rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act rule 15Fi-3
(``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4 (``Rule 15Fi-
4 Condition''); (5) Exchange Act rule 15Fi-5 (``Rule 15Fi-5
Condition''); (6) Exchange Act rule 15Fk-1 (``Rule 15Fk-1 Condition'');
(7) Exchange Act rule 18a-1 (``Rule 18a-1 Condition''); (8) Exchange
Act rule 18a-3 (``Rule 18a-3 Condition''); (9) Exchange Act rule 18a-5
(``Rule 18a-5 Condition'') and (10) Exchange Act rule 18a-7 (``Rule
18a-7 Condition''). This proposed approach is consistent with the
approach taken by the Commission in the French and UK Orders.\133\
---------------------------------------------------------------------------

    \133\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

    Moreover, while certain recordkeeping and reporting requirements
are not expressly linked to Exchange Act rule 18a-1, they would be
important to the Commission's ability to monitor or examine for
compliance with the capital requirements of this rule. The records also
would assist the firm in monitoring its net capital position and,
therefore, in complying with Exchange rule 18a-1. Therefore,
substituted compliance with respect to these recordkeeping and
reporting requirements would be subject to the condition that the
Covered Entity applies substituted compliance with respect to Exchange
Act rule 18a-1 (i.e., the ``Rule 18a-1 Condition''). This approach
would be 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.
    Additionally, substituted compliance with respect to paragraphs
(a)(1), (b), and (c) through (h) of Exchange Act rule 18a-7 would be
subject to the additional condition that the Covered Entity applies
substituted compliance with respect to Exchange Act rule 18a-
6(b)(1)(viii) (the ``Rule 18a-6(b)(1)(viii) Condition''). This record
preservation requirement is directly linked to the financial and
operational reporting requirements of paragraphs (a)(1), (b), and (c)
through (h) of Exchange Act rule 18a-7 and this additional condition
would be designed to provide clarity as to the Covered Entity's
obligations under this record preservation requirement when applying
substituted compliance with respect to paragraphs (a)(1), (b), and (c)
through (h) of Exchange Act rule 18a-7 pursuant to this proposed
Amended Order. This proposed approach is consistent with the approach
taken by the Commission in the French and UK Orders.\134\
---------------------------------------------------------------------------

    \134\ See French Order, 86 FR 41650; UK Order, 86 FR 43361.
---------------------------------------------------------------------------

2. Exchange Act Rule 18a-5
    Exchange Act rule 18a-5 requires SBS Entities to make and keep
current various types of records. The requirements for SBS Entities
without a prudential regulator are set forth in paragraph (a) of the
rule.\135\ The requirements for SBS Entities with a prudential
regulator are set forth in paragraph (b) of the rule.\136\ The Order
makes substituted compliance available for the requirements of
paragraph (b) of Exchange Act rule 18a-5 (subject to conditions and
limitations). The Commission is making a preliminary positive
substituted compliance determination for many of the requirements of
paragraph (a) of Exchange Act rule 18a-5 and making preliminary
positive substituted compliance determinations with respect to
paragraph (b) in a more granular manner than the Order.\137\
---------------------------------------------------------------------------

    \135\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
    \136\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
    \137\ See para. (f)(1) of the proposed Amended Order.
---------------------------------------------------------------------------

    However, certain of the requirements in these paragraphs are linked
to substantive Exchange Act requirements for which substituted
compliance is not available or a positive substituted compliance would
not be made under the proposed Amended Order. In these cases, a
positive substituted compliance determination would not be made for the
linked requirement in Exchange Act rule 18a-5 or the portion of the
requirement in Exchange Act rule 18a-5 that is linked to the
substantive Exchange Act requirement.\138\
---------------------------------------------------------------------------

    \138\ A positive preliminary substituted compliance
determination would not be made for the following requirements of
Exchange Act rule 18a-5 because they are linked to a substantive
Exchange Act requirement for which the proposed Amended Order would
not provide substituted compliance: (1) The portion of Exchange Act
rule 18a-5(a)(9) that relates to Exchange Act rule 18a-2 would be
subject to the Rule 18a-2 Exclusion; (2) Exchange Act rules 18a-
5(a)(13) and (14) and (b)(9) and (10) are fully linked to Exchange
Act rule 18a-4 and, therefore, would be subject to the Rule 18a-4
Exclusion; (3) the portions of Exchange Act rules 18a-5(a)(16) and
(b)(12) that relate to Exchange Act rule 15Fh-6 would be subject to
the Rule 15Fh-6 Exclusion; (4) the portions of Exchange Act rules
18a-5(a)(17) and (b)(13) that relate to Exchange Act rule 15Fh-4
would be subject to the Rule 15Fh-4 Exclusion; and (5) the portions
of Exchange Act rules 18a-5(a)(17) and (b)(13) that relate to
Exchange Act rule 15Fh-5 would be subject to the 15Fh-5 Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-5
are fully or partially linked to substantive Exchange Act requirements
where a preliminary positive substituted compliance determination would
be made under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-5 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\139\
---------------------------------------------------------------------------

    \139\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rules 18a-5(a)(6), (a)(15), (b)(6)
and (b)(11) are linked to Exchange Act rule 15Fi-2 and, therefore,
would be subject to the Rule 15Fi-2 Condition; (2) Exchange Act rule
18a-5(a)(9) is linked to Exchange Act rule 18a-1 and, therefore,
would be subject to the Rule 18a-1 Condition; (3) Exchange Act rule
18a-5(a)(12) is linked to Exchange Act rule 18a-3 and, therefore,
would be subject to the Rule 18a-3 Condition; (4) Exchange Act rules
18a-5(a)(17) and (b)(13) are linked to Exchange Act rule 15Fh-3 and,
therefore, would be subject to the Rule 15Fh-3 Condition; (5)
Exchange Act rules 18a-5(a)(17) and (b)(13) are linked to Exchange
Act rule 15Fk-1 and, therefore, would be subject to the Rule 15Fk-1
Condition; (6) Exchange Act rules 18a-5(a)(18)(i) and (ii) and
(b)(14)(i) and (ii) are linked to Exchange Act rule 15Fi-3 and,
therefore, would be subject to the Rule 15Fi-3 Condition; and (7)
Exchange Act rules 18a-5(a)(18)(iii) and (b)(14)(iii) are linked to
Exchange Act rule 15Fi-4 and, therefore, would be subject to the
Rule 15Fi-4 Condition.
---------------------------------------------------------------------------

    Moreover, there are certain requirements in Exchange Act rule 18a-5
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, substituted compliance
with respect to these requirements of Exchange Act rule 18a-5 would be
subject to the condition that the Covered Entity applies substituted
compliance for Exchange Act rule 18a-1 (i.e., the Rule 18a-1
Condition).\140\
---------------------------------------------------------------------------

    \140\ Substituted compliance with the requirements of Exchange
Act rules 18a-5(a)(1), (2), (3), (4), (5), (7), (8), and (9) would
be conditioned on the Covered Entity applying substituted compliance
to Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    In addition, the proposed Amended Order would allow a Covered
Entity to apply substituted compliance on a transaction-by-transaction
basis to the Commission's recordkeeping

requirements that are linked with the counterparty protection
requirements of Exchange Act rule 15Fh-3.\141\ This approach would
align with the proposed Amended Order allowing Covered Entities to
apply substituted compliance on a transaction-by-transaction basis for
the Commission's counterparty protection requirements.
---------------------------------------------------------------------------

    \141\ See para. (f)(1)(ii)(B) of the proposed Amended Order.
---------------------------------------------------------------------------

    Under the proposed Amended Order, substituted compliance in
connection with the record making requirements of Exchange Act rule
18a-5 would be subject to the condition that the Covered Entity: (1)
Preserves all of the data elements necessary to create the records
required by Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7) (if
not prudentially regulated) or Exchange Act rules 18a-5(b)(1), (2),
(3), and (7) (if prudentially regulated); and (2) upon request
furnishes promptly to representatives of the Commission the records
required by those rules (``SEC Format Condition'').\142\ This proposed
condition is modeled on the alternative compliance mechanism in
paragraph (c) of Exchange Act rule 18a-5. In effect, a Covered Entity
applying substituted compliance with respect to these requirements of
Exchange Act rule 18a-5 would need to comply with the comparable EU and
German requirements. However, under the SEC Format Condition, the
Covered Entity would need to produce a record that is formatted in
accordance with the requirements of Exchange Act rule 18a-5 at the
request of Commission staff. The objective would be to require--on a
very limited basis--the production of a record that consolidates the
information required by Exchange Act rules 18a-5(a)(1), (2), (3), (4),
and (7) (if not prudentially regulated) or Exchange Act rules 18a-
5(b)(1), (2), (3), and (7) (if prudentially regulated) in a single
record and, as applicable, in a blotter or ledger format. This would
assist the Commission staff in reviewing the information on the record.
---------------------------------------------------------------------------

    \142\ See para. (f)(1)(ii)(A) of the proposed Amended Order. The
Order includes this condition for a Covered Entity with a prudential
regular to apply substituted compliance for Exchange Act rule 18a-5.
The proposed Amended Order would extend the scope of this condition
to address Covered Entities without a prudential regulator applying
substituted compliance for the requirements of Exchange Act rule
18a-5.
---------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-5 by listing in each row: (1) The
paragraph of the proposed Amended Order that sets forth the preliminary
determination; (2) the paragraph(s) of Exchange Act rule 18a-5 to which
the preliminary determination applies; (3) a brief description of the
records required by the paragraph(s); and (4) a brief description of
any additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Amended Order would not provide substituted
compliance.\143\
---------------------------------------------------------------------------

    \143\ The table does not include the proposed conditions for
applying substituted compliance to Exchange Act rule 18a-5; namely
that the Covered Entity: (1) Must be subject to and comply with
specified requirements of foreign law; and (2) as discussed below,
must promptly furnish to a representative of the Commission upon
request an English translation of a record. See para. (f)(8) of the
proposed Amended Order (setting forth the English translation
requirement).

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description    Additional conditions
                                                                                and
                                                                                partial exclusions
----------------------------------------------------------------------------------------------------------------
(f)(1)(i)(A)..............  (a)(1).............  (b)(1)............  Trade blotters....  (1) SEC Format
                                                                                Condition.
                                                                                (2) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(1).
(f)(1)(i)(B)..............  (a)(2).............  ..................  General ledger....  (1) SEC Format
                                                                                Condition.
                                                                                (2) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(2).
(f)(1)(i)(C)..............  (a)(3).............  (b)(2)............  Account ledgers...  (1) SEC Format
                                                                                Condition.
                                                                                (2) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(3).
(f)(1)(i)(D)..............  (a)(4).............  (b)(3)............  Stock record......  (1) SEC Format
                                                                                Condition.
                                                                                (2) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(4).
(f)(1)(i)(E)..............  ...................  (b)(4)............  Memoranda of        N/A.
                                                                      brokerage orders.
(f)(1)(i)(F)..............  (a)(5).............  (b)(5)............  Memoranda of        Rule 18a-1 Condition
                                                                      proprietary         for ] (a)(5).
                                                                      orders.
(f)(1)(i)(G)..............  (a)(6).............  (b)(6)............  Confirmations,      Rule 15Fi-2 Condition.
                            (a)(15)............  (b)(11)...........   trade
                                                                      verification.
(f)(1)(i)(H)..............  (a)(7).............  (b)(7)............  Accountholder       (1) SEC Format
                                                                      information.        Condition.
                                                                                (2) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(7).
(f)(1)(i)(I)..............  (a)(8).............  ..................  Options positions.  Rule 18a-1 Condition.
(f)(1)(i)(J)..............  (a)(9).............  ..................  Trial balances,     (1) Rule 18a-1
                                                                      computation of      Condition.
                                                                      net capital and    (2) Rule 18a-2
                                                                      tangible net        Exclusion.
                                                                      worth.
(f)(1)(i)(K)..............  (a)(10)............  (b)(8)............  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
(f)(1)(i)(L)..............  (a)(12)............  ..................  Non-cleared margin  Rule 18a-3 Condition.
                                                                      rule calculations.
(f)(1)(i)(M)..............  (a)(17)............  (b)(13)...........  Compliance with     (1) Rule 15Fh-3
                                                                      business conduct    Condition.
                                                                      requirements.      (2) Rule 15Fk-1
                                                                                Condition.
                                                                                (3) Rule 15Fh-4
                                                                                Exclusion.
                                                                                (4) Rule 15Fh-5
                                                                                Exclusion.
(f)(1)(i)(N)..............  (a)(18)(i).........  (b)(14)(i)........  Portfolio           Rule 15Fi-3 Condition.
                            (a)(18)(ii)........  (b)(14)(ii).......   reconciliation.
(f)(1)(i)(O)..............  (a)(18)(iii).......  (b)(14)(iii)......  Portfolio           Rule 15Fi-4 Condition.
                                                                      compression.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-5
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraphs of Exchange Act rule 18a-5 to which the determination
applies; (3) a brief description of the records required by the
paragraphs; and (4) a brief description of why the requirement is
excluded from substituted compliance.

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description   Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(1)(ii)(C).............  (a)(13)............  (b)(9)............  Possession or       Rule 18a-4 Exclusion.
                                                                      control records.
(f)(1)(ii)(C).............  (a)(14)............  (b)(10)...........  Reserve             Rule 18a-4 Exclusion.
                                                                      computations.
(f)(1)(ii)(C).............  (a)(16)............  (b)(12)...........  Political           Rule 15Fh-6 Exclusion.
                                                                      contribution
                                                                      records.
----------------------------------------------------------------------------------------------------------------

3. Exchange Act Rule 18a-6
    Exchange Act rule 18a-6 requires an SBS Entity to preserve certain
types of records if it makes or receives them (in addition to the
records the SBS Entity is required to make and keep current pursuant to
Exchange Act rule 18a-5).\144\ Exchange Act rule 18a-6 also prescribes
the time period that these additional records and the records required
to be made and kept current pursuant to Exchange Act rule 18a-5 must be
preserved and the manner in which they must be preserved.
---------------------------------------------------------------------------

    \144\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------

    Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the
records that an SBS Entity must retain if it makes or receives them and
prescribes the retention periods for these records as well as for the
records that must be made and kept current pursuant to Exchange Act
rule 18a-5. Certain of these paragraphs prescribe requirements
separately for SBS Entities without a prudential regulator and SBS
Entities with a prudential regulator.\145\ The Order makes substituted
compliance available for the requirements of these paragraphs
applicable to SBS Entities with a prudential regulator. As discussed
below, the Commission is making a preliminary positive substituted
compliance determination for many of the requirements of these
paragraphs applicable to SBS Entities without a prudential regulator.
Further, the Commission is making preliminary positive substituted
compliance determinations for many of the requirements of these
paragraphs applicable to SBS Entities with a prudential regulator in a
more granular manner than the Order.
---------------------------------------------------------------------------

    \145\ Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a-6 apply to SBS Entities without a prudential
regulator. Paras. (a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of
Exchange Act rule 18a-6 apply to SBS Entities with a prudential
regulator. Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act
rule 18a-6 apply to SBS Entities irrespective of whether they have a
prudential regulator.
---------------------------------------------------------------------------

    However, certain of these requirements are fully or partially
linked to substantive Exchange Act requirements for which a positive
substituted compliance determination would not be made under the
proposed Amended Order. In these cases, a positive substituted
compliance determination would not be made for the linked requirement
in Exchange Act rule 18a-6.\146\
---------------------------------------------------------------------------

    \146\ A positive substituted compliance determination would not
be made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which the proposed Amended Order would not provide substituted
compliance: (1) The portion of Exchange Act rule 18a-6(b)(1)(v)
relating to Exchange Act rule 18a-2 would be subject to the Rule
18a-2 Exclusion; (2) Exchange Act rule 18a-6(b)(1)(viii)(L) is fully
linked to Exchange Act Rule 18a-4 and, therefore, would be subject
to the Rule 18a-4 Exclusion; (3) the portion of Exchange Act rule
18a-6(b)(1)(viii)(M) relating to Exchange Act rule 18a-2 would be
subject to the Rule 18a-2 Exclusion; (4) Exchange Act rules 18a-
6(b)(1)(xi) and (b)(2)(vi) are fully linked to Regulation SBSR and,
therefore, would be subject to the Regulation SBSR Exclusion; (5)
Exchange Act rules 18a-6(b)(1)(xiii) and 18a-6(b)(2)(viii) are fully
linked to Exchange Act rules 15Fh-4 and, therefore, would be subject
to the Rule 15Fh-4 Exclusion; (6) Exchange Act rules 18a-
6(b)(1)(xiii) and 18a-6(b)(2)(viii) are fully linked to Exchange Act
rule 15Fh-5 and, therefore, would be subject to the Rule 15Fh-5
Exclusion; (7) Exchange Act rule 18a-6(b)(2)(v) is fully linked to
Exchange Act rule 18a-4 and, therefore, would be subject to the Rule
18a-4 Exclusion; and (8) the portion of Exchange Act rule 18a-6(c)
relating to Form SBSE and its variations would be subject to the
Form SBSE Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-6
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-6 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\147\
---------------------------------------------------------------------------

    \147\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rule 18a-6(b)(1)(v) is linked to
Exchange Act rule 18a-1 and, therefore, would be subject to the Rule
18a-1 Condition; (2) Exchange Act rules 18a-6(b)(1)(viii) and
(b)(2)(v) are linked to Exchange Act rule 18a-7 and, therefore,
would be subject to the Rule 18a-7 Condition; (3) Exchange Act rule
18a-6(b)(1)(viii) is linked to Exchange Act rule 18a-1 and,
therefore, would be subject to the Rule 18a-1 Condition; (4)
Exchange Act rule 18a-6(b)(1)(ix) is linked to Exchange Act rule
18a-1 and, therefore, would be subject to the Rule 18a-1 Condition;
(5) Exchange Act rule 18a-6(b)(1)(x) is linked to Exchange Act rule
18a-1 and, therefore, would be subject to the Rule 18a-1 Condition;
(6) Exchange Act rules 18a-6(b)(1)(xii) and (b)(2)(vii) are linked
to Exchange Act rule 15Fh-3 and, therefore, would be subject to the
Rule 15Fh-3 Condition; (7) Exchange Act rules 18a-6(b)(1)(xii) and
(b)(2)(vii) are linked to Exchange Act rule 15Fk-1 and, therefore,
would be subject to the Rule 15Fk-1 Condition; (8) Exchange Act
rules 18a-6(d)(4) and (d)(5) are linked to Exchange Act rule 15Fi-3
and, therefore, would be subject to the Rule 15Fi-3 Condition; (9)
Exchange Act rules 18a-6(d)(4) and (d)(5) are linked to Exchange Act
rule 15Fi-4 and, therefore, would be subject to the Rule 15Fi-4
Condition; and (10) Exchange Act rules 18a-6(d)(4) and (d)(5) are
linked to Exchange Act rule 15Fi-3 and, therefore, would be subject
to the Rule 15Fi-5 Condition.
---------------------------------------------------------------------------

    Moreover, there are certain requirements in Exchange Act rule 18a-6
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, under the proposed
Amended Order, substituted compliance for these requirements of
Exchange Act rule 18a-6 would be subject to the Rule 18a-1
Condition.\148\
---------------------------------------------------------------------------

    \148\ Substituted compliance with the requirements of Exchange
Act rules 18a-6(b)(1)(ii), (b)(1)(iii), (b)(1)(vi), (b)(1)(vii),
(d)(2)(i), and (d)(3)(i) would be conditioned on the Covered Entity
applying substituted compliance to Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for

preserving records electronically. Paragraph (f) sets forth
requirements for when records are prepared or maintained by a third
party. The Order makes substituted compliance available for the
requirements of paragraphs (e) and (f) of Exchange Act rule 18a-6 if
the Covered Entity has a prudential regulator. The proposed Amended
Order would extend this treatment to Covered Entities without a
prudential regulator.\149\
---------------------------------------------------------------------------

    \149\ See paras. (f)(2)(i)(Q) and (R) of the proposed Amended
Order.
---------------------------------------------------------------------------

    Paragraph (g) of Exchange Act rule 18a-6 requires an SBS Entity to
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the SBS Entity that
are required to be preserved under Exchange Act rule 18a-6, or any
other records of the SBS Entity that are subject to examination or
required to be made or maintained pursuant to section 15F of the
Exchange Act that are requested by a representative of the Commission.
The Order does not make substituted compliance available for the
requirements of paragraph (g) of Exchange Act rule 18a-6 because there
is no comparable requirement in the EU or Germany to produce these
records to a representative of the Commission. The proposed Amended
Order similarly would not make substituted compliance available for
paragraph (g) of Exchange Act rule 18a-6.
    The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-6 by listing in each row: (1) The
paragraph of the proposed Amended Order that sets forth the
determination; (2) the paragraph(s) of Exchange Act rule 18a-6 to which
the determination applies; (3) a brief description of the records
required by the paragraph(s); and (4) a brief description of any
additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Amended Order would not provide substituted
compliance.\150\
---------------------------------------------------------------------------

    \150\ The table does not include the proposed conditions for
applying substituted compliance to Exchange Act rule 18a-6; namely
that the Covered Entity: (1) Must be subject to and complies with
the requirements of foreign law; and (2) must promptly furnish to a
representative of the Commission upon request an English translation
of a record. See para. (f)(8) of the proposed Amended Order (setting
forth the English translation requirement).

                                             Exchange Act Rule 18a-6
                                              [Record preservation]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description   Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(2)(i)(A)..............  (a)(1).............  (a)(2)............  6 year record       N/A.
                                                                      preservation.
(f)(2)(i)(B)..............  (b)(1)(i)..........  (b)(2)(i).........  3 year record       N/A.
                                                                      preservation.
(f)(2)(i)(C)..............  (b)(1)(ii).........  ..................  Bank records,       Rule 18a-1 Condition.
                            (b)(1)(iii)........                       bills.
(f)(2)(i)(D)..............  (b)(1)(iv).........  (b)(2)(ii)........  Communications....  N/A.
(f)(2)(i)(E)..............  (b)(1)(v)..........  ..................  Trial balances....  (1) Rule 18a-1
                                                                                Condition.
                                                                                (2) Rule 18a-2
                                                                                Exclusion.
(f)(2)(i)(F)..............  (b)(1)(vi).........  (b)(2)(iii).......  Account documents.  Rule 18a-1 Condition
                                                                                for ] (b)(1)(vi).
(f)(2)(i)(G)..............  (b)(1)(vii)........  (b)(2)(iv)........  Written agreements  Rule 18a-1 Condition
                                                                                for ] (b)(1)(vii).
(f)(2)(i)(H)..............  (b)(1)(viii).......  ..................  Information         (1) Rule 18a-7
                                                                      supporting          Condition.
                                                                      financial reports. (2) Rule 18a-4
                                                                                Exclusion for ]
                                                                                (b)(1)(viii)(L).
                                                                                (3) Rule 18a-2
                                                                                Exclusion for ]
                                                                                (b)(1)(viii)(M).
(f)(2)(i)(I)..............  (b)(1)(ix).........  ..................  Rule 15c3-4 risk    Rule 18a-1 Condition.
                                                                      management
                                                                      records.
(f)(2)(i)(J)..............  (b)(1)(x)..........  ..................  Credit risk         Rule 18a-1 Condition.
                                                                      determinations.
(f)(2)(i)(K)..............  (b)(1)(xii)........  (b)(2)(vii).......  Business conduct    (1) Rule 15Fh-3
                                                                      standard records.   Condition.
                                                                                (2) Rule 15Fk-1
                                                                                Condition.
                           -----------------------------------------
(f)(2)(i)(L)..............                    (c)                    Corporate           Form SBSE Exclusion.
                                                                      documents.
                           -----------------------------------------
(f)(2)(i)(M)..............                   (d)(1)                  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
                           -----------------------------------------
(f)(2)(i)(N)..............  (d)(2)(i)..........  (d)(2)(ii)........  Regulatory          Rule 18a-1 Condition
                                                                      authority reports.  for ] (d)(2)(i).
(f)(2)(i)(O)..............  (d)(3)(i)..........  (d)(3)(ii)........  Compliance,         Rule 18a-1 Condition
                                                                      supervisory, and    for ] (d)(3)(i).
                                                                      procedures
                                                                      manuals.
                           -----------------------------------------
(f)(2)(i)(P)..............                   (d)(4)                  Portfolio           (1) Rule 15Fi-3
                                                                      reconciliation.     Condition.
                                             (d)(5)                                      (2) Rule 15Fi-4
                                                                                Condition.
                                                                                (3) Rule 15Fi-5
                                                                                Condition.
                           -----------------------------------------
(f)(2)(i)(Q)..............                    (e)                    Electronic storage  N/A.
                                                                      system.
(f)(2)(i)(R)..............                    (f)                    Third-party         N/A.
                                                                      recordkeeper.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-6
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-6 to which the

determination applies; (3) a brief description of the records required
by the paragraph(s); and (4) a brief description of why the requirement
is excluded from substituted compliance.

                                             Exchange Act Rule 18a-6
                                                 [Preservation]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description   Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(2)(ii)................  (b)(1)(xi).........  (b)(2)(vi)........  Regulation SBSR     Regulation SBSR
                                                                      information.        Exclusion.
(f)(2)(i)(H)..............  ...................  (b)(2)(v).........  Information         Rule 18a-4 Exclusion.
                                                                      supporting
                                                                      financial reports.
(f)(2)(ii)................  (b)(1)(xiii).......  (b)(2)(viii)......  Special entity      (1) Rule 15Fh-4
                                                                      documents.          Exclusion.
                                                                                (2) Rule 15Fh-5
                                                                                Exclusion.
----------------------------------------------------------------------------------------------------------------

4. Exchange Act Rule 18a-7
    Exchange Act rule 18a-7 requires SBS Entities, on a monthly basis
(if not prudentially regulated) or on a quarterly basis (if
prudentially regulated), to file an unaudited financial and operational
report on the FOCUS Report Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated). The Commission will use the FOCUS
Reports filed by the SBS Entities to both monitor the financial and
operational condition of individual SBS Entities and to perform
comparisons across SBS Entities. The FOCUS Report Part IIC elicits less
information than the FOCUS Report Part II because the Commission does
not have responsibility for overseeing the capital and margin
requirements applicable to these entities.
    The FOCUS Report Parts II and IIC are standardized forms that
elicit specific information through numbered line items. This
facilitates cross-firm analysis and comprehensive monitoring of all SBS
Entities registered with the Commission. Further, the Commission has
designated the Financial Industry Regulatory Authority, Inc.
(``FINRA'') to receive the FOCUS Reports from SBS Entities.\151\
Broker-dealers registered with the Commission currently file their
FOCUS Reports with FINRA through the eFOCUS system it administers.
Using FINRA's eFOCUS system will enable broker-dealers, security-based
swap dealers, and major security-based swap participants to file FOCUS
Reports on the same platform using the same preexisting templates,
software, and procedures.
---------------------------------------------------------------------------

    \151\ See Order Designating Financial Industry Regulatory
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------

    Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS Entities
with a prudential regulator to file the FOCUS Report Part IIC on a
quarterly basis. The Order provides substituted compliance for this
requirement subject to the condition that the Covered Entity file with
the Commission periodic unaudited financial and operational information
in the manner and format specified by the Commission by order or rule
(``Manner and Format Condition'') and present the financial information
in accordance with GAAP that the firm uses to prepare general purpose
publicly available or available to be issued financial statements in
Germany (``German GAAP Condition'').\152\ The proposed Amended Order
would continue to provide Covered Entities with a prudential regulator
substituted compliance for paragraph (a)(2) of Exchange Act rule 18a-7,
subject to the Manner and Format and German GAAP Conditions.\153\ The
Commission continues to believe that it would be appropriate to
condition substituted compliance with respect to Exchange Act rule 18a-
7 on the Covered Entity filing unaudited financial and operational
information in a manner and format that facilitates cross-firm analysis
and comprehensive monitoring of all SBS Entities registered with the
Commission.\154\ For example, the Commission could by order or rule
require SBS Entities to file the financial and operational information
with FINRA using the FOCUS Report Part II (if not prudentially
regulated) or Part IIC (if prudentially regulated) but permit the
information input into the form to be the same information the SBS
Entity reports to EU and German authorities.
---------------------------------------------------------------------------

    \152\ Under the Order, Covered Entities with a prudential
regulator must present the information reported in the FOCUS Report
in accordance with GAAP that the firm uses to prepare publicly
available or available to be issued general purpose financial
statements in its home jurisdiction instead of U.S. GAAP if other
GAAP, such as International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB), is
used by the Covered Entity in preparing publicly available or
available to be issued general purpose financial statements in
Germany.
    \153\ See para. (f)(3)(i) of the proposed Amended Order.
    \154\ In addition to the Order, the Manner and Format condition
is included in the French and UK Orders. See French Order, 86 FR
41651; UK Order, 86 FR 43361-62.
---------------------------------------------------------------------------

    Paragraph (a)(1) of Exchange Act rule 18a-7 requires SBS Entities
without a prudential regulator to file the FOCUS Report Part II on a
monthly basis. The proposed Amended Order would provide Covered
Entities without a prudential regulator substituted compliance for
paragraph (a)(1) of Exchange Act rule 18a-7 subject to the Manner and
Format and German GAAP conditions.\155\ However, there would two
additional conditions. First, for the reasons discussed above, the
Covered Entity would need to apply substituted compliance for Exchange
Act Rule 18a-1 (i.e., substituted compliance would be subject to the
Rule 18a-1 Condition).\156\ Second, the Covered Entity would need to
apply substituted compliance with respect to Exchange Act rule 18a-
6(b)(1)(viii) (a record preservation requirement) (``Rule 18a-
6(b)(1)(viii) Condition'').\157\ This record preservation requirement
is directly linked to the financial and operational reporting
requirements of Exchange Act rule 18a-7(a)(1).
---------------------------------------------------------------------------

    \155\ See para. (f)(3)(i) of the proposed Amended Order.
    \156\ See para. (f)(3)(i)(C) of the proposed Amended Order. See
part VII.B.1, supra (discussing how certain recordkeeping and
reporting requirements are expressly linked to or important for
examining compliance with Rule 18a-1 condition).
    \157\ See para. (f)(3)(i)(D) of the proposed Amended Order.
---------------------------------------------------------------------------

    Paragraph (a)(3) of Exchange Act rule 18a-7 requires SBS Entities
without a prudential regulator that have been authorized by the
Commission to compute net capital under Exchange Act rule 18a-1 using
models to file certain monthly or quarterly information related to
their use of models.\158\ Paragraph (b) of Exchange Act rule 18a-7
requires SBS Entities that are not prudentially regulated to make
certain financial information available on their

websites.\159\ Paragraphs (c), (d), (e), (f), (g), and (h) of Exchange
Act rule 18a-7 set forth requirements for SBS Entities that are not
prudentially regulated to annually file financial statements and
certain reports, as well as reports covering those statements and
reports prepared by an independent public accountant.\160\ Paragraph
(i) of Exchange Act rule 18a-7 requires SBS Entities that do not have a
prudential regulator to notify the Commission when they change their
fiscal year.\161\ Finally, Paragraph (j) of Exchange Act rule 18a-7
sets forth requirements with respect to the reports that must be filed
with the Commission under the rule.\162\
---------------------------------------------------------------------------

    \158\ See 17 CFR 240.18a-7(a)(3).
    \159\ See 17 CFR 240.18a-7(b).
    \160\ See 17 CFR 240.18a-7(c) through (h).
    \161\ See 17 CFR 240.18a-7(i).
    \162\ See 17 CFR 240.18a-7(i).
---------------------------------------------------------------------------

    The Commission preliminarily is making a positive substituted
compliance determination for paragraphs (b) through (j) of Exchange Act
rule 18a-7. As discussed below, substituted compliance with respect to
these paragraphs of Exchange Act rule 18a-7 would be subject to certain
conditions and limitations.
    First, certain of the requirements in Exchange Act rule 18a-7 are
fully or partially linked to substantive Exchange Act requirements for
which a positive substituted compliance determination would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-7 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\163\
---------------------------------------------------------------------------

    \163\ Substituted compliance with the following requirements of
Exchange Act rule 18a-7 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rule 18a-7(a)(1) is linked to
Exchange Act rules 18a-1 and 18a-6(b)(1)(viii) and, therefore, would
be subject to the Rule 18a-1 Condition and the Rule 18a-
6(b)(1)(viii) Condition; (2) Exchange Act rule 18a-7(a)(3) is linked
to Exchange Act rule 18a-1 and, therefore, would be subject to the
Rule 18a-1 Condition; (3) Exchange Act rule 18a-7(b) is linked to
Exchange Act rule 18a-6(b)(1)(viii) and, therefore, would be subject
to the Rule 18a-6(b)(1)(viii) Condition; and (4) Exchange Act rules
18a-7(c), (d), (e), (f), (g) and (h) taken as a whole are linked to
Exchange Act rules 18a-1 and 18a-6(b)(1)(viii) and, therefore, would
be subject to the Rule 18a-1 Condition and the Rule 18a-
6(b)(1)(viii) Condition.
---------------------------------------------------------------------------

    Second, under the proposed Amended Order, substituted compliance in
connection with the requirement that Covered Entities without a
prudential regulator file audited annual reports under Exchange Act
rule 18a-7 would be subject to six conditions.\164\ The first condition
would be that the Covered Entity simultaneously sends a copy of the
financial statements the Covered Entity is required to file with EU or
German authorities, including a report of an independent public
accountant covering the financial statements, to the Commission in the
manner specified on the Commission's website (``SEC Filing
Condition''). Because EU and German laws would not otherwise require
the financial statements and report of the independent public
accountant covering the financial statements to be filed with the
Commission, the purpose of this condition would be to provide the
Commission with the financial statements and report to more effectively
supervise and monitor Covered Entities.
---------------------------------------------------------------------------

    \164\ See para. (f)(3)(iv)(B) to the proposed Amended Order.
---------------------------------------------------------------------------

    The second condition would be that the Covered Entity include with
the transmission of the annual financial statements and report the
contact information of an individual who can provide further
information about the financial statements and reports (``Contact
Information Condition''). This would assist the Commission staff in
promptly contacting an individual at the Covered Entity who can respond
to questions that information on the financial statements or report may
raise about the Covered Entity's financial or operational condition.
    The third condition would be that the Covered Entity includes with
the transmission the report of an independent public accountant
required by Exchange Act rule 18a-7(c)(1)(i)(C) covering the annual
financial statements if EU and German laws do not require the Covered
Entity to engage an independent public accountant to prepare a report
covering the annual financial statements (``Accountant's Report
Condition''). The third condition further would provide that the report
of the independent public accountant may be prepared in accordance with
generally accepted auditing standards (``GAAS'') in Germany that are
used to perform audit and attestation services and the accountant
complies with German independence requirements. According to the BaFin
Application, German laws only require certain investment firms
(depending on their size) to have their financial statements audited,
so this condition would be designed to ensure that all SBS Entities
subject to the requirement in rule 18a-7 to file audited annual reports
are required to have their financial statements audited.
    The fourth condition would be that a Covered Entity that is a
security-based swap dealer would need to file the reports required by
Exchange Act rule 18a-7(c)(1)(i)(B) and (C) addressing the statements
identified in Exchange Act rule 18a-7(c)(3) or (c)(4), as applicable,
that relate to Exchange Act rule 18a-4 (``Rule 18a-4 Limited
Exclusion'').\165\ These reports are designed to provide the Commission
with information about an SBS Entity's compliance with Rule 18a-4.
Substituted compliance is not available for Exchange Act rule 18a-4
and, therefore, this condition is designed to provide the Commission
with similar compliance information. Under this condition, Covered
Entities would need to file a limited compliance report that includes
the statements relating to Rule 18a-4 \166\ or an exemption report if
the Covered Entity claims an exemption from Rule 18a-4. The Covered
Entity also would need to file the report of an independent public
accountant covering the limited compliance report or exemption report.
The fourth condition further would provide that the report of the
independent public accountant may be prepared in accordance with GAAS
in Germany that are used to perform audit and attestation services and
the accountant complies with German independence requirements.
---------------------------------------------------------------------------

    \165\ The Commission views this as a limited exclusion from the
availability of substituted compliance for these requirements
because the proposed Amended Order would permit these reports
relating Exchange Act rule 18a-4 to be included with the German
regulatory reports the Covered Entities will file with the
Commission and because the reports could be prepared in accordance
with German GAAS (as discussed below).
    \166\ The limited compliance report would not need to address
Exchange Act rule 18a-9 if the Covered Entity is applying
substituted compliance to this requirement. Further, as discussed
above, substituted compliance with paras. (c) through (h) of
Exchange Act rule 18a-7 is conditioned on the Covered Entity
applying substituted compliance to Exchange Act rule 18a-1.
Therefore, the Covered Entity would not need to address that rule in
the compliance report. Finally, the Covered Entity would not need to
address an account statement rule of a self-regulatory organization.
---------------------------------------------------------------------------

    The fifth condition would be that a Covered Entity that is a major
security-based swap participant would need to file the supporting
schedules required by Exchange Act rule 18a-7(c)(1)(i)(A) and (C)
addressing the statements identified in Exchange Act rules 18a-
7(c)(2)(ii) and (iii) that relate to Exchange Act rule 18a-2 for which
the proposed Amended Order would not provide substituted compliance.
These supporting schedules are the Computation of Tangible Net Worth.
    The sixth condition would be that a Covered Entity that is a
security-based swap dealer would need to file the supporting schedules
required by Exchange Act rule 18a-7(c)(1)(i)(A) and (C) addressing the
statements identified

in Exchange Act rules 18a-7(c)(2)(ii) and (iii) that relate to Exchange
Act rule 18a-4 and 18a-4a if the Covered Entity is not exempt from
Exchange Act rule 18a-4 (i.e., the Rule 18a-4 Limited Exclusion). These
supporting schedules are the Computation for Determination of Security-
Based Swap Customer Reserve Requirements and the Information Relating
to the Possession or Control Requirements for Security-Based Swap
Customers, which are designed to provide the Commission with
information about an SBS Entity's compliance with Rule 18a-4.
Substituted compliance for Exchange Act rule 18a-4 is not available.
    The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-7 by listing in each row: (1)
The paragraph of the proposed Amended Order that sets forth the
determination; (2) the paragraph(s) of Exchange Act rule 18a-7 to which
the determination applies; (3) a brief description of the records
required by the paragraph(s); and (4) a brief description of any
additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Amended Order would not provide substituted
compliance.\167\
---------------------------------------------------------------------------

    \167\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a report. See para. (f)(8) of the proposed
Amended Order (setting forth the English translation requirement).

                                             Exchange Act Rule 18a-7
                                                   [Reporting]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description    Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(3)(i).................  (a)(1).............  (a)(2)............  File FOCUS Reports  (1) Manner and Format
                                                                                Condition.
                                                                                (2) German GAAP
                                                                                Condition.
                                                                                (3) Rule 18a-1
                                                                                Condition for ]
                                                                                (a)(1).
                                                                                (4) Rule 18a-
                                                                                6(b)(1)(viii)
                                                                                Condition for ]
                                                                                (a)(1).
(f)(3)(ii)................  (a)(3).............  ..................  Information         (1) Rule 18a-1
                                                                      related to          Condition.
                                                                      capital models.
(f)(3)(iii)...............  (b)................  ..................  Publish certain     (1) Rule 18a-
                                                                      financial           6(b)(1)(viii)
                                                                      information.        Condition.
(f)(3)(iv)................  (c)................  ..................  File annual         (1) SEC Filing
                            (d)................                       audited reports.    Condition.
                            (e)................                                          (2) Contact Information
                            (f)................                                           Condition.
                            (g)................                                          (3) Accountant's Report
                            (h)................                                           Condition.
                                                                                (4) Rule 18a-4 Limited
                                                                                Exclusion.
                                                                                (5) Supporting
                                                                                Schedules Condition.
                                                                                (6) Rule 18a-1
                                                                                Condition.
                                                                                (7) Rule 18a-
                                                                                6(b)(1)(viii)
                                                                                Condition.
----------------------------------------------------------------------------------------------------------------

5. Exchange Act Rule 18a-8
    Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\168\ The Order
provides substituted compliance for the requirements of Exchange Act
rule 18a-8 applicable to SBS Entities with a prudential regulator
(subject to conditions and limitations). In particular, the
requirements of: (1) Paragraph (c) of Exchange Act rule 18a-8 that an
SBS Entity that is a security-based swap dealer and that files a notice
of adjustment to its reported capital category with a U.S. prudential
regulator must transmit a copy of the notice to the Commission; (2)
paragraph (d) of the rule that an SBS Entity provide notification to
the Commission if it fails to make and keep current books and records
under Exchange Act rule 18a-5 and to transmit a subsequent report on
steps being taken to correct the situation; (3) and paragraph (h) of
the rule setting forth how to make the notifications required by
Exchange Act 18a-8.
---------------------------------------------------------------------------

    \168\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------

    Under the Order, substituted compliance in connection with the
notification requirements of Exchange Act rule 18a-8 are subject to the
conditions that the Covered Entity: (1) Simultaneously sends a copy of
any notice required to be sent by EU or German notification laws to the
Commission in the manner specified on the Commission's website (i.e.,
the ``SEC Filing Condition''); and (2) includes with the transmission
the contact information of an individual who can provide further
information about the matter that is the subject of the notice (i.e.,
the ``Contact Information Condition''). The purpose of these conditions
is to alert the Commission to financial or operational problems that
could adversely affect the firm--the objective of Exchange Act rule
18a-8. In addition, the Order does not provide substituted compliance
for paragraph (g) of Exchange Act rule 18a-8 that an SBS Entity that is
a security-based swap dealer provide notification if it fails to make a
required deposit into its special reserve account for the exclusive
benefit of security-based swap customers under Exchange Act rule 18a-4.
Substituted compliance is not available for Exchange Act rule 18a-4.
    The proposed Amended Order would continue to provide Covered
Entities with a prudential regulator substituted compliance for the
notification requirements of Exchange Act rule 18a-8 discussed above
subject to the conditions and limitations. However, the substituted
compliance determinations would be made on a more granular basis.
Further, the proposed Amended Order would provide Covered Entities
without a prudential regulator substituted compliance for these
notification requirements (also on a granular basis), subject to the
SEC Filing and Contact Information Conditions. The proposed Amended
Order also would apply the limitation with respect to the notification
requirements linked to Exchange Act rule 18a-4 to Covered Entities
without a prudential regulator.

    Exchange Act rule 18a-8 has notification requirements that apply
exclusively to Covered Entities without a prudential regulator. In
particular, paragraphs (a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and
(b)(4) of Exchange Act rule 18a-8 require an SBS Entity that is a
security-based swap dealer and that does not have a prudential
regulator to provide notifications related to the capital requirements
of Exchange Act rule 18a-1. Paragraphs (a)(2) and (b)(3) of Exchange
Act rule 18a-8 require an SBS Entity that is a major security-based
swap participant and that does not have a prudential regulator to
provide notifications related to the capital requirements of Exchange
Act rule 18a-2. Paragraph (e) of Exchange Act rule 18a-8, in pertinent
part, requires an SBS Entity that is a security-based swap dealer and
that does not have a prudential regulator to provide notification if it
has a material weakness under Exchange Act rule 18a-7 and to transmit a
subsequent report on the steps being taken to correct the situation.
    The Commission is preliminarily making a positive substituted
compliance determination for a number of the notification requirements
set forth in these paragraphs, subject to the SEC Filing and Contact
Information Conditions. However, certain of these requirements are
linked to substantive Exchange Act requirements for which the proposed
Amended Order would not provide substituted compliance. In these cases,
a positive substituted compliance determination would not be made for
the linked requirement in Exchange Act rule 18a-8 or the portion of the
requirement in Exchange Act rule 18a-8 that is linked to the
substantive Exchange Act requirement.\169\
---------------------------------------------------------------------------

    \169\ A positive substituted compliance determination would not
be made for the following requirements of Exchange Act rule 18a-8
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) Exchange Act rules 18a-8(a)(3) and (b)(3) are fully
linked to Exchange Act rule 18a-2 and, therefore, would be subject
to the Rule 18a-2 Exclusion; (2) the portion of Exchange Act rule
18a-8(e) that relates to Exchange Act rule 18a-2 would be subject to
the Rule 18a-2 Exclusion; (3) the portion of Exchange Act rule 18a-
8(e) that relates to Exchange Act rule 18a-4 would be subject to the
Rule 18a-4 Exclusion; and (4) Exchange Act rule 18a-8(g) is fully
linked to Exchange act rule 18a-4 and, therefore, would be subject
to the Rule 18a-4 Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-8
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination would be made
under the proposed Amended Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-8 would be
conditioned on the SBS Entity applying substituted compliance to the
linked substantive Exchange Act requirement.\170\
---------------------------------------------------------------------------

    \170\ Substituted compliance with the following requirements of
Exchange Act rule 18a-8 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rules 18a-8(a)(1)(i) and (ii),
(b)(1), (b)(2), and (b)(4) are linked to Exchange Act rule 18a-1
and, therefore, would be subject to the Rule 18a-1 Condition; and
(2) Exchange Act rule 18a-8(d) is linked to Exchange Act rule 18a-5
and, therefore, would be subject to the Rule 18a-5 Condition with
respect to any category of records required to made and kept current
by that rule. With respect to Exchange Act rule 18a-8(d), if the
Covered Entity does not apply substituted compliance with respect to
a category of record required to be made and kept current by
Exchange Act rule 18a-5, the Covered Entity would need to provide
the notification required by Exchange Act rule 18a-8(d) if it fails
to make and keep current that category of record.
---------------------------------------------------------------------------

    The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-8 by listing in each row: (1)
The paragraph of the proposed Amended Order that sets forth the
determination; (2) the paragraph(s) of Exchange Act rule 18a-8 to which
the determination applies; (3) a brief description of the notifications
required by the paragraph(s); and (4) a brief description of any
additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Amended Order would not provide substituted
compliance.\171\
---------------------------------------------------------------------------

    \171\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a notification. See para. (f)(8) of the
proposed Amended Order (setting forth the English translation
requirement).

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(4)(i)(A)..............  (a)(1)(i)..........  ..................  Capital notices...  (1) Rule 18a-1
                            (a)(1)(ii).........                                           Condition.
                            (b)(1).............                                          (2) SEC Filing
                            (b)(2).............                                           Condition.
                            (b)(4).............                                          (3) Contact Information
                                                                                Condition.
(f)(4)(i)(B)..............  (c)................  ..................  Prudential          (1) SEC Filing
                                                                      regulator capital   Condition.
                                                                      category           (2) Contact Information
                                                                      adjustment          Condition.
                                                                      notices.
(f)(4)(i)(C)..............  (d)................  ..................  Books and records   (1) Rule 18a-5
                                                                      notices.            Condition.
                                                                                (2) SEC Filing
                                                                                Condition.
                                                                                (3) Contact Information
                                                                                Condition.
(f)(4)(i)(D)..............  (e)................  ..................  Material weakness   (1) Rule 18a-1
                                                                      notices.            Condition.
                                                                                (2) Rule 18a-2
                                                                                Exclusion.
                                                                                (3) Rule 18a-4 Limited
                                                                                Exclusion.
                                                                                (4) SEC Filing
                                                                                Condition.
                                                                                (5) Contact Information
                                                                                Condition.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-8
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Amended Order would not provide
substituted compliance by listing in each row: (1) The paragraph of the
proposed Amended Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-8 to which the

determination applies; (3) a brief description of the records required
by the paragraph(s); and (4) the exclusion from substituted compliance.

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph               Rule description          Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(4)(ii)(B).............  (a)(2).............  (b)(3)............  MSBSP capital       Rule 18a-2 Exclusion.
                                                                      notices.
(f)(4)(ii)(C).............  (g)................  ..................  Reserve account     Rule 18a-4 Exclusion.
                                                                      notices.
----------------------------------------------------------------------------------------------------------------

6. Exchange Act Rule 18a-9
    Exchange Act rule 18a-9 requires SBS Entities that are security-
based swap dealers without a prudential regulator to examine and count
the securities they physically hold, account for the securities that
are subject to their control or direction but are not in their physical
possession, verify the locations of securities under certain
circumstances, and compare the results of the count and verification
with their records.\172\ The Commission preliminarily believes EU and
German laws produce a comparable result in terms of securities count
requirements.\173\ Accordingly, the Commission preliminarily is making
a positive substituted compliance determination for this rule.\174\
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    \172\ See 17 CFR 240.18a-9.
    \173\ See EMIR article 11(1)(b); EMIR RTS articles 12 and 13;
WpHG section 84; HGB sections 316 and 325; and WpHG section 89 (1)
sentence 1 no. 1.
    \174\ See para. (f)(5) to the proposed Amended Order.
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7. Exchange Act Section 15F(g)
    Exchange Act Section 15F(g) requires SBS Entities to maintain daily
trading records.\175\ The Commission preliminarily believes EU and
German laws produce a comparable result in terms of daily trading
recordkeeping requirements.\176\ Accordingly, the Commission
preliminarily is making a positive substituted compliance determination
for the self-executing requirements in this statute.\177\
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    \175\ See 15 U.S.C. 78o-10(g).
    \176\ See WpHG section 83 para. 1; and MiFID Org Reg article
21(1)(f), 21(4), and 72(1)
    \177\ See para. (f)(6) to the proposed Amended Order.
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8. Examination and Production of Records
    The Order does not extend to, and Covered Entities remain subject
to, the requirement of Exchange Act section 15F(f) to keep books and
records open to inspection by any representative of the Commission and
the requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the Covered Entity that are required to be
preserved under Exchange Act rule 18a-6, or any other records of the
Covered Entity that are subject to examination or required to be made
or maintained pursuant to Exchange Act section 15F that are requested
by a representative of the Commission.\178\ The proposed Amended Order
similarly would not extend substituted compliance to these inspection
and production requirements.\179\
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    \178\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g). The French and UK Orders do not extend substituted compliance
to these requirements. See French Order, 86 FR 41650; UK Order, 86
FR 43361.
    \179\ See para. (f)(7) to the proposed Amended Order.
---------------------------------------------------------------------------

    Consequently, every Covered Entity registered with the Commission,
whether complying directly with Exchange Act requirements or relying on
substituted compliance as a means of complying with the Exchange Act,
is required to satisfy the inspection and production requirements
imposed on such entities under the Exchange Act. Covered Entities may
make, keep, and preserve records, subject to the conditions described
above, in a manner prescribed by applicable EU and German requirements.
BaFin has provided the Commission with 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. Consistent with those assurances and the requirements that
apply to all Covered Entities under the Exchange Act, Covered Entities
operating under the proposed Amended Order would need to keep books and
records open to inspection by any representative of the Commission and
to furnish promptly to a representative of the Commission legible,
true, complete, and current copies of those records of the firm that
these entities are required to preserve under Exchange Act rule 18a-6
(which would include records for which a positive substituted
compliance determination is being made with respect to Exchange Act
rule 18a-6 under the Order), or any other records of the firm that are
subject to examination or required to be made or maintained pursuant to
Exchange Act section 15F that are requested by a representative of the
Commission.
9. English Translations
    The proposed Amended Order provides that to the extent documents
are not prepared in the English language, Covered Entities would need
to furnish to a representative of the Commission upon request an
English translation of any record, report, or notification of the
Covered Entity that is required to be made, preserved, filed, or
subject to examination pursuant to Exchange Act section 15F or the
German Order.\180\ This proposed condition would be designed to
addresses difficulties that Commission examinations staff would have
examining Covered Entities that furnish documents in a foreign
language. The English translations would need to be provided promptly.
This condition is included in the French and UK Orders.\181\
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    \180\ See para. (f)(8) to the proposed Amended Order.
    \181\ See French Order, 86 FR 41651; UK Order, 86 FR 43361.
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VIII. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness Related to Capital and Margin

A. General Considerations

    Exchange Act rule 3a71-6 provides that the Commission's assessment
of the comparability of the requirements of the foreign financial
regulatory system take into account ``the effectiveness of the
supervisory program administered, and the enforcement authority
exercised'' by the foreign financial regulatory authority. This
prerequisite accounts for the understanding that substituted compliance
determinations should reflect the reality of the foreign regulatory
framework, in that rules that appear high-quality on paper nonetheless
should not form the basis

for substituted compliance if--in practice--market participants are
permitted to fall short of their regulatory obligations. This
prerequisite, however, also recognizes that differences among the
supervisory and enforcement regimes should not be assumed to reflect
flaws in one regime or another.\182\
---------------------------------------------------------------------------

    \182\ See generally Business Conduct Adopting Release, 81 FR
30079.
---------------------------------------------------------------------------

    In the substituted compliance Order for Germany the Commission
concluded that ``the relevant supervisory and enforcement
considerations in Germany are consistent with substituted compliance.''
\183\ In its amended application, BaFin provided the Commission with
additional information on the supervision and enforcement framework for
compliance with capital and margin requirements applicable to
significant credit institutions. For purposes of the supervision of
capital and margin by Germany, the Commission preliminary believes that
the relevant supervisory and enforcement considerations for capital and
margin in Germany are consistent with substituted compliance.
---------------------------------------------------------------------------

    \183\ Order, 85 FR 84697.
---------------------------------------------------------------------------

    In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission has considered the supervision and enforcement framework
described in the Order as well as the following factors:\184\
---------------------------------------------------------------------------

    \184\ The factors described in this section are in addition to
the factors described in the German Substituted Compliance Notice
and Proposed Order. See Exchange Act Release No. 90378 (Nov. 9,
2020), 85 FR 72726, 72739-40 (Nov. 13, 2020) (``German Substituted
Compliance Notice and Proposed Order'').
---------------------------------------------------------------------------

B. Supervisory and Enforcement Framework in Germany

    The ECB, through its single supervisory mechanism (``SSM'') and
executed by joint supervisory teams (``JSTs''), supervises firms for
compliance with the CRD and CRR, including all capital requirements.
The JSTs comprise of ECB staff, BaFin staff, and staff from other
countries in the EU where the significant institution has a subsidiary
or branch.\185\ For each firm, the JST conducts a Supervisory Review
and Evaluation Process (``SREP''), which measures the risks for each
bank. The SREP shows where a firm stands in terms of capital
requirements and the way it handles risks. To develop the SREP,
supervisors review the sustainability of each firm's business model,
governance and risk management by the firm, capital risks (credit,
market, operational, rate in the banking book and equity risks), and
liquidity and funding risks. Once the SREP is developed, the firm will
receive a letter setting forth specific measures that must be
implemented the following year based on the firm's individual profile.
For example, the SREP may ask the firm to hold additional capital or
set forth qualitative requirements related to the firm's governance
structure or management. After these supervisory measures are imposed,
the JST will monitor the credit institutions to ensure that it
establishes compliance with the regulatory framework and supervisory
measures taken. If a credit institution does not comply with such
measures, additional actions are considered. Available actions for the
JST range from informal communication with the supervised entity to
enforcement measures or sanctions.
---------------------------------------------------------------------------

    \185\ Information on the ECB supervision was obtained from the
SSM Supervisory Manual, March 2018, available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.supervisorymanual201803.en.pdf?42da4200dd38971a82c2d15b9ebc0e65.
---------------------------------------------------------------------------

    Misconduct detected by the JSTs is addressed primarily by the ECB.
The ECB has the power to enforce violations and to impose fines on
supervised entities for breaches of directly applicable European Union
law. The ECB can also ask national competent authorities (such as
BaFin) to open proceedings that may lead to the imposition of certain
pecuniary and non-pecuniary penalties.

IX. Request for Comment

A. Nonbank Capital and Margin

1. Capital
    The Commission further requests comment regarding the comparability
analysis of EU and German capital requirements with Exchange Act
capital requirements for security-based swap dealers without a
prudential regulator. Commenters particularly are invited to address
the basis for substituted compliance in connection with those
requirements, and the proposed conditions and limitations connected to
substituted compliance for those requirements. Does EU and German law
taken as a whole produce regulatory outcomes that are comparable to
those of Exchange Act rule 18a-1? Are there any additional conditions
that should be applied to substituted compliance for these capital
requirements to promote comparable regulatory outcomes, as a supplement
or alternative to those in the proposed Amended Order?
    The Commission requests comment on the proposed capital condition
that is designed to bridge the gap between the Basel capital standard
and the net liquid assets test imposed by Exchange Act rule 18a-1.
Under this condition, a Covered Entity would need to: (1) Maintain
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) make and preserve for three years a quarterly record
that: (a) Identifies and values the liquid assets maintained as defined
in the proposed condition, (b) compares 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 shows the
amount of the difference between the two amounts (``the excess liquid
assets amount''), and (c) shows the amount of the deduction specified
in the proposed condition and the amount that deduction reduces the
excess liquid assets amount; (3) notify the Commission in writing
within 24 hours in the manner specified on the Commission's website if
the Covered Entity fails to meet the requirements of the proposed
condition and include in the notice the contact information of an
individual who can provide further information about the failure to
meet the requirements; and (4) include 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. The Commission requests
comment on each prong of this condition. Please identify any regulatory
or operational issues in connection with adhering to each prong of this
condition. The Commission requests comment on how this proposed
condition would compare to the liquidity requirements a Covered Entity
is subject to under the Basel capital standard.
    For the purposes of this additional 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, subject
to certain conditions. Are these definitions of the categories of
liquid assets sufficiently clear? For example, should the definitions
provide more detail about the types of assets that could be included
within a category? If so, please explain. Should the condition use
different definitions? If so, please

explain why and suggest an alternative definition.
    For the purposes of this additional capital condition, the
deduction (haircut) would be determined by dividing the amount of the
Covered Entity's risk-weighted assets by 12.5 (i.e., the reciprocal of
8%). Is this an appropriate method of calculating the deduction? If
not, explain why and suggest an alternative method. Would this
deduction be comparable to the haircuts under Exchange Act rule 18a-1?
If not, explain why. More generally, is the term ``risk-weighted
assets'' understood by market participants? If not, please explain why.
    Under this proposed capital condition, the Covered Entity would be
required to maintain an excess of liquid assets over total liabilities
that equals or exceeds $100 million before the deduction (derived from
the firm's risk-weighted assets) and $20 million after the deduction.
Is ``total liabilities'' an appropriate metric for this condition? The
$100 million requirement is modeled on the minimum tentative net
capital requirement of Exchange Act rule 18a-1 and $20 million
requirement is modeled on the minimum fixed-dollar net capital
requirement of the rule. Are these appropriate requirements for the
proposed condition? If not, explain why and suggest alternative
requirements. For example, should the amount before applying the
proposed deduction be $50, $75, $125, or $150 million or some other
amount, or should the amount after the proposed deductions be $10, $30,
or $50 million or some other amount? If so, explain why.
    The Commission requests comment on the proposed capital condition
that would require the Covered Entity to 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). Is this proposed capital condition appropriate? If not,
explain why. Would the proposed capital condition 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-3? If not, please explain why.
    The Commission requests comment on the potential benefits and costs
of the potential capital conditions. Would the conditions promote
comparable regulatory outcomes between the capital requirements applied
to Covered Entities in Germany and capital requirements under Exchange
Act rule 18a-1? If so, explain why. If not, explain why not. The
Commission is mindful that compliance with these capital conditions
would require Covered Entities applying substituted compliance to
Exchange Act rule 18a-1 to supplement their existing capital
calculations and practices, as well as to incur additional time and
cost burdens to implement the potential conditions and integrate them
into existing business operations. The Commission requests comment and
supporting data on these potential time and cost burdens, including
quantitative information about the amount of the burdens. The
Commission also requests comment on any potential operational or
regulatory issues or burdens associated with adhering to the proposed
capital conditions.
    The Commission requests comment on the potential impacts the
capital conditions would have on competition. For example, how would
they impact competition between Covered Entities applying substituted
compliance with respect to Exchange Act rule 18a-1 and SBS Entities
that will comply with Exchange Act rule 18a-1? Would the conditions
eliminate or mitigate potential competitive advantages that Covered
Entities adhering to the Basel capital standard might have over SBS
Entities adhering to the more stringent net liquid assets test standard
of Exchange Act rule 18a-1? Alternatively, would the conditions create
competitive disadvantages for Covered Entities applying substituted
compliance with respect to Exchange Act rule 18a-1 compared to SBS
Entities complying with Exchange Act rule 18a-1? Please describe the
competitive advantages or disadvantages and explain their impact.
    Please identify and describe any potential impacts the proposed
capital conditions would have on the way Covered Entities currently
conduct their business.
    The first proposed capital condition for substituted compliance
with Exchange Act rule 18a-1 requires the Covered Entity to be subject
to and comply with specific EU and German capital and liquidity
requirements. Under Articles 7 and 8 of the CRR, supervisory
authorities can grant a Covered Entity a waiver from these EU and
German capital and/or liquidity requirements if its parent is subject
to them. The Bafin's Amended Application requests substituted
compliance for Covered Entities operating pursuant to these waivers.
The proposed Amended Order requires 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 provide
substituted compliance for Exchange Act rule 18a-1 to a Covered Entity
operating pursuant to these waivers.
    However, the Commission requests 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 when its immediate holding company is subject to
those requirements. Are there additional conditions that 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? If so, describe the conditions and explain how they would produce a
comparable regulatory outcome. For example, should the Commission
consider imposing additional conditions on either the Covered Entity
and/or its immediate holding company? In this regard, should the
Covered Entity and its immediate holding company be subject to the
proposed four-pronged capital condition that is designed to bridge the
gap between the Basel capital standard and the net liquid assets test
of Exchange Act rule 18a-1? Further, should substituted compliance be
conditioned on the Covered Entity maintaining a pool of liquid and
unencumbered assets to meet potential cash outflows over a 30-day (or
longer or shorter) stress period? Should the pool of unencumbered
liquid assets be sized based on an alternative metric? Should the
Commission further condition substituted compliance in this fact
pattern on the Covered Entity complying with paragraph (f) under
Exchange Act rule 18a-4 (i.e., the exemption from segregation
requirements) in order to limit its business activities? Are there
other limits that should be placed on the Covered Entity's activities
that would mitigate the risk of the firm not being directly subject to
EU and German capital and liquidity requirements? If so, please
describe them.
    The Commission further requests comment on whether any investment
firms that may be relying on the Commission's proposed substituted
compliance determination with respect to Exchange Act rule 18a-1 would
potentially be covered under the new prudential rules for investment
firms in the EU and Germany. If so, should the Commission make a
positive substituted compliance determination with respect to these
capital requirements? If so, explain how they are comparable to the

capital requirements of Exchange Act rule 18a-1.
    Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for capital in the French and UK Orders.\186\ Are there reasons to take
a different approach with respect to substituted compliance in a final
German amended order than was taken in the French and UK Orders with
respect to capital? If so, identify the differences and explain why
they should result in a different approach.
---------------------------------------------------------------------------

    \186\ See French Order, 86 FR 41658-59; UK Order, 86 FR 43371-
71.
---------------------------------------------------------------------------

    The Commission further requests comment on whether there would be
major security-based swap participants without a prudential regulator
in Germany that would seek substituted compliance with respect to
Exchange Act rule 18a-2.
2. Margin
    The Commission further requests comment regarding the Commission's
preliminary view that the EU and German margin requirements are
comparable to Exchange Act rule 18a-3, subject to additional conditions
to address differences in counterparty exceptions. Commenters
particularly are invited to address the basis for substituted
compliance in connection with those requirements. Does EU and German
law taken as a whole produce regulatory outcomes that are comparable to
those of Exchange Act rule 18a-3? Are there any additional conditions
that should be applied to substituted compliance for these margin
requirements to promote comparable regulatory outcomes, as a supplement
or alternative to those in the proposed Amended Order?
    The Commission further requests comment on whether the haircuts
required under the EMIR Margin RTS are comparable to the collateral
haircuts required under paragraph (c)(3) of Exchange Act rule 18a-3.
The Commission also requests comment on whether the standardized grid
for computing initial margin under the EMIR Margin RTS is comparable to
the standardized approach for computing initial margin under paragraph
(d)(1) of Exchange Act rule 18a-3.
    The Commission requests comment and supporting data on the proposed
margin conditions that are designed to address differences in the
counterparty exceptions between Exchange Act rule 18a-3 and German and
EU margin requirements. The first proposed additional margin condition
would require a Covered Entity to collect variation margin, as defined
in the EMIR Margin RTS, from a counterparty with respect to a
transaction in a non-cleared security-based swap, 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. The second proposed additional margin condition would require a
Covered Entity to collect initial margin, as defined in the EMIR Margin
RTS, from a counterparty with respect to a transaction in a non-cleared
security-based swap, unless the counterparty would qualify for an
exception under Exchange Act rule 18a-3 from the requirement to deliver
initial margin to the Covered Entity. Do these proposed margin
conditions accomplish the goal of closing the gap between the
counterparty exceptions of Exchange Act rule 18a-3 and the EU and
German margin requirements? If so, please explain. If not, please
explain why. Would the proposed margin conditions impact any particular
type of counterparty more than another? If so, please explain. Does the
fact that the EU and German margin requirements have a final phase-in
date for implementation of initial margin requirements of September 1,
2022 impact the ability of Covered Entities to implement the proposed
margin conditions? If so, please explain.
    The Commission also requests comment on the proposed margin
condition that a Covered Entity apply substituted compliance for the
requirements of Exchange Act rule 18a-5(a)(12) (a record making
requirement). Is this proposed margin condition appropriate? If not,
explain why. Would the proposed margin condition provide clarity as to
the Covered Entity's obligations under this record making requirement
when applying substituted compliance with respect to Exchange Act rule
18a-3? If not, please explain why.
    The Commission requests comment on the potential benefits and costs
of the potential margin conditions. Would the conditions promote
comparable regulatory outcomes between the margin requirements applied
to Covered Entities in the EU and Germany and the margin requirements
of Exchange Act rule 18a-3? If so, explain why. If not, explain why
not. The Commission is mindful that compliance with the proposed margin
conditions would require Covered Entities applying substituted
compliance to Exchange Act rule 18a-3 to supplement their existing
margin processes and documentation, as well as to incur additional time
and cost burdens to implement the potential margin conditions and
integrate them into existing business operations. The Commission
requests comment and supporting data on these potential time and cost
burdens, including quantitative information about the amount of the
burdens. The Commission also requests comment on any potential
operational or regulatory issues or burdens associated with adhering to
the proposed margin conditions.
    The Commission requests comment on the potential impacts the margin
conditions would have on competition. For example, how would they
impact competition between Covered Entities applying substituted
compliance with respect to Exchange Act rule 18a-3 and SBS Entities
that will comply with Exchange Act rule 18a-3? Would the conditions
eliminate or mitigate potential competitive advantages that Covered
Entities complying with EU and German margin requirements might have
over SBS Entities complying with the margin requirements of Exchange
Act rule 18a-3? Alternatively, would the proposed margin conditions
create competitive disadvantages for Covered Entities applying
substituted compliance with respect to Exchange Act rule 18a-3 compared
to SBS Entities complying with Exchange Act rule 18a-3? Please describe
the competitive advantages or disadvantages and explain their impact.
    Please identify and describe any potential impacts on the way
Covered Entities currently conduct their business with respect to
implementing the proposed margin conditions.
    Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for margin in the French and UK Orders.\187\ Are there reasons to take
a different approach with respect to substituted compliance in a final
German amended order than was taken in the French and UK Orders with
respect to margin? If so, identify the differences and explain why they
should result in a different approach.
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    \187\ See French Order, 86 FR 41659; UK Order, 86 FR 43372.
---------------------------------------------------------------------------

B. Trade Acknowledgment and Verification, and Trading Relationship
Documentation

    Commenters are invited to address all aspects of the proposed
amendments related to trade acknowledgment and

verification, and trading relationship documentation. In this regard
commenters are invited to address the efficacy of the proposed EMIR-
related general conditions. Commenters also are invited to address the
proposed removal of MiFID conditions in connection with substituted
compliance for the trade acknowledgment and verification requirements
and trading relationship documentation requirements.

C. Recordkeeping, Reporting, Notification, and Securities Count
Requirements

    The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to recordkeeping, reporting, notification, and
securities counts applicable to SBS Entities without a prudential
regulator as well as the requirements of Exchange Act section 15F(g)
applicable to all SBS Entities. Commenters particularly are invited to
address the basis for substituted compliance in connection with those
requirements, and the proposed conditions and limitations connected to
substituted compliance for those requirements. Do EU and German
requirements taken as a whole produce regulatory outcomes that are
comparable to those of Exchange Act section 15F(g) and Exchange Act
rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9? In this regard, commenters
are invited to address the EU and German laws cited for each
substituted compliance determination with respect to the distinct
requirements within Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8
(i.e., the rules for which a more granular approach to substituted
compliance is being taken). With respect to each substituted compliance
determination, the Commission seeks comment on the following matters:
(1) Will the EU and German laws cited for the determination result in a
comparable regulatory outcome; (2) are there additional or alternative
EU and German laws that should be cited to achieve a comparable
regulatory outcome; and (3) are any of the EU and German laws cited for
the determination unnecessary to achieve a comparable regulatory
outcome?
    Commenters particularly are invited to address the proposed
condition with respect to Exchange Act rule 18a-5 that a Covered Entity
without a prudential regulator preserve all of the data elements
necessary to create the records required by Exchange Act rules 18a-
5(a)(1), (2), (3), (4), and (7). Do the relevant EU and German laws
require Covered Entities without a prudential regulator to retain the
data elements necessary to create the records required by these rules?
If not, please identify which data elements are not preserved pursuant
to the relevant EU and German laws. Further, how burdensome would it be
for a Covered Entity without a prudential regulator to format the data
elements into the records required by these rules (e.g., a blotter,
ledger, or securities record, as applicable) if the firm was requested
to do so? In what formats do Covered Entities without a prudential
regulator in the Germany produce this information to EU and German
authorities? How do those formats differ from the formats required by
Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7)?
    Is it appropriate to structure the Commission's substituted
compliance determinations in the proposed Amended Order with respect to
the recordkeeping, reporting and notification rules to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader recordkeeping, reporting, and notification rules for
which they want to apply substituted compliance? Explain why or why
not. For example, would it be more efficient for a Covered Entity to
comply with certain Exchange Act requirements within a given
recordkeeping or reporting rule (rather than apply substituted
compliance) because it can utilize systems that its affiliated broker-
dealer has implemented to comply with them? If so, explain why. If not,
explain why not. Is it appropriate to permit Covered Entities to take a
more granular approach to the requirements within these recordkeeping
rules? For example, would this approach make it more difficult for the
Commission to get a comprehensive understanding of the Covered Entity's
security-based swap activities and financial condition? Explain why or
why not. Would it be overly complex for the Covered Entity to
administer a firm-wide recordkeeping system under this approach?
Explain why or why not.
    Certain of the Commission's recordkeeping, reporting, and
notification requirements are fully or partially linked to substantive
Exchange Act requirements for which a preliminary positive substituted
compliance determination would not be made under the proposed Amended
Order. In these cases, should the Commission not make a positive
substituted compliance determination for the fully linked requirement
in the recordkeeping, reporting, and notification rules or to the
portion of the requirement that is linked to a substantive Exchange Act
requirement? Explain why or why not.
    Certain of the requirements in the Commission's recordkeeping,
reporting, and notification rules are linked to substantive Exchange
Act requirements where a preliminary positive substituted compliance
determination would be made under the proposed Amended Order. In these
cases, should a positive substituted compliance determination for the
linked requirement in the recordkeeping, reporting, or notification
rule be conditioned on the Covered Entity applying substituted
compliance to the linked substantive Exchange Act requirement? If not,
explain why. Should this be the case regardless of whether the
requirement is fully or partially linked to the substantive Exchange
Act requirement? If not, explain why.
    While certain recordkeeping and reporting requirements are not
expressly linked to Exchange Act rule 18a-1, they would be important to
the Commission's ability to monitor or examine for compliance with the
capital requirements under this rule. The records also would assist the
firm in monitoring its net capital position and, therefore, in
complying with Exchange rule 18a-1 and its appendices. Should a
positive substituted compliance determination with respect to these
recordkeeping and reporting requirements be subject to the condition
that the Covered Entity applies substituted compliance with respect to
Exchange Act rule 18a-1 and its appendices? If not, explain why.
    Commenters also are invited to address the proposal that a positive
substituted compliance determination with respect to Exchange Act rule
18a-7 would be conditioned on the Covered Entity without a prudential
regulator filing financial and operational information with the
Commission in the manner and format specified by the Commission by
order or rule. In addition to requesting comment about how Covered
Entities without a prudential regulator should meet the Manner and
Format Condition, the Commission continues to seek comment on the how
Covered Entities with a prudential regulator should meet this
condition. With respect to the FOCUS Report Part II, not all of the
line items on the report may be as pertinent to a Covered Entity
without a prudential regulator if a positive substituted compliance
determination is made with respect to capital or margin. With respect
to the FOCUS Report Part IIC, because the Commission does not have
responsibility to administer capital and margin requirements for
prudentially

regulated Covered Entities, the FOCUS Report Part IIC elicits much less
information than the FOCUS Report Part II or the financial reports
Covered Entities file with EU and/or German authorities. Should the
Commission require Covered Entities to file the financial and
operational information using the FOCUS Report Part II (if not
prudentially regulated) or Part IIC (if prudentially regulated)? Are
there line items on the FOCUS Report Part II or Part IIC that elicit
information that is not included in the reports Covered Entities file
with EU and/or German authorities? If so, do Covered Entities record
that information in their required books and records? Please identify
any information that is elicited in the FOCUS Report Part II (if not
prudentially regulated) or Part IIC (if prudentially regulated) that is
not: (1) Included in the financial reports filed by Covered Entities
with EU and/or German authorities; or (2) recorded in the books and
records required of Covered Entities. With respect to the FOCUS Report
Part IIC, would the answer to these questions change if references to
FFIEC Form 031 were not included in the FOCUS Report Part IIC? If so,
how?
    As a preliminary matter, as a condition of substituted compliance
should Covered Entities file a limited amount of financial and
operational information on the FOCUS Report Part II (if not
prudentially regulated) or Part IIC (if prudentially regulated) for a
period of two years to further evaluate the burden of requiring all
applicable line items to be filled out? If so, which line items should
be required? To the extent that Covered Entities otherwise report or
record information that is responsive to the FOCUS Report Part II or
Part IIC, how could the information on these reports be integrated into
a database of filings the Commission or its designee will maintain for
filers of the FOCUS Report Parts II and IIC (e.g., the eFOCUS system)
to achieve the objective of being able to perform cross-form analysis
of information entered into the uniquely numbered line items on the
forms?
    Commenters also are invited to address the proposed conditions to
applying substituted compliance for the requirement of Exchange Act
rule 18a-7 that Covered Entities without a prudential regulator file
annual audited reports. For example, comment is sought on the first and
third conditions that the Covered Entity simultaneously transmit to the
Commission a copy of the financial statements the Covered Entity is
required to file annually with EU and/or German authorities, and, if
not already required, that the Covered Entity engage an independent
public accountant to prepare a report covering the annual financial
statements. Are there any concerns with the Commission accepting
financial statements that are prepared in accordance with EU or German
GAAP and audited by an independent public accountant in accordance with
EU or German GAAS? In addition, are there any concerns with the public
accountant being independent in accordance with EU or German
requirements? Further, the third proposed condition would require
Covered Entities that are not required under German law to file a
report of an independent public accountant covering their financial
statements to file such an accountant's report. This proposed condition
is based on the fact that German law only requires certain investment
firms (depending on their size) to have their financial statements
audited. Do the firms in Germany that are not subject to the
requirement to file audited financial reports engage in security-based
swap activities? If so, are they likely to register with the Commission
as a non-prudentially regulated security-based swap dealer or major
security-based swap participant?
    Commenters also are invited to address any differences between
German requirements and the French and UK requirements that formed the
basis for the Commission's conditional grants of substituted compliance
for recordkeeping, reporting, notification, and securities count
requirements in the French and UK Orders.\188\ Are there reasons to
take a different approach with respect to substituted compliance in a
final German amended order than was taken in the French and UK Orders
with respect to these requirements? If so, identify the differences and
explain why they should result in a different approach.
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    \188\ See French Order, 86 FR 41648-57; UK Order, 86 FR 43359-
69.
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D. Additional Aspects of the Proposal

    Commenters further are invited to address the proposed amendments
to the Order related to written notice of a Covered Entity's intent to
rely on substituted compliance, regarding the incorporation of
references to MiFIR into the general condition related to EU cross-
border issues, and the additional MOU condition. Commenters are also
invited to address the changes to the requirements for CCO reports, and
the provisions added and deleted from the sections on risk control,
internal supervision and counterparty protection requirements.
    In addition, commenters are invited to address how the Commission
should weigh considerations related to supervisory and enforcement
effectiveness related to capital and margin, including considerations
regarding relevant EU and German supervisory and enforcement authority,
practices and tools related to capital and margin.
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    \189\ 17 CFR 200.30-3(a)(89).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority,\189\
J. Matthew DeLesDernier,
Assistant Secretary.

Attachment A

    It Is Hereby Determined and Ordered, pursuant to rule 3a71-6
under the Exchange Act, that a Covered Entity (as defined in
paragraph (g)(1) of this Order) may satisfy the requirements under
the Exchange Act that are addressed in paragraphs (b) through (f) of
this Order so long as the Covered Entity is subject to and complies
with relevant requirements of the Federal Republic of Germany and
the European Union and with the conditions of this Order, as amended
or superseded from time to time.

(a) General Conditions

    This Order is subject to the following general conditions, in
addition to the conditions specified in paragraphs (b) through (f):
    (1) Activities as MiFID ``investment services or activities.''
For each condition in paragraphs (b) through (f) of this Order that
requires the application of, and the Covered Entity's compliance
with, provisions of MiFID, provisions of WpHG that implement MiFID,
and/or other EU and German requirements adopted pursuant to those
provisions, the Covered Entity's relevant security-based swap
activities constitute ``investment services'' or ``investment
activities,'' as defined in MiFID article 4(1)(2) and in WpHG
section 2(8), and fall within the scope of the Covered Entity's
authorization from BaFin to provide investment services and/or
perform investment activities in the Federal Republic of Germany.
    (2) Counterparties as MiFID ``clients.'' For each condition in
paragraphs (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions
of MiFID, provisions of WpHG that implement MiFID and/or other EU
and German requirements adopted pursuant to those provisions, the
relevant counterparty (or potential counterparty) to the Covered
Entity is a ``client'' (or potential ``client''), as defined in
MiFID article 4(1)(9) and in WpHG section 67(1).
    (3) Security-based swaps as MiFID ``financial instruments.'' For
each condition in paragraphs (b) through (f) of this Order that
requires the application of, and the Covered Entity's compliance
with, provisions

of MiFID, provisions of WpHG that implement MiFID and/or other EU
and German requirements adopted pursuant to those provisions, the
relevant security-based swap is a ``financial instrument,'' as
defined in MiFID article 4(1)(15) and in WpHG section 2(4).
    (4) Covered Entity as CRD/CRR ``institution.'' For each
condition in paragraphs (b) through (f) of this Order that requires
the application of, and the Covered Entity's compliance with, the
provisions of CRD, provisions of KWG that implement CRD, CRR and/or
other EU and German requirements adopted pursuant to those
provisions, the Covered Entity is an ``institution,'' as defined in
CRD article 3(1)(3), in CRR article 4(1)(3) and in KWG section
1(1b).
    (5) Counterparties as EMIR ``counterparties.'' For each
condition in paragraphs (b) through (f) of this Order that requires
the application of, and the Covered Entity's compliance with,
provisions of EMIR, EMIR RTS, EMIR Margin RTS and/or other EU
requirements adopted pursuant to those provisions, if the relevant
provision applies only to the Covered Entity's activities with
specified types of counterparties, and if the counterparty to the
Covered Entity is not any of the specified types of counterparty,
the Covered Entity complies with the applicable condition of this
Order:
    (i) As if the counterparty were the specified type of
counterparty; in this regard, if the Covered Entity reasonably
determines that the counterparty would be a financial counterparty
if it were established in the EU and authorized by an appropriate EU
authority, it must treat the counterparty as if the counterparty
were a financial counterparty; and
    (ii) Without regard to the application of EMIR article 13.
    (6) Security-based swap status under EMIR. For each condition in
paragraphs (b) through (f) of this Order that requires the
application of, and the Covered Entity's compliance with, provisions
of EMIR and/or other EU requirements adopted pursuant to those
provisions, 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-
15, and EMIR Margin RTS article 2; or
    (ii) The relevant security-based swap has been cleared by a
central counterparty that is authorized or recognized to clear
derivatives contracts by a relevant authority in the EU.
    (7) Memorandum of Understanding with BaFin. The Commission and
BaFin have a supervisory and enforcement memorandum of understanding
and/or other arrangement addressing cooperation with respect to this
Order at the time the Covered Entity complies with the relevant
requirements under the Exchange Act via compliance with one or more
provisions of this Order.
    (8) Memorandum of Understanding Regarding ECB-Owned Information.
The Commission and the ECB have a supervisory and enforcement
memorandum of understanding and/or other arrangement addressing
cooperation with respect to this Order as it pertains to information
owned by the ECB at the time the Covered Entity complies with the
relevant requirements under the Exchange Act via compliance with one
or more provisions of this Order.
    (9) Notice to Commission. A Covered Entity relying on this Order
must provide notice of its intent to rely on this Order by notifying
the Commission in writing. Such notice must be sent to the
Commission in the manner specified on the Commission's website. The
notice must include the contact information of an individual who can
provide further information about the matter that is the subject of
the notice. The notice must also identify each specific substituted
compliance determination within paragraphs (b) through (f) of the
Order for which the Covered Entity intends to apply substituted
compliance. A Covered Entity must promptly provide an amended notice
if it modifies its reliance on the substituted compliance
determinations in this Order.
    (10) European Union Cross-Border Matters.
    (i) If, in relation to a particular service provided by a
Covered Entity, responsibility for ensuring compliance with any
provision of MiFID or MiFIR or any other EU or German requirement
adopted pursuant to MiFID or MiFIR listed in paragraphs (b) through
(f) of this Order is allocated to an authority of the Member State
of the European Union in whose territory a Covered Entity provides
the service, BaFin must be the authority responsible for supervision
and enforcement of that provision or requirement in relation to the
particular service.
    (ii) If responsibility for ensuring compliance with any
provision of MAR or any other EU requirement adopted pursuant to MAR
listed in paragraphs (b) through (f) of this Order is allocated to
one or more authorities of a Member State of the European Union, one
of such authorities must be BaFin.
    (11) Notification Requirements Related to Changes in Capital. A
Covered Entity that is prudentially regulated relying on this 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).

(b) Substituted Compliance in Connection With Risk Control
Requirements

    This Order extends to the following provisions related to risk
control:
    (1) Internal risk management. The requirements of Exchange Act
section 15F(j)(2) and related aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that the Covered Entity is subject to and