[Federal Register Volume 86, Number 206 (Thursday, October 28, 2021)]
[Notices]
[Pages 59797-59824]
[FR Doc No: 2021-23445]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93411; File No. S7-08-21]

Amended and Restated 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 Federal Republic of Germany;
Amended Orders Addressing Non-U.S. Security-Based Swap Entities Subject
to Regulation in the French Republic or the United Kingdom; and Order
Extending the Time To Meet Certain Conditions Relating to Capital and
Margin

October 22, 2021.

I. Overview

A. Amended and Restated Order

    Pursuant to Securities Exchange Act of 1934 (``Exchange Act'') rule
3a71-6, in December 2020, the Securities and Exchange Commission
(``Commission'') issued a substituted compliance order \1\ providing
that security-based swap dealers and major security-based swap
participants (``SBS Entities'') subject to regulation in the Federal
Republic of Germany (``Germany'') conditionally may satisfy certain
requirements under the Exchange Act related to risk control, internal
supervision and compliance, counterparty protection, and books and
records by complying with comparable German and European Union (``EU'')
requirements.\2\ The German Order did not address substituted
compliance for Exchange Act capital and margin requirements applicable
to SBS Entities without a prudential regulator.
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    \1\ See Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR
85686 (Dec. 29, 2020) (``German Order'').
    \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; ``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
``books and records'' includes requirements related to making and
keeping current certain prescribed records, preservation of records,
reporting, notification and securities counts.
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    In August 2021, the Bundesanstalt f[uuml]r
Finanzdienstleistungsaufsicht (``BaFin'') submitted an amended
``substituted compliance'' application (``Amended Application'')
requesting that the Commission amend the existing German Order \3\ to
address nonbank capital and margin requirements.\4\ The Amended
Application incorporated comparability analyses between the relevant
requirements in Exchange Act section 15F and the rules and regulations
thereunder for which BaFin is seeking substituted compliance
determinations and applicable German and EU law, as well as information
regarding German supervisory and enforcement frameworks.
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    \3\ See Letter from Thorsten P[ouml]tzsch, Chief Executive
Director of BaFin's Resolution Sector, BaFin, to Vanessa Countryman,
Secretary, Commission, dated August 12, 2021. The Amended
Application is available on the Commission's website at: https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap.
    \4\ ``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. More specifically, the Amended Application requested that
the Commission extend the German Order to also provide for
substituted compliance for the capital requirements of Exchange Act
section 15F(e) and Exchange Act rules 18a-1 through 18a-1d
(collectively, ``Exchange Act Rule 18a-1''), the margin requirements
of Exchange Act section 15F(e) and Exchange Act rule 18a-3, and
related recordkeeping, reporting, notification, and securities count
requirements.
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    On August 12, 2021, the Commission issued a notice of the Amended
Application, accompanied by a proposed amended and restated substituted
compliance order (the ``proposed Amended Order'').\5\ In addition to
addressing margin and capital requirements, the proposed Amended Order
proposed changes the Commission preliminarily viewed as necessary to
align the German Order with substituted compliance orders for SBS
Entities subject to regulation in the French Republic (``France'') \6\
and the United Kingdom (``UK'') \7\ which the

Commission finalized after issuing the German Order.\8\
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    \5\ See Exchange Act Release No. 92647 (Aug. 12, 2021), 86 FR
46500 (Aug. 18, 2021) (``German Substituted Compliance Notice and
Proposed Amended Order'').
    \6\ See Exchange Act Release No. 92484 (July 23, 2021), 86 FR
41612 (Aug. 2, 2021) (``French Order''). See also Exchange Act
Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020)
(``French Substituted Compliance Notice and Proposed Order'');
Exchange Act Release No. 91477 (Apr. 5, 2021), 86 FR 18341 (Apr. 8,
2021) (``French Reopening Release'').
    \7\ See Exchange Act Release No. 92529 (July 30, 2021), 86 FR
43318 (Aug. 6, 2021) (``UK Order''). See also Exchange Act Release
No. 91476 (Apr. 5, 2021), 86 FR 18378 (Apr. 8, 2021) (``UK
Substituted Compliance Notice and Proposed Order'').
    \8\ In addition, the Commission had the benefit of the public
comment on the French Substituted Compliance Notice and Proposed
Order, the French Reopening Release and the UK Substituted
Compliance Notice and Proposed Order, some of which also referenced
the German Order. See German Substituted Compliance Notice and
Proposed Amended Order, 86 FR 46500 n.6.
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    As discussed below, the Commission is adopting an Amended Order
that has been modified from the proposal in certain respects to address
commenter concerns and to make clarifying changes.

B. Amendments to French and UK Orders

    The French and UK Orders include an additional capital condition
that is designed to ensure comparable regulatory outcomes between
Exchange Act capital requirements and French and UK capital
requirements, respectively.\9\ The Commission proposed an identical
additional capital condition with respect to non-U.S. security-based
swap dealers subject to regulation in Germany applying substituted
compliance with respect to Exchange Act capital requirements.\10\ As
discussed in part V, the Commission is modifying this additional
capital condition in the Amended Order. These modifications respond to
comments that were also directed to the capital conditions in the
French and UK Orders.\11\ The Commission is now issuing an order to
amend the French and UK Orders to make the additional capital
conditions in those orders consistent with the additional capital
condition in the Amended Order.
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    \9\ See French Order, 86 FR 41630-36, 41659; UK Order, 86 FR
43338-44, 43372.
    \10\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505-09, 46528-29.
    \11\ See Letter from Kyle Brandon, Managing Director, Head of
Derivatives Policy, SIFMA (Sept. 13, 2021) (``SIFMA II Letter'') at
2. Comments may be found on the Commission's website at: http://www.sec.gov/comments/s7-08-21/s70821.htm.
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    In addition, in response to one commenter's concern regarding
general condition (a)(5) as discussed in parts II.B and IV below,\12\
which is relevant to French and UK Orders as well, the Commission is
amending the French and UK Orders.
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    \12\ See SIFMA II Letter at 3.
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C. Order Extending Time To Meet Certain Capital Conditions

    In addition, as discussed in part V, the Commission is extending
until January 1, 2022 the time to meet certain additional conditions to
applying substituted compliance to Exchange Act capital and margin
requirements in the Amended Order, the French Order, and the UK Order.
The Commission also is extending the compliance date for Exchange Act
capital requirements for a certain type of security-based swap dealer
located in Germany.

II. Substituted Compliance Framework, Scope of Substituted Compliance,
and Prerequisites

A. Substituted Compliance Framework and Purpose

    As the Commission discussed when it finalized the German Order,\13\
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.\14\ 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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    \13\ See German Order, 85 FR 85687. See also, e.g., French
Substituted Compliance Notice and Proposed Order, 85 FR 85721.
    \14\ 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,\15\ but is not
available in connection with antifraud prohibitions and certain other
requirements under the Federal securities laws.\16\ As stated in the
German Order, SBS Entities in Germany accordingly must comply directly
with those requirements notwithstanding the availability of substituted
compliance for other requirements.\17\
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    \15\ 17 CFR 240.3a71-6(d).
    \16\ Exchange Act Release No. 90378 (Nov. 9, 2020), 85 FR 72726,
72727 nn.11 & 12 (Nov. 13, 2020)(``German Substituted Compliance
Notice and Proposed Order'')(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).
    \17\ See German Order, 85 FR 85687.
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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.\18\
In practice, substituted compliance may be expected to help SBS
Entities leverage their existing systems and practices to comply with
relevant Exchange Act requirements in conjunction with their compliance
with relevant foreign requirements. Market participants began to count
security-based swap transactions toward the thresholds for registration
with the Commission as an SBS Entity on August 6, 2021, and the first
security-based swap dealers and major security-based swap participants
are required to be registered with the Commission by November 1, 2021
and December 1, 2021, respectively.\19\ Substituted compliance should
assist relevant non-U.S. security-based swap market participants in
preparing for registration.
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    \18\ See generally Business Conduct Adopting Release, 81 FR
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'').
    \19\ 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

    BaFin, in both its initial application and its Amended Application,
sought substituted compliance for SBS Entities subject to regulation in
Germany for entity-level and transaction-level Exchange Act
requirements. For entity-level Exchange Act requirements,\20\ a

Covered Entity (as such term in defined in the Amended Order) \21\ must
choose either to apply substituted compliance pursuant to the proposed
Amended Order with respect to all security-based swap business subject
to the relevant German and EU requirements or to comply directly with
the Exchange Act with respect to all such business; a Covered Entity
may not choose to apply substituted compliance for some of the business
subject to the relevant German or EU requirements and comply directly
with the Exchange Act for another part of the business that is subject
to the relevant German and EU requirements. Additionally, for entity-
level Exchange Act requirements, if the Covered Entity also has
security-based swap business that is not subject to the relevant German
requirements, the Covered Entity must either comply directly with the
Exchange Act for that business or comply with the terms of another
applicable substituted compliance order.\22\ For transaction-level
Exchange Act requirements,\23\ 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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    \20\ 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 30064.
    \21\ See para. (g)(1)(iii) of the Amended Order.
    \22\ In the context of the EMIR counterparties condition in
paragraph (a)(5) of the proposed Amended Order, a Covered Entity
would have to choose: (1) To apply substituted compliance pursuant
to the proposed Amended 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.
    \23\ Transaction-level requirements encompass business conduct
requirements for the protection of counterparties, and additional
provisions for the protection of special entities. See Business
Conduct Adopting Release, 81 FR 30065.
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    One commenter requested that the Commission make an exception to
its approach to substituted compliance for entity-level requirements
when a Covered Entity enters into a security-based swap with a
counterparty that is not subject to EMIR.\24\ The commenter asked that
the Commission permit the Covered Entity, in those circumstances, to
choose either to apply the relevant EMIR-related requirements to that
counterparty as though it were covered by EMIR or to comply directly
with the relevant Exchange Act requirement. In effect, the commenter
asked that Covered Entities be permitted to treat entity-level
requirements as transaction-level requirements when the Covered Entity
enters into a security-based swap with a counterparty that is not
subject to EMIR. The commenter made a related request with respect to
counterparties not subject to EMIR, which the Commission addresses in
part IV.B below.
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    \24\ See SIFMA II Letter at 3.
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    The Amended Order requires a Covered Entity to be subject to and
comply with EMIR-related requirements if it applies substituted
compliance for Exchange Act entity-level requirements related to
internal risk management, trade acknowledgment and verification,
portfolio reconciliation and dispute resolution, portfolio compression,
trading relationship documentation, internal supervision, chief
compliance officers, recordkeeping, and securities count requirements.
When the Commission adopted these requirements, it determined that SBS
Entities should apply them at an entity level.\25\ The Commission
believes that allowing non-U.S. SBS Entities to follow a different
approach to these entity-level requirements for purposes of the Amended
Order would undermine its decision to require all SBS Entities to apply
these requirements at an entity level and create unwarranted
disparities in the requirements applicable to SBS Entities. In choosing
to use substituted compliance for an Exchange Act entity-level
requirement, the Covered Entity is choosing to comply with the relevant
conditions of the Amended Order. Any Covered Entity that wishes to
avoid complying with the relevant conditions of the Amended Order, such
as applying EMIR-related requirements to all of its business that
satisfies all conditions of the Amended Order, may do so by choosing
not to use substituted compliance for the relevant entity-level
requirements.
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    \25\ See note 20, supra.
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    For these reasons, and for the reasons discussed in part IV.B
below, the Commission is not making an exception to its approach to
substituted compliance for entity-level requirements when a Covered
Entity enters into a security-based swap with a counterparty that is
not subject to EMIR. Commenters did not address the proposed approach
to substituted compliance for transaction-level requirements. The
Commission accordingly is issuing the Amended Order with the proposed
approach to entity-level and transaction-level requirements.

C. Specific Prerequisites

1. Covered Entity
    Under the German Order, the definition of ``Covered Entity''
specified which entities could make use of substituted compliance.\26\
In connection with its Amended Application related to capital and
margin requirements, BaFin requested substituted compliance with
respect to investment firms and credit institutions that are authorized
by BaFin to provide investment services or perform investment
activities in Germany and are supervised by the European Central Bank
(``ECB'') as significant institutions (or had a licensing application
pending as of August 12, 2021).\27\ In order to ensure that the firms
that would rely on the proposed Amended Order are subject to the
relevant German and EU requirements and oversight, the proposed
definition was revised in accordance with BaFin's request.\28\
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    \26\ The German Order defined a ``Covered Entity'' as an entity
that (i) is an SBS Entity registered with the Commission; (ii) is
not a ``U.S. person,'' as that term is defined in Exchange Act rule
3a71-3(a)(4); and (iii) is an investment firm or credit institution
authorized by BaFin to provide investment services or perform
investment activities in Germany. See para. (f)(1) of the German
Order, 85 FR 85700.
    \27\ See Amended Application at 1. The Amended Application
requested that firms that had a licensing application pending with
the ECB as of the date of the Amended Application be included within
the definition of Covered Entity.
    \28\ See para. (g)(1)(iii) of the proposed Amended Order; see
also German Substituted Compliance Notice and Proposed Amended
Order, 86 FR 46533.
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    Commenters did not address the amended ``Covered Entity''
definition, and the Commission is issuing the definition as
proposed.\29\ Substituted compliance accordingly is available only to
Covered Entities that are subject to the relevant German and EU
regulatory requirements and oversight.
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    \29\ See para. (g)(1)(iii) of the Amended Order.
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2. Comparability of Regulatory Outcomes
    As discussed in the German Order and earlier in the German
Substituted Compliance Notice and Proposed Order,\30\ Rule 3a71-6
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.\31\ As noted upon adoption of the German Order and
subsequent substituted compliance orders, 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.'' \32\
The Commission has concluded that this comparability prerequisite is
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.\33\
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    \30\ See German Order, 85 FR 85687; German Substituted
Compliance Notice and Proposed Order, 85 FR 72727.
    \31\ Exchange Act rule 3a71-6(a)(2)(i).
    \32\ See German Order; 85 FR 85687; French Order, 86 FR 41613;
UK Order, 86 FR 43319. See also Business Conduct Adopting Release,
81 FR 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 30079 (footnote omitted).
    \33\ See German Order, 85 FR 85687.
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3. 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.'' \34\ With the
proposed expansion of substituted compliance to nonbank capital and
margin requirements, BaFin and the ECB share responsibility for
supervising compliance with the provisions of EU and German law
applicable to the Amended Order. Accordingly, the Commission entered
into relevant memoranda of understanding with BaFin on December 20,
2020 \35\ and with the ECB on August 16, 2021.\36\ Both memoranda of
understanding must be in place before Covered Entities may use
substituted compliance to satisfy obligations under the Exchange
Act.\37\
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    \34\ Exchange Act rule 3a71-6(a)(2)(ii).
    \35\ On December 18, 2020, the Commission and BaFin 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.
    \36\ On August 16, 2021, the Commission and the ECB entered into
a memorandum of understanding setting 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 serves 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. A copy
of the memorandum of understanding is available 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.
    \37\ See paras. (a)(7) and (8) of the Amended Order.
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4. ``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.'' \38\ The Commission
found that BaFin had satisfied this requirement in connection with the
German Order when noticing the application.\39\ In addition, in
proposing the Amended Order, the Commission stated that BaFin had again
satisfied this prerequisite in the Commission's preliminary view,
taking into account information and representations that BaFin provided
regarding certain German 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.\40\ The
Commission received no comments on this preliminary view and has not
changed its view.
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    \38\ See Exchange Act rule 3a71-6(c)(3).
    \39\ See German Substituted Compliance Notice and Proposed
Order, 85 FR 72728. In adopting the German Order, the Commission
reiterated its view with regard to adequate assurances. See German
Order, 85 FR 85696.
    \40\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46522. See also Amended Application at 2
(providing ``adequate assurances'' regarding access to books and
records and on-site inspections and examinations).
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III. Amended and Additional General Conditions

    The original German Order incorporated a number of general
conditions and other prerequisites to help ensure that the relevant
German 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.\41\ In the German Substituted Compliance Notice and
Proposed Amended Order, the Commission proposed to amend certain of the
general conditions and prerequisites and to include additional new
conditions. The proposed Amended Order would address BaFin's request to
extend the German Order to provide substituted compliance for nonbank
capital and margin requirements and also provide clarity and
consistency with the French Order and the UK Order as described more
fully in this part III below.
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    \41\ See paras. (a)(1) through (7) of the German Order, 85 FR
85698.
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A. Revision of General Condition Regarding Notice

1. Proposed Approach
    The German Order included a general condition that Covered Entities
must provide the Commission with written notice of their intent to rely
on substituted compliance.\42\ To promote clarity in the notice
regarding the Covered Entity's intended use of substituted compliance
and for consistency with the Commission's other substituted compliance
orders,\43\ the Commission proposed to amend the general condition to
require that the notice identify each specific substituted compliance
determination for which the Covered Entity intends to apply substituted
compliance. The proposed Amended Order also would require the Covered
Entity to amend the notice if it modifies the scope of its reliance on
substituted compliance and to send the notice to the Commission in the
manner

specified on the Commission's website.\44\
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    \42\ See para. (a)(6) of the German Order.
    \43\ See French Order, 86 FR 41685; UK Order, 86 FR 43371. See
also German Substituted Compliance Notice and Proposed Amended
Order, 86 FR 46501 n.13.
    \44\ See para. (a)(9) of the proposed Amended Order.
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2. Commenter Views and Final Provisions
    Commenters did not address the revision to the notice requirement
in paragraph (a)(9) of the proposed Amended Order for the Covered
Entity to notify the Commission in writing of its intent to rely on
substituted compliance and the Commission is issuing this requirement
as proposed.\45\
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    \45\ See para. (a)(9) of the Amended Order.
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B. Additional Condition Regarding Notification of Requirements Related
to Changes in Capital

1. Proposed Approach
    The Commission proposed to add a general condition that Covered
Entities with a prudential regulator relying on substituted compliance
pursuant to the proposed Amended Order must apply substituted
compliance with respect to the requirements of Exchange Act rule 18a-
8(c) and the requirements of Exchange Act rule 18a-8(h) as applied to
Exchange Act rule 18a-8(c).\46\ 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 on same day by transmitting a copy to the Commission of
the notice of adjustment of reported capital category in accordance
with Exchange Act rule 18a-8(h).\47\ 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.\48\
While Exchange Act rule 18a-8(c) is not linked to an Exchange Act
capital requirement, it is linked to capital requirements in the U.S.
promulgated by the prudential regulators. In its application, BaFin
cited several German and EU provisions as providing similar outcomes to
the notifications requirements of Exchange Act Rule 18a-8.\49\ This
proposed general condition was designed to clarify that a prudentially
regulated Covered Entity must provide the Commission with copies of any
notifications regarding changes in the Covered Entity's capital
situation required by German or EU law. The intent was to align the
notification requirement with the German and EU capital requirements
applicable to the Covered Entity.
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    \46\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46502; para. (a)(11) of the proposed Amended
Order.
    \47\ 17 CFR 240.18a-8(c).
    \48\ See 240.18a-8(h).
    \49\ See KWG section 25a(1) sentence 6 no. 3, and FinDAG section
4d.
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2. Commenter Views and Final Provisions
    The Commission did not receive any comments on this proposed
amendment to the German Order and the Amended Order includes this
provision.\50\
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    \50\ See para. (a)(11) of the Amended Order.
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C. Amendment to General Condition Regarding EU Cross-Border Matters

1. Proposed Approach
    The Commission proposed to modify the German Order's general
condition related to EU cross-border matters. Substituted compliance
under the German Order in part is predicated on BaFin being responsible
for the supervision and enforcement of Covered Entities in connection
with certain MiFID provisions that constitute conditions to individual
substituted compliance provisions.\51\ That general condition is
intended to help ensure that the prerequisites to substituted
compliance with respect to supervision and enforcement are satisfied in
practice when MiFID allocates responsibility for ensuring compliance to
another EU Member State. Because MiFIR is subject to similar allocation
provisions,\52\ the Commission proposed to incorporate references to
MiFIR requirements into the general condition.\53\ This change would be
consistent with the French Order.\54\
---------------------------------------------------------------------------

    \51\ See part IX, infra.
    \52\ See MiFID art. 35(8) (in part allocating responsibility
over MiFIR articles 14 to 26 to competent authorities in member
states in which branches are located).
    \53\ See para. (a)(10) of the proposed Amended Order.
    \54\ See para. (a)(10) of the French Order.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    The Commission did not receive any comments on this proposed
revision to the German Order's general condition related to EU cross-
border matters and is issuing the revision as proposed.\55\
---------------------------------------------------------------------------

    \55\ See para. (a)(10) of the Amended Order.
---------------------------------------------------------------------------

D. Additional MOU-Related General Condition

1. Proposed Approach
    In light of the Amended Application addressing capital and margin
requirements for nonbanks, the Commission also proposed to add a new
general condition that would predicate substituted compliance on the
presence of a supervisory and enforcement memorandum of understanding
between the Commission and the ECB, pertaining to information owned by
the ECB.\56\ The Commission stated its preliminary view that access to
this ECB information will assist the Commission's effective oversight
of Covered Entities that use substituted compliance in connection with
capital and margin requirements. The Commission and the ECB entered
into a MOU addressing supervisory and enforcement cooperation related
to substituted compliance on August 16, 2021.\57\
---------------------------------------------------------------------------

    \56\ See para. (a)(8) of the proposed Amended Order.
    \57\ See note 36, supra.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    The Commission did not receive any comments on this new proposed
general condition to the German Order requiring a supervisory and
enforcement memorandum of understanding between the Commission and the
ECB and is issuing the condition as proposed.\58\
---------------------------------------------------------------------------

    \58\ See para. (a)(8) of the Amended Order.
---------------------------------------------------------------------------

IV. Changes to Risk Control and Internal Supervision Requirements

A. Changes to Trade Acknowledgement and Verification and Trading
Relationship Documentation

1. Proposed Approach
    Under the original German Order, substituted compliance for trade
acknowledgement and verification and for trading relationship
documentation in part requires that a Covered Entity comply with
certain requirements under MiFID (plus the German implementation of
MiFID) and with certain requirements under EMIR.\59\ Commenters to the
French Order expressed concern that the interplay between those
particular MiFID conditions and a separate EU cross-border condition to
the Order in practice would preclude the availability of substituted
compliance for entities that have branches in other EU Member
States.\60\ After careful consideration and

finalization of the French Order, the Commission proposed to amend the
German Order to address those concerns and for consistency with the
French Order. The proposed Amended Order revised the conditions related
to trade acknowledgment and verification requirements, and to trading
relationship documentation, by removing the MiFID-related conditions
and instead relying solely on EMIR conditions to establish
comparability for those requirements.\61\ The Commission believes that
the Amended Order's EU cross-border condition provides an important
safeguard to help ensure that firms that avail themselves of
substituted compliance are subject to appropriate regulatory
supervision and enforcement.
---------------------------------------------------------------------------

    \59\ See paras. (b)(2) and (5) of the German Order.
    \60\ See Letter from Kyle Brandon, Managing Director, Head of
Derivatives Policy, SIFMA (Jan. 25, 2021)(``SIFMA Letter I'')
(commenting on the French Substituted Compliance Notice and Proposed
Order but stating that the concerns applied equally to the German
Order). SIFMA Letter I can be found on the Commission's website at:
http://www.sec.gov/comments/s7-22-20/s72220.htm. In relevant part,
the cross-border condition of paragraph (a)(10) of the proposed
Amended Order stated that if responsibility for ensuring compliance
with any provision of MiFID or MiFIR (or the EU or German
implementing requirement) that is a condition for substituted
compliance is allocated to an authority in a Member State of the EU
in whose territory a Covered Entity provides a service, BaFin must
be the authority responsible for supervision and enforcement of that
provision. In practice (pursuant to MiFID article 35), this
allocation of oversight applies to requirements pursuant to MiFID
article 25 (``assessment of suitability and appropriateness and
reporting to clients'') as well as certain other MiFID provisions
not relevant here. In the commenter's view, application of those
MiFID article 25 conditions in connection with trade acknowledgment
and verification requirements and trading relationship documentation
requirements would ``in practice lead to an untenable patchwork of
substituted compliance.'' See SIFMA Letter I at 3. The commenter
further states that SBS Entities ``operating branches throughout the
EU'' would not be able to avail themselves of substituted compliance
in connection with these requirements ``unless authorities or
regulated SBS Entities in every or nearly every one of the 27 EU
Member States submit their own substituted compliance applications
covering local branches of SBS Entities, and the Commission reviews
and responds to those applications and enters into memoranda of
understanding . . . with authorities in each of these Member
States.'' That problem does not arise in connection with
requirements under EMIR, which does not allocate oversight of a
German entity's compliance to authorities in other EU Member States.
That problem also does not arise in connection with other
requirements under MiFID (e.g., MiFID art. 16 organizational
provisions) that are not subject to the same allocation of
oversight.
    \61\ See paras. (b)(2) and (5) of the proposed Amended Order.
---------------------------------------------------------------------------

    Consistent with French Order,\62\ the proposed Amended Order
removed the MiFID conditions to substituted compliance for trade
acknowledgement and verification and trade relationship
documentation.\63\ In addition, the Commission proposed to add the
confirmation provisions of EMIR article 11(1)(a) and EMIR RTS article
12 as conditions to substituted compliance for trade relationship
documentation.\64\ The Commission preliminarily believed that the EMIR
provisions related condition described below, were sufficient for
regulatory comparability and recognized that in practice the interplay
between the EU cross-border conditions and MiFID documentation
provisions may limit the use of substituted compliance and its
associated regulatory benefits.\65\ To ensure that there would be no
opportunity for gaps that may prevent the EMIR provisions in practice
from producing outcomes consistent with those of the Exchange Act
rules, that preliminary view, however, required the addition of the
EMIR-related conditions in paragraphs (a)(5) and (a)(6) of the proposed
Amended Order and described below.
---------------------------------------------------------------------------

    \62\ See para. (b)(2) of the French Order.
    \63\ See paras. (b)(2) and (5) of the proposed Amended Order.
    \64\ See para. (b)(5) of the proposed Amended Order.
    \65\ In addition, these proposed changes are consistent with the
French Order. See paras. (a)(5) and (a)(6) of the French Order.
---------------------------------------------------------------------------

2. Commenter's Views and Final Provisions
    The Commission did not receive any comments on the proposed
revisions to the German Order's conditions related to trade
acknowledgment and verification requirements, and trading relationship
documentation, to remove the MiFID-related conditions and rely solely
on EMIR conditions to establish comparability for those requirements,
and issues those revisions as proposed and consistent with the French
Order.\66\ This decision takes into account the discussion below
related to the EMIR-related general conditions and the comment the
Commission received on the EMIR-related general condition regarding
counterparty status.
---------------------------------------------------------------------------

    \66\ See paras. (b)(2) and (b)(5) of the Amended Order.
---------------------------------------------------------------------------

B. Addition of EMIR-Related General Conditions

1. Proposed Approach
    The heightened reliance on the EMIR conditions to establish
comparability in connection with trade acknowledgment and verification
and trading relationship documentation requires additional safeguards
to help ensure that there will be no opportunity for gaps that may
prevent the EMIR provisions in practice from producing outcomes
consistent with those of the Exchange Act rules. In response, the
proposed Amended Order included two additional EMIR-related general
conditions. The first such condition provides that the Covered Entity
must comply with the applicable EMIR-related condition of the proposed
Amended Order as if the counterparty were the type of counterparty that
would trigger the application of the relevant EMIR-based requirements.
If the Covered Entity reasonably determines that its counterparty would
be a financial counterparty \67\ if not for the counterparty's location
and/or lack of regulatory authorization in the EU, the condition
further requires the Covered Entity to treat the counterparty as if the
counterparty were a financial counterparty, rather than as another type
of counterparty to which the relevant EMIR-based requirements may
apply.\68\
---------------------------------------------------------------------------

    \67\ EMIR article 2(8) defines ``financial counterparty'' to
encompass investment firms, credit institutions, insurers and
certain other types of businesses that have been authorized in
accordance with EU law. Under EMIR, the distinction between
financial counterparties and other types of counterparties such as
non-financial counterparties is manifested, inter alia, in
connection with confirmation timing standards. See EMIR RTS article
12.
    \68\ See para. (a)(5) of the proposed Amended Order.
---------------------------------------------------------------------------

    The second such condition would require that, for each part of the
Order that requires compliance with EMIR-related requirements, either:
(i) The relevant security-based swap is an ``OTC derivative'' or ``OTC
derivative contract,'' as defined in EMIR article 2(7), that has not
been cleared by a central counterparty and otherwise is subject to the
provisions of EMIR article 11, EMIR RTS articles 11 through 15, and
EMIR Margin RTS article 2; or (ii) the relevant security-based swap has
been cleared by a central counterparty that has been authorized or
recognized to clear derivatives contracts by a relevant authority in
the EU.\69\ This second condition would help ensure that substituted
compliance is available in connection with an instrument that has been
cleared at an EU-authorized or EU-recognized central counterparty (and
hence is not within the Exchange Act rule's exclusion but also is not
subject to relevant EMIR requirements).
---------------------------------------------------------------------------

    \69\ See para. (a)(6) of the proposed Amended Order. Prong (i)
to this proposed condition would be satisfied by uncleared
instruments that fall within the ambit of the EMIR requirements at
issue. The alternative prong (ii) would be satisfied when
instruments fall outside the ambit of those EMIR requirements by
virtue of being cleared in the EU, akin to the Exchange Act rules'
exclusion for security-based swaps cleared by clearing agencies
registered with the Commission.
---------------------------------------------------------------------------

2. Commenter's Views and Final Provisions
    One commenter stated that the proposed additional EMIR-related
condition related to counterparty status effectively would override
exemptions and exclusions from EMIR for certain public sector
counterparties, such as multilateral development banks, and would
expand the application of EMIR to counterparties who are not
``undertakings,'' such as natural persons.\70\ The commenter noted that

compliance with the condition would require the Covered Entity to
``assess whether these counterparties who are not subject to EMIR would
be so subject as if it were the type of counterparty specified by EMIR
as well as, in many cases, enter into documentation with those
counterparties compliant with EMIR.'' \71\ The commenter noted that
these counterparties would be confused why an order of the Commission
``now deprives them of an exception or exemption under EU law that has
for some time applied to them'' and would be reluctant to enter into
new documentation to enable a Covered Entity to satisfy the
Commission's substituted compliance order.\72\ To address this
reluctance, the commenter requested a six-month transition period until
May 1, 2022, before a Covered Entity will be required to comply with
the EMIR counterparty general condition in paragraph (a)(5) of the
Amended Order.
---------------------------------------------------------------------------

    \70\ See SIFMA II Letter at 2.
    \71\ See SIFMA II Letter at 3.
    \72\ See SIFMA II Letter at 3.
---------------------------------------------------------------------------

    The Commission proposed revisions to the conditions to trade
acknowledgement and verification and trading relationship documentation
substituted compliance to remove the MiFID conditions and rely entirely
on EMIR requirements in response to commenters' concerns that the
relevant MiFID conditions in the German Order would preclude the
availability of substituted compliance for entities that have branches
in EU Member States.\73\ The Commission proposed to amend the German
Order to address those concerns and for consistency with French Order,
but only with the addition of the EMIR-related counterparty condition.
By requiring a Covered Entity to treat its counterparty as a type of
counterparty that would trigger the application of the relevant EMIR-
based requirements, the condition will require the Covered Entity to
perform the relevant obligations pursuant to those EMIR-based
requirements and thus act in a way that is comparable to Exchange Act
requirements. Absent the condition, the Commission would not find
comparability with regard to the categories of counterparties, such as
U.S. persons and natural persons, to which EMIR is not applicable for
the entity-level requirements and, accordingly, would not have been
able to make a positive substituted compliance determination for those
entity-level requirements. The EMIR-related conditions were intended to
help ensure that there will be no opportunity for gaps that may prevent
the EMIR provisions in practice from producing outcomes consistent with
those of the Exchange Act rules.\74\
---------------------------------------------------------------------------

    \73\ See German Substituted Compliance Order and Proposed
Amended Order, 86 FR 46503.
    \74\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46503.
---------------------------------------------------------------------------

    The Commission, however, did not intend for the condition to
require compliance with EMIR under circumstances where neither EMIR nor
the Exchange Act would apply. As such, the Commission is modifying the
EMIR counterparties general condition to clarify that this condition
applies only to the extent that an Exchange Act section or rule cited
in the relevant part of the Amended Order applies to the security-based
swap activities with that counterparty.\75\ To promote consistency in
the use of substituted compliance across other jurisdictions in which
EMIR applies, the Commission also is modifying the same condition in
the French Order and the UK Order.
---------------------------------------------------------------------------

    \75\ See para. (a)(5)(iii) of the Amended Order.
---------------------------------------------------------------------------

    Although the Commission is not modifying the condition to the
extent requested by the commenter, the Commission is not providing an
additional transition period at this time. 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.
This date has been known to potential SBS Entities since February 4,
2020.\76\ In areas where the Commission makes a positive substituted
compliance determination under the Amended 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 later of the
registration compliance date or the date when they register with the
Commission. Commission staff are available to discuss implementation
issues with Covered Entities during the implementation period.
---------------------------------------------------------------------------

    \76\ See Exchange Act Release No. 87780 (Dec. 18, 2019), 85 FR
6270, 6345-46 (Feb. 4, 2020).
---------------------------------------------------------------------------

    The same commenter asked that the Commission confirm that, when a
Covered Entity enters into a security-based swap with a counterparty
that is not subject to EMIR, the Covered Entity may choose either to
apply the relevant EMIR-related requirements to that counterparty as
though it were covered by EMIR or to comply directly with the relevant
Exchange Act requirement.\77\ As discussed in part II.B above, the
Commission is not providing the requested relief.
---------------------------------------------------------------------------

    \77\ See SIFMA II Letter at 3.
---------------------------------------------------------------------------

    The Commission did not receive any comments on the proposed
addition of the general condition in paragraph (a)(6) of the Amended
Order related to the security-based swap's status as an ``OTC
derivative'' or ``OTC derivate contract'' under EMIR. The Commission is
issuing this additional general condition with a clarification that the
condition applies only if the relevant EMIR-based requirement applies
to OTC derivatives that have not been cleared by a central
counterparty.\78\ The Commission is making this clarification because
some provisions of EMIR cited in the Amended Order, such as EMIR
articles 39(4) and (5), are not limited in their application to non-
centrally cleared OTC derivatives. The Commission also is clarifying
that the condition applies whenever the Amended Order requires the
application of, and the Covered Entity's compliance with EMIR, EMIR RTS
EMIR Margin RTS and/or other EU requirements adopted pursuant to those
provisions. These clarifications already appear in a similar condition
in the UK Order, and, to promote consistency in the use of substituted
compliance across other jurisdictions in which EMIR applies, the
Commission also is modifying the same condition in the French Order.
---------------------------------------------------------------------------

    \78\ See para. (a)(6) of the Amended Order.
---------------------------------------------------------------------------

C. Revisions to Internal Risk Management and Internal Supervision

1. Proposed Approach
    The Commission also proposed to incorporate--as part of the
relevant conditions in paragraph (b)(1) of the proposed Amended Order
relating to internal risk management--MiFID articles 16 and 23 and the
related implementing provisions, MiFID Org Reg articles 25 through 37,
72 through 76 and Annex IV, as well as CRD articles 88(1), 91(1)-(2)
and (7)-(9) and the related implementing provisions.\79\ These
provisions address additional aspects of a Covered Entity's management
of the risks posed by internal governance and organization, business
operations, conflicts of interest with and between clients, and senior
staff remuneration policies and were part of the Commission's
comparability determination for entities subject to regulation in
France. The Commission also proposed to incorporate CRR articles 286-88
and 293 and EMIR Margin RTS article 2 to the conditions of paragraph
(d)(3) of the proposed Amended Order relating to internal

supervision.\80\ These provisions relate to counterparty credit risk
and risk management generally and collateral-related risk management
procedures and were also part of the Commission's comparability
analysis in the French Order.\81\ Also consistent with the French
Order, the Commission proposed to delete CRD article 93 and the related
implementing provisions from both paragraph (d)(1) and (d)(3), as those
provisions relate to remuneration policies for institutions that
benefit from exceptional (German and EU) government intervention.\82\
---------------------------------------------------------------------------

    \79\ See para. (b)(1) of the proposed Amended Order.
    \80\ See para. (d)(3) of the proposed Amended Order.
    \81\ See paras. (b)(1) and (d)(3) of the French Order.
    \82\ See paras. (b)(1) and (d)(3) of the proposed Amended Order.
---------------------------------------------------------------------------

2. Commenter Views and Final Provisions
    The Commission did not receive any comments on the proposed
revisions to paragraphs (b)(1) and (d)(3) of the German Order related
to the inclusion of additional conditions and to paragraphs (d)(1) and
(d)(3) of the German Order related to the deletion of CRD article 93
and implementing provisions. The Commission issues these revisions to
the German Order as proposed.\83\
---------------------------------------------------------------------------

    \83\ See paras. (b)(1), (d)(1) and (d)(3) of the Amended Order.
---------------------------------------------------------------------------

V. Substituted Compliance for Capital and Margin Requirements

A. Proposed Approach

    The Amended Application in part requested substituted compliance in
connection with requirements under the Exchange Act relating to:
     Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 and 18a-1a through 18a-1d
applicable to certain SBS Entities.\84\ Exchange Act rule 18a-1 helps
to ensure the SBS Entity maintains at all times sufficient liquid
assets to promptly satisfy its liabilities, and to provide a cushion of
liquid assets in excess of liabilities to cover potential market,
credit, and other risks.\85\ The rule's net liquid assets test standard
protects customers and counterparties and mitigates the consequences of
an SBS Entity's failure by promoting the ability of the firm to absorb
financial shocks and, if necessary, to self-liquidate in an orderly
manner.\86\ As part of the capital requirements, security-based swap
dealers without a prudential regulator also must comply with the
internal risk management control requirements of Exchange Act Rule
15c3-4 with respect to certain activities.\87\
---------------------------------------------------------------------------

    \84\ Exchange Act rule 18a-1 applies to security-based swap
dealers that: (1) Do not have a prudential regulator; and (2) are
either (a) not dually registered with the Commission as a broker-
dealer or (b) are dually registered with the Commission as a special
purpose broker-dealer known as an OTC derivatives dealer. Security-
based swap dealers that are dually-registered with the Commission as
a full-service broker-dealer are subject to the capital requirements
of Exchange Act rule 15c3-1 (17 CFR 240.15c3-1) for which
substituted compliance is not available. See 17 CFR 240.3a71-
6(d)(4)(i) (making substituted compliance available only with
respect to the capital requirements of Exchange Act section 15F(e)
and Exchange Act rule 18a-1).
    \85\ See Capital and Margin Adopting Release, 84 FR 43947. The
Amended Application discusses EU and German requirements that
address firms' capital requirements. See Amended Application Annex A
category 3 (Side Letter Addressing Capital Requirements). See also
Amended Application Annex A category 4 (Internal Risk Management
Requirements) (generally discussing internal risk management
requirements).
    \86\ See Capital and Margin Adopting Release, 84 FR 43879-83.
The capital standard of Exchange Act rule 18a-1 is based on the net
liquid assets test of Exchange Act rule 15c3-1 applicable to broker-
dealers. Id. The net liquid assets test seeks to promote liquidity
by requiring that a firm maintain sufficient liquid assets to meet
all liabilities, including obligations to customers, counterparties,
and other creditors, and, in the event a firm fails financially, to
have adequate additional resources to wind-down its business in an
orderly manner without the need for a formal proceeding. See id. at
43879. See Amended Application Annex A category 3 (Side Letter
Addressing Capital Requirements).
    \87\ See 17 CFR 240.15c3-4 and 18a-1(f).
---------------------------------------------------------------------------

     Margin--Margin requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially
regulated SBS Entities.\88\ The margin requirements are designed to
protect SBS Entities from the consequences of a counterparty's
default.\89\
---------------------------------------------------------------------------

    \88\ 17 CFR 240.18a-3.
    \89\ See Capital and Margin Adopting Release, 84 FR 43947, 43949
(``Obtaining collateral is one of the ways OTC derivatives dealers
manage their credit risk exposure to OTC derivatives counterparties.
Prior to the financial crisis, in certain circumstances,
counterparties were able to enter into OTC derivatives transactions
without having to deliver collateral. When `trigger events' occurred
during the financial crisis, those counterparties faced significant
liquidity strains when they were required to deliver collateral'').
The Amended Application discusses EU and German requirements that
address firms' margin requirements. See Amended Application Annex A
category 4 (Margin Requirements for Nonbank Firms).
---------------------------------------------------------------------------

    Taken as a whole, these capital and margin requirements help to
promote market stability by mandating that SBS Entities follow
practices to manage the market, credit, liquidity, solvency,
counterparty, and operational risks associated with their security-
based swap businesses.
    In proposing to provide conditional substituted compliance in
connection with this part of the Amended Application, the Commission
preliminarily concluded that substituted compliance with respect to the
Exchange Act capital and margin requirements would be subject to
certain additional conditions.\90\
---------------------------------------------------------------------------

    \90\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505-11.
---------------------------------------------------------------------------

B. Commenter Views and Final Provisions

1. Capital
    Substituted compliance with respect to the capital requirements of
Exchange Act rule 18a-1 would be conditioned on Covered Entities being
subject to and complying with relevant EU and German capital
requirements.\91\ The Commission did not receive comment on this
proposed capital condition and the Amended Order includes the
condition.\92\
---------------------------------------------------------------------------

    \91\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505.
    \92\ See para. (c)(1)(i) of the Amended Order.
---------------------------------------------------------------------------

    The first additional capital condition required that the Covered
Entity apply substituted compliance with respect to Exchange Act rules
18a-5(a)(9) (a record making requirement), 18a-6(b)(1)(x) (a record
preservation requirement), and 18a-8(a)(1)(i), (a)(1)(ii), (b)(1),
(b)(2), and (b)(4) (notification requirements relating to capital).\93\
These recordkeeping and notification requirements are directly linked
to the capital requirements of Exchange Act rule 18a-1. The proposed
Amended Order conditioned substituted compliance with respect to these
recordkeeping and notification requirements on the Covered Entity
applying substituted compliance with respect to Exchange Act rule 18a-
1.\94\ This additional capital condition in the proposed Amended Order
did the reverse: It conditioned substituted compliance with respect to
Exchange Act rule 18a-1 on the Covered Entity applying substituted
compliance for these linked recordkeeping and notification
requirements. This proposed additional capital condition was designed
to provide clarity as to the Covered Entity's obligations under these
recordkeeping and notification requirements when applying substituted
compliance with respect to Exchange Act rule 18a-1. The Commission did
not receive comment on this proposed additional capital condition and
the Amended Order includes the condition.\95\
---------------------------------------------------------------------------

    \93\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505.
    \94\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-18, 46520-22.
    \95\ See para. (c)(1)(ii) of the Amended Order.
---------------------------------------------------------------------------

    The second additional capital condition imposed a simplified net
liquid assets test and related

requirements on the Covered Entity.\96\ This condition was designed to
help ensure the comparability of regulatory outcomes between Exchange
Act rule 18a-1 (which imposes a net liquid assets test) and the capital
requirements applicable to nonbank security-based swap dealers in
Germany that are expected to register with the Commission. Those
capital requirements are based on the international capital standard
for banks (``Basel capital standard'').\97\
---------------------------------------------------------------------------

    \96\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505-09.
    \97\ See, e.g., Basel Committee on Banking Supervision
(``BCBS''), The Basel Framework, available at: https://www.bis.org/basel_framework/.
---------------------------------------------------------------------------

    The second additional capital condition had four prongs. In
particular, it conditioned substituted compliance with respect to
Exchange Act rule 18a-1 on the Covered Entity: (1) Maintaining liquid
assets (as defined in the proposed condition) that have an aggregate
market value that exceeds the amount of the Covered Entity's total
liabilities by at least $100 million before applying the deduction
specified in the proposed condition, and by at least $20 million after
applying the deduction specified in the proposed condition; (2) making
and preserving for three years a quarterly record with respect to the
first prong; \98\ (3) notifying the Commission in writing within 24
hours in the manner specified on the Commission's website if the
Covered Entity fails to meet the requirements of the proposed condition
and including in the notice the contact information of an individual
who could provide further information about the failure to meet the
requirements; and (4) including its most recent statement of financial
condition filed with its local supervisor (whether audited or
unaudited) with its initial written notice to the Commission of its
intent to rely on substituted compliance.\99\
---------------------------------------------------------------------------

    \98\ In particular, quarterly record would need to: (1) Identify
and value the liquid assets (as defined in the proposed condition)
maintained pursuant to the proposed condition; (2) compare the
amount of the aggregate value the liquid assets maintained pursuant
to the proposed condition to the amount of the Covered Entity's
total liabilities and show the amount of the difference between the
two amounts (``the excess liquid assets amount''), and (3) show the
amount of the deduction specified in the proposed condition and the
amount that deduction reduces the excess liquid assets amount. See
German Substituted Compliance Notice and Proposed Amended Order, 86
FR 46509.
    \99\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46507-09.
---------------------------------------------------------------------------

    For the purposes of the capital condition, ``liquid assets'' would
be defined as: (1) Cash and cash equivalents; (2) collateralized
agreements; (3) customer and other trading related receivables; (4)
trading and financial assets; and (5) initial margin posted by the
Covered Entity to a counterparty or third-party that meets certain
conditions.\100\ These categories of liquid assets were designed to
align with assets that are considered allowable assets for purposes of
calculating net capital under Exchange Act rule 18a-1. If an asset did
not fall within one of the five categories of ``liquid assets'' as
defined in the proposed Amended Order, it would be considered non-
liquid, and could not be treated as a liquid asset for purposes of this
capital condition.\101\ For example, the following categories of assets
generally would not have been able to be treated as liquid assets: (1)
Investments; (2) loans; and (3) other assets.\102\ The non-liquid
``investment'' category would have included the Covered Entity's
ownership interests in subsidiaries or other affiliates. The non-liquid
``loans'' category would have included unsecured loans and advances.
The non-liquid ``other'' assets category would have referred to assets
that do not fall into any of the other categories of liquid or non-
liquid assets. These non-liquid ``other'' assets would have included
furniture, fixtures, equipment, real estate, property, leasehold
improvements, deferred tax assets, prepayments, and intangible assets.
---------------------------------------------------------------------------

    \100\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46508. The fifth category of liquid assets
would be initial margin posted by the Covered Entity to a
counterparty or a third-party custodian, provided: (1) The initial
margin requirement is funded by a fully executed written loan
agreement with an affiliate of the Covered Entity; (2) the loan
agreement provides that the lender waives re-payment of the loan
until the initial margin is returned to the Covered Entity; and (3)
the liability of the Covered Entity to the lender can be fully
satisfied by delivering the collateral serving as initial margin to
the lender. Id.
    \101\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46508.
    \102\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46508.
---------------------------------------------------------------------------

    The deduction (haircut) required for purposes of this capital
condition would be determined by dividing the amount of the Covered
Entity's total risk-weighted assets by 12.5 (i.e., the reciprocal of
8%).\103\ Under the Basel standard, Covered Entities must risk-weight
their assets.\104\ This involves adjusting the nominal value of each
asset based on the inherent market or credit risk of the asset. Less
risky assets are adjusted to lower values (i.e., have less weight) than
more risky assets. As a result, Covered Entities must hold lower levels
of regulatory capital for less risky assets and higher levels of
capital for riskier assets. The Commission's proposal to use risk-
weighted assets to calculate the deduction was designed to be similar
to how haircuts are calculated under Exchange Act rule 18a-1 insomuch
as less risky assets incur lower haircuts than riskier assets and,
therefore, require less net capital to be held in relation to
them.\105\ Consequently, the Commission stated that the process of
risk-weighting assets under the Basel capital standard provides a
method to account for the inherent risk in an asset held by a Covered
Entity similar to how the haircuts under the Exchange Act rule 18a-1
account for the risk of assets held by SBS Entities.\106\
---------------------------------------------------------------------------

    \103\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46508-09. Under the Basel capital standard,
Covered Entities must hold regulatory capital equal to at least 8%
of the amount of their risk-weighted assets. See BCBS, Risk-based
capital requirements (RBC20), available at: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20191215&published=20191215.
    \104\ See BCBS, Risk-based capital requirements (RBC20).
    \105\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46508-09.
    \106\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46509.
---------------------------------------------------------------------------

    The proposed approach to calculating the deduction for the capital
condition would have required a Covered Entity to divide the total
amount of its risk-weighted assets by 12.5. In proposing to use the
total amount of risk-weighted assets, the Commission acknowledged that
a Covered Entity's total risk-weighted assets include components in
addition to credit and market risk charges (e.g., operational risk
charges).\107\
---------------------------------------------------------------------------

    \107\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46509, n.87.
---------------------------------------------------------------------------

    Commenters addressed two aspects of the additional four pronged
capital condition and made recommendations as to how they believed it
should be clarified or modified.\108\ One of the commenters stated that
the recommendations with respect to the Amended Order ``apply equally
to the UK and French Orders.'' \109\
---------------------------------------------------------------------------

    \108\ See Letter from Andrew Nash, Managing Director, Morgan
Stanley (July 20, 2021) (``Morgan Stanley Letter'') at 1-3; SIFMA II
Letter at 4-7. The Morgan Stanley Letter may be found on the
Commission's website at: https://www.sec.gov/comments/s7-16-20s/s71620.htm.
    \109\ See SIFMA II Letter at 2.
---------------------------------------------------------------------------

    First, commenters made recommendations about how to calculate total
liabilities.\110\ In particular, commenters requested that the
calculation of total liabilities exclude instruments that qualify as
Tier 2 capital under the Basel capital standard, including subordinated
debt instruments that qualify as Tier 2

capital.\111\ Commenters pointed out that Exchange Act rule 18a-1
recognizes subordinated debt that meets certain requirements as a form
of regulatory capital.\112\ In addition, commenters stated that Covered
Entities are generally subject to a minimum requirement for own funds
and eligible liabilities (referred to as ``MREL'') in connection with
supporting ``bail-in'' tools of resolution regimes.\113\ Commenters
requested that eligible liabilities under MREL also be excluded from
the total liabilities calculation because the MREL liabilities share
key characteristics with Tier 2 capital, including the condition that
the liabilities satisfy certain requirements related to maturity,
subordination, repayment, ownership, reduction, and/or conversion.\114\
Further, a commenter provided a table comparing the requirements for
debt to qualify as capital under Exchange Act rule 18a-1, as Tier 2
capital under the Basel capital standard, and as an eligible liability
under MREL.\115\ The commenter stated that debt to qualifying as Tier 2
capital under the Basel capital standard or an eligible liability under
MREL has ``characteristics comparable to subordinated loans that
qualify'' as capital under Exchange Act rule 18a-1.\116\
---------------------------------------------------------------------------

    \110\ See Morgan Stanley Letter; SIFMA II Letter.
    \111\ See Morgan Stanley Letter at 2-3; SIFMA II Letter at 5.
    \112\ See Morgan Stanley Letter at 3; SIFMA II Letter at 5.
    \113\ See SIFMA II Letter at 5.
    \114\ See SIFMA II Letter at 6.
    \115\ See SIFMA II Letter, Appendix.
    \116\ See SIFMA II Letter at 5.
---------------------------------------------------------------------------

    In response to these comments, the Commission believes it would be
appropriate to exclude subordinated debt issued by the Covered Entity
that qualifies as Tier 2 capital under the Basel Capital standard from
the calculation of total liabilities for purposes of the capital
condition.\117\ Exchange Act rule 18a-1 permits subordinated debt that
meets certain requirements to count as regulatory capital by excluding
the liability from the calculation of net worth for purposes of
computing net capital.\118\ Subordinated debt that qualifies for this
treatment under Exchange Act rule 18a-1 and subordinated debt that
qualifies as Tier 2 capital under the Basel capital standard have
comparable characteristics in terms of requirements relating to minimum
terms, effective subordination, permissive prepayments, and
accelerating maturity.\119\ The Commission, however, does not believe
other types of instruments that might qualify as Tier 2 capital under
the Basel standard should be excluded from liabilities for the purposes
of the capital condition. Exchange rule 18a-1 makes a specific
allowance for subordinated debt. Similarly, the Commission does not
believe eligible liabilities under MREL should be excluded from
liabilities for the purposes of the capital condition. While these
liabilities may share characteristics with subordinated debt that
qualifies as Tier 2 capital, they do not qualify as Common Equity Tier
1, Additional Tier 1, or Tier 2 capital under the Basel capital
standard.\120\
---------------------------------------------------------------------------

    \117\ See paras. (c)(1)(iii)(A)(1) and (c)(1)(iii)(C) of the
Amended Order.
    \118\ See 17 CFR 240.18a-1(c)(1)(ii).
    \119\ Compare 17 CFR 240.18a-1d, with CRR Article 63.
    \120\ See BRRD.
---------------------------------------------------------------------------

    To implement this modification, the term ``total liabilities'' in
the capital condition has been replaced with the term ``adjusted
liabilities.'' \121\ Further, the term ``adjusted liabilities'' has
been defined to mean the Covered Entity's total liabilities, excluding
subordinated debt issued by the Covered Entity that qualifies as Tier 2
capital pursuant to the Basel capital standard.\122\
---------------------------------------------------------------------------

    \121\ See paras. (c)(1)(iii)(A)(1) and (c)(1)(iii)(A)(2)(b) of
the Amended Order.
    \122\ See para. (c)(1)(iii)(C) of the Amended Order.
---------------------------------------------------------------------------

    Second, commenters made recommendations about how to calculate the
deduction (haircut) derived from risk-weighted assets.\123\ In
particular, commenters recommended that assets that are not treated as
liquid assets for purposes of the proposed capital condition be
excluded from the calculation of total risk-weighted assets.\124\ A
commenter stated that these assets are excluded from the calculation of
``liquid assets'' and, therefore, they are subject to a 100 percent
deduction for purposes of the capital condition.\125\ Therefore,
including them in the risk-weighted assets deduction would result in
their being deducted twice for purposes of the capital condition. A
commenter also requested that components of risk-weighted assets other
than CRR Part Three, Title III (credit risk) and CRR Part Three, Title
IV (market risk) be excluded from the calculation of total risk-
weighted assets.\126\ In particular, the commenter requested that the
following components be excluded: (1) CRR Part Three, Title III
(operational risk); (2) CRR Part Three, Title IV (settlement risk); and
CRR Part Three, Title VI (credit valuation adjustment risk). The
commenter stated that the standardized or model-based haircuts required
by Exchange Act rule 18a-1 address credit and market risk and that the
parallel requirements under the Basel capital standard are the
calculations under CRR Part Three, Title III (credit risk) and CRR Part
Three, Title IV (market risk). A commenter stated that calculations
under CRR Part Three, Title III (operational risk), (2) CRR Part Three,
Title IV (settlement risk), and CRR Part Three, Title VI (credit
valuation adjustment risk) are not directly analogous to the
Commission's net capital requirements and may not be suitable for
inclusion in the risk-weighted assets used to calculate the deduction
(haircut) for purposes of the proposed capital condition.\127\ Finally,
a commenter stated that excluding these assets from risk-weighted
assets would be straightforward and transparent process since a Covered
Entity must track illiquid assets and must separately compute the
different categories of risk-weighted assets under the Basel capital
standard.\128\
---------------------------------------------------------------------------

    \123\ See Morgan Stanley Letter; SIFMA II Letter.
    \124\ See Morgan Stanley Letter at 2; SIFMA II Letter at 6-7.
    \125\ See SIFMA II Letter at 6.
    \126\ See SIFMA II Letter at 7.
    \127\ See Morgan Stanley Letter at 2, n.4.
    \128\ See SIFMA II Letter at 7.
---------------------------------------------------------------------------

    In response to these comments, the Commission believes it would be
appropriate to exclude assets that are not treated as liquid assets for
purposes of the capital condition from the amount of the risk-weighted
assets used to calculate the deduction.\129\ These illiquid assets will
be deducted entirely from the Covered Entity's assets prior to applying
the deduction derived from the Covered Entity's risk-weighted assets.
Consequently, their illiquidity will be addressed in that first step of
the calculation. The Commission also believes it would be appropriate
to exclude risk-weighted assets that are calculated under CRR Part
Three, Title III (Own Funds Requirements for Operational Risk) from the
amount of the risk-weighted assets used to calculate the
deduction.\130\ Under Exchange Act rule 18a-1, SBS Entities that are
approved to use models must take market and credit risk
deductions.\131\ The proposed capital condition is modeled, in part, on
the provisions of Exchange Act rule 18a-1 applicable to SBS Entities
approved to use models.\132\ The provisions of Exchange Act rule 18a-1
governing the use of models by SBS Entities do not

require operational risk charges. The Commission, however, does not
agree that risk-weighted assets calculated under CRR Part Three, Title
IV (settlement risk) and CRR Part Three, Title VI (credit valuation
adjustment risk) should be excluded from the amount of the risk-
weighted assets used to calculate the deduction. These components do
relate to credit risk.
---------------------------------------------------------------------------

    \129\ See paras. (c)(1)(iii)(D)(1) and (2) of the Amended Order.
    \130\ See paras. (c)(1)(iii)(D)(1) and (2) of the Amended Order.
    \131\ See 17 CFR 240.18a-1(e).
    \132\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46507-08.
---------------------------------------------------------------------------

    To implement these modifications, the Amended Order provides that a
Covered Entity may exclude assets that are not treated as liquid assets
for the purposes of the capital condition and risk-weighted assets that
are calculated under CRR Part Three, Title III (Own Funds Requirements
for Operational Risk) from the amount of the risk-weighted assets used
to calculate the deduction.\133\
---------------------------------------------------------------------------

    \133\ See para. (c)(1)(iii)(D)(2) of the Amended Order.
---------------------------------------------------------------------------

    The French and UK Orders also include the four pronged additional
capital condition.\134\ In light of the modifications to the four
pronged capital condition in the Amended Order, the Commission is
issuing an order that makes conforming amendments to the French and UK
Orders.
---------------------------------------------------------------------------

    \134\ See French Order, 86 FR 41630-36, 41659; UK Order, 86 FR
43338-44, 43372.
---------------------------------------------------------------------------

    In addition to these comments on the four pronged capital
condition, commenters responded to questions the Commission asked about
a Covered Entity operating under waivers from capital and liquidity
requirements that can be granted by German and EU authorities under
Articles 7 and 8 of the CRR.\135\ Under Articles 7 and 8 of the CRR,
supervisory authorities can grant a Covered Entity a waiver from EU and
German capital and liquidity requirements, respectively, if its parent
is subject to them. The Bafin's Amended Application requested
substituted compliance for Covered Entities operating pursuant to these
waivers.\136\ The Bafin stated that this type of waiver is only granted
under strict conditions.
---------------------------------------------------------------------------

    \135\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46524 (requesting comment on this topic). See
also Morgan Stanley Letter; SIFMA II Letter (responding to the
request for comment).
    \136\ Amended Application Annex A category 3 (Side Letter
Addressing Capital Requirements).
---------------------------------------------------------------------------

    The proposed Amended Order required the Covered Entity (i.e., the
registrant itself) to be subject to the specified EU and German capital
and liquidity requirements. Accordingly, it would not have provided
substituted compliance for Exchange Act rule 18a-1 to a Covered Entity
operating pursuant to these waivers. However, the Commission requested
comment on whether a positive substituted compliance determination
(subject to conditions and limitations) could be made with respect to a
Covered Entity operating pursuant to a waiver from compliance with the
Basel capital and liquidity requirements.\137\ Specifically, the
Commission requested comment on whether additional conditions could be
imposed on a Covered Entity operating pursuant to these waivers that
could produce a comparable regulatory outcome to Exchange Act rule 18a-
1.
---------------------------------------------------------------------------

    \137\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46524.
---------------------------------------------------------------------------

    Commenters supported permitting a firm operating under the Article
7 waiver from the German and EU capital requirements to apply
substituted compliance to Exchange Act rule 18a-1.\138\ A commenter
stated that relevant competent authorities will only approve a request
for a waiver if the Covered Entity and holding company satisfy a number
of requirements that are designed to ensure that resources would be
available to the Covered Entity to substantially the same extent absent
a waiver.\139\ This commenter stated that competent authorities will
not approve a waiver unless Covered Entity and its holding company can
demonstrate that there are not structural or corporate impediments to
the free transfer of funds between the entities, the parent is
sufficiently involved in setting the risk appetite and risk management
of the Covered Entity; and the Covered Entity complies with the group's
risk management policy. Commenters also stated that the level of
oversight by European and German supervisors over a Covered Entity
operating pursuant to the waiver is no different than the level of
oversight exercised with respect to a Covered Entity that is not
operating pursuant to the waiver.\140\
---------------------------------------------------------------------------

    \138\ See Morgan Stanley Letter at 1-2; SIFMA II Letter at 7.
    \139\ See SIFMA II Letter at 7.
    \140\ See SIFMA II Letter at 7.
---------------------------------------------------------------------------

    The Commission is not prepared at the this time to permit a Covered
Entity that is operating under an Article 7 and/or 8 waiver to apply
substituted compliance to Exchange Act rule 18a-1. The Commission's
preliminary substituted compliance determination with respect to
Exchange Act rule 18a-1 was based, in part, on the Covered Entity being
subject to and complying with the Basel capital standard.\141\ In fact,
all of the Commission's substituted compliance determinations are
conditioned on the Covered Entity being subject to and complying with
comparable requirements of the home jurisdiction. Further, Exchange Act
rule 3a71-6 provides that the Commission will consider (in addition to
any conditions imposed) whether the capital requirements of the foreign
financial regulatory system are designed to help ensure the safety and
soundness of registrants in a manner that is comparable to the
applicable provisions arising under the Exchange Act and its rules and
regulations (emphasis added). Exchange Act rule 18a-1 does not have a
comparable provision under which an SBS Entity can obtain a waiver from
the requirements of that rule if its immediate holding company is
subject to the rule.
---------------------------------------------------------------------------

    \141\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46505-07.
---------------------------------------------------------------------------

    However, the Commission also believes it would be appropriate to
provide additional time for a Covered Entity located in Germany and
operating under the Article 7 waiver to take steps necessary to comply
with the terms and conditions of the Amended Order or otherwise address
the fact that it does not meet the those terms and conditions.
Otherwise, the Covered Entity may have to drastically reduce its
operations on November 1, 2021 (the SBS Entity registration date),
which could cause severe disruptions to the services the Covered Entity
provides its security-based swap customers. Therefore, the Commission,
by order, is extending the compliance date for Exchange Act rule 18a-1
until January 1, 2022 for a Covered Entity located in Germany that is
operating under an Article 7 waiver.
    Finally, commenters requested that the application of the
additional capital conditions be delayed until September 1, 2022.\142\
A commenter stated that Covered Entities did not have effective notice
of the additional capital conditions until the issuance of the French
Order on July 23, 2021, and that there is not sufficient time between
that date and the November 1, 2021 registration date to come into
compliance with the capital conditions.\143\ The commenter stated that
Covered Entities must put in place systems for performing the
calculations required by the additional four pronged capital condition.
Further, this commenter stated that complying with the capital
conditions by November 1, 2021 may create significant challenges with
the senior officer certification required in connection with
registration, which requires a certification that a Covered Entity has
developed and implemented policies and procedures

reasonably designed to prevent violations of Federal securities laws
and regulations.\144\
---------------------------------------------------------------------------

    \142\ See Morgan Stanley Letter at 4; SIFMA II Letter at 10.
    \143\ See SIFMA II Letter at 9.
    \144\ See SIFMA II Letter at 10.
---------------------------------------------------------------------------

    In response to the comments requesting a delay in compliance with
the capital conditions until September 1, 2022, the Commission
acknowledges that Covered Entities will have a limited period of time
to comply with the conditions before the November 1, 2021 registration
compliance date. Substituted compliance, however, is conditioned upon
the capital conditions in the Amended Order and it is important for
Covered Entities to comply with these conditions in order for German
and European capital requirements to have comparable outcomes to
Exchange Act rule 18a-1. Consequently, in order to balance the limited
timeframe to achieve compliance with the capital conditions with the
policy goals of comparability, the Commission is, by order, extending
the time when a Covered Entity needs to meet the additional capital
condition in paragraph (c)(1)(iii) of the Amended Order until January
1, 2022. The Commission similarly is, by order, extending the time to
meet the capital condition in paragraph (c)(1)(iii) of the French Order
and (c)(1)(iii) of the UK Order until January 1, 2022.
2. Margin
    Substituted compliance with respect to the margin requirements of
Exchange Act rule 18a-3 was subject to two additional conditions. The
first additional condition required a Covered Entity to collect
variation margin, as defined in the EMIR Margin RTS, from a
counterparty with respect to a transaction in non-cleared security-
based swaps, unless the counterparty would qualify for an exception
under Exchange Act rule 18a-3 from the requirement to deliver variation
margin to the Covered Entity. This additional condition was designed to
close the gap between the counterparty exceptions of Exchange Act rule
18a-3 and the EU and German margin rules with respect to variation
margin. The second additional condition required a Covered Entity to
collect initial margin, as defined in the EMIR Margin RTS, from a
counterparty with respect to transactions in non-cleared security-based
swaps, unless the counterparty would qualify for an exception under
Exchange Act rule 18a-3 from the requirement to deliver initial margin
to a Covered Entity. This additional condition was designed to close
the gap between the counterparty exceptions of Exchange Act rule 18a-3
and the EU and German margin rules with respect to initial margin.
    The Commission did not receive any comments on the margin
conditions in the proposed Amended Order. A commenter, however,
recommended that the application of the additional margin conditions be
delayed until September 1, 2022.\145\ A commenter stated that Covered
Entities did not have effective notice of the additional margin
conditions until the issuance of the French Order on July 23, 2021, and
that there is not sufficient time between that date and the November 1,
2021 registration date to come into compliance with the capital
conditions.\146\ The commenter stated that in connection with the
margin requirements, a Covered Entity will need to work with
counterparties to determine which counterparties may be subject to
exemptions for initial and/or variation margin under the Exchange Act
rule 18a-3. In addition, if counterparties are subject to Exchange Act
rule 18a-3, a commenter stated that a Covered Entity will need to enter
into written agreements and put in place systems necessary to collect
margin.\147\
---------------------------------------------------------------------------

    \145\ See SIFMA II Letter at 9-10.
    \146\ See SIFMA II Letter at 9.
    \147\ See SIFMA II Letter at 9-10.
---------------------------------------------------------------------------

    The Commission is adopting the margin conditions as proposed.\148\
In response to comments regarding a delay in compliance with the margin
conditions until September 1, 2022, the Commission is, by order,
extending the time when a Covered Entity needs to meet the additional
margin conditions in paragraphs (c)(2)(ii) and (iii) of the Amended
Order until January 1, 2022. The Commission similarly is, by order,
extending the time to meet the margin conditions in paragraphs
(c)(2)(ii) and (iii) the French Order and paragraphs (c)(2)(ii) and
(iii) of the UK Order until January 1, 2022.
---------------------------------------------------------------------------

    \148\ See para. (c)(2) of the Amended Order.
---------------------------------------------------------------------------

VI. Amendments Related to Chief Compliance Officer Reports

A. Proposed Approach

    Exchange Act rule 15Fk-1 states that the required compliance
reports must include ``a certification by the chief compliance officer
or senior officer that, to the best of his or her knowledge and
reasonable belief and under penalty of law, the information contained
in the compliance report is accurate and complete in all material
respects.'' \149\ The standard applied in the German Order required
certification that ``under penalty of law, the report is accurate and
complete.'' \150\ The Commission preliminarily believed that,
consistent with the French Order,\151\ further alignment of the
proposed Amended Order's certification requirement with that of the
applicable Exchange Act rule was appropriate. Therefore, the proposed
Amended Order clarified that the required reports should be certified
by ``the chief compliance officer or senior officer'' of the Covered
Entity and that the same certification standard contained in Exchange
Act rule 15Fk-1 applies.\152\
---------------------------------------------------------------------------

    \149\ Exchange Act rule 15Fk-1(c)(2)(ii)(D), 17 CFR 240.15Fk-
1(c)(2)(ii)(D). See also Exchange Act rule 15Fk-1(e)(2) (defining
``senior officer'' as ``the chief executive officer or other
equivalent officer'').
    \150\ See para. (d)(2) of the German Order.
    \151\ See French Order, 86 FR 41659; UK Order, 86 FR 43372.
    \152\ See para. (d)(2)(ii)(B) of the proposed Amended Order. In
addition, for consistency with the French Order, the Commission is
proposing to incorporate CRR articles 286-88 and 293 and EMIR Margin
RTS article 2 as part of para. (d)(3) of the proposed Amended Order.
---------------------------------------------------------------------------

    In further seeking consistency with the Commission's other
substituted compliance orders,\153\ the Commission proposed to amend
the German Order to clarify the timing for Covered Entities to submit
compliance reports to the Commission. To promote timely notice
comparable to what the Exchange Act rule provides, the Commission
proposed to incorporate a timing standard that accounts for MiFID-
required timing as well as the possibility that the relevant reports
may be submitted to the management body early. Under the proposed
Amended Order, the applicable compliance reports would be provided to
the Commission no later than 15 days following the earlier of: (i) The
submission of the report to the Covered Entity's management body; or
(ii) the time the report is required to be submitted to the management
body.\154\ The proposed Amended Order also clarified that together the
reports must cover the entire period that the Covered Entity's annual
compliance report referenced in Exchange Act section 15F(k)(3) and
Exchange Act rule 15Fk-1(c) would be required to cover.\155\
---------------------------------------------------------------------------

    \153\ See, e.g., French Order, 86 FR 41659.
    \154\ See para. (d)(2)(D) of the proposed Amended Order.
    \155\ See para. (d)(2)(E) of the proposed Amended Order.
---------------------------------------------------------------------------

B. Commenters Views and Final Provisions

    No commenters addressed the proposed changes to the compliance
report requirements and the Commission is issuing the changes described
in part VI.A above as proposed.

VII. Amendments Related to Counterparty Protection Requirements

A. Proposed Approach

1. Disclosure of Information Regarding Material Risks and
Characteristics
    With the Amended Order, the Commission proposed to add two
requirements to the list of German and EU disclosure of information
regarding material incentives or conflicts of interest requirements
that the Covered Entity must be subject to and comply with. The MAR
Investment Recommendations Regulation articles 5 and 6 enumerate
specific obligations in relation to disclosure of interests or of
conflicts of interest. Article 5 requires that persons who produce
recommendations disclose in their recommendations all relationships and
circumstances that may reasonably be expected to impair the objectivity
of the recommendation, including interests or conflicts of interest.
Article 6 imposes additional obligations on certain entities, including
the disclosure of information on their interests and conflicts of
interest concerning the issuer to which a recommendation relates. The
Commission preliminarily believed that requiring Covered Entities to be
subject to and comply with MAR Investment Recommendations Regulation
articles 5 and 6 contributes to a determination that relevant German
and EU requirements produce regulatory outcomes that are comparable to
relevant requirements of Exchange Act rule 15Fh-3(b).
2. Fair and Balanced Communications
    The Commission also proposed to modify the fair and balanced
communications section of the proposed Amended Order.\156\ First, the
Commission believes that German and EU fair and balanced communications
requirements are more comparable to Exchange Act requirements when
considering three additional EU requirements: MAR article 20(1) would
require the Covered Entity to present recommendations in a manner that
ensures the information is objectively presented and to disclose
interests and conflicts of interest concerning the financial
instruments to which the information relates. MAR Investment
Recommendations Regulation article 3 would require a Covered Entity to
communicate only recommendations that present facts in a way that they
are clearly distinguished from interpretations, estimates, opinions and
other types of non-factual information; label clearly and prominently
projections, forecasts and price targets; indicate the relevant
material assumptions and substantial material sources of information;
and include only reliable information or a clear indication when there
is doubt about reliability. MAR Investment Recommendations Regulation
article 4 would require the Covered Entity to provide in its
recommendation additional information about the factual basis of its
recommendation. Accordingly, the Commission proposed to add these three
requirements to the Amended Order's list of German and EU fair and
balanced communications requirements that the Covered Entity must be
subject to and comply with.\157\ Second, the German Order required the
Covered Entity to be subject to and comply with MAR Investment
Recommendations Regulation article 5,\158\ which relates to obligations
to disclose conflicts of interest. As discussed above, the Commission
is requiring Covered Entities to comply with this requirement and with
MAR Investment Recommendations Regulation article 6 when using
substituted compliance for disclosure of material incentives and
conflicts of interest requirements. Accordingly, the Commission
believes that MAR Investment Recommendations Regulation article 5 is
less relevant to comparability of fair and balanced communications
requirements and proposed to delete the reference to it in relation to
substituted compliance for fair and balanced communications.
---------------------------------------------------------------------------

    \156\ See para. (e)(2)(iii) of the proposed Amended Order.
    \157\ See para. (e)(5) of the Amended Order.
    \158\ See para. (d)(2) of the German Order.
---------------------------------------------------------------------------

B. Commenters Views and Final Provisions

    Commenters did not address the proposed revisions to the
counterparty protection requirements described in part VII.A above and
the Commission is amending and restating this part of the Amended Order
as proposed.

VIII. Amendments Related to Recordkeeping, Reporting, Notification, and
Securities Count Requirements

A. Proposed Approach

    In its initial application (the ``BaFin Application''), the BaFin
requested, in part, substituted compliance for requirements applicable
to SBS Entities with and without a prudential regulator under the
Exchange Act relating to:
     Recordmaking--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\159\
---------------------------------------------------------------------------

    \159\ See 17 CFR 240.18a-5. The BaFin Application discusses
German requirements that address firms' record creation obligations
related to matters such as financial condition, operations,
transactions, counterparties and their property, personnel and
business conduct. See BaFin Application Annex A category 2 at 4-34.
---------------------------------------------------------------------------

     Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\160\
---------------------------------------------------------------------------

    \160\ See 17 CFR 240.18a-6. The BaFin Application discusses
German requirements that address firms' record preservation
obligations related to records that firms are required to create, as
well as additional records such as records of communications. See
BaFin Application Annex A category 2 at 35-79.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain
reports.\161\
---------------------------------------------------------------------------

    \161\ See 17 CFR 240.18a-7. The BaFin Application discusses
German requirements that address firms' obligations to make certain
reports. See BaFin Application Annex A category 2 at 80-91, 96-102.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\162\
---------------------------------------------------------------------------

    \162\ See 17 CFR 240.18a-8. The BaFin Application discusses
German requirements that address firms' obligations to make certain
notifications. See BaFin Application Annex A category 2 at 92-96,
102.
---------------------------------------------------------------------------

     Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a
quarterly securities count.\163\
---------------------------------------------------------------------------

    \163\ See 17 CFR 240.18a-9. The BaFin Application discusses
German requirements that address firms' obligations to perform
securities counts. See BaFin Application Annex A category 2 at 27-
30.
---------------------------------------------------------------------------

     Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\164\
---------------------------------------------------------------------------

    \164\ See 15 U.S.C. 78o-10(g). The BaFin Application discusses
German requirements that address firms' record preservation
obligations related to records that firms are required to create, as
well as additional records such as records of communications. See
BaFin Application Annex A category 2 at 35-79.
---------------------------------------------------------------------------

    Taken as a whole, the recordkeeping, reporting, notification, and
securities count requirements that apply to SBS Entities are designed
to promote the prudent operation of the firm's security-based swap
activities, assist the Commission in conducting compliance examinations
of those activities, and alert the Commission to potential financial or
operational problems that could impact the firm and its customers.
    In issuing the German Order, the Commission found that relevant EU
and German requirements, subject to conditions and limitations, would
produce regulatory outcomes that are comparable to the outcomes
associated with the recordkeeping, reporting, and notification
requirements of Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8
applicable to SBS Entities with a prudential regulator.\165\ However,
the BaFin Application did not seek substituted compliance for the
Exchange Act capital and margin requirements

applicable to SBS Entities without a prudential regulator. Because of
the close relationship between many of the Exchange Act recordkeeping,
reporting, and notification requirements and the administration and
oversight of Exchange Act capital and margin requirements, the German
Order did not address substituted compliance for recordkeeping,
reporting, notification, and securities count requirements applicable
to SBS Entities without a prudential regulator.
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    \165\ See German Order, 85 FR 85695-97.
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    The BaFin's Amended Application requested substituted compliance
for the Exchange Act capital and margin requirements applicable to SBS
Entities without a prudential regulator. Consequently, the Commission
considered substituted compliance for the recordkeeping, reporting,
notification, and securities count requirements applicable to SBS
Entities without a prudential regulator.\166\ The Commission also
considered substituted compliance with respect to the trading record
preservation requirements of Exchange Act section 15F(g), which are
applicable to SBS Entities with and without a prudential
regulator.\167\
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    \166\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-522.
    \167\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46522.
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    The Commission preliminarily concluded that the relevant EU and
German requirements, subject to conditions and limitations, would
produce regulatory outcomes that are comparable to the outcomes
associated with the requirements of Exchange Act rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9 applicable to SBS Entities without a prudential
regulator and to the outcomes associated with Exchange Act section
15F(g) applicable to all SBS Entities (collectively, the ``Exchange Act
Recordkeeping an Reporting Requirements'').\168\ Moreover, the proposed
structure of the substituted compliance determinations with respect to
Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8 (collectively, the
``recordkeeping, reporting, and notification rules'') would have
provided Covered Entities with greater flexibility to select distinct
requirements within the broader rules for which they want to apply
substituted compliance.\169\
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    \168\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-22.
    \169\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-22.
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B. Commenter Views and Final Provisions

    As was the case with German Order, the Commission's preliminary
substituted compliance determinations for the additional Exchange Act
Recordkeeping and Reporting Requirements were subject to the condition
that the Covered Entity is subject to and complies with the relevant
German or EU laws.\170\ Substituted compliance for all of the Exchange
Act Recordkeeping and Reporting Requirements accordingly is conditioned
on Covered Entities being subject to and complying with the EU and
German provisions that in the aggregate establish a framework that
produces outcomes comparable to those associated with the analogous
Exchange Act Recordkeeping and Reporting Requirements.\171\
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    \170\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46530-33.
    \171\ See paras. (f)(1)(i)(A)(1), (f)(1)(i)(B)(1),
(f)(1)(i)(C)(1), (f)(1)(i)(D)(1), (f)(1)(i)(E), (f)(1)(i)(F)(1),
(f)(1)(i)(G)(1), (f)(1)(i)(H)(1), (f)(1)(i)(I)(1), (f)(1)(i)(J)(1),
(f)(1)(i)(K), (f)(1)(i)(L)(1), (f)(1)(i)(M)(1), (f)(1)(i)(N)(1),
(f)(1)(i)(O)(1), (f)(2)(i)(A), (f)(2)(i)(B), (f)(2)(i)(C)(1),
(f)(2)(i)((D), (f)(2)(i)(E)(1), (f)(2)(i)(F)(1), (f)(2)(i)(G)(1),
(f)(2)(i)(H)(1), (f)(2)(i)(O)(1), (f)(2)(i)(C)(1), (f)(2)(i)(J)(1),
(f)(2)(i)(K)(1), (f)(2)(i)(L)(1), (f)(2)(i)(M), (f)(2)(i)(N)(1),
(f)(2)(i)(P)(1), (f)(2)(i)(Q), (f)(2)(i)(R), (f)(3)(i)(A),
(f)(3)(ii)(B), (f)(e)(iii)(A), (f)(3)(iv)(A), (f)(4)(i)(A)(1),
(f)(4)((ii)(B), (f)(4)(iii)(A)(1), (f)(4)(iv)(D)(1), (f)(5)(i), and
(f)(6) of the Amended Order.
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    In addition to making preliminary substituted compliance
determinations with respect to requirements of Exchange Act rules 18a-
5, 18a-6, 18a-7, 18a-8, and 18a-9 applicable to SBS Entities without a
prudential regulator and to the requirements of Exchange Act section
15F(g) applicable to all SBS Entities, the Commission proposed to amend
the German Order in a number of ways.\172\ The proposed amendments are
discussed below.
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    \172\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-22, 46530-33.
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1. General Considerations
    The Commission proposed to amend the German Order in ways that
would implicate two or more of Exchange Act rules 18a-5, 18a-6, 18a-7,
and 18a-8.
    First, the German Order made substituted compliance available with
respect to the entirety of Exchange Act rules 18a-5, 18a-6, 18a-7, and
18a-8 as applicable to Covered Entities with a prudential
regulator.\173\ Consequently, under the German Order, the Covered
Entity could elect to apply substituted compliance with respect to the
entire rule (subject to conditions and limitations) or, alternatively,
comply with the Exchange Act rule. The Commission proposed modifying
this approach to provide all Covered Entities with greater flexibility
to select which distinct requirements within the broader rule for which
they would apply substituted compliance.\174\ This would not preclude a
Covered Entity from applying substituted compliance for the entire rule
(subject to conditions and limitations). However, it would permit the
Covered Entity to apply substituted compliance with respect to certain
requirements of a given rule and to comply directly with the remaining
requirements. This more granular approach to the recordkeeping,
reporting, and notification rules was intended to permit Covered
Entities to leverage existing recordkeeping and reporting systems that
are designed to comply with the broker-dealer recordkeeping, reporting,
and notification requirements on which the recordkeeping, reporting,
and notification requirements applicable to SBS Entities are based. For
example, it may be more efficient for a Covered Entity to comply with
certain Exchange Act requirements within a given recordkeeping,
reporting, or notification rule (rather than apply substituted
compliance) because it can utilize systems that its affiliated broker-
dealer has implemented to comply with them. This proposed approach was
consistent with the approach taken by the Commission in the French and
UK Orders.\175\
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    \173\ See German Order, 85 FR 85699-700.
    \174\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46512-13, 46530-33.
    \175\ See French Order, 86 FR 41649; UK Order, 86 FR 43360.
---------------------------------------------------------------------------

    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility resulted in preliminary substituted
compliance determinations with respect to the different categories of
records these rules require SBS Entities to make, keep current, and/or
preserve.\176\ The objective of these rules--taken as a whole--is to
assist the Commission in monitoring and examining for compliance with
substantive Exchange Act requirements applicable to SBS Entities (e.g.,
capital and margin requirements) as well as to promote the prudent
operation of these firms.\177\ The Commission stated a preliminary
belief that the comparable EU and German recordkeeping rules achieve
these outcomes with respect to compliance with substantive EU and
German requirements for which preliminary positive substituted
compliance

determinations were being made (e.g., the preliminary positive
substituted compliance determinations with respect to the Exchange Act
capital and margin requirements).\178\ At the same time, the
recordkeeping rules address different categories of records through
distinct requirements within the rules. Each requirement with respect
to a specific category of records (e.g., paragraph (a)(2) of Exchange
Act rule 18a-5 addressing ledgers (or other records) reflecting all
assets and liabilities, income and expense and capital accounts) can be
viewed in isolation as a distinct recordkeeping rule. Therefore, the
Commission made preliminary substituted compliance determinations at
this level of Exchange Act rules 18a-5 and 18a-6.\179\
---------------------------------------------------------------------------

    \176\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46513, 46530-32.
    \177\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
    \178\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46513.
    \179\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46513, 46530-32.
---------------------------------------------------------------------------

    The Commission did not receive any comments on this proposed
approach and the Amended Order structures the substituted compliance
determinations in this manner.\180\
---------------------------------------------------------------------------

    \180\ See paras. (f)(1), (f)(2), (f)(3), and (f)(4) of the
Amended Order.
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    Second, the Commission did not make a preliminary positive
substituted compliance determination with respect to a discrete
provision of the Exchange Act Recordkeeping and Reporting Requirements
if it was fully or partially linked to a substantive Exchange Act
requirement for which substituted compliance was not available or for
which a preliminary positive substituted compliance determination was
not being made.\181\ In particular, a preliminary positive substituted
compliance determination was not made, in full or in part, for
recordkeeping, reporting, or notification requirements linked to the
following Exchange Act rules for which substituted compliance is not
available or a positive substituted compliance determination was not
made: (1) Exchange Act rule 15Fh-4; (2) Exchange Act rule 15Fh-5; (3)
Exchange Act rule 15Fh-6; (4) Exchange Act rule 18a-2; (5) Exchange Act
rule 18a-4; (6) Regulation SBSR; and (7) Form SBSE and its variations.
This proposed approach was consistent with the approach taken by the
Commission in the French and UK Orders.\182\
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    \181\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46513.
    \182\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

    The Commission did not receive comment on these limitations and the
Amended Order includes the limitations.\183\
---------------------------------------------------------------------------

    \183\ See paras. (f)(1)(i)(J)(3), (f)(1)(ii)(C),
(f)(2)(i)(E)(3), (f)(2)(i)(H)(4), (f)(2)(i)(H)(5), (f)(2)(i)(L)(2),
(f)(2)(ii)(B), (f)(4)(i)(C)(2), (f)(4)(i)(D)(3), (f)(4)(i)(D)(4),
(f)(4)(ii)(B), and (f)(4)(ii)(C) of the Amended Order.
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    Third, the Commission conditioned substituted compliance with
discrete provisions of the Exchange Act Recordkeeping and Reporting
Requirements that were fully or partially linked to a substantive
Exchange Act requirement for which substituted compliance was available
on the Covered Entity applying substituted compliance with respect to
the linked Exchange Act requirement.\184\ In particular, substituted
compliance for a provision of the Exchange Act Recordkeeping and
Reporting Requirements that is linked to the following Exchange Act
rules was conditioned on the SBS Entity applying substituted compliance
to the linked substantive Exchange Act rule: (1) Exchange Act rule
15Fh-3; (2) Exchange Act rule 15Fi-2; (3) Exchange Act rule 15Fi-3; (4)
Exchange Act rule 15Fi-4; (5) Exchange Act rule 15Fi-5; (6) Exchange
Act rule 15Fk-1; (7) Exchange Act rule 18a-1; (8) Exchange Act rule
18a-3; (9) Exchange Act rule 18a-5; (10) Exchange Act rule 18a-
6(b)(1)(viii); and (11) Exchange Act rule 18a-7. This proposed approach
was consistent with the approach taken by the Commission in the French
and UK Orders.\185\
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    \184\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46513-22, 46530-33.
    \185\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

    The Commission did not receive comment on these proposed conditions
and the Amended Order includes the conditions.\186\
---------------------------------------------------------------------------

    \186\ See paras. (f)(1)(i)(G)(2), (f)(1)(i)(L)(2),
(f)(1)(i)(M)(2), (f)(1)(i)(M)(3), (f)(1)(i)(N)(2), (f)(1)(i)(O)(2),
(f)(2)(i)(E)(2), (f)(2)(i)(H)(2), (f)(2)(i)(H)(3), (f)(2)(i)(I)(2),
(f)(2)(i)(J)(2), (f)(2)(i)(K)(2), (f)(2)(i)(K)(3), (f)(2)(i)(P)(2),
(f)(3)(i)(C), (f)(3)(i)(D), (f)(3)(ii)(B), (f)(3)(iii)(C),
(f)(3)(iv)(C), (f)(3)(iv)(D), (f)(4)(i)(A)(2), and (f)(4)(i)(D)(2)
of the Amended Order.
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    Fourth, the Commission conditioned substituted compliance with
discrete provisions of the Exchange Act Recordkeeping and Reporting
Requirements that would be important for monitoring or examining
compliance with the capital rule for nonbank security-based swap
dealers on the Covered Entity applying substituted compliance with
respect to the capital rule (i.e., the Rule 18a-1 Condition).\187\ This
approach was designed to ensure that, if the Covered Entity does not
apply substituted compliance with respect to Exchange Act rule 18a-1,
it makes and preserves records and files reports that the Commission
uses to monitor and examine for compliance with the Exchange Act rule
18a-1, and that the firm makes and preserves records to assist it in
complying with these rules. This proposed approach was consistent with
the approach taken by the Commission in the French and UK Orders.\188\
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    \187\ See German Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46514-15, 46530-33.
    \188\ See French Order, 86 FR 41650-51; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

    The Commission did not receive comment on these proposed conditions
and the Amended Order includes the conditions.\189\
---------------------------------------------------------------------------

    \189\ See paras. (f)(1)(i)(A)(2), (f)(1)(i)(B)(2),
(f)(1)(i)(C)(2), (f)(1)(i)(D)(2), (f)(1)(i)(F)(2), (f)(1)(i)(H)(2),
(f)(1)(i)(I)(2), (f)(1)(i)(J)(2), (f)(2)(i)(C)(2), (f)(2)(i)(F)(2),