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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices Substituted compliance should assist relevant non-U.S. security-based swap market participants in preparing for registration.

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B. Scope of Substituted Compliance For entity-level Exchange Act requirements,11 a Covered Entity must choose either to apply substituted compliance pursuant to the Order with respect to all security-based swap business subject to the relevant French and EU requirements or to comply directly with the Exchange Act with respect to all such business; a Covered Entity may not choose to apply substituted compliance for some of the business subject to the relevant French or EU requirements and comply directly with the Exchange Act for another part of the business that is subject to the relevant French and EU requirements.
Additionally, for entity-level Exchange Act requirements, if the Covered Entity also has security-based swap business that is not subject to the relevant French requirements, the Covered Entity must either comply directly with the Exchange Act for that business or comply with the terms of another applicable substituted compliance order.12 For transaction-level Exchange Act requirements,13 a Covered Entity may decide to apply substituted compliance for some of its securitybased-swap-dealers-and-major-security-basedswap-participants.
11 The entity-level requirements relate to capital and margin, books and records other than those linked to the counterparty protection rules, internal risk management systems, trade acknowledgement and verification, portfolio reconciliation, compression, trading relationship documentation, and internal supervision and chief compliance officer requirements. See Exchange Act Release No. 86175 June 21, 2019 84 FR 43872, 43879 Aug 22, 2019 Capital and Margin Adopting Release; Exchange Act Release No.
87005 June 19, 2019 84 FR 68550, 68596 Dec. 16, 2019 Books and Records Adopting Release;
Exchange Act Release No. 78011 June 8, 2016 81
FR 39808, 39827 June 17, 2016 TAV Adopting Release; Exchange Act Adopting Release No.
87782 Dec. 18, 2019 85 FR 6359, 6378 Feb. 4, 2020 Risk Mitigation Adopting Release;
Business Conduct Adopting Release, 81 FR at 30064. Transaction-level requirements encompass business conduct requirements for the protection of counterparties, and additional provisions for the protection of special entities. See also Business Conduct Adopting Release, 81 FR at 30065.
12 In the context of the EMIR counterparties condition in paragraph a5, a Covered Entity must choose: 1 To apply substituted compliance pursuant to the Orderincluding compliance with paragraph a5 as applicablefor a particular set of entity-level requirements with respect to all of its business that would be subject to the relevant EMIR-based requirement if the counterparty were the relevant type of counterparty; or 2 to comply directly with the Exchange Act with respect to such business.
13 Transaction-level requirements are the counterparty protection requirements and the books and records requirements related to those counterparty protection requirements.

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based swap business and to comply directly with the Exchange Act or comply with another applicable substituted compliance order for other parts of its security-based swap business.
C. Specific Prerequisites 1. Comparability of Regulatory Outcomes Rule 3a716, adopted by the Commission in 2016, describes the requirements for the Commission to make a substituted compliance determination. Under the rule, the Commission must determine that the analogous foreign requirements are comparable to otherwise applicable requirements under the Exchange Act i.e., the relevant requirements in the Exchange Act and the rules and regulations thereunder, after accounting for factors such as the scope and objectives of the relevant foreign regulatory requirements and the effectiveness of the supervisory compliance program administered, and the enforcement authority exercised by the foreign authority.14 The comparability assessments are to be based on a holistic approach that will focus on the comparability of regulatory outcomes rather than predicating substituted compliance on requirement-by-requirement similarity. 15
2. Memoranda of Understanding Exchange Act rule 3a716a2ii further predicates the availability of substituted compliance on the Act rule 3a716a2i.
French Substituted Compliance Notice and Proposed Order, 85 FR at 85722; see also Business Conduct Adopting Release, 81 FR at 3007879
further recognizing that different regulatory systems may be able to achieve some or all of those regulatory outcomes by using more or fewer specific requirements than the Commission, and that in assessing comparability the Commission may need to take into account the manner in which other regulatory systems are informed by business and market practices in those jurisdictions. The Commissions assessment of a foreign authoritys supervisory and enforcement effectivenessas part of the broader comparability analysiswould be expected to consider not only overall oversight activities, but also oversight specifically directed at conduct and activity relevant to the substituted compliance determination. For example, it would be difficult for the Commission to make a comparability determination in support of substituted compliance if oversight is directed solely at the local activities of foreign securitybased swap dealers, as opposed to the cross-border activities of such dealers. Business Conduct Adopting Release, 81 FR at 30079 footnote omitted. In the French Substituted Compliance Notice and Proposed Order, the Commission preliminarily concluded that this comparability prerequisite was met in connection with a number of requirements under the Exchange Act, in some cases with the addition of conditions to help ensure the comparability of regulatory outcomes.

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Commission and the foreign financial regulatory authority or authorities entering into a supervisory and enforcement memorandum of understanding and/or other arrangement with the relevant foreign financial regulatory authorities addressing supervisory and enforcement cooperation and other matters arising under the substituted compliance determination. 16 Accordingly, the Commission and the AMF and the ACPR recently entered into a relevant memorandum of understanding.17
Moreover, the Commission and the European Central Bank ECB are in the process of developing a memorandum of understanding or other arrangement to address cooperation matters related to substituted compliance.18 Those memoranda of understanding or other arrangements must be in place before Covered Entities may use substituted compliance to satisfy obligations under the Exchange Act.19
3. Adequate assurances A foreign financial regulatory authority may submit a substituted compliance application only if the authority provides adequate assurances that no law or policy would impede the ability of any entity that is directly supervised by the authority and that may register with the Commission to provide prompt access to the Commission to such entitys books and records or to submit to onsite inspection or examination by the Commission. 20
16 Exchange
Act rule 3a716a2ii.
Commission, the AMF and the ACPR have entered into a memorandum of understanding to address substituted compliance cooperation, a copy of which is on the Commissions website at www.sec.gov under the Substituted Compliance tab, which is located on the Security-Based Swap Markets page in the Division of Trading and Markets section of the site AMF and ACPR
MOU. The AMF, ACPR and the ECB share responsibility for supervising compliance with certain provisions of EU and French law.
18 The memorandum of understanding will set forth the conditions under which supervisory and enforcement information for certain subject matters, including but not limited to margin and capital, that is owned by the ECB, can be requested, shared, used and protected from unauthorized disclosure by the SEC and ECB. The memorandum of understanding will also serve as a framework for consultation, cooperation and the exchange of information between the SEC and the ECB in the supervision, enforcement and oversight of the covered firms.
19 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85721 n.4. The Commission expects to publish any such memoranda of understanding or arrangements on its website at www.sec.gov under the Substituted Compliance tab, which is located on the SecurityBased Swap Markets page in the Division of Trading and Markets section of the site.
20 See Exchange Act rule 3a716c3.
17 The
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