[Federal Register Volume 86, Number 145 (Monday, August 2, 2021)]
[Notices]
[Pages 41612-41666]
[FR Doc No: 2021-16135]

Vol. 86

Monday,

No. 145

August 2, 2021

Part III

 Securities and Exchange Commission

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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
French Republic; Notice

Federal Register / Vol. 86 , No. 145 / Monday, August 2, 2021 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92484; File No. S7-22-20]

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 French Republic

July 23, 2021.

I. Overview

    The French Autorit[eacute] des March[eacute]s Financiers (``AMF'')
and the Autorit[eacute] de Contr[ocirc]le Prudentiel et de
R[eacute]solution (``ACPR''), the French financial authorities, have
submitted a ``substituted compliance'' application requesting that the
Securities and Exchange Commission (``Commission'') determine, pursuant
to the Securities Exchange Act of 1934 (``Exchange Act'') rule 3a71-6,
that security-based swap dealers and major security-based swap
participants (``SBS Entities'') subject to regulation in the French
Republic (``France'') conditionally may satisfy requirements under the
Exchange Act by complying with comparable French and European Union
(``EU'') requirements.\1\ The AMF and the ACPR (``French Authorities'')
sought substituted compliance in connection with certain Exchange Act
requirements related to risk control, capital and margin, internal
supervision and compliance, counterparty protection, and record
keeping, reporting, notification, and securities counts.\2\ The
application incorporated comparability analyses between the relevant
requirements in Exchange Act section 15F and the rules and regulations
thereunder and applicable French and EU law, as well as information
regarding French supervisory and enforcement frameworks.
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    \1\ See Letter from Robert Oph[egrave]le, Chairman, AMF, and
Denis Beau, Chairman, ACPR, to Vanessa Countryman, Secretary,
Commission, dated Dec. 9, 2020 (``French Authorities'
Application''). The application is available on the Commission's
website at: https://www.sec.gov/files/full-french-application.pdf.
    \2\ ``Risk control'' includes requirements related to internal
risk management, trade acknowledgment and verification, portfolio
reconciliation and dispute resolution, portfolio compression and
trading relationship documentation; ``capital and margin'' includes
requirements related to capital applicable to non-prudentially
regulated security-based swap dealers and to margin applicable to
non-prudentially regulated SBS Entities; ``internal supervision and
compliance'' includes requirements related to diligent supervision,
conflicts of interest, information gathering under Exchange Act
section 15F(j), 15 U.S.C. 78o-10(j), and chief compliance officers;
``counterparty protection'' includes requirements related to
disclosure of material risks and characteristics and 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
``record keeping, reporting, notification, and securities counts''
includes requirements related to making and keeping current certain
prescribed records, preservation of records, reporting, notification
and securities counts.
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    On December 22, 2020, the Commission issued a notice of the French
Authorities' Application, accompanied by a proposed order to grant
substituted compliance with conditions in connection with the French
Authorities' Application (the ``proposed Order'').\3\ The proposed
Order incorporated a number of conditions to tailor the scope of
substituted compliance consistent with the prerequisite that relevant
French and EU requirements produce regulatory outcomes that are
comparable to relevant requirements under the Exchange Act. The
Commission reopened the comment period for the proposed Order on April
5, 2021.\4\
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    \3\ See Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR
85720, 85721 (Dec. 29, 2020) (``French Substituted Compliance Notice
and Proposed Order'').
    \4\ See Exchange Act Release No. 91477 (Apr. 5, 2021), 86 FR
18341 (Apr. 8, 2021) (``Reopening Release''). The reopened comment
period ended on May 3, 2021.
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    As discussed below, the Commission is adopting a final Order that
has been modified from the proposal in certain respects to address
commenter concerns and to make clarifying changes.

II. Substituted Compliance Framework, Prerequisites and Commenter
Issues of General Applicability

A. Substituted Compliance Framework and Purpose

    As the Commission has discussed previously,\5\ 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.\6\
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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    \5\ See French Substituted Compliance Notice and Proposed Order,
85 FR at 85721; Exchange Act Release No. 90765 (Dec. 22, 2020), 85
FR 85686, 85687 (Dec. 29, 2020) (``German Substituted Compliance
Order'').
    \6\ 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,\7\ but is not
available in connection with antifraud prohibitions and certain other
requirements under the Federal securities laws.\8\ SBS Entities in
France accordingly must comply directly with those requirements
notwithstanding the availability of substituted compliance for other
requirements.
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    \7\ 17 CFR 240.3a71-6(d).
    \8\ French Substituted Compliance Notice and Proposed Order, 85
FR at 85721 n.2 (addressing unavailability of substituted compliance
in connection with antifraud provisions, as well as provisions
related to transactions with counterparties that are not eligible
contract participants (``ECPs''), segregation of customer assets,
required clearing upon counterparty election, regulatory reporting
and public dissemination, 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.\9\ 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 will begin to count
security-based swap transactions toward the thresholds for registration
with the Commission as an SBS Entity on August 6, 2021, and will be
required to begin registering with the Commission on November 1,
2021.\10\

Substituted compliance should assist relevant non-U.S. security-based
swap market participants in preparing for registration.
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    \9\ See generally Business Conduct Adopting Release, 81 FR at
30073 (noting 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'').
    \10\ 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. Scope of Substituted Compliance

    For entity-level Exchange Act requirements,\11\ a Covered Entity
must choose either to apply substituted compliance pursuant to the
Order with respect to all security-based swap business subject to the
relevant French and EU requirements or to comply directly with the
Exchange Act with respect to all such business; a Covered Entity may
not choose to apply substituted compliance for some of the business
subject to the relevant French or EU requirements and comply directly
with the Exchange Act for another part of the business that is subject
to the relevant French and EU requirements. Additionally, for entity-
level Exchange Act requirements, if the Covered Entity also has
security-based swap business that is not subject to the relevant French
requirements, the Covered Entity must either comply directly with the
Exchange Act for that business or comply with the terms of another
applicable substituted compliance order.\12\ For transaction-level
Exchange Act requirements,\13\ a Covered Entity may decide to apply
substituted compliance for some of its security-based swap business and
to comply directly with the Exchange Act (or comply with another
applicable substituted compliance order) for other parts of its
security-based swap business.
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    \11\ The entity-level requirements relate to capital and margin,
books and records (other than those linked to the counterparty
protection rules), internal risk management systems, trade
acknowledgement and verification, portfolio reconciliation,
compression, trading relationship documentation, and internal
supervision and chief compliance officer requirements. See Exchange
Act Release No. 86175 (June 21, 2019) 84 FR 43872, 43879 (Aug 22,
2019) (``Capital and Margin Adopting Release''); Exchange Act
Release No. 87005 (June 19, 2019) 84 FR 68550, 68596 (Dec. 16, 2019)
(``Books and Records Adopting Release''); Exchange Act Release No.
78011 (June 8, 2016) 81 FR 39808, 39827 (June 17, 2016) (``TAV
Adopting Release''); Exchange Act Adopting Release No. 87782 (Dec.
18, 2019) 85 FR 6359, 6378 (Feb. 4, 2020) (``Risk Mitigation
Adopting Release''); Business Conduct Adopting Release, 81 FR at
30064. Transaction-level requirements encompass business conduct
requirements for the protection of counterparties, and additional
provisions for the protection of special entities. See also Business
Conduct Adopting Release, 81 FR at 30065.
    \12\ In the context of the EMIR counterparties condition in
paragraph (a)(5), a Covered Entity must choose: (1) To apply
substituted compliance pursuant to the 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.
    \13\ Transaction-level requirements are the counterparty
protection requirements and the books and records requirements
related to those counterparty protection requirements.
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C. 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.\14\ 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.'' \15\
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    \14\ Exchange Act rule 3a71-6(a)(2)(i).
    \15\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85722; see also Business Conduct Adopting Release,
81 FR at 30078-79 (further 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 at 30079 (footnote omitted). In the
French 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 entering into a
supervisory and enforcement memorandum of understanding and/or other
arrangement with the relevant foreign financial regulatory authorities
``addressing supervisory and enforcement cooperation and other matters
arising under the substituted compliance determination.'' \16\
Accordingly, the Commission and the AMF and the ACPR recently entered
into a relevant memorandum of understanding.\17\ Moreover, the
Commission and the European Central Bank (``ECB'') are in the process
of developing a memorandum of understanding or other arrangement to
address cooperation matters related to substituted compliance.\18\
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.\19\
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    \16\ Exchange Act rule 3a71-6(a)(2)(ii).
    \17\ The Commission, the AMF and the ACPR have entered into a
memorandum of understanding to address substituted compliance
cooperation, a copy of which is on the Commission's 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 (``AMF and ACPR MOU'').
The AMF, ACPR and the ECB share responsibility for supervising
compliance with certain provisions of EU and French law.
    \18\ The memorandum of understanding will set forth the
conditions under which supervisory and enforcement information for
certain subject matters, including but not limited to margin and
capital, that is owned by the ECB, can be requested, shared, used
and protected from unauthorized disclosure by the SEC and ECB. The
memorandum of understanding will also serve as a framework for
consultation, cooperation and the exchange of information between
the SEC and the ECB in the supervision, enforcement and oversight of
the covered firms.
    \19\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85721 n.4. The Commission expects to publish any
such memoranda of understanding or arrangements 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.
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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.'' \20\

In the French Substituted Compliance Notice and Proposed Order, the
Commission stated that the French Authorities had satisfied this
prerequisite in the Commission's preliminary view, taking into account
information and representations that the French Authorities provided
regarding certain French 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.\21\ The
Commission received no comments on this preliminary view and has not
changed its view.
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    \20\ See Exchange Act rule 3a71-6(c)(3).
    \21\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85721 n.5.
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D. Commenter Views of General Applicability

    As the Commission previously discussed, commenters raised a variety
of concerns and other views regarding specific aspects of the proposed
Order (apart from certain global concerns addressed below in part
II.D.1 through 4.\22\ Those included: Concerns that the interplay
between certain proposed MiFID-related conditions to substituted
compliance for risk control requirements and a proposed EU cross-border
condition would undermine the availability of substituted compliance;
\23\ views regarding the possibility of substituted compliance related
to capital; \24\ and views regarding substituted compliance in
connection with books and records requirements.\25\
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    \22\ See generally Reopening Release, 86 FR 18341. See also
Letter from Kyle Brandon, Managing Director, Head of Derivative
Policy, SIFMA (Jan. 25, 2021) (``SIFMA Letter I''); Letter from Wim
Mijs, Chief Executive Officer, European Banking Federation (Jan. 25,
2021) (``EBF Letter I'') (generally supporting the SIFMA Letter I);
and Letter from Etienne Barel, Deputy Chief Executive Officer,
French Banking Federation (Jan. 25, 2021) (``FBF Letter I'').
Comments may be found on the Commission's website at: https://www.sec.gov/comments/s7-22-20/s72220.htm.
    \23\ Reopening Release, 86 FR at 18343 (expressing the view that
the interplay of those MiFID conditions and the proposed EU cross-
border condition ``in practice would undermine the availability of
substituted compliance for Covered Entities that have branches in EU
Member States for which the Commission has not entered into an
applicable substituted compliance memorandum of understanding'').
    \24\ Id. at 18343-47.
    \25\ Id. at 18347-48.
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    The Commission reopened the comment period in April 2021.\26\ The
Commission also requested comment on a number of specific issues,
including: The potential removal of MiFID provisions from the trade
acknowledgment and verification and trading relationship documentation
conditions in conjunction with additional general conditions to address
the resulting increased reliance upon EMIR; \27\ the inclusion of
additional capital standards; \28\ the availability of greater
flexibility in distinguishing between recordkeeping and reporting
requirements; \29\ limiting the definition of ``covered entity''; \30\
and supplementing the internal supervision and compliance
conditions.\31\ In response, commenters expressed a range of views and
identified a number of specific issues with the proposed conditions and
prerequisites for each subject matter of the proposed Order for which
substituted compliance is available.\32\
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    \26\ See Reopening Release, 86 FR 18341. The reopened comment
period ended on May 3, 2021.
    \27\ Id. at 18341-43.
    \28\ Id. at 18343-47.
    \29\ Id. at 18347-48.
    \30\ Id. at 18348.
    \31\ Id.
    \32\ See Letter from Kyle Brandon, Managing Director, Head of
Derivative Policy, SIFMA (May 3, 2021) (``SIFMA Letter II''); Letter
from Wim Mijs, Chief Executive Officer, European Banking Federation
(May 3, 2021) (``EBF Letter II''); Letter from Etienne Barel, Deputy
Chief Executive Officer, French Banking Federation (May 3, 2021)
(``FBF Letter II''); Letter from Americans for Financial Reform
Education Fund (May 3, 2021) (``AFREF Letter''); Letter from Dennis
M. Kelleher, President and CEO, Stephen Hall, Legal Director and
Securities Specialist, and Jason Grimes, Senior Counsel, Better
Markets, Inc. (May 3, 2021) (``Better Markets Letter'') at 3-4.
Comments may be found on the Commission's website at: https://www.sec.gov/comments/s7-22-20/s72220.htm.
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1. Effects of Non-Compliance
    One commenter addressed a Commission statement that non-compliance
with applicable French and EU requirements would lead to a violation of
relevant requirements under the Exchange Act. The commenter
particularly requested that the Commission represent that SBS Entities
``would not violate the Commission's requirements where the relevant
foreign regulatory authority has found no violation of the comparable
French or EU requirement and the SBS Entity's conduct would have
complied with the Commission's requirements (even if the SBS Entity
relied on French and EU rules that imposed stricter or additional
requirements).'' \33\ The commenter also expressed a concern that the
Commission might find a violation of the foreign laws even where the
Commission's own requirements would be fulfilled.\34\ The commenter
further requested that the Commission state that it ``will not
independently examine for or otherwise assess whether an SBS Entity is
complying with EU or French requirements.'' \35\
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    \33\ SIFMA Letter I at 9; see also FBF Letter I at 2.
    \34\ See SIFMA Letter I at 9 n.22.
    \35\ SIFMA Letter I at 9.
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    Although the Commission expects to take the views of foreign
regulatory authorities into account when it considers whether
registered entities have complied with the conditions to substituted
compliance, the Commission cannot make the requested representations.
It is for the Commission--not foreign regulators--to determine whether
a non-U.S. SBS Entity has complied with the conditions to substituted
compliance and with the Federal securities laws. Moreover, as noted,
even with substituted compliance the Commission retains its full
authority to inspect, examine and supervise registered entities'
compliance with the Federal securities laws, and to take enforcement
action as appropriate.\36\
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    \36\ See Business Conduct Adopting Release, 81 FR at 30079.
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2. Prerequisites to Substituted Compliance
    One commenter stated that the Commission should make a positive
substituted compliance determination only when the Commission
determines that granting substituted compliance promotes the protection
of the U.S. financial system.\37\ The commenter also stated that grants
of substituted compliance must be predicated on a ``well-supported,
evidence-based determination'' that the relevant foreign requirements
will produce ``substantially similar'' regulatory outcomes.\38\
Congress gave the Commission authority in Title VII to implement a
security-based swap framework to address the potential effects of
security-based swap activity on U.S. market participants, the financial
stability of the United States, the transparency of the U.S. financial
system and the protection of counterparties.\39\ When adopting rules
regarding the application of Title VII's

definitions of ``security-based swap dealer'' and ``major security-
based swap participant'' in the cross-border context, the Commission
was guided by the purposes of Title VII and the applicable requirements
of the Exchange Act, which include consideration of not only risk to
the U.S. financial system but also other factors such as counterparty
protection, transparency, prevention of evasion, economic impacts and
consultation and coordination with other U.S. financial regulatory
authorities and foreign financial regulatory authorities.\40\ In its
registration rules for these SBS Entities, the Commission determined
that a foreign market participant whose U.S.-nexus security-based swap
activity qualifies it as an SBS Entity would be required to register as
such, without substituted compliance available for registration
requirements.\41\ The Commission concluded that obliging these foreign
persons to register serves an important regulatory function that would
be significantly impaired by permitting substituted compliance for
registration requirements.\42\ This registration requirement thus puts
into practice the Commission's consideration of the purposes of Title
VII and the applicable requirements of the Exchange Act in its adoption
of the definitions of ``security-based swap dealer'' and ``major
security-based swap participant'' in the cross-border context, and
ensures that such firms will be subject to the jurisdiction of the
Commission. Moreover, the rules applicable to these registered foreign
SBS Entities reflect the Commission's best judgment for how to achieve
the purposes of Title VII and satisfy the requirements of the Exchange
Act, including the Commission's consideration of risk to the U.S.
financial system.\43\
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    \37\ See Better Markets Letter at 3-4.
    \38\ See id. at 4.
    \39\ See Exchange Act Release No. 72472 (June 25, 2014), 79 FR
47278, 47286 (Aug. 12, 2014) (``Cross-Border Entity Definitions
Adopting Release'') (citing Pub. L. 111-203, Preamble (stating that
the Dodd-Frank Act was enacted ``[t]o promote the financial
stability of the United States by improving accountability and
transparency in the financial system, to end `too big to fail', to
protect the American taxpayer by ending bailouts, to protect
consumers from abusive financial services practices, and for other
purposes''); Public Law 111-203, sections 701-774 (providing for,
among other things, a comprehensive new regulatory framework for
security-based swaps, including by: (i) Providing for the
registration and comprehensive regulation of security-based swap
dealers and major security-based swap participants; (ii) imposing
clearing and trade execution requirements on security-based swaps,
subject to certain exceptions; and (iii) creating real-time
reporting and public dissemination regimes for security-based
swaps)).
    \40\ See Cross-Border Entity Definitions Adopting Release, 79 FR
at 47292 (purposes of Title VII include consideration of risk to the
U.S. financial system and promotion of transparency in the U.S.
financial system); Exchange Act section 30(c), 15 U.S.C. 78dd(c)
(Commission rulemaking authority to prevent evasion of Title VII);
Exchange Act section 3(f), 15 U.S.C. 78c(f) (requirement to consider
whether certain Commission rulemaking actions would promote
efficiency, competition and capital formation); Exchange Act section
23(a)(2), 15 U.S.C. 78w(a)(2) (requirement to consider the impact of
Exchange Act rules and regulations on competition and prohibition on
adopting rules or regulations that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act); Dodd-Frank Act section 712(a)(2), 15
U.S.C. 8302 (requirement to consult and coordinate with U.S.
financial regulatory authorities on Title VII rulemaking); Dodd-
Frank Act section 752(a), 15 U.S.C. 8325 (requirement to consult and
coordinate, as appropriate, with foreign regulatory authorities on
the establishment of consistent international standards with respect
to the regulation of security-based swaps and security-based swap
entities); see also Exchange Act Release No. 77104 (Feb. 10, 2016),
81 FR 8598, 8599 (Feb. 19, 2016) (``ANE Adopting Release'') (``A key
part of [the Title VII] framework is the regulation of security-
based swap dealers, which may transact extensively with
counterparties established or located in other jurisdictions and, in
doing so, may conduct sales and trading activity in one jurisdiction
and book the resulting transactions in another. These market
realities and the potential impact that these activities may have on
U.S. persons and potentially the U.S. financial system have informed
our consideration of these rules.''); Exchange Act Release No. 87780
(Dec. 18, 2019), 85 FR 6270, 6272 and n.26 (Feb. 4, 2020) (``Cross-
Border Adopting Release'') (``[T]he Title VII SBS Entity
requirements . . . serve a number of regulatory purposes apart from
mitigating counterparty and operational risks, `including enhancing
counterparty protections and market integrity, increasing
transparency, and mitigating risk to participants in the financial
markets and the U.S. financial system more broadly.' '' ``The
Commission's actions to mitigate the negative consequences
potentially associated with the various uses of [the `arranged,
negotiated or executed' test] accordingly are designed to do so
while preserving the important Title VII interests that the
Commission advanced when it incorporated the test into the various
cross-border rules.'') (internal citations omitted).
    \41\ See Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR
48964, 48972-73 (Aug. 14, 2015) (``Registration Adopting Release'').
    \42\ See id.
    \43\ See Cross-Border Entity Definitions Adopting Release, 79 FR
at 47286 n.65 (``Future rulemakings that depend on [the definitions
of `security-based swap dealer' and `major security-based swap
participant'] are intended to address the transparency, risk, and
customer protection goals of Title VII.'').
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    The Commission's rules for registered foreign SBS Entities thus
reflect the Commission's consistent consideration of all of the
purposes of Title VII and relevant parts of the Exchange Act, first in
the context of its adoption of the definitions of ``security-based swap
dealer'' and ``major security-based swap participant,'' then in its
decision to require foreign SBS Entities to register and finally in its
adoption of cross-border rules for SBS Entities pursuant to Title VII.
When making a substituted compliance determination, the Commission's
task, as outlined in rule 3a71-6, is to evaluate whether the relevant
foreign requirements are comparable to these Title VII-based
requirements and relevant provisions of the Exchange Act. The
comparability assessments are to be based on a ``holistic, outcomes-
oriented framework,'' \44\ which in the Commission's view--consistent
with the commenter's view--includes ``inquiry regarding whether foreign
requirements adequately reflect the interests and protections
associated with the particular Title VII requirement.'' \45\ Also
consistent with the commenter's view, the Commission's comparability
assessments reflect a close reading of the relevant French and EU
requirements. In addition, the Commission recognizes that other
regulatory regimes will have exclusions, exceptions and exemptions that
may not align perfectly with the corresponding requirements under the
Exchange Act.\46\ Accordingly, where French and EU requirements produce
comparable outcomes--with or without conditions as discussed in part
III.B below--notwithstanding those particular differences, and taking
into account the scope and objectives and the effectiveness of
supervision and enforcement of those requirements, the Commission has
determined that the relevant French and EU requirements are comparable
and has made a positive substituted compliance determination.
Conversely, where those exclusions, exemptions and exceptions lead to
outcomes that are not comparable--taking into account potential
conditions--the Commission has not made a positive substituted
compliance determination.
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    \44\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85722; see also Business Conduct Adopting Release,
81 FR at 30076, 30078-79.
    \45\ See Business Conduct Adopting Release, 81 FR at 30067.
    \46\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85722 n.17; see also Business Conduct Adopting
Release, 81 FR at 30076, 30078-79.
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    The Commission also is including certain conditions in the Order.
The commenter stated that the inclusion of conditions should be viewed
as an indication that the requirements of substituted compliance have
not been met and as creating ``ad hoc, custom-made rules to supplement
inadequate rules of other jurisdictions.'' \47\ Pursuant to rule 3a71-
6, the Commission may make a conditional or unconditional substituted
compliance determination.\48\ As described in greater detail in part
III.B below, many of the conditions in the Order are designed to make
substituted compliance available to Covered Entities only when the
relevant French and EU requirements in fact apply to the relevant
security-based swap activity in a way that promotes comparable
regulatory outcomes. The commenter correctly notes that the Order also
employs conditions to promote comparability.\49\ For example,
substituted compliance in connection with Exchange Act rule 15Fi-3(c)
dispute reporting provisions is conditioned in part on the Covered
Entity providing the Commission with

the dispute reports required under French law.\50\ Consistent with rule
3a71-6, conditioning substituted compliance on the Commission receiving
those reports helps to promote timely notice of disputes to support a
comparable regulatory outcome.
---------------------------------------------------------------------------

    \47\ See Better Markets Letter at 4.
    \48\ See Exchange Act rule 3a71-6(a)(1).
    \49\ See Better Markets Letter at 2.
    \50\ See para. (b)(3)(ii) of the Order.
---------------------------------------------------------------------------

3. Ensuring Ongoing Appropriateness of Substituted Compliance
    One commenter stated that the Commission ``must ensure, on an
ongoing basis, that each grant of substituted compliance remains
appropriate over time.'' \51\ The commenter added that substituted
compliance orders and memoranda of understanding should incorporate the
obligation that the Commission be apprised regarding the effectiveness
of the jurisdiction's supervision and enforcement programs, and to
immediately apprise the Commission of material changes to the
regulatory regime.\52\ The Commission concurs that the ongoing
availability of substituted compliance should account for relevant
changes in the foreign jurisdiction's regulatory requirements and in
the effectiveness of that jurisdiction's supervisory and enforcement
program.\53\ Accordingly, the Commission and the French Authorities
recently entered into a substituted compliance memorandum of
understanding that addresses ongoing information regarding potential
changes to substantive legal requirements and supervisory and
enforcement effectiveness.\54\ Additionally, the Commission and the ECB
are in the process of developing a memorandum of understanding to
address cooperation matters related to substituted compliance. The
Commission believes that these arrangements will provide timely
information to ensure that the Commission is aware of material
developments that may affect the comparability of the relevant French
and EU requirements, including the scope and objectives of those
requirements and the effectiveness of the French Authorities'
supervision and enforcement programs. In response to any such
developments, the Commission may amend the Order as needed to ensure
that it continues to require a Covered Entity to comply with comparable
French and EU requirements, or may withdraw the Order if the relevant
French or EU requirements are no longer comparable.\55\ Moreover,
substituted compliance under the Order is conditioned on the Commission
having these memoranda of understanding, or another arrangement with
the French Authorities and ECB addressing cooperation with respect to
the Order, at the time the Covered Entity makes use of substituted
compliance.\56\ If the arrangements in the memoranda of understanding
prove in practice not to provide information about relevant
developments, the Commission could terminate the memoranda of
understanding in accordance with its terms and/or amend or withdraw the
Order.\57\ If the Commission, the French Authorities or the ECB
terminates either memorandum of understanding, Covered Entities would
not be able to rely on substituted compliance under the Order to
satisfy Exchange Act compliance obligations that arise after the
termination takes effect. For these reasons, in the Commission's view,
the Order's memoranda of understanding conditions, coupled with the
ongoing information sharing provisions in the memoranda of
understanding with the French Authorities and with the ECB, establish
the commenter's suggested mechanism to apprise the Commission of
changes that may affect the ongoing appropriateness of substituted
compliance.
---------------------------------------------------------------------------

    \51\ Better Markets Letter at 5.
    \52\ Id.
    \53\ See Business Conduct Adopting Release, 81 FR at 30078-79
(stating that order conditions and memoranda of understanding are
possible tools for providing that the Commission be notified of
material changes).
    \54\ The memorandum of understanding between the Commission and
the French Authorities in part provides that the French Authorities
will provide ``ongoing information sharing'' regarding Firm
Information (incorporating supervisory and related information as to
the Covered Entities using substituted compliance) and regarding
Regulatory Change Information (incorporating information about any
material publicly available draft, proposed, or final change in law,
regulation, or order of the jurisdiction of the French Authorities
that may have a material impact on the firms at issue with respect
to their relevant activities). See note 17, supra (information on
publication of memoranda of understanding with the French
Authorities and ECB).
    \55\ Any such amendment or withdrawal may be at the Commission's
own initiative after appropriate notice and opportunity for comment.
See Exchange Act rule 3a71-6(a)(3).
    \56\ See part II.C.2, supra; paras. (a)(7) and (a)(8) of the
Order.
    \57\ See note 18, supra.
---------------------------------------------------------------------------

4. Request for Transition Period
    Commenters stated that the Commission's proposed approach to
certain entity-level requirements could result in the Commission's
requirements still applying to a non-U.S. Entity's security-based swap
transaction with non-U.S. counterparties and a resulting need for SBS
Entities to obtain written agreement from their non-U.S.
counterparties.\58\ As a result, commenters requested a one-year
transition period from the November 1, 2021, date by which security-
based swap dealers must register with the Commission to come into
compliance with any documentation requirements.\59\
---------------------------------------------------------------------------

    \58\ See SIFMA Letter I at 10; FBF Letter I at 3.
    \59\ Id.
---------------------------------------------------------------------------

    The Commission is not providing an additional transition period at
this time for documentation requirements related to Exchange Act
requirements that will apply to Covered Entities' existing non-U.S.
counterparties. The registration compliance date for U.S. and non-U.S.
SBS Entities is October 6, 2021, and that is also the compliance date
for the entity-level requirements at issue. These dates have been known
to potential SBS Entities since February 4, 2020.\60\ In areas where
the Commission makes a positive substituted compliance determination
under the Order, Covered Entities will have additional flexibility with
respect to how to comply with the relevant Exchange Act requirements,
but they, like all registered SBS Entities, must comply with the
Exchange Act as of the registration compliance date. The Commission
staff will be available to discuss implementation issues with Covered
Entities during the implementation period.
---------------------------------------------------------------------------

    \60\ See Exchange Act Release No. 87780 (Dec. 18, 2019), 85 FR
6270 at 6345-46 (Feb. 4, 2020).
---------------------------------------------------------------------------

III. General Availability of Substituted Compliance Under the Order

A. 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 in part 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 French and EU
requirements and oversight, the proposed definition would require that
Covered Entities be investment firms authorized to provide investment
services by the AMF or credit institutions authorized by the ACPR after
approval by the AMF of its program of operations to provide investment
services or perform investment activities in France.\61\
---------------------------------------------------------------------------

    \61\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85723.

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

2. Commenter Views and Final Provisions
    One commenter requested changes to the proposed ``Covered Entity''
definition, to reflect that under the French framework the requisite
authorizations to provide credit and investment services are provided
by the ACPR, in conjunction with the AMF's approval of the provision of
investment services.\62\ In addition, as described in the French
Substituted Compliance Notice and Proposed Order, and confirmed by the
AMF,\63\ the AMF uses a risk-based approach to supervision whereby
investment firms are categorized within four Tiers. Tier 1 firms
receive the most supervisory attention and the staff has been told that
all firms that use substituted compliance will be treated as Tier 1
firms.\64\ The Commission has revised the Order in response to the
comment and to reflect the AMF's approach.\65\
---------------------------------------------------------------------------

    \62\ See SIFMA Letter II at Appendix A.
    \63\ See Memorandum, dated June 10, 2021, from Patrice Aguesse
of the French AMF.
    \64\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85735.
    \65\ See para. (g)(1)(iii) of the Order (providing that a
Covered Entity in part means ``an investment firm authorized by the
ACPR to provide investment services or perform investment activities
in the French Republic, or a credit institution authorized by the
ACPR, after approval by the AMF of its program of operations to
provide investment services or perform investment activities in the
French Republic, and supervised by the AMF under its Tier 1
framework'').
---------------------------------------------------------------------------

B. Additional General Conditions

1. Proposed Approach
    The proposed Order incorporated a number of additional general
conditions and other prerequisites, to help ensure that the relevant
French 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 entity being
subject to and complying with the applicable French and EU requirements
needed to establish comparability.\66\
---------------------------------------------------------------------------

    \66\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85723. The Commission stated, as an example, that
this proposed condition would not be satisfied when the comparable
French or EU requirements would not apply to the security-based swap
activities of a third-country branch of a French SBS Entity.
---------------------------------------------------------------------------

     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 \67\ under MiFID, MFC and related EU and French
requirements, and must fall within the scope of the firm's
authorization from the AMF or from the ACPR after approval by the AMF
of the firm's program of operations.\68\
---------------------------------------------------------------------------

    \67\ Under this condition, a Covered Entity's security-based
swap activities must 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, provisions under MFC that implement MiFID and
related EU and French 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 do not have to constitute
``investment services or activities'' to be able to use substituted
compliance under that part of the Order.
    \68\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85723. The EU's Markets in Financial Instruments
Directive (``MiFID''), Directive 2014/65/EU, has been implemented in
France as part of article L. 511 to the French Monetary and
Financial Code--Code mon[eacute]taire et financier (``MFC''). MiFID
and MFC address, inter alia, organizational, compliance and conduct
requirements applicable to nonbank ``investment firms.'' In
significant part, those requirements also apply to credit
institutions that provide investment services or perform investment
activities. Commission Delegated Regulation (EU) 2017/565 (``MiFID
Org Reg'') in part supplements MiFID with respect to organizational
requirements for firms. The Markets in Financial Instruments
Regulation (``MiFIR''), Regulation (EU) 648/2012, generally
addresses trading venues and transparency. Commission Delegated
Directive (EU) 2017/593 (``MiFID Delegated Directive'') in part
supplements MiFID with regard to safeguarding client property, and
in France is implemented in relevant part by the R[egrave]glement
G[eacute]n[eacute]ral de L'Autorit[eacute] des March[eacute]s
Financiers (``AMF General Regulation''). Directive (EU) 2015/849
(``MLD'') addresses requirements on the prevention of the use of the
financial system for the purposes of money laundering or terrorist
financing, and in France is implemented by article L. 561 to the
MFC.
---------------------------------------------------------------------------

     Counterparties as MiFID ``clients''--The Covered Entity's
counterparties (or potential counterparties) would have to be
``clients'' (or potential ``clients'') for purposes of MiFID,
provisions under MFC that implement MiFID and/or other EU and French
requirements adopted pursuant to those provisions.\69\
---------------------------------------------------------------------------

    \69\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85723.
---------------------------------------------------------------------------

     MiFID ``financial instruments''--The relevant security-
based swaps would have to be ``financial instruments'' for purposes of
applicable provisions under MiFID, MFC and related EU and French
requirements.\70\
---------------------------------------------------------------------------

    \70\ Id.
---------------------------------------------------------------------------

     CRD ``institutions''--The Covered Entity would have to be
an ``institution'' for purposes of applicable provisions under CRD,
MFC, CRR and related EU and French requirements.\71\
---------------------------------------------------------------------------

    \71\ Id. The EU's Capital Requirements Directive IV (``CRD''),
Directive 2013/36/EU has been adopted in France as part of article
L. 533 to the MFC, and sets forth prudential requirements and
certain related requirements applicable to credit institutions and
certain nonbank investment firms. Certain CRD requirements regarding
reporting obligations have been incorporated into French law as part
of articles L. 511 and L. 634 to the MFC. The Capital Requirements
Regulation (``CRR''), Regulation (EU) 575/2013, further addresses
prudential requirements and related recordkeeping requirements for
credit institutions and certain investment firms. Commission
Implementing Regulation (EU) 680/2014 (``CRR Reporting ITS'') sets
forth implementing technical standards regarding supervisory
reporting. Pursuant to amendments that will become effective in June
2021, the requirements of CRD and the CRR will apply to credit
institutions and to certain nonbank undertakings (that carry on
activities involving dealing, portfolio management, investment
advice and underwriting/placing) that meet specified thresholds
(e.g., consolidated assets of [euro]30 billion or more). See
generally Investment Firms Regulation (``IFR''), Regulation (EU)
2019/2033, art. 62 (amending certain definitions in the CRR).
---------------------------------------------------------------------------

     Memoranda of understanding--Consistent with the
requirements of rule 3a71-6 and the Commission's need for access to
information regarding registered entities, substituted compliance under
the proposed Order would be conditioned on the Commission having
applicable memoranda of understanding or other arrangements in place
with the French Authorities and with the ECB, addressing cooperation
with respect to the Order at the time the Covered Entity makes use of
substituted compliance.\72\
---------------------------------------------------------------------------

    \72\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85723. The Commission, AMF and ACPR have entered
into a memorandum of understanding to address substituted compliance
cooperation. The Commission and the ECB are also in the process of
developing a memorandum of understanding or other arrangement to
address cooperation matters related to substituted compliance. See
notes 17-19, supra. Consistent with the Order, Covered Entities must
ensure that this memorandum of understanding remains in place at the
time the Covered Entity relies on substituted compliance.
---------------------------------------------------------------------------

     Notice of reliance on substituted compliance--To assist
the Commission's oversight of firms that avail themselves of
substituted compliance, a Covered Entity relying on the substituted
compliance order would have to provide notice of its intent to rely on
the Order by notifying the Commission in writing.\73\
---------------------------------------------------------------------------

    \73\ French Substituted Compliance Notice and Proposed Order, 85
FR at 85723.
---------------------------------------------------------------------------

    When the Commission reopened the comment period and addressed the
possible removal of certain MiFID-related conditions, the Commission
also discussed the possibility of adding two new EMIR-related
conditions related to ``counterparty'' status under EMIR and related to
products subject to the European Market Infrastructure Regulation
(``EMIR''), to satisfy the prerequisites to substituted

compliance.\74\ The Commission explained that those additional two
conditions may ``promote certainty that EMIR will apply and help
preclude gaps between the regulatory outcomes associated with the
Exchange Act and those associated with the relevant EMIR provisions.''
\75\ This is particularly significant due to the Order's removal of
proposed MiFID-related conditions with respect to substituted
compliance for trade acknowledgement and verification requirements and
for trading relationship documentation requirements, and the
accompanying heightened reliance on certain EMIR-related
conditions.\76\ The two additional EMIR-related conditions are:
---------------------------------------------------------------------------

    \74\ Reopening Release, 86 FR at 18342.
    \75\ Id.
    \76\ See generally parts IV.B.2 and IV.B.5 infra.
---------------------------------------------------------------------------

     Covered Entity's counterparties as EMIR
``counterparties''--For each condition in the proposed Order that
requires the application of, and compliance with, provisions of EMIR,
Commission Delegated Regulation (EU) 149/2013 (``EMIR RTS'') and/or
Delegated Regulation (EU) 2016/2251 (``EMIR Margin RTS''), if the
counterparty to the Covered Entity is not a ``financial counterparty''
or ``non-financial counterparty'' as defined in EMIR articles 2(8) or
2(9), respectively, the Covered Entity must comply with the applicable
condition as if the counterparty were a financial counterparty or non-
financial counterparty. In other words, the Covered Entity would be
subject to the relevant requirements under EMIR even if the
counterparty is not authorized pursuant to EU law as anticipated by the
EMIR article 2(8) ``financial counterparty'' definition, or if the
counterparty is not an ``undertaking'' (such as by virtue of being a
natural person), or is not established in the EU (by virtue of being a
U.S. person or otherwise being established in some non-EU
jurisdiction), as anticipated by the EMIR article 2(9) ``non-financial
counterparty'' definition.\77\
---------------------------------------------------------------------------

    \77\ See Reopening Release, 86 FR at 18342 n.9.
---------------------------------------------------------------------------

     Security-based swap status under EMIR--For each condition
in the proposed Order that requires the application of, and compliance
with, provisions of EMIR, EMIR RTS and/or EMIR Margin RTS, either: (1)
The relevant security-based swap must be an ``OTC derivative'' or ``OTC
derivative contract,'' as defined in EMIR article 2(7), that has not
been cleared by a central counterparty (``CCP'') and otherwise is
subject to the provisions of EMIR; or (2) the relevant security-based
swap must have been cleared by a central counterparty that has been
authorized or recognized to clear derivatives contracts in the EU.\78\
---------------------------------------------------------------------------

    \78\ Id. at 18342.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    Commenters addressed the proposed general conditions related to
MiFID ``clients,'' the memoranda of understanding, and the notice to
the Commission.\79\ Commenters also addressed the two additional EMIR-
related conditions the Commission discussed when it reopened the
comment period.\80\ For the reasons discussed below, the Order largely
incorporates the general conditions as proposed, subject to certain
changes and the addition of the two EMIR-related conditions.\81\ In the
Commission's view, the conditions are structured appropriately to
predicate a positive substituted compliance determination on the
applicability of relevant French and EU requirements needed to
establish comparability, as well as on the continued effectiveness of
the requisite MOU, and the provision of notice to the Commission
regarding the Covered Entity's intent to rely on substituted
compliance.
---------------------------------------------------------------------------

    \79\ See SIFMA Letter II at 7, 16, and Appendix A; FBF Letter II
at 3 (addressing counterparties as MiFID ``clients''); Better
Markets Letter at 5 (addressing the memorandum of understanding).
    \80\ See SIFMA Letter II at 4; FBF Letter II at 2; Better
Markets Letter at 5-7.
    \81\ The Commission is adopting, largely as proposed, other
general conditions that were not the subject of comments and that
are not otherwise addressed below. See paras. (a)(1), (a)(3), and
(a)(4) of the Order. The Commission is making technical changes to
clarify the captions of certain of the general conditions (e.g., in
the final Order the caption to the proposed condition related to
``Activities as `investment services or activities''' now refers to
``Activities as MiFID `investment services or activities''').
Certain of the general conditions also have been renumbered from the
proposal.
---------------------------------------------------------------------------

a. Counterparties as MiFID ``clients''
    One commenter requested that the Commission modify the general
condition regarding MiFID client status, which as proposed required
that the counterparty be a ``client'' (or potential ``client'') as
defined in MiFID, such that the condition also would encompass
counterparties that are ``acting through an agent which the Covered
Entity treats as its `client' (or potential `client').'' \82\ The
commenter stated that this change would address circumstances in which
an agent acted on its counterparty's behalf, ``such as an investment
manager acting for a fund,'' reasoning that in practice entities ``will
look to the agent'' rather than the agent's principal when satisfying
applicable requirements.\83\
---------------------------------------------------------------------------

    \82\ SIFMA Letter II at Appendix A.
    \83\ SIFMA Letter II at 7.
---------------------------------------------------------------------------

    As noted above, the proposed Order would require a Covered Entity
to be ``subject to and comply with'' relevant MiFID-based requirements.
The Commission proposed that requirement of the proposed Order to
ensure that comparable MiFID-based requirements in practice would apply
to a Covered Entity using substituted compliance. The condition in
paragraph (a)(2) to the proposed Order would ensure that the Covered
Entity's counterparty--i.e., the entity to whom it owes its various
duties under the Exchange Act--is the ``client'' to whom the Covered
Entity owes its performance of the duties to which it is subject under
the comparable MiFID-based requirements.\84\ The Commission believes
that, in the case of an agent acting on behalf of a principal, if the
principal is the counterparty for purposes of the relevant Exchange Act
requirement, then this condition should require the principal, as the
counterparty, to be the ``client'' for purposes of the relevant MiFID-
based requirements. If the Covered Entity instead treats the agent as
the ``client,'' then the Covered Entity would not be ``subject to''
French and EU requirements that are comparable to Exchange Act
requirements related to counterparties. Accordingly, the Commission is
not amending the Order to modify the condition in paragraph (a)(2) to
permit a Covered Entity to treat an agent, rather than the agent's
principal, as its client with regard to the relevant MiFID-based
requirements. In taking this position, the Commission does not prohibit
Covered Entities from working with agents or others acting on behalf of
a counterparty. Rather, the Covered Entity must ensure that, in working
with the agent, it fulfills any duties owed to a ``client'' (or
potential ``client'') in relation to the counterparty.\85\
---------------------------------------------------------------------------

    \84\ Some provisions of the MiFID-based requirements cited in
the condition, such as certain organizational requirements, do not
pertain to counterparties or clients. In those cases, there is no
``relevant counterparty (or potential counterparty)'' for purposes
of the condition, and the condition would have no effect.
    \85\ MiFID article 26 permits firms to rely upon information
about a client received from another French and EU-regulated firm.
Under that provision, the other firm is legally responsible for the
completeness and accuracy of any information about the client that
the other firm receives from the first firm. The Commission believes
that it is appropriate to permit a Covered Entity to rely on
information about its client communicated by another French and EU-
regulated firm on behalf of the client. Accordingly, the application
of this provision would not cause the Covered Entity to be not
``subject to'' the relevant French and EU requirements listed in the
Order, and thus would not impact the Covered Entity's ability to use
substituted compliance in relation to those communications. On the
other hand, MiFID article 26 also provides that the other firm is
legally responsible for the suitability of advice and
recommendations provided to the client. The other firm, however, may
not be a Covered Entity applying substituted compliance pursuant to
the Order. Accordingly, the Commission believes that a Covered
Entity relying on the suitability assessment of another firm
pursuant to MiFID article 26 is not ``subject to'' the relevant
French suitability requirements listed in the Order, and thus may
not apply substituted compliance for those recommendations.

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

b. Memoranda of Understanding
    Commenters stated that a separate memorandum of understanding with
the ECB need not be in place before SBS Entities can rely on the Order,
based on the rationale that a memorandum of understanding containing
certain assurances from the AMF and ACPR would be sufficient to ensure
the Commission can promptly obtain relevant ECB-controlled
information.\86\ The Commission disagrees that such assurances would be
sufficient. As the Order in part addresses substituted compliance for
matters within the purview of the ECB, including but not limited to
capital and margin requirements, the Commission believes that a
memorandum of understanding with the ECB must be in place at the time
an SBS Entity relies on the Order. As a result, the Order incorporates,
as proposed, separate conditions related to the French Authorities and
to the ECB memoranda of understanding.\87\
---------------------------------------------------------------------------

    \86\ See SIFMA Letter I at 16; see also FBF Letter I at 3.
    \87\ See paras. (a)(7) and (a)(8) of the Order.
---------------------------------------------------------------------------

c. Notice of Reliance on Substituted Compliance
    One commenter \88\ requested that the Commission modify the
proposed notice condition to correspond with the analogous condition
that the Commission proposed in connection with the proposed
substituted compliance order for the United Kingdom (UK).\89\ The
Commission agrees that the notice requirements for the substituted
compliance orders should be consistent. As a result, the condition has
been modified from the French proposed Order to add flexibility by
stating that the notice must be sent to the Commission in the manner
specified on the Commission's website (while the proposed Order instead
referred to an email address).\90\ Moreover, the condition further has
been modified from the proposal by stating that the notice must
identify each specific substituted compliance determination for which
the Covered Entity intends to apply substituted compliance.\91\
Further, a Covered Entity must promptly update the notice if it intends
to modify its reliance on the positive substituted compliance
determinations in the Order.\92\ Every SBS Entity registered with the
Commission, whether complying directly with Exchange Act requirements
or relying on substituted compliance as a means of complying with the
Exchange Act, is required to satisfy the inspection and production
requirements imposed on such entities under the Exchange Act,\93\ and
specificity as to the scope of the entity's reliance on substituted
compliance is necessary to facilitate the Commission's oversight under
the Order.
---------------------------------------------------------------------------

    \88\ SIFMA Letter II at Appendix A.
    \89\ Exchange Act Release No. 91476 (Apr. 5, 2021), 86 FR 18378
(Apr. 8, 2021) (``UK Proposed Order'').
    \90\ See para. (a)(9) of the proposed Order.
    \91\ See para. (a)(9) of the Order. If the Covered Entity
intends to rely on all the substituted compliance determinations in
a given paragraph of the Order, it can cite that paragraph in the
notice. For example, if the Covered Entity intends to rely on the
capital and margin determinations in paragraph (c) of the Order, it
can indicate in the notice that it is relying on the determinations
in paragraph (c). However, if the Covered Entity intends to rely on
the margin determination but not the capital determination, it will
need to indicate in the notice that it is relying on paragraph
(c)(2) of the Order (the margin determination). In this case,
paragraph (c)(1) of the Order (the capital determination) will be
excluded from the notice and the Covered Entity will need to comply
with the Exchange Act capital requirements. Further, as discussed
below, the recordkeeping and reporting determinations in the Order
have been structured to provide Covered Entities with a high level
of flexibility in selecting specific requirements within those rules
for which they want to rely on substituted compliance. For example,
paragraph (f)(1)(i) of the Order sets forth the Commission's
substituted compliance determinations with respect to the
requirements of Exchange Act rule 18a-5, 17 CFR 240.18a-5. These
determinations are set forth in paragraphs (f)(1)(i)(A) through (O)
of the Order. If a Covered Entity intends to rely on some but not
all of the determinations, it will need to identify in the notice
the specific determinations in this paragraph it intends to rely on
(e.g., paragraphs (f)(1)(i)(A), (B), (C), (D), (G), (H), (I), and
(O)). For any determinations excluded from the notice, the Covered
Entity will need to comply with the Exchange Act rule 18a-5
requirement. Finally, a Covered Entity is able to apply substituted
compliance at the transaction level (rather than the entity level)
for certain counterparty protection requirements and the
recordkeeping requirements that are linked to them. In this case,
the notice will need to indicate the class of transactions (e.g.,
transactions with French counterparties) for which the Covered
Entity is applying substituted compliance with respect to the
Exchange Act counterparty protection requirements and linked
recordkeeping requirements. Similarly, as discussed above, a Covered
Entity is able to apply substituted compliance for entity-level
Exchange Act requirements to all of its security-based swap business
that is eligible for substituted compliance under the Order, and may
either comply directly with the Exchange Act or apply substituted
compliance under another applicable order for its security-based
swap business that is not eligible for substituted compliance under
the Order. In this case, the notice will need to indicate the scope
of security-based swap business (e.g., security-based swap business
carried on from an establishment in France) for which the Covered
Entity is applying substituted compliance with respect to the
relevant Exchange Act entity-level requirements.
    \92\ A Covered Entity would modify its reliance on the positive
substituted compliance determinations in the Order, and thereby
trigger the requirement to update its notice, if it adds or
subtracts determinations for which it is applying substituted
compliance or completely discontinues its reliance on the Order.
    \93\ See French Substituted Compliance Notice and Proposed
Order, 85 FR 85734.
---------------------------------------------------------------------------

d. Additional EMIR-Related Conditions
    The final rules have been modified from the proposal to add two
general conditions that address Covered Entities' reliance on the EMIR-
related provisions. The additions should help ensure that the relevant
EMIR-related provisions will apply in fact, and help avoid any gaps
between the regulatory outcomes associated with Exchange Act
requirements and regulatory outcomes associated with those EMIR-related
provisions. Consistent with the discussion regarding scope of
substituted compliance in part II.B, in the context of the EMIR
counterparties condition in paragraph (a)(5), a Covered Entity must
choose (1) to apply substituted compliance pursuant to the 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.
    Some commenters expressed general support for adding the two
additional EMIR-related general conditions to the Order.\94\ One
commenter disagreed with including any additional EMIR-related
conditions, expressing the view that if ``some industry participants
may not be able to take advantage of substituted compliance under the
SEC's proposed framework is not, in and of itself, a reason to change
the framework.'' \95\
---------------------------------------------------------------------------

    \94\ See FBF Letter II at 2 (stating that ``[t]he FBF is
generally welcoming of the new general EMIR conditions that are
introduced as a corollary to the above changes. As applied in the
context of trading relationship documentation, trade acknowledgment
and verification, they largely convey the manner in which EMIR has
been interpreted.''); see also SIFMA Letter II at 4.
    \95\ Better Markets Letter at 6.
---------------------------------------------------------------------------

    The first new general condition addresses the fact that the
``financial counterparty'' and ``non-financial counterparty''
definitions that trigger the application of the relevant EMIR
provisions are predicated on the entity being an undertaking
established in the

EU.\96\ The conditions are not based upon the concern that some
industry participants may not be able to take advantage of substituted
compliance, but rather the conditions are intended to help ensure that
the relevant EMIR requirements will apply in practice regardless of the
counterparty's location or status as ``an undertaking''. As such, the
condition provides that the Covered Entity must comply with the
applicable condition of this Order as if the counterparty were the type
of counterparty that would trigger the application of the relevant
EMIR-based requirements. If the Covered Entity reasonably determines
that its counterparty would be a financial counterparty if not for the
counterparty's location and/or lack of authorization in the EU, the
condition further requires the Covered Entity to treat the counterparty
as if the counterparty were a financial counterparty, rather than as
another type of counterparty to which the relevant EMIR-based
requirements apply.\97\ By requiring a Covered Entity to treat its
counterparty as the type of counterparty that would trigger the
application of the relevant EMIR-based requirements, the EMIR-based
requirements require the Covered Entity to act in a way that is
comparable to Exchange Act requirements. The Commission is modifying
the Order to include this condition to ensure that a Covered Entity can
apply substituted compliance only when it treats its counterparty as a
type that will trigger the Covered Entity's performance of obligations
pursuant to those EMIR-based requirements.\98\ Because each EMIR-based
requirement applies to different types of counterparties, the
Commission is amending the condition to make clear that a Covered
Entity must treat its counterparty as if the counterparty were the type
of counterparty specified in the relevant EMIR-based requirement and
that a Covered Entity may not rely on EMIR article 13 to comply with
another jurisdiction's requirement.
---------------------------------------------------------------------------

    \96\ See EMIR articles 2(8) and 2(9).
    \97\ EMIR article 2(8) defines ``financial counterparty'' to
encompass investment firms, credit institutions, insurers and
certain other types of businesses that have been authorized in
accordance with EU directives. The distinction between ``financial''
and ``non-financial'' counterparties under EMIR is manifested, inter
alia, in connection with confirmation timing standards (see EMIR RTS
article 12).
    \98\ See para. (a)(5) of the Order.
---------------------------------------------------------------------------

    Another commenter requested that the Commission clarify that this
condition would not require a Covered Entity to treat as financial
counterparties or non-financial counterparties certain public sector
counterparties, such as multilateral development banks, that are exempt
from EMIR or counterparties that are not ``undertakings'' for purposes
of EMIR's definitions of ``financial counterparty'' and ``non-financial
counterparty.'' \99\ The Commission declines to do so, given that the
relevant requirements under the Exchange Act lack analogous carve-outs
based on counterparty status. The Commission is, however, clarifying
that the condition applies only if the relevant EMIR-based provision
applies to the Covered Entity's activities with specified types of
counterparties.\100\
---------------------------------------------------------------------------

    \99\ SIFMA Letter II at 4.
    \100\ See para. (a)(5) of the Order.
---------------------------------------------------------------------------

    The second new general condition accounts for the fact that: (a)
The relevant trade acknowledgement and verification and trading
relationship documentation rules under the Exchange Act do not apply to
security-based swaps cleared by a clearing agency registered with the
Commission or a clearing agency that is exempt from registration with
the Commission, and (b) the analogous EMIR provisions only apply to
over-the-counter derivatives that are not cleared on a CCP (as defined
in EMIR article 2(1)). To help ensure that substituted compliance is
not precluded in connection with instruments that have been cleared in
the EU, this second condition provides that for the applicable EMIR-
related conditions, the relevant security-based swap must be an ``OTC
derivative'' or ``OTC derivative contract'' (as defined under EMIR)
that has not been cleared and otherwise is subject to the provisions of
the relevant requirements under EMIR, or else that the relevant
security-based swap must have been cleared by a central counterparty
that has been authorized or recognized by a relevant authority to clear
derivatives contracts in the EU.\101\
---------------------------------------------------------------------------

    \101\ See para. (a)(6) of the Order. Absent this type of
condition, instruments that have been cleared at an EU-authorized or
recognized central counterparty neither would be excluded from the
application of those Exchange Act rules nor would be subject to the
EMIR requirements that otherwise would underpin substituted
compliance. That would make direct compliance with the Exchange Act
rules problematic, but compliance with the conditions of a positive
substituted compliance order unworkable.
---------------------------------------------------------------------------

    One commenter requested that the second new general condition be
revised to include transactions cleared by any central counterparty--
not merely central counterparties authorized or recognized by the
EU.\102\ The commenter stated that in certain circumstances French and
EU law permit counterparties to agree to submit certain transactions to
third-country central counterparties, and that it would be impractical
to require Covered Entities to satisfy Exchange Act requirements that
are ``principally targeted to non-cleared [security-based swaps] in
relation to these transactions.'' \103\ The Commission has modified the
condition to clarify that it extends to instruments cleared by central
counterparties that have been authorized or recognized by a ``relevant
authority'' in the EU, but the Commission declines to extend it to
instruments cleared on ``any'' central counterparty, as such a standard
would provide no safeguard against the risks potentially associated
with central counterparties that are not subject to adequate
safeguards. In application, the central counterparties described by the
provision would extend to those that have been authorized by a
competent authority pursuant to EMIR article 14, and those that have
been recognized by the European Securities and Markets Authority
(``ESMA'') pursuant to EMIR article 25.\104\
---------------------------------------------------------------------------

    \102\ SIFMA Letter II at 4-5.
    \103\ Id. at 4.
    \104\ In light of these considerations, the condition does not
extend to clearing permitted pursuant to the equivalence framework
of EMIR article 13.
---------------------------------------------------------------------------

    Finally, the Commission is amending the condition to clarify that
the condition applies only if the relevant EMIR-based provision 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. Consistent with the condition in
paragraph (a)(6) of the Order, the Commission is also adding to the
condition references to EMIR RTS and EMIR Margin RTS.
e. Notification Requirements Related to Changes in Capital
    A commenter requested that the Commission make more granular
substituted compliance determinations with respect to the Exchange Act
recordkeeping requirements.\105\ The commenter stated that for
``operational reasons'' a Covered Entity may ``prefer to comply
directly with certain Exchange Act requirements (i.e., not to rely on
substituted compliance with those requirements).'' \106\ The Commission
took this approach in the UK Proposed Order with respect to the
Exchange Act recordkeeping, reporting, and notification
requirements.\107\ As

part of this approach, the Commission also conditioned substituted
compliance with certain of the discrete recordkeeping, reporting, and
notification requirements on the Covered Entity applying substituted
compliance with respect to the substantive Exchange Act requirement to
which they were linked.\108\ This linked condition was designed to
ensure that a Covered Entity consistently applies substituted
compliance with respect to the substantive Exchange Act requirement and
the Exchange Act recordkeeping, reporting, or notification requirement
that complements the substantive requirement. The Commission sought
comment in the Reopening Release on whether it should take a similar
granular approach to the Exchange Act recordkeeping, reporting, and
notification requirements.\109\
---------------------------------------------------------------------------

    \105\ See SIFMA Letter I at 8.
    \106\ Id.
    \107\ See UK Substituted Compliance Notice and Proposed Order,
86 FR 18394-403, 18415-420.
    \108\ Id.
    \109\ See Reopening Release, 86 FR at 18347-48.
---------------------------------------------------------------------------

    On further consideration and in light of the more granular approach
requested by the commenter, the Commission believes it necessary to do
the reverse with respect to certain substantive financial
responsibility requirements: Condition substituted compliance with
respect to the substantive requirement on the Covered Entity applying
substituted compliance with respect to the linked recordkeeping,
reporting, or notification requirement. The Exchange Act financial
responsibility requirements addressed in this Order (capital, margin,
recordkeeping, reporting, notification, and securities count
requirements) are highly integrated. Therefore, implementing the
reverse conditional link is designed to ensure that the granular
approach requested by the commenter results in comparable regulatory
outcomes in terms of obligations to make and preserve records, and to
submit reports and notifications to the Commission concerning the
Covered Entity's compliance with the financial responsibility rules. It
also is designed to provide clarity as to the obligations of a Covered
Entity under this Order when using the granular approach to the
Exchange Act recordkeeping, reporting, and notification requirements
linked to the financial responsibility rules.
    For example, because of the granular approach, a Covered Entity
could elect to apply substituted compliance with respect to a
substantive Exchange Act requirement such as the capital requirements
of Exchange Act rule 18a-1 but elect not to apply substituted
compliance with respect to a linked requirement under Exchange Act rule
18a-8 to provide the Commission notice of a capital deficiency under
Exchange Act rule 18a-1. In this scenario, the Covered Entity would not
be subject to the condition for applying substituted compliance with
respect to Exchange Act rule 18a-8; namely, that the firm provide the
Commission copies of notifications relating to French and EU capital
requirements required under French and EU law. Consequently, as
discussed below in this section and other sections of this release, the
Commission is conditioning substituted compliance with respect to
certain substantive Exchange Act requirements on the Covered Entity
applying substituted compliance with respect to linked recordkeeping
reporting, or notification requirements.
Exchange Act Rule 18a-8(c)
    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 that same day
by transmitting a copy of the notice of adjustment of reported capital
category in accordance with Exchange Act rule 18a-8(h).\110\ 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.\111\ While Exchange Act rule 18a-8(c) is not linked to a
substantive Exchange Act requirement, it is linked to substantive
capital requirements applicable to prudentially regulated SBS Entities
in the U.S. (i.e., capital requirements of the Federal Reserve Board,
the Office of the Comptroller of the Currency, or the Federal Deposit
Insurance Corporation). Therefore, to implement the granular approach
requested by the commenter, the Commission is adding a general
condition that Covered Entities with a prudential regulator relying on
the final Order for substituted compliance must apply substituted
compliance with respect to the requirements of Exchange Act rule 18a-
8(c) and the requirements of Exchange Act rule 18a-8(h) as applied to
Exchange Act rule (c).\112\
---------------------------------------------------------------------------

    \110\ See 17 CFR 240.18a-8(c).
    \111\ See 17 CFR 240.18a-8(h).
    \112\ Better Markets Letter at 2-3.
---------------------------------------------------------------------------

    In their application, the French Authorities cited several French
provisions as providing similar outcomes to the notifications
requirements of Exchange Act rule 18a-8. Additionally, based on
comments received, the Commission has identified additional provisions
that are relevant.\113\ This general condition is necessary in order to
clarify that a prudentially regulated Covered Entity must provide the
Commission with copies of any notifications regarding changes in the
Covered Entity's capital situation required by French and EU law. In
particular, a prudentially regulated Covered Entity could elect not to
apply substituted compliance with respect to Exchange Act rule 18a-
8(c). However, because the Covered Entity is not required to provide
any notifications to the Federal Reserve Board, the Office of the
Comptroller of the Currency, or the Federal Deposit Insurance
Corporation, ``compliance'' with the provisions of Exchange Act rule
18a-8(c) raises a question as to the Covered Entity's obligations under
this Order to provide the Commission with notification of changes in
capital.
---------------------------------------------------------------------------

    \113\ These French provisions include: (1) MFC Articles L. 511-
33II, L. 634-1, and L. 634-2, which provide, among other things,
that the staff of firms may report potential or actual breaches
related to certain specified provisions, and provide for the
establishment of procedures and secure communication channels
through which French regulatory and prudential authorities can be
informed of failures to comply with applicable regulations; and (2)
Internal Control Order articles 249 and 249-1, which require
notification to the ACPR, without delay, of significant incidents
with respect to certain thresholds related to the firm's risk
analysis and measurement systems, and with respect to operational
incidents.
---------------------------------------------------------------------------

    Moreover, a commenter stated that foreign financial services firms
were among the entities that used emergency lending facilities in the
U.S. along with other U.S. measures to address the 2008 financial
crisis.\114\ The Commission adopted Exchange Act rule 18a-8(c) to
require SBS Entities with a prudential regulator to give notice to the
Commission when filing an adjustment of reported capital category
because such notices may indicate that the entity is in or is
approaching financial difficulty.\115\ The Commission has a regulatory
interest in being notified of changes in the capital of a prudentially
regulated Covered Entity, as it could signal the firm is in or
approaching financial difficulty and presents a risk to U.S. security-
based swap markets and participants. For the foregoing reasons, the
Commission is conditioning applying substituted compliance pursuant to
the Order on the general condition that a prudentially regulated
Covered Entity apply substituted compliance with respect to Exchange
Act rule 18a-8(c) and the requirements

of Exchange Act rule 18a-8(h) as applied to Exchange Act rule 18a-8(c).
---------------------------------------------------------------------------

    \114\ Better Markets Letter at 2.
    \115\ See Exchange Act Release No. 71958 (Sept. 19, 2019), 84 FR
68550, 68589-90 (Dec. 16, 2019) (``Recordkeeping and Reporting
Adopting Release'') (citing Exchange Act Release No. 71958 (Aug. 17,
2014) 79 FR 25193, 25249 (May 2, 2014)).
---------------------------------------------------------------------------

C. European Union Cross-Border Matters

1. Proposed Approach
    The proposed Order also included general conditions to address the
cross-border application of MiFID and MAR, along with EU and French
requirements adopted pursuant to those directives. For some
requirements under MiFID (and other EU and Member State requirements
adopted pursuant to MiFID), EU law allocates the responsibility for
supervising and enforcing those requirements to authorities of the
Member State where an entity provides certain services. 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, the proposed Order provided
substituted compliance only if one of the authorities responsible for
supervision and enforcement of those requirements is the AMF or the
ACPR.\116\
---------------------------------------------------------------------------

    \116\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85724, 85739.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    Commenters raised concerns with the proposed approach to European
Union cross-border matters. The commenters did not object to the
Commission's underlying premise, with one commenter noting that they
``[understood] that the Commission has included these conditions in the
order to ensure that the prerequisites with respect to supervision and
enforcement are satisfied.'' \117\ Commenters instead asserted that the
proposed condition would significantly curtail the ability to rely on
the Order, with one commenter stating that requiring the AMF or ACPR to
be allocated responsibility for the supervision and enforcement of
applicable MiFID and MAR provisions, ``will in practice lead to an
untenable patchwork of substituted compliance.'' \118\ To address these
issues, commenters urged the Commission to consider whether it could
dispense with certain of the requirements cited in the proposed Order
and still make a holistic, outcomes based comparability determination.
---------------------------------------------------------------------------

    \117\ See SIFMA Letter I at 2-8.
    \118\ See SIFMA Letter I at 3.
---------------------------------------------------------------------------

    The Commission continues to believe that requiring that the AMF or
ACPR have responsibility for applicable MiFID and MAR provisions will
help ensure that the supervision and enforcement prerequisites to
substituted compliance are satisfied.\119\ Additionally, the proposed
approach helps ensure that applicable MiFID and MAR provisions are
interpreted and applied in a consistent manner by entities that are
party to the MOUs and/or other arrangements which are a prerequisite to
substituted compliance.\120\ In light of these considerations the
Commission is issuing the general conditions related to EU cross-border
matters largely as proposed.\121\ In the Commission's view, these
conditions are structured appropriately to permit the use of
substituted compliance only when the AMF or the ACPR is the entity
responsible for supervising a Covered Entity's compliance with a
relevant provision of MiFID, MAR or related EU or French requirements.
---------------------------------------------------------------------------

    \119\ See Business Conduct Adopting Release, 81 FR at 30080; see
also id. at 30067.
    \120\ See id. at 30087.
    \121\ See para. (a)(8) of the Order.
---------------------------------------------------------------------------

    The Commission agrees, however, that in light of the EU cross-
border implications, further consideration of the specific conditions
cited with respect to internal risk management, trade acknowledgement
and verification, trading relationship documentation, internal
supervision and compliance and recordkeeping, reporting, notification,
and securities counts is warranted to ensure that the scope of
substituted compliance is appropriate. The Commission addresses those
specific requirements below.\122\
---------------------------------------------------------------------------

    \122\ See also discussion in part III.B.2.d.
---------------------------------------------------------------------------

    This part of the Order has been modified from the proposed Order to
incorporate references to conditions requiring compliance with MiFIR,
given that certain relevant MiFIR conditions to substituted compliance
are subject to the same principles regarding the allocation of
authority.\123\
---------------------------------------------------------------------------

    \123\ MiFID article 35(8) particularly provides that these
allocation principles apply in connection with MiFIR articles 14 to
26. The Commission requested comment on the addition of MiFIR and
received no comment.
---------------------------------------------------------------------------

IV. Substituted Compliance for Risk Control Requirements

A. Proposed Approach

    The French Authorities' Application in part requested substituted
compliance in connection with risk control requirements relating to:
     Internal risk management--Internal risk management system
requirements that address the obligation of registered entities to
follow policies and procedures reasonably designed to help manage the
risks associated with their business activities.
     Trade acknowledgment and verification--Trade
acknowledgment and verification requirements intended to help avoid
legal and operational risks by requiring definitive written records of
transactions and procedures to avoid disagreements regarding the
meaning of transaction terms.
     Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting provisions that require that
counterparties engage in portfolio reconciliation and resolve
discrepancies in connection with uncleared security-based swaps, and to
provide prompt notification to the Commission and applicable prudential
regulators regarding certain valuation disputes.
     Portfolio compression--Portfolio compression provisions
that require that SBS Entities have procedures addressing bilateral
offset, bilateral compression and multilateral compression in
connection with uncleared security-based swaps.
     Trading relationship documentation--Trading relationship
documentation provisions that require SBS Entities to have procedures
to execute written security-based swap trading relationship
documentation with their counterparties prior to, or contemporaneously
with, executing certain security-based swaps.\124\
---------------------------------------------------------------------------

    \124\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85724.
---------------------------------------------------------------------------

    Taken as a whole, these risk control requirements help to promote
market stability by mandating that registered entities follow practices
that are appropriate to manage the market, counterparty, operational,
and legal risks associated with their security-based swap businesses.
    In considering conditional substituted compliance for the risk
control portion of the French Authorities' Application, the Commission
preliminarily concluded that the relevant French and EU requirements
generally would help to produce regulatory outcomes that are comparable
to those under the Exchange Act by subjecting Covered Entities to risk
mitigation and documentation practices that are appropriate to the
risks associated with their security-based swap businesses.\125\
Substituted compliance under the proposed Order was to be conditioned
in part on Covered Entities being subject to and

complying with the specified French and EU provisions that in the
aggregate help to produce regulatory outcomes that are comparable to
those associated with the risk control requirements under the Exchange
Act.\126\
---------------------------------------------------------------------------

    \125\ Id. at 85724.
    \126\ Id. at 85724 n.37.
---------------------------------------------------------------------------

    Substituted compliance under the proposed Order also was to be
subject to certain additional conditions to help ensure the
comparability of outcomes: (a) Substituted compliance in connection
with the trading relationship documentation provisions would be
conditioned on the requirement that the Covered Entity not treat its
counterparties as ``eligible counterparties'' for purposes of relevant
MiFID provisions; \127\ (b) substituted compliance related to trading
relationship documentation under the proposed Order would not extend to
certain disclosures regarding legal and bankruptcy status; \128\ and
(c) substituted compliance in connection with portfolio reconciliation
and dispute reporting requirements would be conditioned on the Covered
Entity having to provide the Commission with reports regarding disputes
between counterparties on the same basis as they provide those reports
to competent authorities pursuant to EU law.\129\
---------------------------------------------------------------------------

    \127\ Id. at 85725. Certain relevant French and EU requirements
that provide for this type of documentation do not apply to
investment firms' transactions with ``eligible counterparties.''
    \128\ Id. The trading relationship documentation provisions of
rule 15F(b)(5) require certain disclosures regarding the status of
the SBS Entity or its counterparty as an insured depository
institution or financial counterparty, and regarding the possible
application of the insolvency regime set forth under Title II of the
Dodd-Frank Act or the Federal Deposit Insurance Act. Documentation
requirements under applicable French and EU law would not be
expected to address the disclosure of information related to
insolvency procedures under U.S. law.
    \129\ Id. Under the Exchange Act requirement, SBS Entities must
promptly report, to the Commission, valuation disputes in excess of
$20 million that have been outstanding for three or five business
days (depending on counterparty types). EU requirements provide that
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.
---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

    Commenters initially expressed the view that the Commission should
modify certain of the proposed conditions related to substituted
compliance in connection with internal risk management, trade
acknowledgement and verification, and trading relationship
documentation requirements.\130\ Specifically, commenters expressed
concerns with proposed MiFID requirements for trade acknowledgement and
verification and trading relationship documentation that ``cover the
same ground'' as proposed EMIR requirements and ``would result in undue
burdens for French [security-based swap dealers].'' \131\ Partially in
light of those concerns, the Commission reopened the comment period and
solicited additional comment on whether EMIR requirements standing
alone could produce comparable results such that certain MiFID
provisions may be removed as prerequisites to substituted compliance
for trade acknowledgement and verification and trading relationship
documentation requirements.\132\ Certain commenters generally supported
changes contemplated by the Commission in the Reopening Release.\133\
Another commenter stated that French and EU requirements are not
sufficiently comparable to Exchange Act requirements.\134\
---------------------------------------------------------------------------

    \130\ See SIFMA Letter I at 4-6; FBF Letter I at 2.
    \131\ See FBF Letter I at 2. See also SIFMA Letter I at 3
(noting that the application of certain proposed MiFID and EMIR
rules would ``lead to an untenable patchwork of substituted
compliance.'')
    \132\ See Reopening Release, 86 FR at 18343.
    \133\ See SIFMA Letter II at 6 (stating that ``[w]e generally
support these proposed modifications to the French Order''); see
also FBF Letter II at 2. But see Better Markets Letter at 6 (``It is
understandable that industry groups would urge the SEC to make it
easier for more members of the industry to avail themselves of the
privilege of substituted compliance . . . . However, easing
regulatory burdens for the industry is not the SEC's job.'').
    \134\ See Better Markets Letter at 1-2.
---------------------------------------------------------------------------

    After considering commenters' recommendations regarding the risk
control requirements, the Commission is making positive substituted
compliance determinations in connection with internal risk management,
trade acknowledgment and verification, portfolio reconciliation and
dispute reporting, portfolio compression and trading relationship
documentation requirements. As discussed below, the final Order has
been changed from the proposed Order in certain respects in response to
comments following the proposed Order and Reopening Release. The
Commission continues to conclude that, taken as a whole, applicable
requirements under French and EU law subject Covered Entities to risk
mitigation and documentation practices that are appropriate to the
risks associated with their security-based swap businesses, and thus
help to produce regulatory outcomes that are comparable to the outcomes
associated with the relevant risk control requirements under the
Exchange Act. Although the Commission recognizes that there are
differences between the approaches taken by the relevant risk control
requirements under the Exchange Act and relevant French and EU
requirements, the Commission continues to believe that those
differences on balance should not preclude substituted compliance for
these requirements, as the relevant French and EU requirements taken as
a whole help to produce comparable regulatory outcomes.
    To help ensure the comparability of outcomes, substituted
compliance for risk control requirements is subject to certain
conditions. Substituted compliance for internal risk management, trade
acknowledgment and verification, portfolio reconciliation and dispute
reporting, portfolio compression and trading relationship documentation
requirements is conditioned on the Covered Entity being subject to, and
complying with, relevant French and EU requirements.\135\ In addition,
consistent with the proposed Order, substituted compliance for trading
relationship documentation does not extend to disclosures regarding
legal and bankruptcy status that are required by Exchange Act rule
15Fi-5(b)(5) when the counterparty is a U.S. person.\136\ Finally,
consistent with the proposed Order, substituted compliance for
portfolio reconciliation and dispute reporting requirements is
conditioned on the Covered Entity providing the Commission with reports
regarding disputes between counterparties on the same basis as the
Covered Entity provides those reports to its competent authority
pursuant to French and EU

law.\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 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.
---------------------------------------------------------------------------

    \135\ See paras. (b)(1) through (5) of the Order.
    \136\ 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 Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR 6359, 6374
(Feb. 4, 2020) (``Risk Mitigation Adopting Release''). Documentation
requirements under applicable French 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.
    \137\ See paras. (b)(3)(ii) of the Order. This condition
promotes comparability with the Exchange Act rule requiring reports
to the Commission regarding significant valuation disputes, while
leveraging French and EU reporting provisions to avoid the need for
Covered Entities to create additional reporting frameworks. When it
proposed the condition to report valuation disputes, the Commission
recognized that valuation inaccuracies may lead to uncollateralized
credit exposure and the potential for loss in the event of default.
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621
(Feb. 15, 2019). It thus is important that the Commission be
informed regarding valuation disputes affecting SBS Entities. The
principal difference between the Exchange Act and French and EU
valuation dispute reporting requirements concerns the timing of
notices. Exchange Act rule 15Fi-3, 17 CFR 240.15Fi-3, requires SBS
Entities to report promptly to the Commission valuation disputes in
excess of $20 million that have been outstanding for three or five
business days (depending on the counterparty type). EMIR RTS article
15(2) requires financial counterparties to report to the relevant
competent authority at least monthly any disputes between
counterparties in excess of [euro]15 million and outstanding for at
least 15 business days. The Commission is mindful that the French
and EU provision does not provide for notice as quickly as rule
15Fi-3, but in the Commission's view on balance this difference
would not be inconsistent with the conclusion that the two sets of
requirements, taken as a whole, promote comparable regulatory
outcomes.
---------------------------------------------------------------------------

    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.
1. Internal Risk Management
    Exchange Act section 15F(j)(2) requires a registered SBS Entity to
establish robust and professional risk management systems adequate for
managing its day-to-day business. In addition, Exchange Act rule 15Fh-
3(h)(2)(iii)(I) requires an SBS Entity to establish and maintain a
system to supervise, and to diligently supervise, its business and the
activities of its associated persons. This system of internal
supervision must include, in relevant part, the establishment,
maintenance and enforcement of written policies and procedures
reasonably designed, taking into consideration the nature of the SBS
Entity's business, to comply with its duty under Exchange Act section
15F(j)(2) to establish an internal risk management system.
    Under the proposed Order, substituted compliance in connection with
internal risk management requirements would have been conditioned on
Covered Entities being subject to and complying with certain MiFID, CRD
and EMIR requirements related to internal risk management. One
commenter expressed the view that the scope of this proposed condition
would require SBS Entities to be subject to and comply with ``an
expansive range of detailed and prescriptive requirements'' that are
not necessary to produce comparable regulatory outcomes.\138\ The
commenter further criticized conditions requiring compliance with
certain internal risk management requirements prescribed by the CRD,
stating that those prescriptive requirements go beyond the ``high-
level'' internal risk management requirements set forth by Exchange Act
section 15F(j)(2).\139\ The commenter also expressed the view that the
conditions should not extend to the compliance system requirements of
MiFID Org Reg article 22, on the grounds that compliance system
requirements do not relate to risk management.\140\ Commenters
reiterated these same concerns following the reopening of the comment
period, requesting the removal of specific MiFID, MFC, MiFID Org Reg,
CRD, CRR, Prudential Supervision and Risk Assessment Order, and EMIR
Margin RTS requirements for internal risk management.\141\ By contrast,
another commenter requested that the Commission ``not weaken [the risk
control] conditions any further.'' \142\
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    \138\ SIFMA Letter I at 4-5.
    \139\ Id. at 5.
    \140\ Id.
    \141\ SIFMA Letter II at Appendix A; FBF Letter II at 2.
    \142\ Better Markets Letter at 2.
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    The proposed Order included CRD articles 79 through 87, MiFID
articles 16(4) and (5), CRR articles 286 through 288 and 293, EMIR
Margin RTS article 2, MiFID Org Reg articles 21, 22 and 24, and the
implementing provisions of French law. A commenter stated that the
Commission should delete those provisions because they do not
correspond to and go beyond Exchange Act internal risk management
requirements.\143\ However:
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    \143\ SIFMA Letter II at Appendix A.
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     CRD article 79 and the implementing provisions of French
law address a Covered Entity's management of credit and counterparty
risk. CRD article 80 and the implementing provisions of French law
address a Covered Entity's management of residual risk. CRD article 81
and the implementing provisions of French law address a Covered
Entity's management of concentration risk. CRD article 82 and the
implementing provisions of French law address a Covered Entity's
management of securitization risk. CRD article 83 and the implementing
provisions of French law address a Covered Entity's management of
market risk. CRD article 84 and the implementing provisions of French
law address a Covered Entity's management of interest rate risk. CRD
article 85 and the implementing provisions of French law address a
Covered Entity's management of operational risk. CRD article 86 and the
implementing provisions of French law address a Covered Entity's
management of liquidity risk and funding risk. CRD article 87 and the
implementing provisions of French law address a Covered Entity's
management of risk from excessive leverage.
     MiFID article 16(4) and the implementing provisions of
French law require a Covered Entity to take reasonable steps to ensure
continuity and regularity in the performance of investment services and
activities, including by employing appropriate and proportionate
systems, resources and procedures. MiFID article 16(5) and the
implementing provisions of French law require a Covered Entity to
ensure that it manages the operational risk of

relying on third parties for the performance of operational functions
that are critical to the continuous and satisfactory provision of
service to clients and performance of investment services and
activities.
     CRR article 286 requires a Covered Entity to establish and
maintain a counterparty credit risk management framework, including
policies, processes and systems to ensure the identification,
measurement, approval and internal reporting of counterparty credit
risk and procedures for ensuring that those policies, processes and
systems are complied with. CRR article 287 addresses the internal
governance of risk control and collateral management functions for
Covered Entities that use internal models to calculate capital
requirements. CRR article 288 requires the Covered Entity to conduct
regular, independent reviews of its counterparty credit risk management
systems and any risk control and collateral management functions
required by CRR article 287. CRR article 293 addresses internal
governance of the Covered Entity's internal risk management systems and
validation of risk models that the Covered Entity uses.
     EMIR Margin RTS article 2 requires counterparties to non-
centrally cleared OTC derivative contracts to establish, apply and
document risk management procedures for the exchange of collateral.
     MiFID Org Reg article 21 addresses a Covered Entity's
systems, internal controls and arrangements for management of a variety
of risk areas, including internal decision-making, allocation and
proper discharge of responsibilities, compliance with decisions and
internal procedures, employment of personnel able to discharge their
responsibilities, internal reporting and communication of information,
adequate and orderly recordkeeping, safeguarding information, business
continuity, accounting policies and procedures, as well as regular
evaluation of the adequacy and effectiveness of those systems, internal
controls and arrangements. MiFID Org Reg article 22 addresses a Covered
Entity's policies and procedures for detecting and minimizing risk of
failure to comply with its obligations under EU provisions that
implement MiFID, as well as the Covered Entity's independent compliance
function that monitors and assesses the adequacy and effectiveness of
those policies and procedures. MiFID Org Reg article 24 addresses a
Covered Entity's internal audit function that evaluates the adequacy
and effectiveness of the Covered Entity's systems, internal controls
and arrangements.
    Each of these requirements helps to produce regulatory outcomes
comparable to Exchange Act requirements to establish robust and
professional internal risk management systems adequate for managing the
Covered Entity's day-to-day business. The comparability analysis
requires consideration of Exchange Act requirements as a whole against
analogous French 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 French and EU
requirements that establish comparability with the applicable
regulatory outcome, and helps to avoid ambiguity in the application of
substituted compliance. It would be inconsistent with the holistic
approach to excise relevant requirements and leave only the residual
French and EU provisions that most closely resemble the analogous
Exchange Act requirements.\144\ Accordingly, the Commission is
retaining the references to these provisions. Retaining conditions of
the Order necessary to help produce regulatory outcomes comparable to
Exchange Act internal risk management requirements also should address
another commenter's concern that any substituted compliance
determination not weaken the risk control conditions in the proposed
Order.\145\
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    \144\ The Commission further believes that those conditions to
substituted compliance do not expand the scope of Exchange Act
requirements because substituted compliance is an option available
to non-U.S. person SBS Entities--not a mandate.
    \145\ See Better Markets Letter at 1-2.
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    The Commission is making three changes from the proposed Order for
this portion of the Order. First, the Commission concurs with a
commenter recommendation that the prerequisites to substituted
compliance for internal risk management should not extend to the
Covered Entity being subject to and complying with French Prudential
Supervision and Risk Assessment Order article 7, which does not impose
obligations on regulated entities.\146\ Second, the Commission is
incorporating, as part of the relevant conditions a Covered Entity
using substituted compliance for internal risk management must be
subject to and comply with, MFC L. 533-2, which is the French
implementation of the internal risk management requirements set forth
in the second paragraph of MiFID article 16(5).\147\ Finally, the
Commission is incorporating, as part of the relevant conditions, MiFID
articles 16 and 23 and the related implementing provisions; \148\ MiFID
Org Reg articles 25 through 37, 72 through 76 and Annex IV; and CRD
articles 88(1), 91(1) and (2), and (7) through (9), 92, 94, and 95 and
the related implementing provisions.\149\ These provisions address
additional aspects of a Covered Entity's management of the risks posed
by internal governance and organization, business operations, conflicts
of interest with and between clients and senior staff remuneration
policies.
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    \146\ SIFMA Letter II at Appendix A.
    \147\ That cross-reference inadvertently was omitted from the
proposed Order, but was incorporated within the proposed conditions
related to internal supervision and compliance (see para. (d)(3) of
the Order), and was cited by the French Authorities' Application as
supporting comparability in connection with internal risk management
system requirements (see French Authorities' Application at 68).
    \148\ MFC articles L. 533-10.II (1) through (3) and (6) through
(9), L. 533-10.III, L. 533-24 and L. 533-24-1.
    \149\ MFC articles L. 511-51, L. 511-52.I, L. 511-53, L. 511-58,
L. 511-59, L. 511-67 through L. 511-69, L. 511-71 through L. 511-85,
L. 511-102, R. 511-18-2 and R. 511-16-3.
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    In deciding to make a positive substituted compliance determination
for French and EU internal risk management requirements, the Commission
considers that the Order's condition requiring a Covered Entity to be
subject to and comply with all of the French and EU internal risk
management requirements listed in paragraph (b)(1) of the Order help to
produce regulatory outcomes comparable to Exchange Act internal risk
management requirements. The Commission recognizes that some of the
French and EU requirements related to risk management follow a more
granular approach than the high-level approach of Exchange Act internal
risk management requirements, but these French and EU requirements,
taken as a whole, are crafted to promote a Covered Entity's risk
management. Within the requisite outcomes-oriented approach for
analyzing comparability, the Commission concludes that a Covered
Entity's failure to comply with any of those French and EU internal
risk management requirements would be inconsistent with a Covered
Entity's obligation under Exchange Act internal risk management
requirements.\150\ In

contrast to the assertion that such provisions ``go beyond the general
requirements of Exchange Act section 15(j)(2),'' \151\ the Commission
concludes that compliance with the full set of French and EU internal
risk management requirements listed in paragraph (b)(1) of the Order
would promote comparable regulatory outcomes.
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    \150\ One commenter recognized that the application addressed
CRD requirements in connection with internal risk management
requirements, but expressed the view that those discussions address
comparability in connection with Exchange Act rule 18a-1(f),
relating to risk management systems in connection with capital
requirements. See SIFMA Letter I at 5 n.9. Regardless of applicants'
rationale for citing those CRD requirements as supporting
comparability, the Commission believes that the appropriate
comparability analysis generally should seek to compare regulatory
regimes taken as a whole, and that a Covered Entity's failure to
comply with the applicable CRD risk management system requirements
would not lead to a regulatory outcome consistent with that
established by Exchange Act internal risk management requirements.
    \151\ SIFMA Letter II at Appendix A.
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2. Trade Acknowledgement and Verification
    Under the proposed Order, substituted compliance in connection with
the Exchange Act rule 15Fi-2 trade acknowledgment and verification
requirement would have been conditioned on firms having to comply with
relevant confirmation requirements under MiFID and EMIR. Commenters
expressed the view that the conditions should not incorporate MiFID
confirmation provisions, based in part on the view that EMIR
requirements standing alone would be sufficient to produce regulatory
outcomes comparable to those under Exchange Act trade acknowledgement
and verification requirements.\152\ One commenter further stated that
conditioning substituted compliance on SBS Entities having to comply