with MiFID confirmation requirements in practice would undermine the
availability of substituted compliance for SBS Entities that have
branches in EU member states for which the Commission has not entered
into an applicable substituted compliance memorandum of
understanding.\153\
---------------------------------------------------------------------------

    \152\ See SIFMA Letter I at 5-6; FBF Letter I at 2; EBF Letter I
(providing general support for SIFMA Letter I).
    \153\ See SIFMA Letter I at 2-4.
---------------------------------------------------------------------------

    When the Commission reopened the comment period, it solicited
additional comment on whether EMIR requirements were sufficient to
produce comparable results, such that MiFID provisions may be removed
as conditions to substituted compliance for trade acknowledgement and
verification.\154\ Some commenters generally supported the associated
changes contemplated by the Commission in the Reopening Release.\155\
On the other hand, one commenter stated its opinion that ``some
industry participants may not be able to take advantage of substituted
compliance under the SEC's proposed framework is not, in and of itself,
a reason to change the framework''.\156\ The same commenter stated that
``the French regulatory framework governing [trade acknowledgement] . .
. does not satisfy the test for substituted compliance'' and that ``the
Commission should certainly not weaken [the trade acknowledgment]
conditions any further.'' \157\
---------------------------------------------------------------------------

    \154\ See Reopening Release, 86 FR at 18343.
    \155\ See SIFMA Letter II at 6-7 (stating that the EMIR
requirements ``are sufficient, standing alone, to reach comparable
outcomes'' to the Exchange Act trade acknowledgement and
verification (and trading relationship documentation) requirements,
and that ``further requiring compliance with MiFID documentation
requirements would substantially reduce the overall availability of
substituted compliance in these areas because those MiFID
requirements are not necessarily applicable on an entity-wide basis
like the EMIR requirements are''); see also FBF Letter II at 2.
    \156\ Better Markets Letter at 2.
    \157\ Id.
---------------------------------------------------------------------------

    The Commission agrees that, in and of itself, the fact that some
may not be able to rely on the Order is not a sufficient reason to
modify the Order. On the other hand, the Commission believes that the
duplicative nature of the MiFID-related conditions and the EMIR-related
conditions in light of the implementation issues warrants the removal
of the MiFID-related conditions, and the Order has been modified
accordingly.\158\ In taking this step, the Commission has considered
French and EU timely confirmation requirements. EMIR article 11
requires ``financial counterparties'' and ``non-financial
counterparties'' to ensure appropriate procedures and arrangements are
in place to achieve timely confirmation of the terms of an OTC
derivative contract.\159\ Similarly, EMIR RTS article 12 requires non-
centrally cleared OTC derivative contracts between ``financial
counterparties'' and ``non-financial counterparties'' to be
confirmed.\160\ These counterparty categories do not include entities
organized outside the EU, such as U.S. persons.\161\ Confirmation means
the documentation of the agreement of the counterparties to all the
terms of the OTC derivative contract.\162\ The French and EU
requirements as a whole thus require a Covered Entity \163\ to provide
a confirmation that serves as a trade acknowledgment, without regard to
where its counterparty is organized, and also require the Covered
Entity's counterparty, when it is a financial counterparty or non-
financial counterparty, to provide a confirmation that serves as the
trade verification, and the Commission considers these requirements to
promote regulatory outcomes comparable to Exchange Act trade
acknowledgment and verification requirements for those counterparties.
The French and EU requirements in most instances do not require a
Covered Entity's counterparty that is organized outside the EU to
provide a French confirmation that serves as a trade verification,\164\
though they do require the Covered Entity to confirm the
transaction.\165\ Confirmation is defined as documenting the agreement
of the Covered Entity and its counterparties to all the terms of the
OTC derivative contract.\166\ To ensure that a Covered

Entity using substituted compliance for trade acknowledgment and
verification requirements will be required to document the agreement of
the counterparties to all the terms of the relevant transaction, the
Commission is issuing the Order with two new general conditions that
will require the Covered Entity to treat its counterparty as a
financial counterparty or non-financial counterparty when complying
with French and EU trade acknowledgment and verification requirements
and to ensure that the relevant security-based swap is either non-
centrally cleared and subject to EMIR or cleared by a central
counterparty that has been authorized or recognized to clear
derivatives contracts by a relevant authority in the EU.\167\
---------------------------------------------------------------------------

    \158\ See para. (b)(2) of the Order.
    \159\ See EMIR article 11(1)(a).
    \160\ See EMIR RTS articles 12(1) and (2).
    \161\ See EMIR article 2(8) (definition of ``financial
counterparty''); EMIR article 2(9) (definition of ``non-financial
counterparty'').
    \162\ See EMIR RTS article 1(c).
    \163\ The Order defines a Covered Entity to include an
investment firm or credit institution authorized by the ACPR.
Investment firms and credit institutions are included in the
definition of ``financial counterparty,'' so a Covered Entity is
also a financial counterparty and thus is ``subject to'' EMIR
article 11 and related provisions of EMIR RTS and EMIR Margin RTS
for purposes of the Order.
    \164\ See EMIR article 2(8) (definition of ``financial
counterparty'' limited to entities defined or authorized in a manner
that in most instances is reserved for EU-established entities);
EMIR article 2(9) (definition of ``non-financial counterparty''
limited to EU-established entities); EMIR articles 11(1)(a) and
11(12) (confirmation requirement applies to financial
counterparties, non-financial counterparties and third-country
entities that would be subject to the confirmation requirement if
established in the EU and either the relevant contract has a direct,
substantial and foreseeable effect in the EU or the obligation is
necessary or appropriate to prevent the evasion of any provision of
EMIR).
    \165\ As defined in paragraph (g)(1) of the Order, a Covered
Entity must be an investment firm or credit institution authorized
by the ACPR to provide investment services or perform investment
activities in the French Republic. These investment firms and credit
institutions are limited to French-established entities and do not
include third-country firms. See MiFID article 4(57) (definition of
``third-country firm'' is a firm that would be a credit institution
providing investment services or performing investment activities or
an investment firm if its registered office or head office were
located in the EU); MFC article L. 532-47 (same). Each of these
investment firms and credit institutions also is among the entities
that qualify as a ``financial counterparty.'' See EMIR article 2(8)
(definition of ``financial counterparty'' includes credit
institutions and investment firms).
    \166\ See EMIR RTS article 1(c). In other words, the Covered
Entity would be subject to the relevant requirements under EMIR even
if the counterparty is not authorized pursuant to EU law as
anticipated by the EMIR article 2(8) ``financial counterparty''
definition or if the counterparty is not an ``undertaking'' (such as
by virtue of being a natural person) or is not established in the EU
(by virtue of being a U.S. person or otherwise being established in
some non-EU jurisdiction), as anticipated by the EMIR article 2(9)
``non-financial counterparty'' definition. This approach appears to
be consistent with EU guidance. See European Securities and Markets
Authority, ``Questions and Answers: Implementation of the Regulation
(EU) No 648/2012 on OTC derivatives, central counterparties and
trade repositories (EMIR)'' (https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf) answer 5(a) (stating that
compliance with the EMIR confirmation requirement necessitates that
the counterparties must reach a legally binding agreement to all
terms of the OTC derivative contract, and that the EMIR RTS
``implies'' that both parties must comply and agree in advance to a
specific process to do so); answer 12(b) (stating that where an EU
counterparty transacts with a third-country entity, the EU
counterparty generally must ensure that the EMIR requirements for
portfolio reconciliation, dispute resolution, timely confirmation
and portfolio compression are met for the relevant portfolio and/or
transactions even though the third country entity would not itself
be subject to EMIR).
    \167\ See paras. (a)(5) and (a)(6) of the Order; see also part
III.B, supra. Commenters supported those additions. See FBF Letter
II at 2 (stating that ``[t]he FBF is generally welcoming of the new
general EMIR conditions that are introduced as a corollary to the
above changes. As applied in the context of trading relationship
documentation, trade acknowledgment and verification, they largely
convey the manner in which EMIR has been interpreted.''). See also
SIFMA Letter II at 6 (stating that ``we agree with the Commission
that the cited provisions of EMIR are comparable to the Exchange Act
trade acknowledgment and verification and trading relationship
documentation requirements.'').
---------------------------------------------------------------------------

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

    \168\ See SIFMA Letter II at Appendix A (stating that the
requirements of the rule, which relate to the obligation of
financial counterparties to report, on a monthly basis, the number
of unconfirmed OTC derivative transactions that have been
outstanding for more than five business days, ``do not correspond to
and go beyond the general requirements of'' rule 15Fi-2).
---------------------------------------------------------------------------

    In summary, the Commission believes that French and EU requirements
promote the goal of avoiding legal and operational risks by requiring
definitive written records of transactions and procedures to avoid
disagreements regarding the meaning of transaction terms, in a manner
that is comparable to the purpose of Exchange Act rule 15Fi-2.\169\ The
Commission recognizes that the MiFID confirmation requirements,
particularly MiFID Org Reg article 59, are more specific regarding
relevant categories of information to be disclosed (in the context of a
one-way requirement for firms to provide reports to their clients), but
does not believe that those additional one-way confirmation provisions
are necessary to achieve the policy goal of avoiding legal and
operational risks. While the Commission recognizes the differences
between French and EU requirements and Exchange Act trade
acknowledgment and verification requirements, in the Commission's view
those differences on balance would not preclude substituted compliance,
particularly as requirement-by-requirement similarity is not needed for
substituted compliance. The Commission is not persuaded by a commenter
view that ``denying substituted compliance under the applicable
circumstances seems perfectly reasonable,'' given the Commission's
conclusion that the relevant EMIR-related conditions provide regulatory
outcomes that are comparable to those associated with the Exchange Act
requirement, and the regulatory efficiency benefits associated with
substituted compliance.\170\ That commenter's request for a ``robust,
evidence-based analysis'' has been met here in the context of the
requisite holistic analysis,\171\ and the commenter's suggestion that
there is a need for analysis regarding protection of the American
financial system has been addressed above.\172\
---------------------------------------------------------------------------

    \169\ The two new EMIR-related general conditions addressed
above should further help ensure that the EMIR confirmation
provisions comprehensively apply to relevant non-cleared
transactions of SBS Entities.
    \170\ Better Markets Letter at 6.
    \171\ See Better Markets Letter at 6 (alluding to the need for a
``robust, evidence-based analysis''). As discussed above (see part
II.D.2, supra), the Commission believes that the present approach
toward comparability analyses--which are based on a close reading of
relevant foreign requirements and careful consideration of
regulatory outcomes--appropriately reflects the holistic
comparability approach and the rejection of requirement-by-
requirement similarity.
    \172\ See Better Markets Letter at 6 (stating that the
Commission must provide analysis that the change would protect the
American financial system). See also discussion in part II.D.2
supra).
---------------------------------------------------------------------------

3. Portfolio Reconciliation and Dispute Reporting
    In the French Substituted Compliance Notice and Proposed Order, the
Commission proposed to make a positive substituted compliance
determination conditioned on the Covered Entity being subject to and
complying with specific French portfolio reconciliation and dispute
reporting requirements.\173\ One commenter expressed general support
for the proposed approach toward substituted compliance for the risk
control provisions.\174\ Another commenter stated that, if the
Commission makes a positive substituted compliance determination, it
must at a minimum ensure that it does ``not weaken [the] conditions any
further.'' \175\ The Commission continues to believe that French
portfolio reconciliation and dispute reporting requirements promote
regulatory outcomes comparable to Exchange Act requirements, by
subjecting Covered Entities to risk mitigation practices that are
appropriate to the risks associated with their security-based swap
businesses, and is making a positive substituted compliance
determination

for portfolio reconciliation and dispute reporting requirements
consistent with the proposed Order.\176\ Substituted compliance in
connection with the dispute reporting requirements is conditioned in
part on the Covered Entities providing the Commission with reports
regarding disputes between counterparties on the same basis as the
entities provide those reports to competent authorities pursuant to EU
law, to allow the Commission to obtain notice regarding key information
in a manner that makes use of existing obligations under EU law.\177\
---------------------------------------------------------------------------

    \173\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85740.
    \174\ See SIFMA Letter II at 6.
    \175\ See Better Markets Letter at 2.
    \176\ See para. (b)(3) of the Order.
    \177\ See para. (b)(3)(ii) of the Order. The Commission
recognizes the differences between the two sets of requirements--
under which Exchange Act rule 15Fi-3 requires SBS Entities to report
valuation disputes in excess of $20 million that have been
outstanding for three or five business days (depending on
counterparty types), while EMIR RTS art. 15(2) requires firms to
report disputes between counterparties in excess of [euro]15 million
and outstanding for at least 15 business days. In the Commission's
view, the two requirements produce comparable regulatory outcomes
notwithstanding those differences.
---------------------------------------------------------------------------

4. Portfolio Compression
    In the French Substituted Compliance Notice and Proposed Order, the
Commission proposed to make a positive substituted compliance
determination conditioned on the Covered Entity being subject to and
complying with specific French portfolio compression requirements.\178\
One commenter expressed general support for the proposed approach
toward substituted compliance for the risk control provisions.\179\
Another commenter stated that, if the Commission makes a positive
substituted compliance determination, it must at a minimum ensure that
it does ``not weaken [the] conditions any further.'' \180\ The
Commission continues to believe that French portfolio compression
requirements promote regulatory outcomes comparable to Exchange Act
requirements, by subjecting Covered Entities to risk mitigation
practices that are appropriate to the risks associated with their
security-based swap businesses, and is making a positive substituted
compliance determination for portfolio compression requirements
consistent with the proposed Order.\181\
---------------------------------------------------------------------------

    \178\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85740.
    \179\ See SIFMA Letter II at 6.
    \180\ See Better Markets Letter at 2.
    \181\ See para. (b)(4) of the Order.
---------------------------------------------------------------------------

5. Trading Relationship Documentation
    Under the proposed Order, substituted compliance in connection with
the Exchange Act rule 15Fi-5 trading relationship documentation
requirement would have been conditioned on Covered Entities being
subject to and complying with MiFID and EMIR provisions that address
records regarding counterparty relationships and entities.\182\
Substituted compliance under the proposed Order would not extend to
rule 15Fi-5(b)(5) insolvency-related disclosures when the counterparty
is a U.S. person.\183\
---------------------------------------------------------------------------

    \182\ See para. (b)(5) of the proposed Order.
    \183\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85725.
---------------------------------------------------------------------------

    Consistent with the comments addressed above with respect to trade
acknowledgement and verification, some commenters requested that
substituted compliance for trading relationship documentation not
incorporate conditions requiring compliance with MiFID documentation
requirements.\184\ Those commenters expressed the view that compliance
with MiFID requirements would not be feasible for Covered Entities that
have branches in third countries, and that the EMIR risk management
provisions connected to the exchange of collateral are sufficient to
produce regulatory outcomes comparable to those under the Exchange Act
trading relationship documentation rule.\185\
---------------------------------------------------------------------------

    \184\ See SIFMA Letter I at 6.
    \185\ See SIFMA Letter I at 3-4.
---------------------------------------------------------------------------

    As noted above, the Commission reopened the comment period and
solicited additional comment on whether EMIR requirements standing
alone could produce comparable results such that certain MiFID
provisions may be removed as prerequisites to substituted
compliance.\186\ Some commenters generally supported the associated
changes contemplated by the Commission in the Reopening Release \187\
(including the addition of two new EMIR-related general conditions
addressed above),\188\ while one commenter opposed removal of the MiFID
conditions.\189\
---------------------------------------------------------------------------

    \186\ See part III.B, supra.
    \187\ See SIFMA Letter II at 6; see also FBF Letter II at 2.
    \188\ See part III.B.2.d, supra.
    \189\ See Better Markets Letter at 6-7.
---------------------------------------------------------------------------

    The Commission concludes that the implementation issues raised by
commenters warrant removal of the MiFID-related condition, and that
compliance with EMIR-based risk management requirements are sufficient
to produce risk-mitigating outcomes that are comparable to those
associated with the Exchange Act rule. The Order accordingly has been
modified from the proposed Order to remove conditions requiring
compliance with MiFID trading relationship documentation requirements,
including corollary conditions related to the application of the MiFID
to ``eligible counterparties.'' \190\ In reaching this conclusion, the
Commission highlights the special importance of EMIR Margin RTS article
2, which addresses risk management procedures related to the exchange
of collateral, including procedures related to the terms of all
necessary agreements to be entered into by counterparties (e.g.,
payment obligations, netting conditions, events of default, calculation
methods, transfers of rights and obligations upon termination, and
governing law). Those obligations are denoted as being connected to
collateral exchange obligations, and the Commission believes that they
are necessary to help produce a regulatory outcome that mitigates risk
in a manner that is comparable to the outcome associated with the
Exchange Act trading relationship documentation rule. To bridge any gap
left by EMIR Margin RTS article 2, the Commission is also requiring
compliance with EMIR article 11(1)(a) and EMIR RTS article 12, which
require the Covered Entity to confirm the transaction, with
confirmation defined as documentation of the agreement of the
counterparties to all the terms of the OTC derivative contract.\191\
---------------------------------------------------------------------------

    \190\ See para. (b)(5) of the Order. Consistent with the
proposed Order, substituted compliance in connection with trading
relationship documentation requirements does not extend to Exchange
Act rule 15Fi-5(b)(5) provisions related to disclosures regarding
legal and bankruptcy status when the counterparty is a U.S. person.
    \191\ One commenter suggested including EMIR article 11(1)(a)
and EMIR RTS article 12(1) through (3). The Commission agrees that
these provisions are necessary to a finding of comparability. See
SIFMA Letter II at Appendix A. As discussed in part IV.B.2 the
Commission believes that EMIR RTS article 12(4) is relevant to its
holistic, outcomes-oriented approach.
---------------------------------------------------------------------------

    To ensure that a Covered Entity using substituted compliance for
trading relationship documentation requirements will be required to
document the agreement of the counterparties to all the terms of the
relevant transaction, the Commission is issuing the Order with two new
general conditions that will require the Covered Entity to treat its
counterparty as a financial counterparty or non-financial counterparty
when complying French and EU trading relationship documentation
requirements and to ensure that the relevant security-based swap is
either non-centrally cleared and subject to EMIR or cleared by a
central counterparty that has been authorized or recognized to clear
derivatives contracts

by a relevant authority in the EU.\192\ The Commission agrees with a
commenter that the other proposed conditions to substituted compliance
for trading relationship documentation should be retained.\193\
---------------------------------------------------------------------------

    \192\ See paras. (a)(5) and (a)(6) of the Order; see also part
III.B, supra. Commenters supported those additions. See FBF Letter
II at 2 (stating that ``[t]he FBF is generally welcoming of the new
general EMIR conditions that are introduced as a corollary to the
above changes. As applied in the context of trading relationship
documentation, trade acknowledgment and verification, they largely
convey the manner in which EMIR has been interpreted.''). See also
SIFMA Letter II at 6 (stating that ``we agree with the Commission
that the cited provisions of EMIR are comparable to the Exchange Act
trade acknowledgment and verification and trading relationship
documentation requirements.'').
    \193\ See Better Markets Letter at 1-2.
---------------------------------------------------------------------------

V. Substituted Compliance for Capital and Margin Requirements

A. Proposed Approach

    The French Authorities' Application in part requests substituted
compliance in connection with requirements under the Exchange Act
relating to:
     Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 and its appendices
(collectively ``Exchange Act rule 18a-1'') applicable to certain SBS
Entities.\194\ Exchange Act rule 18a-1 helps to ensure the SBS Entity
maintains at all times sufficient liquid assets to promptly satisfy its
liabilities, and to provide a cushion of liquid assets in excess of
liabilities to cover potential market, credit, and other risks. The
rule's net liquid assets test standard protects customers and
counterparties and mitigates the consequences of an SBS Entity's
failure by promoting the ability of the firm to absorb financial shocks
and, if necessary, to self-liquidate in an orderly manner.\195\ As part
of the capital requirements, security-based swap dealers without a
prudential regulator also must comply with the internal risk management
control requirements of Exchange Act rule 15c3-4 with respect to
certain activities.\196\
---------------------------------------------------------------------------

    \194\ 17 CFR 240.18a-1 through 18a-1d. Exchange Act rule 18a-1
applies to security-based swap dealers that: (1) Do not have a
prudential regulator; and (2) are either (a) not dually registered
with the Commission as a broker-dealer; or (b) are dually registered
with the Commission as a special purpose broker-dealer known as an
OTC derivatives dealer. Security-based swap dealers that are dually
registered with the Commission as a full-service broker-dealer are
subject to the capital requirements of Exchange Act rule 15c3-1 (17
CFR 240.15c3-1) for which substituted compliance is not available.
See Exchange Act rule 3a71-6(d)(4)(i) (making substituted compliance
available only with respect to the capital requirements of Exchange
Act section 15F(e) and Exchange Act rule 18a-1).
    \195\ See Capital and Margin Adopting Release, 84 FR at 43879.
The capital standard of Exchange Act rule 18a-1 is based on the net
liquid assets test of Exchange Act rule 15c3-1 applicable to broker-
dealers. Id. The net liquid assets test seeks to promote liquidity
by requiring that a firm maintain sufficient liquid assets to meet
all liabilities, including obligations to customers, counterparties,
and other creditors, and, in the event a firm fails financially, to
have adequate additional resources to wind-down its business in an
orderly manner without the need for a formal proceeding. See French
Substituted Compliance Notice and Proposed Order, 85 FR at 85726.
See French Authorities' Application Annex 1 category 1 capital
portion at 1-24.
    \196\ See 17 CFR 240.15c3-4 and 18a-1(f).
---------------------------------------------------------------------------

     Margin--Margin requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially
regulated SBS Entities.\197\ The margin requirements are designed to
protect SBS Entities from the consequences of a counterparty's
default.\198\
---------------------------------------------------------------------------

    \197\ 17 CFR 240.18a-3.
    \198\ See Capital and Margin Adopting Release, 84 FR at 43947,
43949 (``Obtaining collateral is one of the ways OTC derivatives
dealers manage their credit risk exposure to OTC derivatives
counterparties. Prior to the financial crisis, in certain
circumstances, counterparties were able to enter into OTC
derivatives transactions without having to deliver collateral. When
`trigger events' occurred during the financial crisis, those
counterparties faced significant liquidity strains when they were
required to deliver collateral'').
---------------------------------------------------------------------------

    Taken as a whole, these capital and margin requirements help to
promote market stability by mandating that SBS Entities follow
practices to manage the market, credit, liquidity, solvency,
counterparty, and operational risks associated with their security-
based swap businesses.
    In proposing to provide conditional substituted compliance in
connection with this part of the French Authorities' Application, the
Commission's preliminary view was that relevant French and EU
requirements would produce regulatory outcomes that are comparable to
those associated with the above capital and margin requirements, by
subjecting Covered Entities to financial responsibility requirements
that are appropriate to the risks associated with their security-based
swap businesses.\199\ Substituted compliance accordingly would be
conditioned on Covered Entities being subject to the French and EU
provisions that, in the aggregate, establish a framework that produces
outcomes comparable to those associated with the capital and margin
requirements under the Exchange Act.\200\
---------------------------------------------------------------------------

    \199\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85726.
    \200\ Id. at 85726 n.49.
---------------------------------------------------------------------------

    However, the Commission also sought comment on whether substituted
compliance with respect to Exchange Act capital requirements should be
subject to additional conditions.\201\ In particular, the Commission
sought comment on the following potential conditions:
---------------------------------------------------------------------------

    \201\ Id. at 85736-37.
---------------------------------------------------------------------------

     A condition that would require a Covered Entity to
maintain a minimum amount of liquid assets, such as a minimum ratio of
liquid assets to illiquid assets (e.g., a ratio of liquid assets to
illiquid assets of 80% to 20%, 70% to 30%, 60% to 40%). With respect to
such a ratio, the Commission also requested comment on whether liquid
and illiquid assets should be defined using the concept of assets that
are allowable or not allowable as capital under Exchange Act rule 18a-
1.
     A condition that would require a Covered Entity to be
subject to a specific liquidity requirement, such as a requirement to
maintain a pool of highly liquid assets to cover cash outflows during a
30-day period of stress.
     A condition that a Covered Entity must maintain equity
capital or Tier 1 capital at least equal to the minimum fixed-dollar
capital requirements under Exchange Act rule 18a-1 (e.g., equity
capital or Tier 1 capital of at least $20 million).
    Additionally, in the Reopening Release, the Commission again sought
comment on whether substituted compliance with respect to Exchange Act
capital requirements should be subject to additional conditions.\202\
The Commission explained that the capital standard of Exchange Act rule
18a-1 is a net liquid assets test. Under this standard, an SBS Entity
will have more than a dollar of highly liquid assets for each dollar of
unsubordinated liabilities. Covered Entities, however, are subject to
capital requirements applicable to prudentially regulated entities
based on the international capital standard for banks (the ``Basel
capital standard'').\203\ The Basel capital standard counts as capital
assets that Exchange Act rule 18a-1 would exclude (e.g., loans and most
other types of uncollateralized receivables, furniture and fixtures,
real estate, and initial margin posted to counterparties).
Consequently, because of the ability to include illiquid assets and
margin posted away as capital, Covered Entities subject to the Basel
capital standard may have less balance sheet liquidity than SBS
Entities subject to Exchange Act rule 18a-1. For this reason, the
Commission sought comment on the following potential conditions to

applying substituted compliance to Exchange Act rule 18a-1:
---------------------------------------------------------------------------

    \202\ See Reopening Release, 86 FR at 18343-47.
    \203\ See, e.g., Basel Committee on Banking Supervision
(``BCBS''), The Basel Framework, available at: https://www.bis.org/basel_framework/.
---------------------------------------------------------------------------

     A condition that would require a Covered Entity to
maintain an amount of assets that are allowable under Exchange Act rule
18a-1, after applying applicable haircuts under the Basel capital
standard, that equals or exceeds the Covered Entity's current
liabilities coming due in the next 365 days.
     A condition that would require a Covered Entity to make a
quarterly record listing: (1) The assets maintained pursuant to the
above condition, their value, and the amount of their applicable
haircuts; and (2) the aggregate amount of the liabilities coming due in
the next 365 days.
     A condition that would require a Covered Entity to
maintains at least $100 million of equity capital composed of highly
liquid assets, as defined in the Basel capital standard.
     A condition that would require a Covered Entity to include
its most recent statement of financial condition (i.e., balance sheet)
filed with its local supervisor whether audited or unaudited with its
written notice to the Commission of its intent to rely on substituted
compliance.

B. Commenter Views and Final Provisions

1. Capital
    Consistent with the proposed Order, the first capital condition
requires the covered entity to be subject to and comply with certain
identified French and EU capital requirements.\204\ As discussed at the
end of this section, the Commission made some modifications to the
French and EU laws and regulations cited in this condition.\205\ For
the reasons discussed below, there are two additional conditions to
applying substituted compliance with respect to Exchange Act rule 18a-
1.
---------------------------------------------------------------------------

    \204\ See para. (c)(1)(i) of the order. See also French
Substituted Compliance Notice and Proposed Order, 85 FR at 85726.
    \205\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85726, n.49.
---------------------------------------------------------------------------

    For the reasons discussed above in part III.B.2.e of this release,
the first additional capital condition is that the Covered Entity
applies substituted compliance with respect to Exchange Act rules 18a-
5(a)(9) (a record making requirement), 18a-6(b)(1)(x) (a record
preservation requirement), and 18a-8(a)(1)(i), (a)(1)(ii), (b)(1),
(b)(2), and (b)(4) (notification requirements).\206\ These
recordkeeping and notification requirements are directly linked to the
capital requirements of Exchange Act rule 18a-1. The UK Proposed Order
conditioned substituted compliance with respect to these recordkeeping
and notification requirements on the Covered Entity applying
substituted compliance with respect to Exchange Act rule 18a-1.\207\
This additional capital condition is designed to provide clarity as to
the Covered Entity's obligations under these recordkeeping and
notification requirements when applying substituted compliance with
respect to Exchange Act rule 18a-1 pursuant this Order.
---------------------------------------------------------------------------

    \206\ See para. (c)(1)(ii) of the Order.
    \207\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18395-403, 18416-17, 19419. The Commission sought comment
in the Reopening Release on whether this approach should be taken in
the final Order. See Reopening Release, 86 FR at 18348.
---------------------------------------------------------------------------

    The second additional capital condition builds on and modifies the
proposed capital condition that was the subject of the Commission's
questions in the Reopening Release and that was designed to address
potential different regulatory outcomes between Exchange Act rule 18a-1
and the French and EU capital requirements. In particular, the
Commission asked questions about a four pronged condition with respect
to applying substituted compliance to the capital requirements of
Exchange Act rule 18a-1.\208\ The first prong would require a Covered
Entity to maintain an amount of assets that are allowable under
Exchange Act rule 18a-1, after applying applicable haircuts under the
Basel capital standard, that equals or exceeds the Covered Entity's
current liabilities coming due in the next 365 days.\209\ The second
prong was linked to the first prong as it would require that a Covered
Entity make a quarterly record listing: (1) The assets maintained
pursuant to the first condition, their value, and the amount of their
applicable haircuts; and (2) the aggregate amount of the liabilities
coming due in the next 365 days. The third prong would require the
Covered Entity to maintain at least $100 million of equity capital
composed of highly liquid assets as defined in the Basel capital
standard. The fourth prong would require the Covered Entity to include
its most recently filed statement of financial condition whether
audited or unaudited with its initial notice to the Commission of its
intent to rely on substituted compliance.
---------------------------------------------------------------------------

    \208\ See id. at 18387-89 (discussing the additional
conditions).
    \209\ As used in this part V.B.1 of the release, the term
``Covered Entity'' refers to a security-based swap dealer located in
the UK that does not have a prudential regulator.
---------------------------------------------------------------------------

    One commenter recommended that the Commission consider denying
substituted compliance for capital requirements on the basis that
France's capital requirements do not produce comparable regulatory
outcomes.\210\ This commenter stated that ``granting substituted
compliance with multiple conditions intended to mimic the Commission's
capital requirements would seem to undermine the entire point of
substituted compliance in the first place; namely, protecting the
stability of the U.S. financial system by allowing substituted
compliance only when foreign regimes are comparable.'' \211\
---------------------------------------------------------------------------

    \210\ Better Markets Letter at 7-8.
    \211\ Better Markets Letter at 8 (emphasis in the original).
---------------------------------------------------------------------------

    In describing the differences in the capital frameworks between the
net liquid assets test and the Basel capital standard, this commenter
highlighted the treatment of initial margin posted to a
counterparty.\212\ Specifically, the commenter stated that in France
initial margin posted to a counterparty counts as capital for that
entity, while in the U.S. initial margin only counts as capital if the
security-based swap dealer has a special loan agreement with an
affiliate. The commenter stated that the U.S. requirement is intended
to mitigate counterparty credit risk with respect to the return of the
initial margin. The commenter argued that the result is that, not only
are the French requirements different from the Commission's in both
form and substance, but the regulatory outcome is not comparable.
---------------------------------------------------------------------------

    \212\ Better Markets Letter at 7-8.
---------------------------------------------------------------------------

    This commenter also stated that if a positive substituted
compliance determination is made regarding capital, the Commission
should not weaken the potential additional capital condition discussed
in the Reopening Release in response to industry commenters, because
these market participants are primarily concerned with reducing their
own operational costs, without any regard to the systemic risk that
would doing so would pose.\213\ This commenter also stated that any
determination to find Frances's capital requirements comparable to and
as comprehensive as the Commission's capital framework without
conditions at least as strong as proposed would not only contravene the
Commission's own conception of substituted compliance ``but expose the
U.S. financial system to very risks Dodd-Frank instructed the SEC to
contain.'' \214\
---------------------------------------------------------------------------

    \213\ Better Markets Letter at 7-8.
    \214\ Better Markets Letter at 7-8.
---------------------------------------------------------------------------

    Another commenter supported the potential capital condition.\215\
This commenter stated that the Commission should require Covered
Entities to

comply with the net liquid assets test under Exchange Act rule 18a-1,
rather than the Basel capital standards.\216\ The commenter stated that
the net liquid assets test ``appropriately limits uncollateralized
lending, fixed assets, and other illiquid assets such as real estate
which have been proven repeatedly to be unreliable forms of capital but
are currently counted'' as allowable capital under the Basel capital
standard.\217\ This commenter also agreed with the Commission that
``the initial margin that is posted is not available for other purposes
and therefore, under the Basel standard, could swiftly result in less
balance sheet liquidity than the standards under the Exchange Act's
Rule 18a-1.'' \218\
---------------------------------------------------------------------------

    \215\ AFREF Letter at 1.
    \216\ See id. (``We support the Commission's proposal to require
foreign security-based swap dealers and participants (``Covered
Entities'') to abide by capital and initial margin requirements that
reflect Exchange Act rule 18a-1 standards appropriate for broker-
dealers, as opposed to Basel capital requirements for banks that
permit illiquid assets to count toward capital minimums.'').
    \217\ Id.
    \218\ Id. at 2.
---------------------------------------------------------------------------

    A commenter supported the Commission's proposed Order to grant
substituted compliance in connection with the Exchange Act capital
requirements.\219\ This commenter, however, opposed additional capital
conditions.\220\ The commenter reiterated this opposition with respect
to the potential four pronged capital condition for which the
Commission sought comment in the Reopening Release.\221\ The commenter
stated that the potential capital condition was unnecessary, unduly
rushed, and highly likely to be costly and disruptive to market
participants and inconsistent with the Commission's substituted
compliance framework.\222\ More specifically, this commenter stated
that the potential capital conditions was unnecessary because Covered
Entities transact predominantly in securities and derivatives, do not
extensively engage in unsecured lending or other activities more
typical of banks, and are already subject to extensive liquidity
requirements.\223\ The commenter also expressed concern that the
potential capital condition was inconsistent with the Commission's
substituted compliance framework in that it was duplicative of and
would contradict the liquidity requirements established by French and
EU authorities.\224\ This commenter stated that the imposition of the
potential capital condition would effectively substitute the
Commission's judgment for that of the French and EU authorities in
terms of the best way to address liquidity risk, and may lead other
regulators to refuse to extend deference to the Commission's regulatory
determinations.\225\
---------------------------------------------------------------------------

    \219\ SIFMA Letter I at 10. See also FBF Letter I at 4; EBF
Letter I at 1 (generally supporting SIFMA Letter I).
    \220\ SIFMA Letter I at 11-13. See also FBF Letter I at 4.
    \221\ SIFMA Letter II at 7-17. See also EBF Letter II at 1
(``The EBF further shares SIFMA's serious concerns that the
potential conditions to substituted compliance with capital
requirements described in the Release would create brand new, far-
ranging capital and liquidity requirements that could not be
established prior to the compliance date.'') and FBF II Letter at 3-
4 (``Last but certainly not least, the FBF shares SIFMA's serious
concerns that the potential conditions to substituted compliance
with capital requirements described in the Release would result in
brand new, far-ranging capital and liquidity requirements that could
not be established in time for registration, and would essentially
force an exit of the relevant entity category from the U.S. SBS
market prior to the de minimis counting date.'')
    \222\ SIFMA Letter II at 7-17.
    \223\ SIFMA Letter II at 8.
    \224\ SIFMA Letter II at 12-14.
    \225\ SIFMA Letter II at 13.
---------------------------------------------------------------------------

    With respect to the using the concept of ``allowable'' and
``nonallowable'' assets under Exchange Act rule 18a-1, the commenter
stated that the first and second prongs of the potential capital
condition do not define these terms and there is no analogous concept
in the capital framework applicable in France.\226\ The commenter
stated this would require firms to re-categorize every asset on their
balance sheets, which would not be feasible in the near term.\227\
Further, this commented asked the Commission to clarify what it means
by ``haircuts'' with respect to the first and second prongs, since the
Basel capital standard does not apply ``haircuts'' to assets, but
instead applies a risk-weighted approach.\228\
---------------------------------------------------------------------------

    \226\ SIFMA Letter II at 14.
    \227\ SIFMA Letter II at 14.
    \228\ SIFMA Letter II at 14.
---------------------------------------------------------------------------

    This commenter also stated that the third prong of the potential
additional capital condition requiring ``at least $100 million of
equity capital composed of `highly liquid assets' as defined in the
Basel capital standard,'' includes concepts that require
clarification.\229\ For example, this commenter stated that is unclear
how a firm would calculate the amount of its ``equity capital'' that is
``composed of highly liquid assets,'' since ``equity'' generally refers
to a firm's paid-in capital, retained earnings and other items on the
liabilities/shareholders' equity side of the balance sheet.\230\
Finally, this commenter asserted that because it is approximately three
months until the August 6th counting date, and firms may encounter
significant operational challenges to meet the potential or revised
capital condition, the potential condition may cause firms to exit the
U.S. security-based swap market, or hope that the conditions are
modified and delayed in a manner that will make it feasible to satisfy
them.\231\
---------------------------------------------------------------------------

    \229\ SIFMA Letter II at 15.
    \230\ SIFMA Letter II at 15.
    \231\ SIFMA Letter II at 15-16.
---------------------------------------------------------------------------

    Overall, this commenter stated that the Commission should take a
more incremental and deliberative approach to additional capital
conditions, and specifically recommended that the Commission: (1)
Delete the first prong of the capital condition; (2) replace the second
prong with a requirement that a nonbank Covered Entity provide the same
reports concerning liquidity metrics that the Covered Entity provides
to the French and EU authorities; (3) modify the third prong to require
a nonbank Covered Entity to maintain at least $100 million of high
quality liquid assets, as defined in the Basel capital standard; and
(4) issue an order on October 6, 2024, determining whether to maintain,
delete, modify or supplement the condition, based on consideration of
the liquidity of nonbank Covered Entities, and after publishing a
notice of any such changes for at least 90 days of public comment.\232\
---------------------------------------------------------------------------

    \232\ SIFMA Letter II at 16-17.
---------------------------------------------------------------------------

    The Commission agrees with the commenters who point out the
differences between the capital standard of Exchange Act rule 18a-1
(i.e., the net liquid assets test) and the Basel capital standard
applicable to Covered Entities, and who therefore believe that--at a
minimum--additional capital conditions are necessary to achieve
comparable regulatory outcomes.\233\ As the Commission explained when
seeking comment on the potential additional capital condition, the net
liquid assets test is designed to promote liquidity.\234\ In
particular, Exchange Act rule 18a-1 allows an SBS Entity to engage in
activities that are part of conducting a securities business (e.g.,
taking securities into inventory) but in a manner that places the firm
in the position of holding at all times more than one dollar of highly
liquid assets for each dollar of unsubordinated liabilities (e.g.,
money owed to customers, counterparties, and creditors).\235\ For
example, Exchange

Act rule 18a-1 allows securities positions to count as allowable net
capital, subject to standardized or internal model-based haircuts. The
rule, however, does not permit most unsecured receivables to count as
allowable net capital. This aspect of the rule limits the ability of
SBS Entities to engage in activities, such as uncollateralized lending,
that generate unsecured receivables. The rule also does not permit
fixed assets or other illiquid assets to count as allowable net
capital, which creates disincentives for SBS Entities to own real
estate and other fixed assets that cannot be readily converted into
cash. For these reasons, Exchange Act rule 18a-1 incentivizes SBS
Entities to confine their business activities and devote capital to
security-based swap activities.
---------------------------------------------------------------------------

    \233\ See AFREF Letter at 1-2; Better Markets Letter at 7-8.
    \234\ See Reopening Release, 86 FR at 18343-45 (explaining the
differences between Exchange Act rule 18a-1 and the Basel capital
standard).
    \235\ See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967),
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was
adopted to provide safeguards for public investors by setting
standards of financial responsibility to be met by brokers and
dealers. The basic concept of the rule is liquidity; its object
being to require a broker-dealer to have at all times sufficient
liquid assets to cover his current indebtedness.'') (footnotes
omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774
(June 26, 1973) (Commission release of a letter from the Division of
Market Regulation) (``The purpose of the net capital rule is to
require a broker or dealer to have at all times sufficient liquid
assets to cover its current indebtedness. The need for liquidity has
long been recognized as vital to the public interest and for the
protection of investors and is predicated on the belief that
accounts are not opened and maintained with broker-dealers in
anticipation of relying upon suit, judgment and execution to collect
claims but rather on a reasonable demand one can liquidate his cash
or securities positions.''); Exchange Act Release No. 15426 (Dec.
21, 1978), 44 FR 1754 (Jan. 8, 1979) (``The rule requires brokers or
dealers to have sufficient cash or liquid assets to protect the cash
or securities positions carried in their customers' accounts. The
thrust of the rule is to insure that a broker or dealer has
sufficient liquid assets to cover current indebtedness.''); Exchange
Act Release No. 26402 (Dec. 28, 1988), 54 FR 315 (Jan. 5, 1989)
(``The rule's design is that broker-dealers maintain liquid assets
in sufficient amounts to enable them to satisfy promptly their
liabilities. The rule accomplishes this by requiring broker-dealers
to maintain liquid assets in excess of their liabilities to protect
against potential market and credit risks.'') (footnote omitted).
---------------------------------------------------------------------------

    The net liquid assets test is imposed through how an SBS Entity is
required to compute net capital pursuant to Exchange Act rule 18a-1.
The first step is to compute the SBS Entity's net worth under U.S.
generally accepted accounting principles (``GAAP''). Next, the SBS
Entity must make certain adjustments to its net worth to calculate net
capital, such as deducting illiquid assets and taking other capital
charges and adding qualifying subordinated loans.\236\ The amount
remaining after these deductions is defined as ``tentative net
capital.'' Exchange Act rule 18a-1 prescribes a minimum tentative net
capital requirement of $100 million for SBS Entities approved to use
models to calculate net capital. An SBS Entity that is meeting its
minimum tentative net capital requirement will be in the position where
each dollar of unsubordinated liabilities is matched by more than a
dollar of highly liquid assets.\237\ The final step in computing net
capital is to take prescribed percentage deductions (standardized
haircuts) or model-based deductions from the mark-to-market value of
the SBS Entity's proprietary positions (e.g., securities, money market
instruments, and commodities) that are included in its tentative net
capital. The amount remaining is the firm's net capital, which must
exceed the greater of $20 million or a ratio amount.
---------------------------------------------------------------------------

    \236\ See 17 CFR 240.15c3-1(c)(2).
    \237\ The highly liquid assets under Exchange Act rule 18a-1 are
otherwise known as ``allowable assets'' because they are not
deducted when computing net capital. See Books and Records Adopting
Release, 84 FR at 68673-74, 68677-80 (the sections of the amended
Part II of the FOCUS Report setting forth the assets side of the
balance sheet and the net capital computation). Illiquid assets
otherwise known as ``non-allowable assets'' are deducted when
computing net capital. Id. Allowable assets include cash, certain
unsecured receivables from broker-dealers and clearing
organizations, reverse repurchase agreements, securities borrowed,
fully secured customer margin loans, and proprietary securities,
commodities, and swaps positions. Id. The term ``high quality liquid
assets'' or ``HQLA'' are defined under the Basel capital standard's
liquidity coverage ratio (``LCR'') and generally consist of cash and
specific classes of liquid securities. See BCBS, LCR30 under the
Basel capital standards, available at: https://www.bis.org/basel_framework/chapter/LCR/30.htm?tldate=20191231&inforce=2019121.
Generally, cash and securities that qualify as HQLA under the LCR
would be allowable assets under Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    In comparison, Covered Entities in France are subject to the Basel
capital standard. The Basel capital standard counts as capital assets
that Exchange Act rule 18a-1 would exclude (e.g., loans and most other
types of uncollateralized receivables, furniture and fixtures, real
estate). The Basel capital standard accommodates the business of
banking: Making loans (including extending unsecured credit) and taking
deposits. While the Covered Entities that will apply substituted
compliance with respect to Exchange Act rule 18a-1 will not be banks,
the Basel capital standard allows them to count illiquid assets such as
real estate and fixtures as capital. It also allows them to treat
unsecured receivables related to activities beyond dealing in security-
based swaps as capital notwithstanding the illiquidity of these assets.
    Further, one critical example of the difference between the
requirements of Exchange Act rule 18a-1 and the Basel capital standard
relates to the treatment of initial margin with respect to security-
based swaps and swaps. Under the French margin requirements, Covered
Entities will be required to post initial margin to counterparties
unless an exception applies.\238\ Under Exchange Act rule 18a-1, an SBS
Entity cannot count as capital the amount of initial margin posted to a
counterparty unless it enters into a special loan agreement with an
affiliate.\239\ The special loan agreement requires the affiliate to
fund the initial margin amount and the agreement must be structured so
that the affiliate--rather than the SBS Entity--bears the risk that the
counterparty may default on the obligation to return the initial
margin. The reason for this restrictive approach to initial margin
posted away is that it ``would not be available [to the SBS Entity] for
other purposes, and, therefore, the firm's liquidity would be
reduced.'' \240\ Under the Basel capital standard, a Covered Entity can
count initial margin posted away as capital without the need to enter
into a special loan arrangement with an affiliate. Consequently,
because of the ability to include illiquid assets and margin posted
away as capital, Covered Entities subject to the Basel capital standard
may have less balance sheet liquidity than SBS Entities subject to
Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    \238\ Exchange Act rule 18a-3 does not require SBS Entities to
post initial margin (though it does not prohibit the practice).
    \239\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
    \240\ See id. at 43887.
---------------------------------------------------------------------------

    For these reasons, the Commission disagrees with the commenter who
stated that additional capital conditions were unnecessary and
inconsistent with the Commission's substituted compliance
framework.\241\ As discussed above, there are key differences between
the net liquid assets test of Exchange Act rule 18a-1 and the Basel
capital standard applicable to Covered Entities. Those differences in
terms of the types of assets that count as regulatory capital and how
regulatory capital is calculated lead to different regulatory
outcomes.\242\ In particular, the net liquid assets test produces a
regulatory outcome in which the SBS Entity has more than one dollar of
highly liquid assets for each dollar of unsubordinated
liabilities.\243\ The Basel capital standard--while having measures
designed to promote

liquidity--does not produce this regulatory outcome.\244\ Therefore, an
additional condition is needed to bridge the gap between these two
capital standards and thereby achieve more comparable regulatory
outcomes in terms of promoting liquid balance sheets for SBS Entities
and Covered Entities.
---------------------------------------------------------------------------

    \241\ SIFMA Letter II at 7-17.
    \242\ See Better Markets Letter at 7-8 (comparing the
differences between Exchange Act rule 18a-1 and the Basel capital
standard and stating that ``not only are the France's capital
requirements different from the SEC's in both form and substance,
but the regulatory outcome is not comparable'').
    \243\ As discussed above, highly liquid assets under Exchange
Act rule 18a-1 are also known as ``allowable assets'' and generally
are consistent the LCR's HQLA.
    \244\ The Basel capital standard does not preclude a firm from
having more than a dollar of highly liquid assets for each dollar of
unsubordinated liabilities. Thus, a firm operating pursuant to the
standard may structure its assets and liabilities in a manner that
achieves this result. However, the standard does not mandate this
result. Rather, it will accommodate a firm that seeks to maintain
this level of liquidity on its own accord.
---------------------------------------------------------------------------

    However, in seeking to bridge this regulatory gap, the additional
condition should take into account that Covered Entities are or will be
subject to French and EU laws and measures designed to promote
liquidity. As a commenter stated, Covered Entities are or will be
subject to: (1) Requirements to hold an amount of HQLA to meet expected
payment obligations under stressed conditions for thirty days (the
``LCR requirement''); \245\ (2) requirements to hold a diversity of
stable funding instruments sufficient to meet long-term obligations
under both normal and stressed conditions (the ``NSFR requirements'');
\246\ (3) requirements to perform liquidity stress tests and manage
liquidity risk (the ``internal liquidity assessment requirements'');
\247\ and (4) regular reviews of a Covered Entity's liquidity risk
management processes by the French Authorities (the ``French Authority
liquidity review process'').\248\ These French and EU laws and measures
will require Covered Entities to hold significant levels of liquid
assets. However, the laws and measures on their own, do not impose a
net liquid assets test. Therefore, an additional condition is necessary
to supplement these requirements.
---------------------------------------------------------------------------

    \245\ See CRR, Article 412(1), Regulation (EU) 2015/61.
    \246\ See CRR, Article 413 and Articles 428a to 428az introduced
by Regulation (EU) 2019/876 (``CRR II''), Article 1(116).
    \247\ See CRD, Article 86, MFC Articles L. 511-41-1 B for credit
institutions and L. 533-2-2 for investment firms; and Articles 148
to 186 of the Decree of 3 November 2014 on internal control.
    \248\ See SIFMA Letter II at 9-12.
---------------------------------------------------------------------------

    The Commission has taken into account the French and EU liquidity
laws and measures discussed above in making a substituted compliance
determination with respect to Exchange Act rule 18a-1, and in tailoring
additional capital conditions designed to achieve comparable regulatory
outcomes. The LCR, NSFR, and internal liquidity assessment requirements
collectively will require Covered Entities to maintain pools of
unencumbered HQLA to cover potential cash outflows during a 30-day
stress period, to fund long-term obligations with stable funding
instruments, and to manage liquidity risk. These requirements--coupled
with the French Authorities' supervisory reviews of the liquidity risk
management practices of Covered Entities--will require Covered Entities
to hold significant levels of liquid assets. These requirements and
measures in combination with the other capital requirements applicable
to Covered Entities provide a starting foundation for making a positive
substituted compliance determination with respect to the capital
requirements of Exchange Act section 15F(e) and Exchange Act rule 18a-
1.\249\ However, more is needed to achieve a comparable regulatory
outcome to the net liquid assets test of Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    \249\ See Better Markets Letter at 8 (recommending that the
Commission consider denying substituted compliance with respect to
these Exchange Act capital requirements).
---------------------------------------------------------------------------

    For these reasons, the Order includes an additional capital
condition that will impose a simplified net liquid assets test.\250\
This simplified test will require the Covered Entity to hold more than
one dollar of liquid assets for each dollar of liabilities. The
simplified net liquid assets test--when coupled with the French and EU
capital requirements,\251\ LCR requirements, NSFR requirements,
internal liquidity assessment requirements, and French Authority
liquidity review process--is designed to produce a regulatory outcome
that is comparable to the net liquid assets test of Exchange Act rule
18a-1 (i.e., sufficient liquidity to cover liabilities and to promote
the maintenance of highly liquid balance sheets).
---------------------------------------------------------------------------

    \250\ See AFREF Letter at 1 (``The Commission should require
that SBS entities who want to operate in the U.S. comply with the
Net Liquid Assets test under the Exchange Act rule 18a-1 rather than
the Basel capital standards'').
    \251\ See, e.g., CRR, Part 1 (Own Funds, including Tier 1
capital) and Part 2 (Capital Requirements).
---------------------------------------------------------------------------

    In response to comments, the Commission has modified the first
three prongs of the additional capital condition, as discussed
below.\252\ In particular, the first and third prongs are being
combined into a single prong of the second additional capital
condition.\253\ Under this prong, the Covered Entity must maintain
liquid assets (as defined in the capital condition) that have an
aggregate market value that exceeds the amount of the Covered Entity's
total liabilities by at least: (1) $100 Million before applying a
deduction (specified in the capital condition); and (2) $20 million
after applying the deduction.\254\ Thus, the condition increases the
scope of the liquid assets requirement so that it must cover all
liabilities (rather than those maturing in 365 days as was contemplated
by the Commission's questions in the Reopening Release).
---------------------------------------------------------------------------

    \252\ See AFREF Letter at 1 (``The Commission should require
that SBS entities who want to operate in the U.S. comply with the
Net Liquid Assets test under the Exchange Act rule 18a-1 rather than
the Basel capital standards''); SIFMA Letter at 17 (raising concerns
that the use of the concept of ``allowable'' assets under Exchange
Act rule 18a-1 in the first condition would require Covered Entities
to re-categorize every asset on their balance sheets, which also
pertains to the second condition, and seeking clarification on to
how to calculate ``equity capital'' and allocate it to highly liquid
assets equal to or greater than $100 million).
    \253\ The first prong of the proposed capital condition would
have required a Covered Entity to maintain an amount of assets that
are allowable under Exchange Act rule 18a-1, after applying
applicable haircuts under the Basel capital standard, that equals or
exceeds the Covered Entity's current liabilities coming due in the
next 365 days. The second prong would have required the Covered
Entity to make a quarterly record related to the first prong. The
third prong would have required the Covered Entity to maintain at
least $100 million of equity capital composed of highly liquid
assets as defined in the Basel capital standard. See Reopening
Release, 86 FR at 18345.
    \254\ See para. (c)(1)(iii)(A)(1) of the Order. The definition
of ``liquid assets'' and the method of calculating the deductions
are discussed below.
---------------------------------------------------------------------------

    These modifications align the first prong more closely to the $100
million tentative net capital requirement of Exchange Act rule 18a-1
applicable to SBS Entities approved to use models. As discussed above,
Exchange Act rule 18a-1 requires SBS Entities that have been approved
to use models to maintain at least $100 million in tentative net
capital. And, tentative net capital is the amount that an SBS Entity's
liquid assets exceed its total unsubordinated liabilities before
applying haircuts. The first prong will require the Covered Entity to
subtract total liabilities from total liquid assets. The amount
remaining will need to equal or exceed $100 million. The modifications
also align the condition more closely to the $20 million fixed-dollar
minimum net capital requirement of Exchange Act rule 18a-1. As
discussed above, net capital is calculated by applying haircuts
(deductions) to tentative net capital and the fixed-dollar minimum
requires that net capital must equal or exceed $20 million. The first
prong will require the Covered Entity to subtract total liabilities
from total liquid assets and then apply the deduction to the
difference. The amount remaining after the deduction will need to equal
or exceed $20 million.
    For the purposes of the first prong of the second additional
capital condition,

``liquid assets'' are defined as: (1) Cash and cash equivalents; (2)
collateralized agreements; (3) customer and other trading related
receivables; (4) trading and financial assets; and (5) initial margin
posted by the Covered Entity to a counterparty or third-party (subject
to certain conditions discussed below).\255\ These categories of liquid
assets are designed to align with assets that are considered allowable
assets for purposes of calculating net capital under Exchange Act rule
18a-1.\256\ Further, the first four categories of liquid assets also
are designed to align with how Covered Entities categorize liquid
assets on their financial statements. \257\ In addition, the commenter
who has raised concerns about the potential capital conditions made
similar comments with respect to proposed capital conditions that would
apply to SBS Entities in the United Kingdom.\258\ The commenter's
letter to the Commission included a table summarizing categories of
liquid assets on the balance sheets of six UK dealers (the ``Balance
Sheet Table'') that the commenter expects will register with the
Commission as security-based swap dealers, and that do not have a
prudential regulator and therefore would be subject to Exchange Act
rule 18a-1.\259\
---------------------------------------------------------------------------

    \255\ See para. (c)(1)(iii)(B) of the Order.
    \256\ See notes 237 and 243, supra (describing allowable assets
under Exchange Act rule 18a-1).
    \257\ As part of the application process, the French Authorities
have stated that the only nonbank (i.e., non-prudentially regulated)
French dealers that will register with the Commission as security-
based swap dealers are French investment firms will be re-authorized
by the European Central Bank as credit institutions in 2021. See
French Authorities' Application (Side Letter for Capital
Requirements). These large investment firms publish annual audited
financial statements. See e.g., BofA Securities Europe SA 2020
Annual Report, available at: https://investor.bankofamerica.com/regulatory-and-other-filings/subsidiary-and-country-disclosures.
    \258\ See Letter from Kyle L. Brandon, Managing Director, Head
of Derivatives Policy, SIFMA (May 3, 2021) (``SIFMA UK Letter'') at
9-20. This comment letter may be found on the Commission's website
at: https://www.sec.gov/comments/s7-04-21/s70421.htm.
    \259\ The categories of liquid assets identified in the Balance
Sheet Table are: (1) ``Cash/Cash Equivalents; (2) ``Collateralised
Agreements;'' (3) ``Trade/Other Receivables; cash collateral
pledged;'' and (4) ``Trading/Financial Assets.'' See SIFMA UK
Letter, Appendix C.
---------------------------------------------------------------------------

    The first category of liquid assets is cash and cash
equivalents.\260\ These assets consist of cash and demand deposits at
banks (net of overdrafts) and highly liquid investments with original
maturities of three months or less that are readily convertible into
known amounts of cash and subject to insignificant risk of change in
value.\261\ The second category of liquid assets is collateralized
agreements.\262\ These assets consist of secured financings where
securities serve as collateral such as repurchase agreements and
securities loaned transactions.\263\ The third category of liquid
assets is customer and other trading related receivables.\264\ These
assets consist of customer margin loans, receivables from broker-
dealers, receivables related to fails to deliver, and receivables from
clearing organizations.\265\ The fourth category of liquid assets is
trading and financial assets.\266\ These assets consist of cash market
securities positions and listed and over-the-counter derivatives
positions.\267\
---------------------------------------------------------------------------

    \260\ See para. (c)(1)(iii)(B)(1) of the Order.
    \261\ See, e.g., International Financial Reporting Standards
Foundation (``IFRS''), IAS 7 Statement of Cash Flows (defining
``cash'' as comprising cash on hand and demand deposits and ``cash
equivalents'' as short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value). See also Books and
Records Adopting Release, 84 FR at 68673-74 (the section of the
amended Part II of the FOCUS Report setting forth the assets side of
the balance sheet and identifying cash as an allowable asset in Box
200).
    \262\ See para. (c)(1)(iii)(B)(2) of the Order.
    \263\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying
securities borrowed as an allowable asset in Boxes 240 and 250 and
securities purchased under agreements to resell as an allowable
asset in Box 360).
    \264\ See para. (c)(1)(iii)(B)(3) of the Order.
    \265\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying fails to
deliver as allowable assets in Boxes 220 and 230, receivables from
clearing organizations as allowable assets in Boxes 280 and 290, and
receivables from customers as allowable assets in Boxes 310, 320,
and 330).
    \266\ See para. (c)(1)(iii)(B)(4) of the Order.
    \267\ See Books and Records Adopting Release, 84 FR at 68673-74
(the section of the amended Part II of the FOCUS Report setting
forth the assets side of the balance sheet and identifying
securities, commodities, and swaps positions as allowable assets in
Box 12019).
---------------------------------------------------------------------------

    As discussed above, initial margin posted to a counterparty is
treated differently under Exchange Act rule 18a-1 and the Basel capital
standard, and commenters highlighted this difference.\268\ The fifth
category of liquid assets is initial margin posted by the Covered
Entity to a counterparty or a third-party custodian, provided: (1) The
initial margin requirement is funded by a fully executed written loan
agreement with an affiliate of the Covered Entity; (2) the loan
agreement provides that the lender waives re-payment of the loan until
the initial margin is returned to the Covered Entity; and (3) the
liability of the Covered Entity to the lender can be fully satisfied by
delivering the collateral serving as initial margin to the lender.\269\
As discussed above, one critical difference between Exchange Act rule
18a-1 and the Basel capital standard is that an SBS Entity cannot count
as capital the amount of initial margin posted to a counterparty or
third-party custodian unless it enters into a special loan agreement
with an affiliate.\270\ Under the Basel capital standard, a Covered
Entity can count initial margin posted away as capital without the need
to enter into a special loan arrangement with an affiliate.
Consequently, to count initial margin posted away as a liquid asset for
purposes of the second additional capital condition, the Covered Entity
must enter into the same type of special agreement that an SBS Entity
must execute to count initial margin as an allowable asset for purposes
of Exchange Act rule 18a-1.\271\
---------------------------------------------------------------------------

    \268\ See Better Markets Letter at 7; AFREF Letter at 2. See
also Reopening Release, 86 FR at 18344-45 (discussing the different
treatment of initial margin posted to a counterparty).
    \269\ See para. (c)(1)(iii)(B)(5) of the order.
    \270\ See Capital and Margin Adopting Release, 84 FR at 43887-
88.
    \271\ Id.
---------------------------------------------------------------------------

    If an asset does not fall within one of the five categories of
``liquid assets'' as defined in the Order,\272\ it will be considered
non-liquid, and could not be treated as a liquid asset for purposes of
the second additional capital condition in the Order. For example, one
commenter listed the following categories of non-liquid assets on the
Balance Sheet Table: (1) ``Investments;'' (2) ``Loans;'' and (3)
``Other Assets.'' \273\ Assets that fall into these categories could
not be treated as liquid assets. The non-liquid ``investment'' category
would include the Covered Entity's ownership interests in subsidiaries
or other affiliates. The non-liquid ``loans'' category would include
unsecured loans and advances. The non-liquid ``other'' assets category
generally refers to assets that do not fall into any of the other
categories of liquid or non-liquid assets. These non-liquid ``other''
assets would include furniture, fixtures, equipment, real estate,
property, leasehold improvements, deferred tax assets, prepayments, and
intangible assets.
---------------------------------------------------------------------------

    \272\ See para. (c)(1)(iii)(B) of the Order.
    \273\ See SIFMA UK Letter, Appendix C.
---------------------------------------------------------------------------

    As discussed above, the first prong of the second additional
capital condition will require the Covered Entity to subtract total
liabilities from total liquid assets and then apply a deduction
(haircut) to the difference.\274\ The amount remaining after the
deduction

will need to equal or exceed $20 million. The method of calculating the
amount of the deduction relies on the calculations Covered Entities
must make under the Basel capital standard.\275\ In particular, under
the Basel capital standard, Covered Entities must risk-weight their
assets. This involves adjusting the nominal value of each asset based
on the inherent risk of the asset. Less risky assets are adjusted to
lower values (i.e., have less weight) than more risky assets. As a
result, Covered Entities must hold lower levels of regulatory capital
for less risky asset and higher levels of capital for riskier assets.
Similarly, under Exchange Act rule 18a-1, less risky assets incur lower
haircuts than riskier assets and, therefore, require less net capital
to be held in relation to them. Consequently, the process of risk-
weighting assets under the Basel capital standard provides a method to
account for the inherent risk in an asset held by a Covered Entity
similar to how the haircuts under the Exchange Act rule 18a-1 account
for the risk of assets held by SBS Entities. For these reasons, it is
appropriate to use the process of risk-weighting assets under the Basel
capital standard to determine the amount of the deduction (haircuts)
under the first prong of the second additional capital condition.
---------------------------------------------------------------------------

    \274\ See para. (c)(1)(ii)(A)(1) of the order.
    \275\ See BCBS, Risk-based capital requirements (RBC20),
available at: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20191215&published=20191215.
---------------------------------------------------------------------------

    Under the Basel capital standard, Covered Entities must hold
regulatory capital equal to at least 8% of the amount of their risk-
weighted assets.\276\ Therefore, the deduction (haircut) required for
purposes of the first prong of the second additional capital condition
is determined by dividing the amount of the Covered Entity's risk-
weighted assets by 12.5 (i.e., the reciprocal of 8%).\277\ In sum, the
Covered Entity must maintain an excess of liquid assets over total
liabilities that equals or exceeds $100 million before the deduction
(derived from the firm's risk-weighted assets) and $20 million after
the deduction. \278\
---------------------------------------------------------------------------

    \276\ Id.
    \277\ See para. (c)(1)(iii)(C) of the Order. The Commission
acknowledges that a Covered Entity's risk-weighted assets will
include components in addition to market and credit risk charges
(e.g., operational risk charges). However, the Commission expects
the combined market and credit risk charges will make up the
substantial majority of the risk-weighted assets. In addition, the
Commission believes that this method of calculating the deduction in
the first prong of the second additional capital condition is a
reasonable approach in that it addresses market and credit risk
similar to the process used by security-based swap dealers
authorized to use internal models to compute market and credit risk
deductions under Exchange Act rule 18a-1. See, e.g., Exchange Act
rule 18a-1(e) (prescribing requirements to calculate market and
credit risk charges, including use of an 8% multiplication factor
for calculating the credit risk charges).
    \278\ For example, assume a Covered Entity has total assets of
$600 million (of which $595 million are liquid and $5 million are
illiquid) and total liabilities of $450 million. In this case, the
Covered Entity's liquid assets would exceed total liabilities by
$145 million ($590 million minus $450 million) and, therefore, the
Covered Entity would have excess liquid assets greater than $100
million as required by the first prong of the second additional
capital condition. Assume further that the Covered Entity's risk-
weighted assets under the Basel capital standard equal $400 million.
In this case, the Covered Entity's deduction would equal $32 million
($400 million divided by 12.5). Subtracting $32 million from $145
million leaves $113 million, which exceeds $20 million. Therefore,
the Covered Entity would meet the second requirement of the first
prong of the second additional capital condition.
---------------------------------------------------------------------------

    The second prong of the second additional capital condition
requires the Covered Entity to make and preserve for three years a
quarterly record that: (1) Identifies and values the liquid assets
maintained pursuant to the first prong; (2) compares the amount of the
aggregate value the liquid assets maintained pursuant to the first
prong to the amount of the Covered Entity's total liabilities and shows
the amount of the difference between the two amounts (``the excess
liquid assets amount''); and (3) shows the amount of the deduction
required under the first prong and the amount that deduction reduces
the excess liquid assets amount.\279\ This prong has been modified from
the proposed Order to conform to the modifications to the first and
third prongs of the proposed capital condition discussed above (i.e.,
combining them into a single prong that imposes a simplified net liquid
assets test). Under the Order, the quarterly record will include
details showing whether the Covered Entity is meeting the $100 million
and $20 million requirements of the first prong.
---------------------------------------------------------------------------

    \279\ See para. (c)(1)(iii)(A)(2) of the order.
---------------------------------------------------------------------------

    The third prong of the second additional capital condition requires
the Covered Entity to notify the Commission in writing within 24 hours
in the manner specified on the Commission's website if the Covered
Entity fails to meet the requirements of the first prong and include in
the notice the contact information of an individual who can provide
further information about the failure to meet the requirements.\280\ As
discussed above, the first additional capital condition requires the
Covered Entity to apply substituted compliance with respect to
notification requirements of Exchange Act rule 18a-8 relating to
capital.\281\ A Covered Entity applying substituted compliance with
respect to Exchange Act rule 18a-8 must simultaneously submit to the
Commission any notifications relating to capital that it must submit to
the French authorities. However, French and EU notification
requirements do not address a failure to adhere to the simplified net
liquid assets test required by the first prong of the second additional
capital condition. Moreover, due to the differences between Exchange
Act rule 18a-1 and the Basel capital standard discussed above, a
Covered Entity could fall out of compliance with the requirements of
the first prong but still remain in compliance with the requirements of
the Basel capital standard. Accordingly, the third prong requires the
Covered Entity to notify the Commission if the firm fails to meet the
requirements of the first prong. This will alert the Commission of
potential issues with the Covered Entity's financial condition that
could pose risks to the firm's customers and counterparties.
---------------------------------------------------------------------------

    \280\ See para. (c)(1)(iii)(A)(3) of the Order.
    \281\ See para. (c)(1)(ii) of the Order.
---------------------------------------------------------------------------

    The fourth prong of the additional capital condition in the
proposed Order would have required the Covered Entity to include its
most recently filed statement of financial condition (whether audited
or unaudited) with its initial notice to the Commission of its intent
to rely on substituted compliance. No commenters raised specific
concerns with this condition and the Order includes it as proposed, but
now it is the fourth prong of the second additional capital
condition.\282\
---------------------------------------------------------------------------

    \282\ See para. (c)(1)(iii)(A)(4) of the Order. As discussed
above, a commenter objected to the capital conditions generally and
provided specific comments with respect to the first three
conditions, but not the fourth condition. See SIFMA Letter at 9-20.
This commenter did support the fourth condition as part of its
recommended incremental approach to implementing the capital
conditions. See SIFMA Letter at 19-20.
---------------------------------------------------------------------------

    The commenter who opposed additional capital conditions stated that
their burdens would be disruptive to market participants and could
cause Covered Entities to exit the U.S. security-based swap
market.\283\ However, this may not be case. For example, the commenter
stated that the Covered Entities expected to register with the
Commission transact predominantly in securities and derivatives and do
not extensively engage in unsecured lending or other activities more
typical of banks.\284\ The commenter based this statement on a high-
level review of public information about the balance sheets of six
Covered Entities undertaken to create the

Balance Sheet Table.\285\ Based on this review, the commenter stated
that the ``vast majority of each firm's total assets consists of cash
and cash equivalents, collateralized agreements, trade and other
receivables, and other trading and financial assets. The commenter
characterized these assets as being ``liquid.'' The commenter stated
further that the amount of illiquid assets held by these firms as a
proportion of their balance sheets is comparable to the proportion of
illiquid assets held by U.S. broker-dealers. The commenter also stated
that the long-term debt, subordinated debt, and equity of the Covered
Entities, as a proportion of their total liabilities and equity, also
was comparable to U.S. broker-dealers. Moreover, based on the Balance
Sheet Table and the staff's analysis of the public financial reports of
the major investment firms regulated by the Prudential Regulatory
Authority (``PRA'') in the United Kingdom (i.e., a PRA-designated
investment firm) and a large investment firm in France, these firms
report total liquid assets that exceed total liabilities and, in most
cases, substantially in excess of $100 million.\286\
---------------------------------------------------------------------------

    \283\ See SIFMA Letter at 19.
    \284\ See SIFMA Letter at 10-11.
    \285\ See SIFMA Letter at 10-11, Appendix C.
    \286\ The Bank of England publishes a list of PRA-designated
investment firms. This list is available at: https://www.bankofengland.co.uk/prudential-regulation/authorisations/which-firms-does-the-pra-regulate.
---------------------------------------------------------------------------

    This information suggests that Covered Entities may be able to meet
the second additional capital condition without having to significantly
adjust their assets, liabilities, and equity. Moreover, the
modifications to the second additional capital condition that
incorporate how Covered Entities categorize liquid and illiquid assets
and calculate risk-weighted assets, will allow them to use existing
processes to derive the measures needed to adhere to the condition.
Therefore, while the condition imposes a simplified net liquid assets
test and associated recordkeeping requirement, it may not cause Covered
Entities to withdraw from the U.S. security-based swap market.
Nonetheless, it is possible that the simplified net liquid assets test
and associated recordkeeping burden could cause a Covered Entity to
withdraw from the U.S. security-based swap market. However, as
discussed above, this additional capital condition is designed to
produce a comparable regulatory outcome with respect to SBS Entities
subject to Exchange Act rule 18a-1 and Covered Entities applying
substituted compliance with respect to that rule.
    In response to a specific request for comment in the Reopening
Release, a commenter stated that the capital conditions would not be
necessary if the balance sheets of the Covered Entities seeking to
apply substituted compliance with respect to Exchange Act rule 18a-1
were similar to the balance sheets of U.S. broker-dealers.\287\
However, the Commission also sought comment on whether the capital
conditions would serve to ensure that these firms do not engage in non-
securities business activities that could impair their liquidity.\288\
Two commenters expressed support for the capital conditions.\289\ The
fact that today certain Covered Entities have liquid balance sheets
does not mean this will hold true in the future or with respect to
other potential registrants. For these reasons, it is appropriate to
include additional conditions with respect to applying substituted
compliance to Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    \287\ See SIFMA Letter II at 8; Reopening Release, 86 FR at
18345.
    \288\ Reopening Release, 86 FR at 18345.
    \289\ See Better Markets Letter at 7-8; AFREF Letter at 1-2.
---------------------------------------------------------------------------

    It would not be appropriate to take a more incremental approach to
the additional capital conditions as suggested by a commenter.\290\
Substituted compliance is premised on comparable regulatory outcomes.
As discussed above, the additional capital condition is designed to
supplement French and EU capital laws in order to achieve a comparable
regulatory outcome in terms of the net liquid assets test of Exchange
Act rule 18a-1. Delaying the implementation of the additional capital
condition would mean that Covered Entities are operating as registered
security-based swap dealers under a capital standard that does impose
the net liquid assets test. This would be inconsistent with the
objective of substituted compliance and could increase risk to the U.S.
security-based swap markets and participants in those markets.
Moreover, the modifications to the capital conditions discussed above
may ease the implementation burdens.
---------------------------------------------------------------------------

    \290\ See SIFMA Letter II at 16-17.
---------------------------------------------------------------------------

    In addition, the Commission does not believe a commenter's
suggestion for an alternative capital condition requiring a Covered
Entity to maintain $100 million of HQLA as defined in the LCR
requirements would be adequate in terms of achieving comparable
regulatory outcomes with Exchange Act rule 18a-1.\291\ The Balance
Sheet Table and public financial reports of investment firms in the UK
and France indicates that Covered Entities have total liabilities of
many billions of dollars.\292\ A condition requiring $100 million in
highly liquid assets would not cover these liabilities and would not
impose a net liquid assets test.
---------------------------------------------------------------------------

    \291\ See SIFMA Letter II at 16.
    \292\ See SIFMA UK Letter, Appendix C.
---------------------------------------------------------------------------

    Finally, the Commission has modified the citations to French and EU
laws in the capital section of the Order in response to comment and
further analysis.\293\ In response to comments, the capital section of
the Order does not cite ``recitals'' because they are not part of a
legally binding regulation.\294\
---------------------------------------------------------------------------

    \293\ SIFMA Letter II at Appendix A.
    \294\ SIFMA Letter II, Appendix A.
---------------------------------------------------------------------------

    The Commission agrees with the comments that the specific
provisions to the CRR citied in the proposed Order are not
comprehensive .\295\ In response, the Commission has modified the final
ordering language to use more comprehensive citations to the CRR
(including the specific CRR provisions cited in the proposed Order), as
the capital analysis includes only discussion of entities that are
fully subject to CRR and CRD IV.\296\ In addition, this commenter
recommended that the Commission modify the final ordering language to
qualify the citations to the CRR with a reference to waivers and
permissions.\297\ In response, the specific provisions in the CRR
referenced in the capital comparability analysis were analysed without
reference to waivers or permissions, and the condition states that the
Covered Entity must be subject to and comply with these specific
capital requirements. Therefore, the more comprehensive references to
the CRR in the final order are cited without reference to waivers or
permissions.
---------------------------------------------------------------------------

    \295\ SIFMA Letter II, Appendix A.
    \296\ French Authorities' Application (Side Letter for Capital
Requirements) at p.4. More specifically, in the final Order, the
Commission is including references to the CRR to read: CRR, Part One
(General Provisions) Article 6(1), Part Two (Own Funds), Part Three
(Capital Requirements), Part Four (Large Exposures), Part Five
(Exposures to Transferred Credit Risk), Part Six (Liquidity), and
Part Seven (Leverage).
    \297\ SIFMA Letter II, Appendix A.
---------------------------------------------------------------------------

    Further, the Commission agrees with the commenter that some of the
citations do not relate to requirements imposed on Covered Entities,
but generally relate to the powers of relevant authorities. In these
cases, citations in the ordering language have been deleted or modified
to reference requirements that a Covered Entity is subject to and must
comply with.\298\
---------------------------------------------------------------------------

    \298\ More specifically, in the final order, the Commission is:
(1) Deleting BRRD Articles 27(1), 31(2), 31(1)(a) and (5), and
32(5); (2) deleting CRD Articles 97, 98(1)(e), 98(6), 99, 100(1),
102(1), 104, 104(1), 105. 142(4) and narrowing the scope of Article
142 to (1) and (2); (3) deleting MFC Articles L. 511-15; 511-41-1
A(XIV), L. 511-41-3.II-IV., L. 511-41-1 C, L. 511-41-3, L. 511-41-4,
L. 511-41-5, L. 511-42, L. 532-6, L. 533-2-3, L. 612-24, R. 612-30,
L. 612-32, R. 612-32, L. 612-33.I, L. 612-33.II, L. 612-40, and L.
613-50.I, L. 631-2-1, narrowing the reference to L. 613-49 to 613-
49I.; (4) deleting the reference to Article 10 of the Decree of 3
November 2014 on internal control; (5) deleting the Ministerial
Order on the Supervisory Review and Evaluation Process, articles 6
through 10; and (6) deleting Articles 37, 38, 63, and 64 of Decree
of 3 November 2014 relating to capital buffers.

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

    In response to the comment that the reference to MFC Article L.
511-13 be deleted because it relates to governance requirements and is
beyond the scope of capital requirements, the Commission agrees.
Therefore, the Commission is deleting this reference from the Order.
    Further, in response to comments to insert the phrase ``as
applicable'' in certain places in the capital condition, the Commission
is not modifying the Order to ensure Covered Entities remain subject to
and comply with the laws and regulations cited in the capital
condition. The Commission acknowledges that some of the citations to
the French laws apply only to specific types of institutions (i.e.,
credit institutions or investment firms).\299\ In such cases, a Covered
Entity would comply with the relevant citation in the MFC article that
corresponds to its entity type.
---------------------------------------------------------------------------

    \299\ For example, Article L. 511-41-1-B of the MFC implements
Article 73 of CRD (Internal Capital) for credit institutions, and
MFC article L. 533-2-2 implements it for investment firms.
---------------------------------------------------------------------------

    In response to the comment that the Commission narrow the scope of
references to CRD Articles 129 (Requirement to maintain a capital
conservation buffer), 130 (Requirement to maintain an institution-
specific countercyclical capital buffer), and 131 (Global and other
systemically important institutions) because some of the paragraphs do
not impose any obligations on firms, the Commission disagrees and is
retaining these citations in the Order. These references were cited in
the French Authorities' Application in their entirety with reference to
the requirement that ``institutions must maintain certain capital
buffers above the minimum 8 percent capital level composed of Common
Equity Tier 1 capital instruments.'' \300\ Therefore, it is appropriate
to retain these citations in the Order.
---------------------------------------------------------------------------

    \300\ French Authorities' Application, Side Letter for Capital
Requirements at n.13 (and accompanying text).
---------------------------------------------------------------------------

    In response to the comments that the Commission update the
reference to BRRD Article 45(6), since it had been amended, the
Commission is retaining the reference, since the references are to
citations in the French Authorities' Application.\301\ In addition, the
term BRRD means Bank Recovery and Resolution Directive 2014/59/EU of
the European Parliament and of the Council of 15 May 2014, as amended
from time to time. Therefore, amendments to the BRRD are already
included in the definition and covered by the capital conditions in the
Order.\302\
---------------------------------------------------------------------------

    \301\ See SIFMA Letter II at Appendix A.
    \302\ The commenter also recommended deleting CRD Article 23
since it has been replaced by recent amendments to CRD. The proposed
Order does not cite Article 23 of the CRD. Therefore, this comment
is moot.
---------------------------------------------------------------------------

    In addition, in response to a recommendation to delete references
to the EMIR margin requirements, the Commission is retaining the
references to the EMIR Margin RTS requirements as the French
Authorities' Application states ``if liquidation did occur, EU
regulations also protect counterparties and promote continued market
liquidity through margin requirements.'' \303\ Finally, the references
to the EMIR Margin RTS and the final references in the capital ordering
language contribute to the conclusion that French and EU laws produces
a comparable regulatory outcome to the capital requirements under the
Exchange Act.
---------------------------------------------------------------------------

    \303\ French Authorities' Application, Side Letter for Capital
Requirements at 22. For example, the EMIR Margin RTS require a
Covered Entity to segregate initial margin from the firm's assets by
either placing it with a third-party holder or custodian or via
other legally binding arrangements, making the initial margin remote
in the case of the firm's default or insolvency. Id.
---------------------------------------------------------------------------

2. Margin
    The Commission's preliminary view, based on the French Authorities'
Application and the Commission's review of applicable provisions, was
that relevant French and EU margin requirements would produce
regulatory outcomes that are comparable to those associated with
Exchange Act margin requirements without the need for additional
conditions.\304\ For example, in adopting final margin requirements for
non-cleared security-based swaps, the Commission modified the rule to
more closely align it with the margin rules of the Commodity Futures
Trading Commission and the U.S. prudential regulators and, in doing so,
with the recommendations made by the BCBS and the Board of the
International Organization of Securities Commissions (``IOSCO'') with
respect to margin requirements for non-centrally cleared
derivatives.\305\
---------------------------------------------------------------------------

    \304\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85726.
    \305\ Id., 85 FR at 85726, n.50; See Capital and Margin Adopting
Release, 84 FR at 43908-09. See also BCBS/IOSCO, Margin Requirements
for Non-centrally Cleared Derivatives (April 2020), available at
https://www.bis.org/bcbs/publ/d499.pdf (``BCBS/IOSCO Paper''). The
French and EU margin requirements also are based on the
recommendation in the BCBS/IOSCO Paper.
---------------------------------------------------------------------------

    Exchange Act rule 18a-3 and the French and EU margin rules require
firms to collect liquid collateral from a counterparty to cover
variation and/or initial margin requirements.\306\ Both sets of rules
also require firms to deliver liquid collateral to a counterparty to
cover variation margin requirements. Under both sets of rules, the fair
market value of collateral used to meet a margin requirement must be
reduced by a haircut.\307\ Further, both sets of rules permit the use
of a model (including a third party model such as ISDA's
SIMMTM model) to calculate initial margin.\308\ The initial
margin model under both sets of rules must meet certain minimum
qualitative and quantitative requirements, including that the model
must use a 99 percent, one-tailed confidence level with price changes
equivalent to a 10-day movement in rates and prices.\309\ Both sets of
rules have common exceptions to the requirements to collect and/or post
initial or variation margin, including exceptions for certain
commercial end users, the Bank for International Settlements, and
certain multilateral development banks.\310\ Both sets of rules also
permit a threshold below which initial margin is not required to be
collected and incorporate a minimum transfer amount.\311\
---------------------------------------------------------------------------

    \306\ See 17 CFR 240.18a-3(c)(1)(ii) and French Authorities'
Application at 27-28.
    \307\ See 17 CFR 240.18a-3(c)(1)(ii) and French Authorities'
Application at 40-43.
    \308\ See 17 CFR 240.18a-3(d)(2)(i) and French Authorities'
Application at 12-20.
    \309\ See 17 CFR 240.18a-3(d)(2)(i) and French Authorities'
Application at 12. The Commission must approve the use of an initial
margin model. 17 CFR 240.18a-3(d)(2)(i). EMIR Article 11(15) directs
European supervisory authorities to develop regulatory technical
standards under which initial margin models have to be approved
(initial and ongoing approval). EU requirements currently provide
that, upon request, counterparties using an initial margin model
shall provide the regulators with any documentation relating to the
risk management procedures relating to such model at any time. EMIR
Margin RTS, Article 2(6).
    \310\ See 17 CFR 240.18a-3(c)(1)(iii) and French Authorities'
Application at 54-65.
    \311\ See 17 CFR 240.18a-3(c)(1)(iii) and French Authorities'
Application at 54-65.
---------------------------------------------------------------------------

    In the French Substituted Compliance Notice and Proposed Order, the
Commission stated substituted compliance with respect to the margin
requirements accordingly would be conditioned on Covered Entities being
subject to those French and EU provisions that, the Commission has
determined, in the aggregate, establish a framework that produces
outcomes comparable to those associated with the

requirements under the Exchange Act rule 18a-3.\312\ Commenters
supported the Commission's proposed approach for substituted compliance
with respect to margin requirements.\313\
---------------------------------------------------------------------------

    \312\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85726.
    \313\ FBF Letter I at 4; SIFMA Letter I at 13.
---------------------------------------------------------------------------

    One commenter suggested technical comments with respect to refining
the French and EU laws cited in the proposed Order.\314\ In particular,
this commenter recommended that the Commission (1) delete the citations
to the CRR; (2) narrow the scope of the reference to EMIR Article 11 to
Article 11(3); and (3) insert the phrase ``as applicable'' before the
citations to the French laws.\315\ The Commission disagrees with the
commenter that the scope of the citation to EMIR Article 11 should be
narrowed. Other provisions of EMIR Article 11 relate to margin
requirements, including the provisions regarding intragroup
transactions. Therefore, the Commission is not modifying this citation
in the final order. With respect to the suggestion by the commenter to
delete references to the CRR requirements, the Commission concludes
that the requirements which were set out in the proposed Order,
contribute to the conclusion that French and EU law produce a
comparable regulatory outcome to the margin requirements under the
Exchange Act.\316\ Finally, the Commission is not modifying the Order
to insert the phrase ``as applicable'' because it is overly broad. The
Commission acknowledges that some of the citations to the French laws
apply only to specific types of institutions (i.e., credit institutions
or investment firms).\317\ In such cases, a Covered Entity would comply
with the relevant citation in the MFC article that corresponds to its
entity type. For the foregoing reasons, the first margin condition
requires the covered entity to be subject to and comply with certain
identified French and EU margin requirements.\318\
---------------------------------------------------------------------------

    \314\ SIFMA Letter II, Appendix A.
    \315\ SIFMA Letter II, Appendix A.
    \316\ The references to the CRR were included in the
comparability assessment for margin requirements, and in the
Commission's view the holistic approach for comparing regulatory
outcomes should seek to reflect the whole of a jurisdiction's
relevant requirements, rather than select subsets of those
requirements.
    \317\ For example Article L. 511-41-1-B of the MFC implements
Article 73 of CRD (Internal Capital) for credit institutions, and
MFC article L. 533-2-2 implements it for investment firms.
    \318\ See para. (c)(2)(i) of the order. The first margin
condition requires that Covered Entities must be subject to and
comply with EMIR article 11; EMIR Margin RTS; CRR articles 103,
105(3), 105(10), 111(2), 224, 285, 286, 286(7), 290, 295, 296(2)(b),
297(1), 297(3), and 298(1); MiFID Org Reg. article 23(1); CRD
articles 74 and 79(b); MFC articles L. 511-41-1-B, L. 533-2-2, L.
533-29, I al. 1, and L. 511-55 al. 1; and Decree of 3 November 2014
on internal control, article 114.
---------------------------------------------------------------------------

    The proposed Order did not contain any additional conditions for
substituted compliance with respect to the margin requirements of
Exchange Act section 15F(e) and Exchange Act rule 18a-3. The
Commission, however, requested comment on whether there were any
conditions that should be applied to substituted compliance for the
margin requirements to promote comparable regulatory outcomes.\319\ As
discussed below, in response to comments received, the Order includes
two additional margin conditions designed to produce comparable
regulatory outcomes with respect to collecting variation and initial
margin from counterparties.\320\
---------------------------------------------------------------------------

    \319\ French Substituted Compliance Notice and Proposed Order,
85 FR at 85737.
    \320\ See paras. (c)(2)(ii) and (iii) of the order.
---------------------------------------------------------------------------

    In particular, a commenter raised general concerns with the
Commission's regulatory outcomes approach to substituted compliance,
and suggested additional general principles that the Commission should
consider in evaluating applications for substituted compliance.\321\
This commenter believed regulatory arbitrage within and outside the
United States was one of the key factors that led to and exacerbated
the 2008 financial crisis, and stated that the Dodd-Frank Act was
enacted in response, which includes the Commission's authority to
promulgate capital, margin, and other rules for non-cleared security-
based swaps ``to reduce the possibility and severity of another crisis
related to excessive buildup of risk in the swaps markets.'' \322\
---------------------------------------------------------------------------

    \321\ Better Markets Letter at 3.
    \322\ Better Markets Letter at 2.
---------------------------------------------------------------------------

    The Commission responds to the comments on the Commission's
approach to substituted compliance in part II.D.2 above. However, as
stated above, the commenter raises concerns about regulatory arbitrage
and the potential impacts of differences in requirements that merit re-
consideration of whether additional margin conditions are needed to
produce comparable regulatory outcomes.\323\ When proposing margin
requirements for non-cleared security-based swaps, the Commission
stated that the ``Dodd-Frank Act seeks to address the risk of
uncollateralized credit risk exposure arising from OTC derivatives by,
among other things, mandating margin requirements for non-cleared
security-based swaps and swaps.'' \324\ Further, the comparability
criteria for margin requirements under Exchange Act rule 3a71-6
provides that prior to making a substituted compliance determination,
the Commission intends to consider (in addition to any conditions
imposed) whether the foreign financial regulatory system requires
registrants to adequately cover their current and future exposure to
OTC derivatives counterparties, and ensures registrants' safety and
soundness, in a manner comparable to the applicable provisions arising
under the Exchange Act and its rules and regulations.\325\ In adopting
this comparability criteria for margin requirements, the Commission
stated that obtaining collateral is one of the ways OTC derivatives
dealers manage their credit risk exposure to OTC derivatives
counterparties.\326\
---------------------------------------------------------------------------

    \323\ Better Markets Letter at 2-3.
    \324\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers; Proposed
Rule, Exchange Act Release No. 68071 (Oct. 18, 2021), 77 FR 70214,
70258 (Nov. 23, 2012).
    \325\ See 17 CFR 240.3a71-6(d)(5)(i) and (ii).
    \326\ See Capital and Margin Adopting Release, 84 FR at 43949
(``Obtaining collateral is one of the ways OTC derivatives dealers
manage their credit risk exposure to OTC derivatives counterparties.
Prior to the financial crisis, in certain circumstances,
counterparties were able to enter into OTC derivatives transactions
without having to deliver collateral. When ``trigger events''
occurred during the financial crisis, those counterparties faced
significant liquidity strains when they were required to deliver
collateral.) Id.
---------------------------------------------------------------------------

    To address the risk of uncollateralized exposures, Exchange Act
rule 18a-3 requires SBS entities without a prudential regulator to
collect variation margin from all counterparties, including affiliates,
unless an exception applies.\327\ Under the French and EU margin
requirements, there are exceptions from the variation margin
requirements for certain intragroup transactions (i.e., transactions
between affiliates).\328\ In addition, Exchange Act rule 18a-3 requires
firms to collect initial margin from all counterparties, unless an
exception applies.\329\ This initial margin requirement under Exchange
Act rule 18a-3 requires the firm to collect initial margin from a
financial counterparty such as a hedge fund without regard to whether
the counterparty has material exposures to non-cleared security-based
swaps and uncleared swaps. In contrast, the French and EU margin
requirements do not require Covered Entities to collect initial margin
from financial counterparties, if their notional exposure to non-
centrally

cleared derivatives does not exceed a certain threshold on a group
basis.\330\
---------------------------------------------------------------------------

    \327\ See 17 CFR 240.18a-3(c)(ii)(A)(1) and (2).
    \328\ French Authorities' Application at 60.
    \329\ See 17 CFR 240.18a-3(c)(ii)(B).
    \330\ French Authorities' Application at 7. These thresholds are
being phased-in with the last initial margin threshold set at EUR 8
billion.
---------------------------------------------------------------------------

    In some cases these differences may result in a Covered Entity not
being adequately collateralized to cover its current or future exposure
to these counterparties with respect to its OTC derivatives
transactions. In addition, differences in the counterparty exceptions
could potentially incentivize market participants to engage in non-
cleared security-based swap transactions outside of the United
States.\331\ Consequently, it is appropriate to impose additional
margin conditions to produce comparable regulatory outcomes in terms of
counterparty exceptions between Exchange Act rule 18a-3 and the French
and EU requirements.
---------------------------------------------------------------------------

    \331\ The Commission recognizes there are also cases where the
French and EU margin rules are more restrictive than Exchange Act
rule 18a-3. French and EU margin rules require Covered Entities to
post initial margin to covered counterparties, while the Exchange
Act rule 18a-3 would permit posting but not require it. In addition,
French and EU margin rules also require a Covered Entity to collect
(and post) initial margin to financial and non-financial
counterparties if their notional exposure to non-centrally cleared
derivatives exceeds a certain threshold on a group basis. In
contrast, Exchange Act rule 18a-3 does not require (but permits) a
nonbank security-based swap dealer to collect initial margin from
counterparties that are financial market intermediaries. 17 CFR
240.18a-3(c)(1)(iii)(B). The comparability analysis, however,
focuses on determining whether the French and EU margin rules are
comparable to Exchange Act rule 18a-3.
---------------------------------------------------------------------------

    The first additional condition addresses differences in the
counterparty exceptions with respect to variation margin. It requires a
Covered Entity to collect variation margin, as defined in the EMIR
Margin RTS, from a counterparty with respect to a transaction in non-
cleared security-based swaps, unless the counterparty would qualify for
an exception under Exchange Act rule 18a-3 from the requirement to
deliver variation margin to the Covered Entity.\332\ This condition
defines variation margin by referencing EMIR Margin RTS to facilitate
implementation of the condition by Covered Entities. Under this
condition, for example, Covered Entities would be required to collect
variation margin from their affiliates, but would be permitted to
comply with all other French and EU margin requirements, including
calculation, collateral, documentation, and timing of collection
requirements. The first additional condition will close the gap between
the counterparty exceptions of Exchange Act rule 18a-3 and the French
and EU margin rules with respect to variation margin.
---------------------------------------------------------------------------

    \332\ See para. (c)(2)(ii) of the order.
---------------------------------------------------------------------------

    The second additional condition addresses differences in the
counterparty exceptions with respect to initial margin. It requires a
Covered Entity to collect initial margin, as defined in the EMIR Margin
RTS, from a counterparty with respect to transactions in non-cleared
security-based swaps, unless the counterparty would qualify for an
exception under Exchange Act rule 18a-3 from the requirement to deliver
initial margin to Covered Entity.\333\ The condition defines initial
margin by referencing EMIR Margin RTS to facilitate implementation of
the condition by Covered Entities. Under this condition, for example,
Covered Entities would be required to collect initial margin from their
certain counterparties, but would be permitted to comply with all other
French and EU margin requirements, including calculation, collateral,
documentation, and timing of collection requirements. The second
additional condition will close the gap between the counterparty
exceptions of Exchange Act rule 18a-3 and the French and EU margin
rules with respect to initial margin.
---------------------------------------------------------------------------

    \333\ See para. (c)(2)(iii) of the order.
---------------------------------------------------------------------------

    Finally, for the reasons discussed above in part III.B.2.e of this
release, the third additional condition is that the Covered Entity
applies substituted compliance with respect to Exchange Act rules 18a-
5(a)(12) (a record making requirement).\334\ This record making
requirement is directly linked to the margin requirements of Exchange
Act rule 18a-3. The UK Proposed Order conditioned substituted
compliance with respect to this record making requirement on the
Covered Entity applying substituted compliance with respect to Exchange
Act rule 18a-3.\335\ This additional condition is designed to 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 pursuant this Order.
---------------------------------------------------------------------------

    \334\ See para. (c)(2)(iv) of the Order.
    \335\ See UK Substituted Compliance Notice and Proposed Order,
86 FR at 18396-98, 18416. The Commission sought comment in the
Reopening Release on whether this approach should be taken in the
final Order. See Reopening Release, 86 FR at 18348.
---------------------------------------------------------------------------

VI. Substituted Compliance for Internal Supervision and Compliance
Requirements

A. Proposed Approach

    The French Authorities' Application further requested substituted
compliance in connection with requirements relating to:
     Internal supervision--Diligent internal supervision and
conflict of interest provisions that generally require SBS Entities to
establish, maintain and enforce supervisory policies and procedures
that reasonably are designed to prevent violations of applicable law,
and implement certain systems and procedures related to conflicts of
interest.
     Chief compliance officers--Chief compliance officer
provisions that generally require SBS Entities to designate individuals
with the responsibility and authority to establish, administer and
review compliance policies and procedures, to resolve conflicts of
interest, and to prepare and certify annual compliance reports to the
Commission.
     Additional Exchange Act section 15F(j) requirements--
Certain additional requirements related to information-gathering and
antitrust prohibitions.\336\
---------------------------------------------------------------------------

    \336\ See French Substituted Compliance Notice and Proposed
Order, 85 FR at 85726-27.
---------------------------------------------------------------------------

    Taken as a whole, these requirements generally help to advance SBS
Entities' use of structures, processes and responsible personnel
reasonably designed to promote compliance with applicable law, identify
and cure instances of noncompliance, and manage conflicts of interest.
    In proposing to provide conditional substituted compliance in
connection with this part of the French Authorities' Application, the
Commission preliminarily concluded that the relevant French and EU
requirements in general would produce comparable regulatory outcomes by
providing that French SBS Entities have structures and processes that
reasonably are designed to promote compliance with applicable law and
to identify and cure instances of non-compliance and manage conflicts
of interest. Substituted compliance under the proposed Order was to be
conditioned in part on SBS Entities being subject to and complying with
specified French and EU provisions that in the aggregate produce
regulatory outcomes that are comparable to those associated with those
internal supervision, compliance and related requirements under the
Exchange Act.\337\
---------------------------------------------------------------------------

    \337\ See id. at 85727 n.55.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance was to be subject
to certain additional conditions to help ensure the comparability of
regulatory outcomes. First, substituted compliance in connection with
the internal supervision requirements

would be conditioned on the Covered Entities complying with applicable
French and EU supervisory and compliance provisions as if those
provisions also require the Covered Entities to comply with applicable
requirements under the Exchange Act and the other conditions of the
Order. This condition was intended to reflect that, even with
substituted compliance, Covered Entities still directly would be
subject to a number of requirements under the Exchange Act and
conditions of the Order that fall outside the ambit of French and EU
internal supervision and compliance requirements.\338\
---------------------------------------------------------------------------

    \338\ See id. at 85727-85728. The condition was designed to
allow Covered Entities to use their existing internal supervision
and compliance frameworks to comply with the relevant Exchange Act
requirements and Order conditions, rather than having to establish
separate special-purpose supervision and compliance frameworks.
---------------------------------------------------------------------------

    For similar reasons, the proposed Order conditioned substituted
compliance in connection with compliance report requirements on the
Covered Entity annually providing the Commission with certain