September 17, 2021

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SEC Issues Notice of Substituted Compliance Application and Proposed Substituted Compliance Order for United Kingdom and Reopens Comment Period for Notice and Proposed Substituted Compliance Order for France

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The Securities and Exchange Commission voted to take two actions to continue to advance implementation of security-based swap regulation under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Commission is publishing a notice of application and proposed substituted compliance order in response to an application from the United Kingdom’s Financial Conduct Authority (FCA).  In addition, the Commission is re-opening the comment period on the notice of application and proposed substituted compliance order in relation to the application by France’s Autorité des Marchés Financiers (AMF) and Autorité de Contrôle Prudentiel et de Résolution (ACPR).

“These actions reflect the Commission’s continued commitment to stand up the Dodd-Frank Title VII regime, prepare for the registration of security-based swap dealers later this year, and continue engaging with our foreign counterparts,” said SEC Acting Chair Allison Herren Lee.  “I thank our UK, French and EU colleagues for their commitment in advancing strong cross-border regulatory cooperation.”

The FCA application seeks substituted compliance for UK-regulated firms based on compliance with UK requirements.  The proposed substituted compliance order for the UK provides that certain UK-regulated firms that are also registered with the Commission as security-based swap dealers and major security-based swap participants conditionally may satisfy certain requirements under the Securities Exchange Act of 1934 by complying with comparable UK requirements.  The Commission would retain the authority to inspect, examine and supervise these firms and take enforcement action as appropriate. 

The Commission also is re-opening the comment period on the French notice of application and proposed substituted compliance order.  The re-opened comment period will give market participants and the public an opportunity to consider potential changes to the proposed order and additional questions related to the proposed order.  

These actions reflect the Commission’s consideration of the comparability of applicable non-U.S. requirements, and incorporate conditions intended to help promote comparability in practice.

The public comment periods for the UK and French applications will remain open for 25 days following publication of the actions in the Federal Register.  Additional information about substituted compliance applications is available at: https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap.

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FACT SHEET

UK and France Substituted Compliance Applications and Proposed Commission Orders

Apr. 5, 2021

Action

The Commission is taking two actions to continue to advance the availability of substituted compliance for certain non-U.S. security-based swap dealers and major security-based swap participants, in anticipation of those firms’ registration with the Commission beginning October 6, 2021.

The Commission is publishing notice of an application by the UK’s Financial Conduct Authority (FCA), requesting substituted compliance for UK-regulated security-based swap dealers and major security-based swap participants.  The Commission also is publishing a proposed order to conditionally provide substituted compliance to UK-regulated firms. 

The Commission is also re-opening the comment period on the notice of substituted compliance application by France’s Autorité des Marchés Financiers (AMF) and Autorité de Contrôle Prudentiel et de Résolution (ACPR) and the related proposed substituted compliance order.

Substituted Compliance Framework

Exchange Act rule 3a71-6 conditionally provides that non-U.S. security-based swap dealers and major security-based swap participants may satisfy certain requirements under section 15F of the Exchange Act by complying with foreign requirements that the Commission has found to be comparable.  The Commission’s comparability assessment must consider the scope and objectives of the foreign requirements and also the effectiveness of the foreign financial supervisory and enforcement frameworks.   

Rule 3a71-6 further conditions substituted compliance on the Commission and the foreign financial regulatory authority entering into a supervisory and enforcement memorandum of understanding and/or other arrangement addressing supervisory and enforcement cooperation and other matters related to substituted compliance.  

Substituted compliance does not constitute exemptive relief, but instead provides an alternative method by which non-U.S. dealers and major participants may comply with applicable U.S. requirements.  The Commission retains the authority to inspect, examine and supervise those firms and take enforcement action as appropriate.

The registration compliance date for security-based swap dealers and major security-based swap participants is October 6, 2021, and market participants will begin counting security-based swap transactions and positions toward the registration thresholds on August 6, 2021.  See “Key Dates for Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,” available at: https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.

The FCA’s Application

The FCA requests that the Commission grant substituted compliance in connection with requirements under the Exchange Act regarding: 

  • Risk control – requirements related to capital, margin, risk management systems, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression and trading relationship documentation.
  • Recordkeeping and reporting – requirements related to record creation, record maintenance, reporting, notices and quarterly securities counts.
  • Internal supervision and compliance – requirements related to supervision, conflicts of interest and chief compliance officers, and certain related matters.
  • Counterparty protection – requirements related to fair and balanced communications, disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, daily mark disclosure, “know your counterparty,” suitability of recommendations and clearing rights disclosure.

In support, the FCA’s application includes analyses that compare UK requirements with relevant requirements under the Exchange Act.  The application also includes information regarding the financial supervisory and enforcement frameworks in the UK.

The FCA’s application is available on the SEC website.
 

Proposed Substituted Compliance Order for UK Firms

The Commission is publishing for comment a proposed substituted compliance order in connection with the FCA’s application.  The proposed order reflects the Commission’s preliminary assessments regarding the comparability of applicable UK requirements, and the effectiveness of the UK financial supervisory and enforcement frameworks.  The proposed order incorporates certain conditions or other limits including:

  • Trading Relationship Documentation – Firms would not receive substituted compliance in connection with certain disclosure-related provisions for transactions with U.S. counterparties, but would receive it for transactions with non-U.S. counterparties.
  • Portfolio Reconciliation and Dispute Reporting – Firms would have to report counterparty valuation disputes directly to the Commission, based on UK timing requirements.
  • Capital – Firms would need to: (a) 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 firm’s current liabilities coming due in the next 365 days; (b) make a quarterly record listing: (i) the assets maintained under the condition described in (a) above, their value, and the amount of their applicable haircuts; and (ii) the aggregate amount of the liabilities coming due in the next 365 days; (c) maintain at least $100 million of equity capital composed of highly liquid assets, as defined in the Basel capital standard; and (d) 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.
  • Internal Supervision – Firms’ internal supervision frameworks must also promote compliance with certain residual U.S. requirements and the conditions to the proposed order.
  • Compliance Reports – Firms must provide compliance reports directly to the Commission.
  • Suitability – The firm’s counterparty must be treated as a “per se professional client” under UK requirements and must not be a “special entity” as defined in Exchange Act section 15F(h)(2)(C) and Exchange Act rule 15Fh-2(d).
  • Daily Mark Disclosure – The firm must be required to reconcile, and in fact reconcile, the portfolio containing the relevant security-based swap on each business day.
  • Recordmaking – Firms would need to: (a) apply substituted compliance to a linked substantive Exchange Act requirement, when a recordmaking requirement is linked to that substantive Exchange Act requirement for which a positive substituted compliance determination is being made; (b) apply substituted compliance to Exchange Act rule 18a-1 with respect to certain records that are important for the Commission to examine for compliance with Exchange Act rule 18a-1; and (c) preserve the data elements to create certain records required by the Commission’s rule and furnish the record in the format (e.g., blotter or ledger) required by that rule.
  • Record Preservation – Firms would need to: (a) apply substituted compliance to a linked substantive Exchange Act requirement, when a record preservation requirement is linked to that substantive Exchange Act requirement for which a positive substituted compliance determination is being made; and (b) apply substituted compliance to Exchange Act rule 18a-1 with respect to certain records that are important for the Commission to examine for compliance with Exchange Act rule 18a-1.
  • Unaudited Financial and Operational Reporting – Firms would need to: (a) report periodic unaudited financial and operational information in the manner and format specified by Commission order or rule; (b) present the financial information in the filing in accordance with generally accepted accounting principles that the firm uses to prepare general purpose publicly available or available to be issued financial statements in the UK; and (c) apply substituted compliance to Exchange Act rule 18a-1 if subject to that rule.
  • Annual Audited Reports – Firms would need to: (a) simultaneously transmit to the Commission a copy of audited financial reports filed with UK authorities; (b) include with the filing contact information of a person who can provide further information about the reports; (c) file accountant’s reports covering the financial reports if the firm is not required by UK law to have its financial reports audited; (d) file compliance or exemption reports addressing statements related to Exchange Act rule 18a-4 for which substituted compliance is not available; (e) file supporting schedules related to Exchange Act rule 18a-4; and (f) apply substituted compliance to Exchange Act rule 18a-1.  Firms that change their fiscal year end would need to (a) simultaneously transmit to the Commission a copy of any notice required to be sent by comparable UK laws; and (b) include contact information of a person who can provide further details about the notice.
  • Notification – Firms would need to: (a) simultaneously transmit to the Commission a copy of any notice required to be sent by comparable UK laws; (b) include contact information of a person who can provide further details about the notice; (c) apply substituted compliance to Exchange Act rule 18a-1 (if subject to that rule) with respect to any required notifications related to that rule; and (d) apply substituted compliance with respect to a category of records required to made and kept current under Exchange Act rule 18a-5 with respect to the requirement to provide notification of a failure to make and keep current that category of records.
  • Access to Books and Records – Firms would remain subject to Exchange Act requirements to keep books and records open to inspection by the Commission and to furnish promptly to the Commission legible, true, complete, and current copies of those records of the firm that are required to be preserved.
  • English Translations – Firms would need to promptly provide an English translation of any record, report, or notification upon request.

The Commission is requesting comment on each of the proposed determinations and conditions.
 

Re-Opening of Comment Period on Substituted Compliance Notice and Proposed Order for France

The French substituted compliance application addresses the same Exchange Act requirements that are the subject of the UK notice and proposed substituted compliance order.  The application includes analyses that compare French and European Union requirements with relevant requirements under the Exchange Act, as well as information regarding the financial supervisory and enforcement frameworks in France.  The application is available on the SEC website.

The Commission is re-opening the comment period on the notice of the French application and the related proposed substituted compliance order.  The re-opened comment period will give market participants and the public an opportunity to consider potential changes to the proposed order and additional questions related to the proposed order.  The proposed conditions relate to capital, trade acknowledgement and verification, and trading relationship documentation and mirror those included in the UK proposed substituted compliance order.  The additional questions, in part, seek comment on whether the more granular approach to recordmaking, record preservation, and reporting taken in the proposed UK proposed substituted compliance order should be incorporated into the French final substituted compliance order.  Other questions are intended to promote consistency across the two proposed orders given the similarity of the regimes.
 

Next Steps

The Commission will seek public comment on these actions for 25 days following publication in the Federal Register. 

Security-based swap market participants are urged to be mindful of the October 2021 registration compliance date for security-based swap dealers and major security-based swap participants, and relevant firms should take action to prepare for registration.  For further information, firms may contact the Office of Derivatives Policy in the Commission’s Division of Trading and Markets, at 202-551-5870.

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