
Notice and Proposed Order, the Commission preliminarily concluded
that this comparability prerequisite was met in connection with a
number of requirements under the Exchange Act, in some cases with
the addition of conditions to help ensure the comparability of
regulatory outcomes.
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2. Memoranda of Understanding
    Exchange Act rule 3a71-6(a)(2)(ii) further predicates the
availability of substituted compliance on the Commission and the
foreign financial regulatory authority or authorities having entered
into a memorandum of understanding and/or other arrangement with the
relevant foreign financial regulatory authority or authorities
``addressing supervisory and enforcement cooperation and other matters
arising under the substituted compliance determination.'' \14\ The CNMV
Application asked the Commission to permit certain entities regulated
and supervised by the CNMV and/or the Bank of Spain to use substituted
compliance. Accordingly, the Commission recently entered into a
memorandum of understanding with the CNMV and the Bank of Spain.\15\
Moreover, because the CNMV, Bank of Spain, and European Central Bank
(``ECB'') share responsibility for supervising compliance with certain
provisions of EU and Spanish law, the Commission and the ECB also have
entered into a memorandum of understanding to address cooperation
matters related to substituted compliance.\16\ Those memoranda of
understanding or other arrangements must be in place before Covered
Entities may use substituted compliance to satisfy obligations under
the Exchange Act.\17\
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    \14\ Exchange Act rule 3a71-6(a)(2)(ii).
    \15\ The Commission expects to publish a copy of the memorandum
of understanding on its website at www.sec.gov under the
``Substituted Compliance'' tab, which is located on the ``Security-
Based Swap Markets'' page in the Division of Trading and Markets
section of the site.
    \16\ The memorandum of understanding sets forth the conditions
under which the Commission nay request, share, use, and protect from
unauthorized disclosure supervisory and enforcement inform ation
that is owned by the ECB. The memorandum of understanding also
serves as a framework for consultation, cooperation, and exchange of
information between the Commission and the ECB in the supervision,
enforcement, and oversight of Spanish firms that are registered with
the Commission as SBS Entities. A copy of the meorandum of
understanding is available on the Commision's website oat https://www.sec.gov/files/8162021-exec7ted-ecb-mou-redacted-annex-secured_0.pdf.
    \17\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47669 n.12.
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3. ``Adequate Assurances''
    A foreign financial regulatory authority may submit a substituted
compliance application only if the authority provides ``adequate
assurances'' that no law or policy would impede the ability of any
entity that is directly supervised by the authority and that may
register with the Commission ``to provide prompt access to the
Commission to such entity's books and records or to submit to onsite
inspection or examination by the Commission.'' \18\ In the Spanish
Substituted Compliance Notice and Proposed Order, the Commission stated
that the CNMV had satisfied this prerequisite in the Commission's
preliminary view, taking into account information and representations
that the CNMV provided regarding certain Spanish and EU requirements
that are relevant to the Commission's ability to inspect, and access
the books and records of, firms using substituted compliance pursuant
to the Order.\19\ The Commission received no comments on this
preliminary view and has not changed its view.
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    \18\ See Exchange Act rule 3a71-6(c)(3).
    \19\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47669 n.13.
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    Commission rule 0-13 \20\ addresses procedures for filing
substituted compliance applications. The rule provides that the
Commission will publish a notice when a completed

application has been submitted and that any person may submit to the
Commission ``any information that relates to the Commission action
requested in the application.'' \21\
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    \20\ 17 CFR 240.0-13.
    \21\ See Commission rule 0-13(h). The Commission may take final
action on a substituted compliance application no earlier than 25
days following publication of the notice in the Federal Register.
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III. Scope of and Conditions to Substituted Compliance Under the Order

A. Comparability Considerations

    In considering the CNMV's request for substituted compliance, the
Commission viewed requirements under the Exchange Act and requirements
under Spanish and EU law to maintain similar approaches with respect to
achieving regulatory goals in several respects, though they follow
differing approaches or incorporate disparate elements in certain other
respects. The Commission considered those similarities and differences
when analyzing comparability and developing its views, while
recognizing that differences in approach do not necessarily preclude
substituted compliance in light of the Commission's holistic, outcomes-
oriented framework for assessing comparability. In this context, the
Commission recognized that other regulatory regimes will have
exclusions, exceptions, and exemptions that may not align perfectly
with the corresponding requirements under the Exchange Act. Where the
Commission found that the Spanish regime produces comparable outcomes
notwithstanding those particular differences, the Commission has made a
positive determination on substituted compliance.\22\ Where the
Commission found that those exclusions, exemptions, and exceptions lead
to outcomes that are not comparable, the Commission has not provided
for substituted compliance.\23\ When a Covered Entity seeks to rely on
substituted compliance to satisfy particular requirements under the
Exchange Act, non-compliance with the applicable Spanish requirements
would lead to a violation of those Exchange Act requirements and
potential enforcement action by the Commission (as opposed to automatic
revocation of the Order).
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    \22\ See paras. (b) through (e) of the Order (internal risk
management, trade acknowledgment and verification, portfolio
reconciliation and dispute reporting, portfolio compression, trading
relationship documentation, internal supervision, chief compliance
officers, disclosure of material risks and characteristics,
disclosure of material incentives or conflicts of interest, ``know
your counterparty,'' suitability, fair and balanced communications,
daily mark disclosure, recordkeeping, reporting, and notification
requirements).
    \23\ See Parts V.B (antitrust requirements), VI.B (clearing
rights disclosure and certain ``know your counterparty''
requirements), and VII.B (certain recordkeeping requirements),
infra.
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B. Covered Entities

1. Proposed Approach
    Under the proposed Order, the definition of ``Covered Entity''
specified which entities could make use of substituted compliance.
Consistent with the availability of substituted compliance under
Exchange Act rule 3a71-6, the proposed definition would limit the
availability of substituted compliance to registered SBS Entities that
are not U.S. persons. In addition, to help ensure that firms that rely
on substituted compliance are subject to relevant Spanish and EU
requirements and oversight, the proposed definition would require a
Covered Entity to be an investment firm or credit institution
authorized by the CNMV and the ECB to provide investment services or
perform investment activities in Spain. In addition, the proposed
definition would require a Covered Entity to be a significant
institution supervised by the CNMV and the ECB (with the participation
of the Bank of Spain).\24\
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    \24\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47670.
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2. Commenter Views and Final Provisions
    Commenters did not address the proposed ``Covered Entity''
definition, and the Commission is issuing the definition as
proposed.\25\ Substituted compliance accordingly is available only to
non-U.S. SBS Entities that have the relevant Spanish and EU regulatory
permission and are subject to Spanish and EU oversight. Because the
Covered Entity definition requires the firm to be ``authorized by the
CNMV. . . to provided investment services and/or perform investment
activities in'' Spain, only firms for whom the CNMV is the competent
authority to grant such permission are able to qualify as Covered
Entities.\26\
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    \25\ See para. (f)(1) of the Order.
    \26\ Firms authorized as investment firms or credit institutions
by authorities of other EU Member States, whose authorization to
provide investment services and/or perform investment activities in
Spain derives from the single market ``passport'' under EU law, are
not able to qualify as Covered Entities under the Order.
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C. General Conditions to Substituted Compliance

1. Proposed Approach
    The proposed Order incorporated a number of additional general
conditions and other prerequisites, to help ensure that the relevant
Spanish and EU requirements that form the basis for substituted
compliance in practice will apply to the Covered Entity's security-
based swap business and activities, and to promote the Commission's
oversight over entities that avail themselves of substituted
compliance:
     ``Subject to and complies with'' applicability condition--
For each relevant section of the proposed Order, a positive substituted
compliance determination would be predicated on the Covered Entity
being subject to and complying with the applicable Spanish and EU
requirements needed to establish comparability.\27\
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    \27\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.31. The Commission stated, as an example,
that this proposed condition would not be satisfied when the
comparable Spanish or EU requirements would not apply to the
security-based swap activities of a third-country branch of a
Spanish SBS Entity. In that event, the Covered Entity would not be
``subject to'' those requirements, and the Covered Entity could not
rely on substituted compliance in connection with those activities.
Moreover, an SBS Entity's ``voluntary'' compliance with the relevant
Spanish requirements also would not suffice for these purposes.
Substituted compliance reflects an alternative means by which an SBS
Entity may comply with applicable requirements under the Exchange
Act, and thus mandates that the SBS Entity be subject to the
requirements needed to establish comparability and face consequences
arising from any failure to comply with those requirements. The
comparability assessment takes into account the effectiveness of the
supervisory compliance program administered and the enforcement
authority exercised by the CNMV, the Bank of Spain, and the ECB, and
Spanish and EU requirements would not be expected to promote
comparable outcomes when compliance merely is ``voluntary.''
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     Activities as MiFID ``investment services or
activities''--The Covered Entity's security-based swap activities would
have to constitute ``investment services or activities'' for purposes
of applicable provisions under the Markets in Financial Instruments
Directive, Directive 2014/65/EU (``MiFID''), Spanish requirements that
implement MiFID, and/or other EU and/or Spanish requirements adopted
pursuant to those provisions, and must fall within the scope of the
Covered Entity's authorization from the CNMV and the ECB.\28\
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    \28\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.32. Under this condition, a Covered
Entity's security-based swap activities would have to constitute
``investment services or activities'' only to the extent that the
relevant part of the Order requires the Covered Entity to be subject
to and comply with a provision of MiFID, Spanish requirements that
implement MiFID, and/or related EU and/or Spanish requirements. If
the relevant part of the Order does not require the Covered Entity
to be subject to and comply with one of those provisions, then the
Covered Entity's security-based swap activities would not have to
constitute ``investment services or activities'' to be able to use
substituted compliance under that part of the Order.

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     Counterparties as MiFID ``clients''--The Covered Entity's
counterparty (or potential counterparty) must be a ``client'' (or
potential ``client'') for purposes of applicable provisions under
MiFID, Spanish requirements that implement MiFID, and/or other EU and
Spanish requirements adopted pursuant to those provisions.\29\
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    \29\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.33.
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     Security-based swaps as MiFID ``financial instruments''--
The relevant security-based swap must be a ``financial instrument'' for
purposes of applicable provisions under MiFID, Spanish requirements
that implement MiFID, and/or other EU and Spanish requirements adopted
pursuant to those provisions.\30\
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    \30\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.34.
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     Covered Entity as CRD ``institution''--The Covered Entity
must be an ``institution'' for purposes of applicable provisions under
the Capital Requirements Directive, Directive 2013/36/EU (``CRD''),
Spanish requirements that implement CRD, and/or other EU and Spanish
requirements adopted pursuant to those provisions.\31\
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    \31\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.35.
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     Counterparties as EMIR ``counterparties''--If an
applicable provision under the European Market Infrastructure
Regulation, Regulation (EU) 648/2012 (``EMIR''), Commission Delegated
Regulation (EU) 149/2013 (``EMIR RTS''), Delegated Regulation (EU)
2016/2251 (``EMIR Margin RTS''), and/or other EU requirements adopted
pursuant to those provisions applies only to the Covered Entity's
activities with specified types of counterparties, and if the
counterparty is not any of the specified types of counterparties, the
Covered Entity must comply with the applicable provision as if the
counterparty were the specified type of counterparty. In addition, the
proposed Order would provide that a Covered Entity could not satisfy a
condition requiring compliance with those EMIR-based provisions by
complying with third country requirements that EU authorities may
determine to be equivalent to EMIR.\32\
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    \32\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and nn.36-37. The Commission proposed that, if
the Covered Entity reasonably determines that the counterparty would
be a financial counterparty if it were established in the EU and
authorized by appropriate EU authority (including Member State
authorities), it must treat the counterparty as if the counterparty
were a financial counterparty, rather than as another type of
counterparty to which the relevant EMIR-based requirements apply.
EMIR article 2(8) defines a ``financial counterparty'' as including
investment firms, credit institutions, insurers, and certain other
types of businesses that have been authorized in accordance with EU
directives.
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     Security-based swap status under EMIR--The relevant
security-based swap must be, for purposes of applicable provisions
under EMIR, EMIR RTS, EMIR Margin RTS, and/or other EU requirements
adopted pursuant to those provisions, either (i) and ``OTC derivative''
or ``OTC derivative contract,'' as defined in EMIR article 2(7), that
has not been cleared by a central counterparty and otherwise is subject
to the provisions of EMIR article 11, EMIR RTS articles 11 through 15,
and EMIR Margin RTS article 2; or (ii) cleared by a central
counterparty that is authorized or recognized to clear derivatives
contracts by a relevant authority in the EU.\33\
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    \33\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and n.38.
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     Memoranda of understanding--The Commission and the CNMV
and the Bank of Spain must have an applicable memorandum of
understanding or other arrangement addressing cooperation with respect
to the Order at the time the Covered Entity makes use of substituted
compliance. Because the CNMV, Bank of Spain, and ECB share
responsibility for supervising compliance with some of the provisions
of EU and Spanish law addressed by the proposed Order, at the time the
Covered Entity makes use of substituted compliance the Commission and
the ECB also must have a supervisory and enforcement memorandum of
understanding and/or other arrangement addressing cooperation with
respect to the Order as it pertains to information owned by the
ECB.\34\
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    \34\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47671 and nn.39-41. The Commission, CNMV and Bank of
Spain have entered into a memorandum of understanding to address
substituted compliance cooperation. The Commission and the ECB also
have entered into a memorandum of understanding to address
substituted compliance cooperation with respect to information owned
by the ECB. See also supra notes 15 through 17 and accompanying
text. The proposed Order would require Covered Entities to ensure
that these memoranda of understanding remain in place at the time
the Covered Entity relies on substituted compliance.
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     Notice of reliance on substituted compliance--To assist
the Commission's oversight of firms that avail themselves of
substituted compliance, a Covered Entity would be required to notify
the Commission of its intent to use substituted compliance.\35\ In the
notice, the Covered Entity would need to identify each specific
substituted compliance determination for which the Covered Entity
intends to apply substituted compliance.\36\ If a Covered Entity elects
not to apply substituted compliance with respect to a specific
substituted compliance determination, it must instead comply directly
with the relevant Exchange Act requirements. Further, except in the
case of the counterparty protection requirements and linked
recordkeeping requirements discussed below, the Commission has
determined that the Exchange Act requirements subject to substituted
compliance determinations in the proposed Order are entity-level
requirements. The Commission thus proposed that, if a Covered Entity
elects to apply substituted compliance to these entity-level
requirements, it must do so at the entity level.\37\ The Covered Entity
must promptly update the notice if it intends to modify its reliance on
substituted compliance.\38\
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    \35\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672 and n.42.
    \36\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672 and n.43. The Commission stated that, if the
Covered Entity intends to rely on all the substituted compliance
determinations in a given paragraph of the proposed Order, it can
cite that paragraph in the notice. For example, if the Covered
Entity intends to rely on the substituted compliance determinations
for Exchange Act risk control requirements in paragraph (b) of the
proposed Order, it would indicate in the notice that it is relying
on the determinations in paragraph (b). However, if the Covered
Entity intends to rely on the internal risk management, trade
acknowledgement and verification, and portfolio reconciliation and
dispute resolution determinations, but not the portfolio compression
and trading relationship documentation determinations, it would need
to indicate in the notice that it is relying on paragraphs (b)(1)
through (3) of the proposed Order. In this case, paragraphs (b)(4)
and (b)(5) of the proposed Order (the portfolio compression and
trading relationship documentation determinations, respectively)
would be excluded from the notice and the Covered Entity would need
to comply with Exchange Act portfolio compression and trading
relationship documentation requirements. Further, as discussed below
in Part VII, the recordkeeping, reporting, and notification
determinations in the proposed Order were structured to provide
Covered Entities with a high level of flexibility in selecting
specific requirements within those requirements for which they want
to rely on substituted compliance. For example, paragraph (e)(1)(i)
of the proposed Order set forth the Commission's preliminary
substituted compliance determinations with respect to the
requirements of Exchange Act rule 18a 5, 17 CFR 240.18a-5. These
proposed determinations were set forth in proposed paragraphs
(e)(1)(i)(A) through (M). If a Covered Entity intends to rely on
some but not all of the determinations, it would need to identify in
the notice the specific determinations in this paragraph it intends
to rely on (e.g., paragraphs (e)(1)(i)(A), (B), (C), (D), (G), (H),
(I), and (M)). For any determinations excluded from the notice, the
Covered Entity would need to comply with the Exchange Act rule 18a-5
requirement.
    \37\ See Part III.E, infra; Spanish Substituted Compliance
Notice and Proposed Order, 86 FR 47672 and n.44.
    \38\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672 and n.45. A Covered Entity would modify its
reliance on substituted compliance, and thus trigger the requirement
to update its notice, if it adds or subtracts substituted compliance
determinations on which it is relying or completely discontinues its
reliance on substituted compliance.

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     Notification related to changes in capital category--
Covered Entities with a prudential regulator would need to apply
substituted compliance with respect to the requirements of Exchange Act
rule 18a-8(c) and the requirements of Exchange Act rule 18a-8(h) as
applied to Exchange Act rule 18a-8(c).\39\ Exchange Act rule 18a-8(c)
generally requires every security-based swap dealer with a prudential
regulator that files a notice of adjustment of its reported capital
category with the Federal Reserve Board, the Office of the Comptroller
of the Currency, or the Federal Deposit Insurance Corporation to give
notice of this fact to the that same day by transmitting a copy to the
Commission of the notice of adjustment of reported capital category in
accordance with Exchange Act rule 18a-8(h).\40\ Exchange Act rule 18a-
8(h) sets forth the manner in which every notice or report required to
be given or transmitted pursuant to Exchange Act rule 18a-8 must be
made. While Exchange Act rule 18a-8(c) is not linked to an Exchange Act
capital requirement, it is linked to capital requirements in the U.S.
promulgated by the prudential regulators. In its application, the CNMV
cited various Spanish provisions as providing similar outcomes to the
notifications requirements of Exchange Act rule 18a-8.\41\ This general
condition would be designed to clarify that a prudentially regulated
Covered Entity must provide the Commission with copies of any
notifications regarding changes in the Covered Entity's capital
situation required by Spanish law. The intent is to align the
notification requirement with the EU and Spanish capital requirements
applicable to the Covered Entity.
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    \39\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672.
    \40\ 17 CFR 240.18a-8(c) and (h).
    \41\ See Act on Regulation, Supervision, and Solvency of Credit
Institutions, Law 10/2014, of June 26 (``LOSSEC'') articles 116,
119, 121, and 122; and Spanish Securities Market Act, Royal
Legislative Decree 4/2015, of October 23 (``SSMA'') articles 276bis,
276ter, 276qu[aacute]ter, and 276quinquies.
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2. Commenter Views and Final Provisions
    In the proposed Order, the Commission proposed to require Covered
Entities to comply with only EMIR-based trade acknowledgement and
verification and trading relationship documentation requirements, and
not with MiFID-based trade acknowledgement and verification and trading
relationship documentation requirements, in response concerns expressed
by commenters on prior substituted compliance orders.\42\ Commenters on
those prior orders had requested that the Commission delete from those
orders proposed conditions that would require firms using substituted
compliance for trade acknowledgment and verification and trading
relationship documentation requirements to comply with MiFID-based
requirements.\43\ Commenters argued that those MiFID-based conditions
in practice would prevent SBS Entities with branches in other EU
countries from relying on substituted compliance for those
requirements, and that compliance with proposed EMIR conditions would
be sufficient to produce the requisite regulatory outcomes. The
Commission amended the prior orders to address these concerns, but only
with the addition of the EMIR counterparties general condition and a
related condition pertaining to EMIR. By requiring a Covered Entity to
treat its counterparty as a type of counterparty that would trigger the
application of the relevant EMIR-based requirements, the condition will
require the Covered Entity to perform the relevant obligations pursuant
to those EMIR-based requirements and thus act in a way that is
comparable to Exchange Act requirements. Absent the condition, the
Commission would not find comparability with regard to the categories
of counterparties, such as U.S. persons and natural persons, to which
EMIR is not applicable for the entity-level requirements and,
accordingly, would not have been able to make a positive substituted
compliance determination for those entity-level requirements. The EMIR
counterparties general condition was intended to help ensure that, with
the heightened reliance on EMIR-based requirements, there will be no
opportunity for gaps that may prevent the EMIR-based requirements in
practice from producing outcomes consistent with those of the Exchange
Act.\44\
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    \42\ See French Substituted Compliance Re-Opening Release, 86 FR
19341-43; German Substituted Compliance Notice and Proposed Amended
Order, 86 FR 46503.
    \43\ See Letter from Kyle Brandon, Managing Director, Head of
Derivatives Policy, Securities and Financial Markets Association,
dated Jan. 25, 2021 (``France SIFMA Letter'') at 3-6 (cited in
French Substituted Compliance Re-opening Release, 86 FR 18341-42 and
nn.5-6; German Substituted Compliance Notice and Proposed Amended
Order, 86 FR 46503 and nn.26-27); Letter from Etienne Barel, Deputy
Chief Executive Officer, French Banking Federation, dated Jan. 25,
2021 (``FBF Letter'') at 2 (cited in French Substituted Compliance
Re-opening Release, 86 FR 18341-42 and nn.5-6). These comment
letters are available on the Commission's website at https://www.sec.gov/comments/s7-22-20/s72220.htm.
    \44\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46503.
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    The Commission invited commenters on the proposed Order to address
whether the responses to any of the questions that the Commission asked
in connection with proposals to make positive substituted compliance
determinations in respect of regulatory requirements and frameworks in
Germany, France and the United Kingdom would differ if those questions
applied to Spanish regulatory requirements and frameworks. The
Commission also requested comment on any differences between Spanish
regulatory requirements and frameworks and the German, French, or UK
requirements and frameworks that formed the basis for the Commission's
conditional grant of substituted compliance for Germany, France, and
the United Kingdom.\45\
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    \45\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47687-90.
---------------------------------------------------------------------------

    A commenter on the German Substituted Compliance Notice and
Proposed Amended Order \46\ stated that the EMIR counterparties general
condition would override exemptions and exclusions from EMIR for
certain public sector counterparties, such as multilateral development
banks, and would expand the application of EMIR to counterparties who
are not ``undertakings,'' such as natural persons.\47\ That commenter
noted that compliance with the condition would require the Covered
Entity to ``assess whether these counterparties who are not subject to
EMIR would be so subject as if it were the type of counterparty
specified by EMIR as well as, in many cases, enter into documentation
with those counterparties compliant with EMIR.'' \48\ The commenter
noted that these counterparties would be confused why an order of the
Commission ``now deprives them of an exception or exemption under EU
law that has for some time applied to them'' and would be reluctant to
enter into new documentation to enable a Covered Entity to satisfy the
Commission's substituted compliance order.\49\ The Commission did not
intend for the condition to require compliance with

EMIR-based requirements under circumstances where neither those
requirements nor the Exchange Act would apply. To clarify this intended
scope, the Commission modified the EMIR counterparties general
condition in the German Amended Substituted Compliance Order to clarify
that this condition applies only to the extent that an Exchange Act
section or rule cited in the relevant part of the Order applies to the
security-based swap activities with that counterparty.\50\ The
Commission made conforming changes the UK Substituted Compliance Order
and the French Substituted Compliance Order.\51\
---------------------------------------------------------------------------

    \46\ See Letter from Kyle Brandon, Managing Director, Head of
Derivatives Policy, Securities Industry and Financial Markets
Association, dated Sept. 13 2021 (``Germany SIFMA Letter''). The
Germany SIFMA Letter is available on the Commission's website at
https://www.sec.gov/comments/s7-08-21/s70821.htm.
    \47\ See Germany SIFMA Letter at 2.
    \48\ See Germany SIFMA Letter at 3.
    \49\ See Germany SIFMA Letter at 3.
    \50\ See German Amended Substituted Compliance Order, Exchange
Act Release No. 93411.
    \51\ See German Amended Substituted Compliance Order, Exchange
Act Release No. 93411.
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    Returning to the Commission's consideration of the same EMIR
regulatory framework in Spain, one commenter stated that proposed Order
``reflects a thoughtful, holistic approach to substituted compliance.''
\52\ The commenter noted in particular that the Commission's
comparability assessments and the conditions and limitations in the
proposed Order were consistent with the UK Substituted Compliance
Order, French Substituted Compliance Order, and the German Substituted
Compliance Notice and Proposed Amended Order, and as a result concluded
that the proposed Order ``would facilitate an orderly implementation of
the Commission's [security-based swap] regulatory regime among market
participants across different jurisdictions without creating undue
complexity or disparity.'' \53\ In the context of the EMIR
counterparties general condition, the Commission agrees that
consistency among substituted compliance orders that require firms to
be subject to and comply with EMIR and laws derived from EMIR, where
feasible, would facilitate orderly implementation of substituted
compliance. The Commission thus is changing the EMIR counterparties
general condition in the Order to reflect the same changes made in the
German Amended Substituted Compliance Order.\54\ The Commission
believes this change will promote consistency among substituted
compliance orders that require firms to be subject to and comply with
EMIR and laws derived from EMIR, consistent with the commenter's
concern and with the Commission's request for comment on differences
between the Spanish, German, French, and UK regulatory requirements and
frameworks.
---------------------------------------------------------------------------

    \52\ See Letter from Julia Bay[oacute]n, Head of Business Legal
and Vice-Secretary of the Board, Santander, dated Sept. 20, 2021
(``Santander Letter''). The Santander Letter is available on the
Commission's website at https://www.sec.gov/comments/s7-09-21/s70921.htm.
    \53\ See Santander Letter at 1.
    \54\ See para. (a)(5) of the Order.
---------------------------------------------------------------------------

    The Commission also is amending the general condition in paragraph
(a)(6) of the Order to clarify that the condition applies only if the
relevant EMIR-based requirement applies to OTC derivatives that have
not been cleared by a central counterparty, as some provisions of EMIR
cited in the Order, such as EMIR articles 39(4) and (5), are not
limited in their application to non-centrally cleared OTC derivatives.
    The Commission continues to believe that the remaining general
conditions are structured appropriately to predicate a positive
substituted compliance determination on the applicability of relevant
Spanish and EU requirements needed to establish comparability, as well
as on the continued effectiveness of the requisite memoranda of
understanding, and the provision of appropriate notices to the
Commission. The Commission is issuing these remaining general
conditions as proposed, and substituted compliance accordingly is
available only when the Covered Entity satisfies all applicable general
conditions.\55\
---------------------------------------------------------------------------

    \55\ See para. (a)(1) through (a)(9), and (a)(11) of the Order.
---------------------------------------------------------------------------

D. European Union Cross-Border Matters

1. Proposed Approach
    The proposed Order also included general conditions to address the
cross-border application of MiFID, the Markets in Financial Instruments
Regulation, Regulation (EU) 600/2014 (``MiFIR''), and the Market Abuse
Regulation, Regulation (EU) 596/2014 (``MAR''), along with EU and
Spanish requirements adopted pursuant to those laws.\56\ For some
requirements under MiFID and MiFIR (and other EU and Member State
requirements adopted pursuant to MiFID and MiFIR), EU law allocates the
responsibility for supervising and enforcing those requirements to
authorities of the Member State where an entity provides certain
services.\57\ Similarly, for some requirements under MAR (and other EU
and Member State requirements adopted pursuant to MAR), EU law
allocates the responsibility for supervising and enforcing those
requirements to authorities of potentially multiple Member States. To
help ensure that the prerequisites to substituted compliance with
respect to supervision and enforcement are satisfied in fact, when the
proposed Order conditioned substituted compliance on the Covered Entity
being subject to and complying with those MiFID- and MiFIR-related
requirements, the proposed Order would permit substituted compliance
only if the CNMV is the authority responsible for supervision and
enforcement of those MiFID- and MiFIR-related requirements in relation
to the particular service provided by the Covered Entity. When the
proposed Order conditioned substituted compliance on the Covered Entity
being subject to and complying with those MAR-related requirements, the
proposed Order would permit substituted compliance only if one of the
authorities responsible for supervision and enforcement of those
requirements is the CNMV.
---------------------------------------------------------------------------

    \56\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672 and nn.48-50.
    \57\ See MiFID article 35(8).
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    Commenters did not address the European Union cross-border
conditions. The Commission continues to believe that requiring that the
CNMV have responsibility for applicable MiFID, MiFIR, and MAR
provisions will help ensure that the supervision and enforcement
prerequisites to substituted compliance are satisfied.\58\ In the
Commission's view, these conditions are structured appropriately to
permit the use of substituted compliance only when the CNMV is
responsible for supervising a Covered Entity's compliance with a
relevant provision of MiFID, MiFIR, MAR, or related EU or Spanish
requirements. Additionally, the conditions help ensure that applicable
MiFID, MiFIR, and MAR provisions are interpreted and applied in a
consistent manner by an entity that is party to the memorandum of
understanding and/or other arrangement that are a prerequisite to
substituted compliance. Accordingly, the Commission is issuing the
conditions as proposed.\59\
---------------------------------------------------------------------------

    \58\ See Business Conduct Adopting Release, 81 FR 30080.
    \59\ See para. (a)(10) of the Order.
---------------------------------------------------------------------------

E. Substituted Compliance for Entity-Level and Transaction-Level
Requirements

1. Proposed Approach
    For entity-level Exchange Act requirements,\60\ the proposed Order

would require a Covered Entity to choose either to apply substituted
compliance pursuant to the proposed Order with respect to all security-
based swap business subject to the relevant Spanish and EU requirements
or to comply directly with the Exchange Act with respect to all such
business; a Covered Entity would not be able to choose to apply
substituted compliance pursuant to the proposed Order for some of the
business subject to the relevant Spanish or EU requirements and comply
directly with the Exchange Act for another part of the business that is
subject to the relevant Spanish and EU requirements.\61\ Additionally,
for entity-level Exchange Act requirements, if the Covered Entity also
has security-based swap business that is not subject to the relevant
Spanish and/or EU requirements, the proposed Order would require the
Covered Entity either to comply directly with the Exchange Act for that
business or to comply with the terms of another applicable substituted
compliance order.\62\ For transaction-level Exchange Act
requirements,\63\ a Covered Entity may decide to apply substituted
compliance for some of its security-based swap business and to comply
directly with the Exchange Act (or comply with another applicable
substituted compliance order) for other parts of its security-based
swap business.\64\
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    \60\ Entity-level requirements relevant to the proposed Order
relate to internal risk management, trade acknowledgment and
verification, portfolio reconciliation and dispute resolution,
portfolio compression, trading relationship documentation, internal
supervision, chief compliance officers, counterparty protection,
recordkeeping (other than requirements linked to counterparty
protection requirements), reporting, and notification. See Exchange
Act Release No. 78011 (June 8, 2016) 81 FR 39808, 39827 (June 17,
2016) (``TAV Adopting Release''); Business Conduct Adopting Release,
81 FR 30064; Exchange Act Release No. 87005 (June 19, 2019) 84 FR
68550, 68596 (Dec. 16, 2019) (``Books and Records Adopting
Release''); Exchange Act Adopting Release No. 87782 (Dec. 18, 2019)
85 FR 6359, 6378 (Feb. 4, 2020) (``Risk Mitigation Adopting
Release'').
    \61\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47672-73 and n.51.
    \62\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47673 and n.53. In the context of the EMIR
counterparties condition in paragraph (a)(5) of the proposed Order,
a Covered Entity would be required to choose: (1) To apply
substituted compliance pursuant to the proposed Order-including
compliance with paragraph (a)(5) as applicable-for a particular set
of entity-level requirements with respect to all of its business
that would be subject to the relevant EMIR-based requirement if the
counterparty were the relevant type of counterparty; or (2) to
comply directly with the Exchange Act with respect to such business.
    \63\ Transaction-level requirements relevant to the proposed
Order are the counterparty protection requirements and the
recordkeeping requirements related to those counterparty protection
requirements. See Business Conduct Adopting Release, 81 FR 30065.
    \64\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47673 and n.54.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    Commenters did not address the proposed approach to substituted
compliance for entity-level and transaction-level requirements. The
Commission continues to believe that the proposed scope of substituted
compliance strikes the right balance between providing Covered Entities
flexibility to tailor the application of substituted compliance to
their business needs and ensuring that substituted compliance is
consistent with the Commission's classification of the relevant
Exchange Act requirements as either entity-level or transaction-level
requirements. The Commission accordingly is issuing the Order with the
proposed approach to substituted compliance for entity-level and
transaction-level requirements.

IV. Substituted Compliance for Risk Control Requirements

A. Proposed Approach

    The CNMV Application requested substituted compliance in connection
with risk control requirements under the Exchange Act relating to:
     Internal risk management--Internal risk management system
requirements pursuant to Exchange Act section 15F(j)(2) and relevant
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I).\65\ Those provisions
address the obligation of SBS Entities to follow policies and
procedures reasonably designed to help manage the risks associated with
their business activities.\66\
---------------------------------------------------------------------------

    \65\ The CNMV did not request substituted compliance in
connection with Exchange Act rule 18a-1(f) Exchange Act rule 18a-
2(c), which include additional internal risk management system
requirements for non-prudentially regulated SBS Entities subject to
the Commission's capital and margin requirements.
    \66\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR
70214, 70250 (Nov. 23, 2012) (proposing capital and margin
requirements for SBS Entities and discussing certain risk management
requirements); Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47673 and n.56.
---------------------------------------------------------------------------

     Trade acknowledgment and verification--Trade
acknowledgment and verification requirements pursuant to Exchange Act
section 15F(i) and Exchange Act rule 15Fi-2.\67\ Those provisions help
avoid legal and operational risks by requiring definitive written
records of transactions and for procedures to avoid disagreements
regarding the meaning of transaction terms.\68\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.15Fi-2.
    \68\ See TAV Adopting Release, 81 FR 39808, 39809, 39820;
Spanish Substituted Compliance Notice and Proposed Order, 86 FR
47673 and n.58.
---------------------------------------------------------------------------

     Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting requirements pursuant to Exchange
Act section 15F(i) and Exchange Act rule 15Fi-3.\69\ Those provisions
require that counterparties engage in portfolio reconciliation and
resolve discrepancies in connection with uncleared security-based swaps
and promptly notify the Commission and applicable prudential regulators
regarding certain valuation disputes.\70\
---------------------------------------------------------------------------

    \69\ 17 CFR 240.15Fi-3.
    \70\ See Risk Mitigation Adopting Release, 85 FR 6359, 6360-61;
Spanish Substituted Compliance Notice and Proposed Order, 86 FR
47673 and n.60.
---------------------------------------------------------------------------

     Portfolio compression--Portfolio compression requirements
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-
4.\71\ Those provisions require that SBS Entities have procedures
addressing bilateral offset, bilateral compression and multilateral
compression in connection with uncleared security-based swaps.\72\
---------------------------------------------------------------------------

    \71\ 17 CFR 240.15Fi-4.
    \72\ See Risk Mitigation Adopting Release, 85 FR 6361; Spanish
Substituted Compliance Notice and Proposed Order, 86 FR 47673 and
n.62.
---------------------------------------------------------------------------

     Trading relationship documentation--Trading relationship
documentation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-5.\73\ Those provisions require that SBS
Entities have procedures to execute written security-based swap trading
relationship documentation with their counterparties prior to, or
contemporaneously with, executing certain security-based swaps.\74\
---------------------------------------------------------------------------

    \73\ 17 CFR 240.15Fi-5.
    \74\ See Risk Mitigation Adopting Release, 85 FR 6361; Spanish
Substituted Compliance Notice and Proposed Order, 86 FR 47673 and
n.64.
---------------------------------------------------------------------------

    Taken as a whole, these risk control requirements help to promote
market stability by mandating that SBS Entities follow practices that
are appropriate to manage the market, credit, counterparty,
operational, and legal risks associated with their security-based swap
businesses. In considering conditional substituted compliance for the
risk control portion of the CNMV Application, the Commission
preliminarily concluded that the relevant Spanish and EU requirements
would produce regulatory outcomes that are comparable to those
associated with the above risk control requirements, by subjecting
Covered Entities to risk mitigation and documentation practices that
are appropriate to the risks associated with their security-based swap
businesses.\75\
---------------------------------------------------------------------------

    \75\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674.
---------------------------------------------------------------------------

    Substituted compliance under the proposed Order was to be subject
to certain additional conditions to help ensure the comparability of
outcomes.

First, substituted compliance under the proposed Order was to be
conditioned on Covered Entities being subject to the Spanish and EU
provisions that in the aggregate establish a framework that produces
outcomes comparable to those associated with these risk control
requirements under the Exchange Act.\76\ Second, substituted compliance
in connection with trading relationship documentation requirements
would 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.\77\ Finally, substituted compliance in
connection with portfolio reconciliation and dispute reporting
requirements would be 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
competent authorities pursuant to EU law.\78\
---------------------------------------------------------------------------

    \76\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and n.65.
    \77\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and nn.66-67.
    \78\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and nn.68-70.
---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

    One commenter supported the Commission's proposal to make the
positive substituted compliance determinations in the proposed
Order,\79\ including positive substituted compliance determinations for
internal risk management, trade acknowledgment and verification,
portfolio reconciliation and dispute reporting, portfolio compression
and trading relationship documentation requirements. The Commission
continues to conclude that, taken as a whole, relevant Spanish and EU
requirements would produce regulatory outcomes that are comparable to
those associated with these risk control requirements, by subjecting
Covered Entities to risk mitigation and documentation practices that
are appropriate to the risks associated with their security-based swap
businesses. While the Commission recognizes certain differences between
Spanish and EU requirements and the applicable risk control
requirements under the Exchange Act, in the Commission's view those
differences on balance should not preclude substituted compliance for
these requirements, as the relevant Spanish and EU requirements taken
as a whole help to produce comparable regulatory outcomes.\80\
Accordingly, 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 and is issuing the risk control section of the Order as
proposed.\81\
---------------------------------------------------------------------------

    \79\ See Santander Letter at 1.
    \80\ The comparability analysis requires consideration of
Exchange Act requirements as a whole against analogous Spanish and
EU 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 Spanish and EU
requirements that establish comparability with the applicable
regulatory outcome, and helps to avoid ambiguity in the application
of substituted compliance.
    \81\ See para. (b) of the Order.
---------------------------------------------------------------------------

    To help ensure the comparability of outcomes, and consistent with
the proposed Order, 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
Spanish and EU requirements.\82\ In addition, 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.\83\ Finally,
substituted compliance in connection with 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 competent authorities pursuant to EU law.\84\ 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.
---------------------------------------------------------------------------

    \82\ See paras. (b)(1) through (5) of the Order.
    \83\ See para. (b)(5) of the Order. The Exchange Act rule 15Fi-
5, 17 CFR 240.15Fi-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 Risk Mitigation Adopting Release, 85 FR 6374. Documentation
requirements under applicable Spanish and EU 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, 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.
    \84\ See para. (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 Spanish and EU reporting provisions to avoid the need for
Covered Entities to create additional reporting frameworks. When it
proposed the requirement for all SBS Entities 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 EU valuation dispute reporting requirements
concerns the timing of notices. Under Exchange Act rule 15Fi-3, 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 the counterparty type). Under EMIR
RTS article 15(2), firms must report at least monthly, to competent
authorities, disputes between counterparties in excess of [euro]15
million and outstanding for at least 15 business days. The
Commission is mindful that the EU provision does not provide for
notice as quickly as rule 15Fi-3(c), but in the Commission's view,
on balance this difference would not be inconsistent with the
conclusion that the two sets of risk control requirements-taken as a
whole-produce comparable regulatory outcomes.
---------------------------------------------------------------------------

    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 of 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.

V. Substituted Compliance for Internal Supervision and Compliance
Requirements

A. Proposed Approach

    The CNMV Application requested substituted compliance in connection
with requirements under the Exchange Act relating to:
     Internal supervision--Diligent supervision is required
pursuant to Exchange Act rule 15Fh-3(h) and Exchange Act section
15F(j)(5) requires conflict of interest systems and procedures. These
provisions generally require that SBS Entities establish, maintain, and
enforce supervisory policies and procedures that reasonably are
designed to prevent violations of applicable law, and implement certain
systems and procedures related to conflicts of interest. Exchange Act
section 15F(j)(4)(A) additionally requires systems and procedures to
obtain necessary information to perform functions required under
section 15F.\85\
---------------------------------------------------------------------------

    \85\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and n.71.
---------------------------------------------------------------------------

     Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and Exchange
Act rule 15Fk-1.\86\ These provisions in general require that SBS
Entities designate individuals with the responsibility and authority to
establish, administer, and review compliance policies and procedures;
to resolve conflicts of interest; and to prepare and certify an annual
compliance report to the Commission.\87\
---------------------------------------------------------------------------

    \86\ 17 CFR 240.15Fk-1.
    \87\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and n.73.
---------------------------------------------------------------------------

     Antitrust requirements--Additional requirements related to
antitrust prohibitions specified by Exchange Act section 15F(j)(6).\88\
---------------------------------------------------------------------------

    \88\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47674 and n.74. Section 15F(j)(6) prohibits firms from
adopting any process or taking any action that results in any
unreasonable restraint of trade or imposing any material
anticompetitive burden on trading or clearing.
---------------------------------------------------------------------------

    Taken as a whole, these internal supervision, chief compliance
officer, and additional Exchange Act section 15F(j) requirements help
to promote SBS Entities' use of structures, processes, and responsible
personnel reasonably designed to promote compliance with applicable
law; to identify and cure instances of non-compliance; and to manage
conflicts of interest. In considering conditional substituted
compliance for this portion of the CNMV Application, the Commission
preliminarily concluded that the relevant Spanish and EU requirements
would produce regulatory outcomes that are comparable to those
associated with Exchange Act internal supervision \89\ and chief
compliance officer requirements by providing that Covered Entities have
structures and processes that reasonably are designed to promote
compliance with applicable law and to identify and cure instances of
non-compliance and manage conflicts of interest.\90\
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    \89\ The proposed Order would provide for substituted compliance
in connection with internal supervision provisions of Exchange Act
rule 15Fh-3(h), the requirement in Exchange Act section 15F(j)(4)(A)
to have systems and procedures to obtain necessary information to
perform functions required under Exchange Act section 15F; and the
conflict of interest provisions of Exchange Act section 15F(j)(5).
The internal supervision portion of the proposed Order did not
extend to the portions of rule 15Fh-3(h) that mandate supervisory
policies and procedures in connection with: The internal risk
management provisions of Exchange Act section 15F(j)(2) (which were
addressed by paragraph (b)(1) of the proposed Order in connection
with internal risk management); the information-related provisions
of Exchange Act sections 15F(j)(3) and (j)(4)(B) (for which
substituted compliance is not available); or the antitrust
provisions of Exchange Act section 15F(j)(6) (for which the
Commission did not propose to provide substituted compliance). See
Spanish Substituted Compliance Notice and Proposed Order, 86 FR
47675 n.75.
    \90\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47675.
---------------------------------------------------------------------------

    Substituted compliance under the proposed Order was to be subject
to certain conditions to help ensure the comparability of outcomes.
First, substituted compliance for internal supervision and chief
compliance officer requirements under the proposed Order was to be
conditioned on Covered Entities being subject to the Spanish and EU
requirements that in the aggregate establish a framework that produces
outcomes comparable to those associated with these internal
supervision, chief compliance officer, conflict of interest, and
information-related requirements under the Exchange Act.\91\ Second,
substituted compliance in connection with internal supervision
requirements would be conditioned on Covered Entities complying with
applicable Spanish and EU internal supervision requirements as if those
provisions also require the Covered Entity to comply with applicable
requirements under the Exchange Act and the other applicable conditions
of the proposed Order.\92\ This condition was intended to reflect that,
even with substituted compliance, Covered Entities still directly would
be subject to a number of requirements under the Exchange Act and to
conditions of the Order, all of which fall outside the ambit of Spanish
and EU internal supervision requirements.\93\ Finally, for similar
reasons, substituted compliance in connection with chief compliance
officer requirements would be subject to the conditions \94\ that

compliance reports required pursuant to Commission Delegated Regulation
(EU) 2017/565 (``MiFID Org Reg'') article 22(2)(c) must: (1) Be
provided to the Commission at least annually and in the English
language; (2) include a certification signed by the chief compliance
officer or senior officer of the Covered Entity that, to the best of
the certifier's knowledge and reasonable belief and under penalty of
law, the report is accurate and complete in all material respects; (3)
address the Covered Entity's compliance with applicable requirements
under the Exchange Act and other applicable conditions of the proposed
Order; \95\ (4) be provided to the Commission no later than 15 days
following the earlier of the submission of the report to the Covered
Entity's management body or the time the report is required to be
submitted to the management body; \96\ and (5) together cover the
entire period that the Covered Entity's annual compliance report
referenced in Exchange Act section 15F(k)(3) and Exchange Act rule
15Fk-1(c) would be required to cover.\97\
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    \91\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.86.
    \92\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47675 and n.77. In other words, the proposed Order
would require that the Covered Entity's supervisory and compliance
program cover applicable requirements under the Exchange Act and
other applicable conditions of the Order.
    \93\ While the Spanish and EU regulatory framework in general
reasonably appears to promote Covered Entities' compliance with
applicable Spanish and EU laws, those requirements do not appear to
promote Covered Entities' compliance with requirements under the
Exchange Act that are not subject to substituted compliance, or to
promote Covered Entities' compliance with the applicable conditions
to the proposed Order. These residual Exchange Act requirements
could, for example, relate to requirements for which substituted
compliance is not available, requirements for which the Order does
not make a positive substituted compliance determination, security-
based swap business for which the Covered Entity is unable to
satisfy the conditions of the Order, and/or requirements or
security-based swap business for which the Covered Entity decides
not to use substituted compliance. The condition was designed to
allow Covered Entities to use their existing internal supervision
and compliance frameworks to comply with the relevant Exchange Act
requirements and proposed Order conditions, rather than having to
establish separate special-purpose internal supervision frameworks.
    \94\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47675-76 and nn.80-85. Although certain Spanish and EU
requirements address a Covered Entity's use of internal compliance
reports, those requirements do not require it to submit compliance
reports to the Commission. These conditions would allow a Covered
Entity to leverage the compliance reports that it otherwise must
produce, by extending those reports to address compliance with the
conditions of the proposed Order. The Commission stated that, in
practice, a Covered Entity may satisfy these conditions by
identifying relevant Exchange Act requirements and proposed Order
conditions and reporting on the implementation and effectiveness of
its controls with regard to compliance with those requirements and
conditions.
    \95\ MiFID Org Reg article 22(2)(c) particularly requires that a
Covered Entity's compliance function ``report to the management
body, on at least an annual basis, on the implementation and
effectiveness of the overall control environment for investment
services and activities, on the risks that have been identified and
on the complaints-handling reporting as well as remedies undertaken
or to be undertaken[.]'' Under the proposed condition, those
reports, as submitted to the Commission and the Covered Entity's
management body, also would address the Covered Entity's compliance
with applicable Exchange Act requirements and other applicable
conditions of the proposed Order (in addition to addressing the
Covered Entity's compliance with applicable Spanish and EU
provisions).
    \96\ This deadline was intended to promote timely notice of
compliance matters in a manner comparable to Exchange Act
requirements, while also accounting for the annual deadline required
under MiFID Org Reg article 22(2)(c) as well as the possibility that
the Covered Entity may submit reports ahead of this annual deadline.
    \97\ This requirement would prevent a Covered Entity from
notifying the Commission just prior to the due date of its annual
Exchange Act compliance report that it will use substituted
compliance for chief compliance officer requirements and then
providing the Commission a Spanish compliance report that covers
only a part of the year that would have been covered in the Exchange
Act report.
---------------------------------------------------------------------------

    Finally, the Commission preliminarily concluded that allowing an
alternative means of compliance with Exchange Act antitrust
requirements would not lead to comparable outcomes, and the proposed
Order did not provide for substituted compliance in connection with
those requirements.\98\
---------------------------------------------------------------------------

    \98\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.86.
---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

    One commenter supported the Commission's proposal to make the
positive substituted compliance determinations in the proposed
Order,\99\ including positive substituted compliance determinations for
internal supervision and chief compliance officer requirements. The
Commission continues to conclude that, taken as a whole, relevant
Spanish and EU requirements would produce regulatory outcomes that are
comparable to those associated with Exchange Act internal supervision
and chief compliance officer requirements by providing that Covered
Entities have structures and processes that reasonably are designed to
promote compliance with applicable law and to identify and cure
instances of non-compliance and manage conflicts of interest. While the
Commission recognizes certain differences between Spanish and EU
requirements and the applicable internal supervision and chief
compliance officer requirements under the Exchange Act, in the
Commission's view those differences on balance should not preclude
substituted compliance for these requirements, as the relevant Spanish
and EU requirements taken as a whole help to produce comparable
regulatory outcomes by requiring Covered Entities to have structures
and processes reasonably designed to promote compliance with applicable
law, identify and cure instances of non-compliance, and manage
conflicts of interest. Accordingly, the Commission is making positive
substituted compliance determinations in connection with internal
supervision and chief compliance officer requirements and is issuing
the internal supervision and compliance section of the Order as
proposed.\100\
---------------------------------------------------------------------------

    \99\ See Santander Letter at 1.
    \100\ See para. (c) of the Order.
---------------------------------------------------------------------------

    To help ensure the comparability of outcomes, and consistent with
the proposed Order, substituted compliance for internal supervision and
chief requirements is subject to certain conditions. Substituted
compliance for both sets of requirements is conditioned on the Covered
Entity being subject to, and complying with, relevant Spanish and EU
requirements.\101\ In addition, substituted compliance for internal
supervision requirements (1) is conditioned on the Covered Entity's
compliance with applicable Spanish and EU internal supervision
requirements as if those provisions also require the Covered Entity to
comply with applicable requirements under the Exchange Act and the
other applicable conditions of the proposed Order \102\ and (2) does
not extend to certain specified internal supervision requirements.\103\
Finally, substituted compliance in connection with chief compliance
officer requirements is subject to the conditions that compliance
reports required pursuant to MiFID Org Reg article 22(2)(c) must: (1)
Be provided to the Commission at least annually and in the English
language; (2) include a certification \104\ signed by the chief
compliance officer or senior officer of the Covered Entity that, to the
best of the certifier's knowledge and reasonable belief and under
penalty of law, the report is accurate and complete in all material
respects; (3) address the Covered Entity's compliance with applicable
requirements under the Exchange Act and other applicable conditions of
the proposed Order; (4) be provided to the Commission no later than 15
days \105\ following the earlier of

the submission of the report to the Covered Entity's management body or
the time the report is required to be submitted to the management body;
and (5) together cover the entire period that the Covered Entity's
annual compliance report referenced in Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) would be required to cover.\106\ 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.
---------------------------------------------------------------------------

    \101\See paras. (c)(1) through (3) of the Order.
    \102\ See paras. (c)(1)(ii) and (c)(4) of the Order. The Order
provides that the Covered Entity must comply with relevant Spanish
and EU provisions as if those provisions address applicable
conditions of the Order connected to requirements for which the
Covered Entity is relying on substituted compliance. That part of
the condition does not apply to parts of the Order for which the
Covered Entity does not rely on substituted compliance. In other
words, a Covered Entity's reliance on substituted compliance under
para. (c)(4) requires that the Covered Entity's supervisory and
compliance programs cover applicable provisions under the Exchange
Act and other applicable conditions of the Order.
    \103\ See para. (c)(1)(iii) of the Order. In particular, the
Order does not extend to the portions of rule 15Fh-3(h) that mandate
supervisory policies and procedures in connection with: The internal
risk management provisions of Exchange Act section 15F(j)(2) (which
are addressed by paragraph (b)(1) of the Order in connection with
internal risk management); the information-related provisions of
Exchange Act sections 15F(j)(3) and (j)(4)(B) (for which substituted
compliance is not available); or the antitrust provisions of
Exchange Act section 15F(j)(6) (for which the Commission is not
making a positive substituted compliance determination).
    \104\ The Commission recognizes that Covered Entities preparing
multiple Spanish compliance reports each year may find it difficult
to submit to those reports to the Commission throughout the year,
each with a chief compliance officer or senior officer certification
and a section addressing the Covered Entity's compliance with U.S.
requirements. However, on balance the Commission continues to
believe that these elements are necessary to achieve a regulatory
outcome comparable to the Exchange Act.
    \105\ The Commission continues to believe that it is appropriate
for the Commission to receive compliance reports shortly after their
submission to the management body. Providing these reports to the
Commission near the times that the Covered Entity submits them to
the management body also will better align with the Spanish and EU
regulatory framework, which permits a Covered Entity to prepare and
submit to the management body multiple compliance reports throughout
the year. The Commission views 15 days as providing a reasonable
time to translate reports, if needed, and convey them to the
Commission.
    \106\ See para. (c)(2)(ii) of the Order. The Commission
continues to believe that these conditions are necessary to promote
comparable regulatory outcomes, particularly in light of the
granular approach to substituted compliance, and to ensure that the
compliance report covers applicable Exchange Act requirements and
proposed Order conditions if the Covered Entity uses substituted
compliance for chief compliance officer requirements, whether or not
the Covered Entity relies on substituted compliance for internal
supervision.
---------------------------------------------------------------------------

    Under the Order, substituted compliance for internal supervision
and chief compliance officer requirements is not subject to a condition
that the Covered Entity apply substituted compliance for related
recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6. A
Covered Entity that applies substituted compliance for internal
supervision and/or chief compliance officer requirements, but does not
apply substituted compliance for the related recordkeeping requirements
in Exchange Act rules 18a-5 and 18a-6, will remain subject to the
relevant provisions of Exchange Act rules 18a-5 and 18a-6. Those rules
require the Covered Entity to make and preserve records of its
compliance with Exchange Act internal supervision and chief compliance
officer requirements and of its security-based swap activities required
or governed by those requirements. A Covered Entity that applies
substituted compliance for internal supervision and/or chief compliance
officer requirements, but complies directly with related recordkeeping
requirements in rules 18a-5 and 18a-6, therefore must make and preserve
records of its compliance with the relevant conditions of 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.
    Finally, for the reasons discussed in the proposed Order,\107\ the
Order does not extend to antitrust provisions under the Exchange Act.
---------------------------------------------------------------------------

    \107\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.86. The Commission is not taking any
position regarding the applicability of the section 15F(j)(6)
antitrust prohibitions in the cross-border context. Non-U.S. SBS
Entities should assess the applicability of those prohibitions to
their security-based swap businesses.
---------------------------------------------------------------------------

VI. Substituted Compliance for Counterparty Protection Requirements

A. Proposed Approach

    The CNMV requested substituted compliance in connection with
counterparty protection requirements under the Exchange Act relating
to:
     Disclosure of material risks and characteristics and
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) requires that SBS Entities disclose to certain counterparties to a
security-based swap certain information about the material risks and
characteristics of the security-based swap, as well as material
incentives or conflicts of interest that the SBS Entity may have in
connection with the security-based swap. These provisions address the
need for security-based swap market participants to have information
that is sufficient to make informed decisions regarding potential
transactions involving particular counterparties and particular
financial instruments.\108\
---------------------------------------------------------------------------

    \108\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.87.
---------------------------------------------------------------------------

     ``Know your counterparty''--Exchange Act rule 15Fh-3(e)
requires a security-based swap dealer to establish, maintain, and
enforce written policies and procedures to obtain and retain certain
information regarding a counterparty that is necessary for conducting
business with that counterparty. This provision accounts for the need
that SBS Entities obtain essential counterparty information necessary
to promote effective compliance and risk management.\109\
---------------------------------------------------------------------------

    \109\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.88.
---------------------------------------------------------------------------

     Suitability--Exchange Act rule 15Fh-3(f) requires a
security-based swap dealer that recommends to certain counterparties a
security-based swap or trading strategy involving a security-based
swap, to undertake reasonable diligence to understand the potential
risks and rewards associated with the recommendation and to have a
reasonable basis to believe that the recommendation is suitable for the
counterparty. This provision accounts for the need to guard against
security-based swap dealers making unsuitable recommendations.\110\
---------------------------------------------------------------------------

    \110\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and nn.89-90.
---------------------------------------------------------------------------

     Fair and balanced communications--Exchange Act rule 15Fh-
3(g) requires that SBS Entities communicate with counterparties in a
fair and balanced manner based on principles of fair dealing and good
faith. These provisions promote complete and honest communications as
part of SBS Entities' security-based swap businesses.\111\
---------------------------------------------------------------------------

    \111\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.91.
---------------------------------------------------------------------------

     Daily mark disclosure--Exchange Act rule 15Fh-3(c)
requires that SBS Entities provide daily mark information to certain
counterparties. These provisions address the need for market
participants to have effective access to daily mark information
necessary to manage their security-based swap positions.\112\
---------------------------------------------------------------------------

    \112\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.92.
---------------------------------------------------------------------------

     Clearing rights disclosure--Exchange Act rule 15Fh-3(d)
requires that SBS Entities provide certain counterparties with
information regarding clearing rights under the Exchange Act.\113\
---------------------------------------------------------------------------

    \113\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47676 and n.93. Exchange Act section 3C(g)(5) provides
certain rights for counterparties to select the clearing agency at
which a security-based swap is cleared. For all security-based swaps
that an SBS Entity enters into with certain counterparties, the
counterparty has the sole right to select the clearing agency at
which the security-based swap is cleared. For security-based swaps
that are not subject to mandatory clearing (pursuant to Exchange Act
sections 3C(a) and (b)) and that an SBS Entity enters into with
certain counterparties, the counterparty also may elect to require
clearing of the security-based swap. Substituted compliance is not
available in connection with these provisions.
---------------------------------------------------------------------------

    Taken as a whole, the counterparty protection requirements under
section 15F of the Exchange Act help to ``bring professional standards
of conduct to, and increase transparency in, the security-based swap
market and to require [SBS Entities] to treat parties to these
transactions fairly.'' \114\ The

proposed Order provided for conditional substituted compliance in
connection with disclosure of material risks and characteristics,
disclosure of material incentives or conflicts of interest, ``know your
counterparty,'' suitability, fair and balanced communications, and
daily mark disclosure requirements.\115\ In proposing to provide
conditional substituted compliance for these counterparty protection
requirements, the Commission preliminarily concluded that the relevant
Spanish and EU requirements produce regulatory outcomes that are
comparable to these requirements under Exchange Act section 15F(h), by
subjecting Covered Entities to obligations that promote standards of
professional conduct, transparency, and the fair treatment of parties.
---------------------------------------------------------------------------

    \114\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677 and n.94; Business Conduct Adopting Release, 81
FR 30065. For non-U.S. SBS Entities, the counterparty protection
requirements under Exchange Act section 15F(h) apply only to the SBS
Entity's transactions with U.S. counterparties (apart from certain
transactions conducted through a foreign branch of the U.S.
counterparty), or to transactions arranged, negotiated, or executed
by personnel located in a U.S. branch or office. See Exchange Act
rule 3a71-3(c), 17 CFR 240.3a71-3(c) (exception from business
conduct requirements for a security-based swap dealer's ``foreign
business''); see also Exchange Act rule 3a71-3(a)(3), (8) and (9)
(definitions of ``transaction conducted through a foreign branch,''
``U.S. business'' and ``foreign business'').
    \115\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677.
---------------------------------------------------------------------------

    As proposed, substituted compliance for these requirements would be
subject to certain conditions to help ensure the comparability of
outcomes. First, under the proposed Order, substituted compliance for
disclosure of material risks and characteristics, disclosure of
material incentives or conflicts of interest, ``know your
counterparty,'' suitability, and fair and balanced communications
requirements would be conditioned on Covered Entities being subject to,
and complying with, relevant Spanish and EU requirements.\116\ Second,
the proposed Order additionally would condition substituted compliance
for suitability requirements on the counterparty being a ``professional
client'' as defined in MiFID (rather than a ``retail client'' or an
elective ``professional client'' \117\) and not a ``special entity'' as
defined in Exchange Act section 15F(h)(2)(C) and Exchange Act rule
15Fh-2(d).\118\ The Commission continues to believe that, absent such a
condition the MiFID-based suitability requirements would not be
expected to produce a counterparty protection outcome that is
comparable with the outcome produced by the suitability requirements
under the Exchange Act.\119\ Finally, in the proposed Order the
Commission preliminarily viewed certain types of EU daily portfolio
reconciliation requirements as comparable to Exchange Act daily mark
disclosure requirements.\120\ These daily portfolio reconciliation
requirements apply to portfolios of a financial counterparty or a non-
financial counterparty subject to the clearing obligation in EMIR in
which counterparties have 500 or more OTC derivatives contracts
outstanding with each other.\121\ The Commission preliminarily viewed
EU portfolio reconciliation requirements for other types of portfolios,
which may be reconciled less frequently than each business day or may
not require disclosure to counterparties, as not comparable to Exchange
Act daily mark requirements.\122\ Accordingly, the proposed Order would
condition substituted compliance for daily mark requirements on the
Covered Entity being required to reconcile, and in fact reconciling,
the portfolio containing the relevant security-based swap on each
business day pursuant to relevant EU requirements.\123\
---------------------------------------------------------------------------

    \116\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677 and nn.97-99.
    \117\ Annex II of MiFID describes which clients are
``professional clients.'' Section I of Annex II describes the types
of clients considered to be professional clients unless the client
elects non-professional treatment; these clients are per se
professional clients. Section II of Annex II describes the types of
clients who may be treated as professional clients on request; these
clients are elective professional clients. See MiFID Annex II.
Retail clients are those that are not professional clients. See
MiFID article 4(1)(11).
    \118\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677.
    \119\ The Commission recognizes that Exchange Act rules permit
security-based swap dealers, when making a recommendation to an
``institutional counterparty,'' to satisfy some elements of the
suitability requirement if the security-based swap dealer reasonably
determines that the counterparty or its agent is capable of
independently evaluating relevant investment risks, the counterparty
or its agent represents in writing that it is exercising independent
judgment in evaluating recommendations, and the security-based swap
dealer discloses to the counterparty that it is acting as
counterparty and is not undertaking to assess the suitability of the
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this
alternative applies are only a subset of the ``professional
clients'' to whom more narrowly tailored suitability requirements
apply under MiFID. The institutional counterparty alternative under
the Exchange Act remains available, in accordance with its terms,
for recommendations that are not eligible for, or for which a
Covered Entity does not rely on, substituted compliance under the
Order.
    \120\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677-78.
    \121\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
    \122\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677-78.
    \123\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47677-78. This approach would avoid reliance on Spanish
and EU trade reporting or mark-to-market (or mark-to-model)
requirements. The Spanish and EU mark-to-market (or mark-to-model)
requirements direct certain types of derivatives counterparties to
mark-to-market (or mark-to-model) uncleared transactions each day
but do not require disclosure of those marks to counterparties.
Moreover, though Spanish and EU trade reporting requirements direct
certain derivatives counterparties to report to a EU trade
repository updated daily valuations for each OTC derivative
contract, in practice U.S. counterparties may encounter challenges
when attempting to access daily marks reported to multiple EU trade
repositories with which they may not otherwise have business
relationships. In addition, the information may be less current,
given the time necessary for reporting and for the trade repository
to make the information available.
---------------------------------------------------------------------------

    The proposed Order would not provide substituted compliance in
connection with Exchange Act requirements for SBS Entities to disclose
a counterparty's clearing rights under Exchange Act section
3C(g)(5).\124\ The CNMV Application cited certain EU provisions related
to a counterparty's clearing rights in the European Union. However,
those provisions do not require disclosure of Exchange Act section
3C(g)(5) clearing rights, and the Commission preliminarily viewed the
EU clearing provisions as not comparable to Exchange Act clearing
rights disclosure requirements.\125\
---------------------------------------------------------------------------

    \124\ Though the requirement to disclose a counterparty's
Exchange Act section 3C(g)(5) clearing rights is eligible for
substituted compliance, the section 3C(g)(5) clearing rights
themselves are not.
    \125\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47678 and n.102.
---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

    One commenter supported the Commission's proposal to make the
positive substituted compliance determinations in the proposed
Order,\126\ including positive substituted compliance determinations
for disclosure of material risks and characteristics, disclosure of
material incentives or conflicts of interest, ``know your
counterparty,'' suitability, fair and balanced communications, and
daily mark disclosure requirements. The Commission continues to
conclude that, taken as a whole, relevant Spanish and EU requirements
would produce regulatory outcomes that are comparable to those
associated with these counterparty protection requirements, by
subjecting Covered Entities to obligations that promote standards of
professional conduct, transparency, and the fair treatment of parties.
The Commission recognizes that there are certain differences between
relevant Spanish and EU requirements and Exchange Act disclosure,
``know your counterparty,'' suitability, and communications
requirements, but in the Commission's view those differences, when
coupled with the conditions in the proposed Order, are not so material
as to be inconsistent with substituted compliance within the requisite
outcomes-oriented framework. Accordingly, the Commission is making

positive substituted compliance determinations in connection with
disclosure of material risks and characteristics, disclosure of
material incentives or conflicts of interest, ``know your
counterparty,'' suitability, fair and balanced communications, and
daily mark disclosure requirements.\127\ The Commission is amending the
substituted compliance determination for ``know your counterparty''
requirements for the reasons discussed below, and is issuing the
remainder of the counterparty protection section of the Order as
proposed.
---------------------------------------------------------------------------

    \126\ See Santander Letter at 1.
    \127\ See para. (d) of the Order.
---------------------------------------------------------------------------

    The Commission is amending paragraph (d)(3) of the Order to replace
the requirements of Directive (EU) 2015/849 (``MLD'') and the Spanish
Anti-Money Laundering Act, Law 10/2010, of April 28 (``SMLA'') with
provisions of MiFID, MiFID Org Reg, SSMA and Royal Decree 217/2008, of
February 15 (``RD 217/2008'').\128\ Exchange Act rule 15Fh-3(e)(3) is
one of three prongs of the Exchange Act ``know your counterparty
requirements,'' and requires a security-based swap dealer to establish,
maintain, and enforce written policies and procedures to obtain and
retain a record of information regarding the authority of any person
acting for its counterparty. Before making a positive substituted
compliance determination, Exchange Act rule 3a71-6 requires the
Commission to determine that foreign requirements are comparable to the
otherwise applicable Exchange Act requirements, after accounting for
factors such as the effectiveness of the supervisory compliance program
administered, and the enforcement authority exercised, by the foreign
authority in respect of the relevant requirements, as well as to enter
into a memorandum of understanding and/or other arrangement with the
relevant foreign financial regulatory authority or authorities
addressing supervisory and enforcement cooperation and other matters
arising under the substituted compliance determination.\129\ The
customer due diligence provisions in the proposed Order's MLD and SMLA
requirements are relevant to the Exchange Act ``know your
counterparty'' requirements relating to records of the authority of a
person acting on behalf of the counterparty. However, in Spain
supervision and enforcement of these MLD and SMLA requirements are
within the jurisdiction of the Servicio Ejecutivo de la Comisi[oacute]n
de Prevenci[oacute]n del Blanqueo de Capitales e Infracciones
Monetarias (``SEPBLAC'') and the Comisi[oacute]n de Prevenci[oacute]n
del Blanqueo de Capitales e Infracciones Monetarias (``COPBLAC''). The
CNMV and the Bank of Spain do work closely with the SEPBLAC and
COPBLAC, but the substituted compliance memorandum of understanding
between the Commission and the CNMV and the Bank of Spain, finalized
after publication of the Spanish Substituted Compliance Notice and
Proposed Order, does not provide for ongoing sharing of supervisory and
enforcement information regarding these MLD and SMLA requirements, as
neither the SEPBLAC nor the COPBLAC is a party to the memorandum of
understanding. Other requirements based on MiFID, as applied by the
CNMV, are, however, comparable to the Exchange Act requirement to
establish, maintain, and enforce written policies and procedures to
obtain and retain a record of information regarding the authority of
any person acting for its counterparty.\130\ The CNMV, rather than
SEPBLAC or COPBLAC, is responsible for supervision and enforcement of
these MiFID-based requirements and the memorandum of understanding
would provide for ongoing sharing of supervisory and enforcement
information regarding these requirements. Accordingly, the Commission
is replacing the MLD and SMLA requirements listed in paragraph (d)(3)
of the proposed Order with these MiFID-based requirements.
---------------------------------------------------------------------------

    \128\ See para. (d)(3) of the Order. Paragraph (d)(3) of
proposed Order cited the following MLD-based requirements: MLD
articles 11 and 13; SMLA articles 3(1) and (2), 4, 5, 6, 7(1)
through (4), 7(7), 7(8), and 8; MLD articles 8(3) and 8(4)(a) as
applied to internal policies, controls and procedures regarding
recordkeeping of customer due diligence activities; and SMLA article
26 as applied to policies and procedures regarding recordkeeping of
customer due diligence activities. The Commission is replacing these
requirements with MiFID article 16(6), MiFID Org Reg articles 72,
74, 75, and applicable parts of Annex I, SSMA article 194(1), and RD
217/2008 article 32(1) and (10).
    \129\ See Parts II.B.1 and II.B.2, supra.
    \130\ MiFID article 16(6), implemented in Spain in SSMA article
194(1) and RD 217/2008 article 32(1) and (10), requires a Covered
Entity to arrange for records to be kept of all services,
activities, and transactions undertaken by it that are sufficient to
enable the CNMV to fulfill its supervisory and enforcement mandates,
and in particular to determine that the Covered Entity has complied
with all obligations including those with respect to clients or
potential clients and to the integrity of the market. MiFID Org Reg
articles 74 and 75 require Covered Entities to record and keep at
the CNMV's disposal certain information about client orders and
decisions to deal. Annex IV of MiFID Org Reg describes that required
client information and includes a requirement to make a record of
the ``name and designation of any relevant person acting on behalf
of the client.'' The CNMV commented that this requirement to make a
record regarding persons acting on behalf of the client ``implies
that the investment firm or credit institution for internal control
reasons, must obtain documentation of the powers/authorization of
the person to be represented which is verifiable y the CNMV.'' See
Memorandum of Correspondence with Santiago Yraola, Deputy Director
of International Affairs, CNMV, dated Sept. 24, 2021 (``CNMV
Memorandum''), at 2. Moreover, the CNMV confirmed that in
supervising compliance with this requirement, it requires Covered
Entities to provide records of the power of attorney or public deed
establishing the authority of client representatives. See CNMV
Memorandum at 2. Finally, MiFID Org Reg article 72 and Annex I
require the Covered Entity to maintain records in the medium, form,
and format that allow the CNMV to access the records readily and to
easily ascertain any amendments, and that make it impossible to
manipulate or alter the records.
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    To help ensure the comparability of outcomes, and consistent with
the proposed Order, substituted compliance for these counterparty
protection requirements is subject to certain conditions. First,
substituted compliance for disclosure of material risks and
characteristics,\131\ disclosure of material incentives or conflicts of
interest,\132\ ``know your counterparty,'' \133\ suitability,\134\ and
fair and balanced communications \135\ requirements is conditioned on
Covered Entities being subject to, and complying with, relevant Spanish
and EU requirements. Second, substituted compliance for suitability
requirements is conditioned on the counterparty being a ``professional
client'' as defined in MiFID (rather than a ``retail client'' or an
elective ``professional client'') and not a ``special entity'' as
defined in Exchange Act section 15F(h)(2)(C) and Exchange Act rule
15Fh-2(d).\136\ Third, substituted compliance for daily mark disclosure
requirements is conditioned on the Covered Entity being required to
reconcile, and in fact reconciling, the portfolio containing the
relevant security-based swap on each business day pursuant to relevant
EU requirements.\137\ 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 counterparty
protection 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.
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    \131\ See para. (d)(1) of the Order.
    \132\ See para. (d)(2) of the Order.
    \133\ See para. (d)(3) of the Order.
    \134\ See para. (d)(4)(i) of the Order.
    \135\ See para. (d)(5) of the Order.
    \136\ See para. (d)(4)(ii) of the Order.
    \137\ See para. (d)(6) of the Order. A Covered Entity must be
required to reconcile, and in fact reconcile, the portfolio
containing the security-based swap for which substituted compliance
is used, on each business day pursuant to EMIR articles 11(1)(b) and
11(2) and EMIR RTS article 13. A Covered Entity may not use
substituted compliance for daily mark disclosure requirements if the
relevant security-based swap is in a portfolio that these EU
requirements do not require to be reconciled on each business day.
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    Under the Order, substituted compliance for counterparty protection
requirements (relating to disclosure of information regarding material
risks and characteristics, disclosure of information regarding material
incentives or conflicts of interest, ``know your counterparty,''
suitability, fair and balanced communications and daily mark
disclosure) is not subject to a condition that the Covered Entity apply
substituted compliance for related recordkeeping requirements in
Exchange Act rules 18a-5 and 18a-6. A Covered Entity that applies
substituted compliance for one or more counterparty protection
requirements, but does not apply substituted compliance for the related
recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6, will
remain subject to the relevant provisions of Exchange Act rules 18a-5
and 18a-6. Those rules require the Covered Entity to make and preserve
records of its compliance with Exchange Act counterparty protection
requirements and of its security-based swap activities required or
governed by those requirements. A Covered Entity that applies
substituted compliance for a counterparty protection requirement, but
complies directly with related recordkeeping requirements in rules 18a-
5 and 18a-6, therefore must make and preserve records of its compliance
with the relevant conditions of 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.
    Finally, for the reasons discussed in the proposed Order, the Order
does not extend to clearing rights disclosure provisions under the
Exchange Act.\138\
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    \138\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47678.
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VII. Substituted Compliance for Recordkeeping, Reporting, Notification,
and Securities Count Requirements

A. CNMV Request and Associated Analytic Considerations

    The CNMV Application in part requested substituted compliance for
requirements applicable to SBS Entities with a prudential regulator
under the Exchange Act relating to:
     Record Making--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\139\
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    \139\ 17 CFR 240.18a-5. The CNMV Application discusses Spanish
and EU recordmaking requirements. See CNMV Application Appendix B,
Category: Recordkeeping and Reporting Requirements; Subcategory:
Record creation, at 1-27, 55-57.
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     Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\140\
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    \140\ 17 CFR 240.18a-6. The CNMV Application discusses Spanish
and EU record preservation requirements. See CNMV Application
Appendix B, Category: Recordkeeping and Reporting; Subcategory:
Record Preservation at 28-58.
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     Reporting--Exchange Act rule 18a-7 requires certain
reports.\141\
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    \141\ 17 CFR 240.18a-7. The CNMV Application discusses Spanish
and EU requirements that address firms' obligations to make certain
reports. See CNMV Application Appendix B, Category: Reports and
Notifications at 59-62.
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     Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\142\
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    \142\ 17 CFR 240.18a-8. The CNMV Application discusses Spanish
and EU requirements that address firms' obligations to make certain
notifications. See CNMV Application Appendix B category 2 at 62-65.
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     Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\143\
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    \143\ The CNMV Application discusses Spanish and EU requirements
that address firms' record preservation obligations related to
records that firms are required to create, as well as additional
records such as records of communications. See CNMV Application
Appendix B, Category: Recordkeeping and Reporting Requirements;
Subcategory: Record Creation at 2-3.
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    Taken as a whole, the recordkeeping, reporting, and notification
requirements that apply to SBS Entities with a prudential regulator are
designed to promote the prudent operation of the firm's security-based
swap activities, assist the Commission in conducting compliance
examinations of those activities, and alert the Commission to potential
financial or operational problems that could impact the firm and its
customers.

B. Commenter Views and Final Provisions

1. General Considerations
    In proposing to provide conditional substituted compliance in
connection with this part of the CNMV Application, the Commission
preliminarily concluded that the relevant EU and Spanish requirements,
subject to conditions and limitations, would produce regulatory
outcomes that are comparable to the outcomes associated with the vast
majority of the recordkeeping, reporting, notification, and securities
count requirements under the Exchange Act applicable to SBS Entities
pursuant to Exchange Act rules 18a-5, 18a-6, 18a-7, 18a-8, and Exchange
Act section 15F(g) (collectively, the recordkeeping, reporting, and
notification requirements'').\144\ Substituted compliance for the
recordkeeping, reporting, and notification requirements accordingly is
conditioned on Covered Entities being subject to and complying with the
EU and Spanish provisions that in the aggregate establish a framework
that produces outcomes comparable to those associated with the
analogous recordkeeping, reporting, and notification requirements under
the Exchange Act.\145\
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    \144\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47678-85, 47693-95.
    \145\ See paras. (e)(1)(i)(A), (e)(1)(i)(B), (e)(1)(i)(C),
(e)(1)(i)(D), (e)(1)(i)(E), (e)(1)(i)(F)(1), (e)(1)(i)(G),
(e)(1)(i)(H), (e)(1)(i)(I)(1), (e)(1)(i)(J)(1), (e)(1)(i)(K)(1),
(e)(2)(i)(A), (e)(2)(i)(B), (e)(2)(i)(C), (e)(2)(i)(D),
(e)(2)(i)(E), (e)(2)(i)(F)(1), (e)(2)(i)(G)(1), (e)(2)(i)(H),
(e)(2)(i)(I), (e)(2)(i)(J), (e)(2)(i)(K)(1), (e)(2)(i)(L),
(e)(2)(i)(M), (e)(3)(i), (e)(4)(i)(A), (e)(4)(i)(B)(1), and (e)(5)
of the Order.
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    The proposed structure of the substituted compliance determinations
with respect to the recordkeeping, reporting, and notification
requirements would have provided Covered Entities with greater
flexibility to select distinct requirements within the broader rules
for which they want to apply substituted compliance.\146\ This would
not preclude a Covered Entity from applying substituted compliance for
the entire rule (subject to conditions and limitations). However, it
would permit the Covered Entity to apply substituted compliance with
respect to certain requirements of a given rule and to comply directly
with the remaining requirements. This more granular approach to the
recordkeeping, reporting, and notification rules was intended to permit
Covered Entities to leverage existing recordkeeping and reporting
systems that are designed to comply with the broker-dealer
recordkeeping and reporting requirements on which the recordkeeping,
reporting, and notification requirements applicable to SBS Entities are
based. For example, it may be more efficient for a Covered Entity to
comply with certain Exchange Act requirements within a given
recordkeeping, reporting, or notification rule (rather than apply
substituted compliance) because it can utilize systems that its
affiliated broker-dealer has implemented to comply with them. This
proposed approach was consistent with the approach taken by the
Commission in the French Substituted Compliance Order and UK
Substituted Compliance Order.\147\
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    \146\ See Spanish Substituted Compliance Notice and Proposed
Order, 86 FR 47678-79, 47693-95.
    \147\ See French Substituted Compliance Order, 86 FR 41649; UK
Substituted Compliance Order, 86 FR 43360.

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    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility resulted in preliminary substituted
compliance determinations with respect to the different categories of