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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices complying with the specified French and EU provisions that in the aggregate help to produce regulatory outcomes that are comparable to those associated with the risk control requirements under the Exchange Act.126
Substituted compliance under the proposed Order also was to be subject to certain additional conditions to help ensure the comparability of outcomes:
a Substituted compliance in connection with the trading relationship documentation provisions would be conditioned on the requirement that the Covered Entity not treat its counterparties as eligible counterparties for purposes of relevant MiFID provisions; 127 b substituted compliance related to trading relationship documentation under the proposed Order would not extend to certain disclosures regarding legal and bankruptcy status; 128 and c substituted compliance in connection with portfolio reconciliation and dispute reporting requirements would be conditioned on the Covered Entity having to provide the Commission with reports regarding disputes between counterparties on the same basis as they provide those reports to competent authorities pursuant to EU law.129
B. Commenter Views and Final Provisions Commenters initially expressed the view that the Commission should modify certain of the proposed conditions related to substituted compliance in connection with internal risk management, trade acknowledgement and verification, and trading relationship documentation requirements.130 Specifically, commenters expressed concerns with proposed MiFID requirements for trade 126 Id.

at 85724 n.37.
at 85725. Certain relevant French and EU
requirements that provide for this type of documentation do not apply to investment firms transactions with eligible counterparties.
128 Id. The trading relationship documentation provisions of rule 15Fb5 require certain disclosures regarding the status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty, and regarding the possible application of the insolvency regime set forth under Title II of the Dodd-Frank Act or the Federal Deposit Insurance Act. Documentation requirements under applicable French and EU law would not be expected to address the disclosure of information related to insolvency procedures under U.S. law.
129 Id. Under the Exchange Act requirement, SBS
Entities must promptly report, to the Commission, valuation disputes in excess of $20 million that have been outstanding for three or five business days depending on counterparty types. EU
requirements provide that firms must report at least monthly, to competent authorities, disputes between counterparties in excess of 15 million and outstanding for at least 15 business days.
130 See SIFMA Letter I at 46; FBF Letter I at 2.

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127 Id.

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acknowledgement and verification and trading relationship documentation that cover the same ground as proposed EMIR requirements and would result in undue burdens for French securitybased swap dealers. 131 Partially in light of those concerns, 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 for trade acknowledgement and verification and trading relationship documentation requirements.132 Certain commenters generally supported changes contemplated by the Commission in the Reopening Release.133 Another commenter stated that French and EU
requirements are not sufficiently comparable to Exchange Act requirements.134
After considering commenters recommendations regarding the risk control requirements, the Commission is making positive substituted compliance determinations in connection with internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression and trading relationship documentation requirements. As discussed below, the final Order has been changed from the proposed Order in certain respects in response to comments following the proposed Order and Reopening Release.
The Commission continues to conclude that, taken as a whole, applicable requirements under French and EU law subject Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses, and thus help to produce regulatory outcomes that are comparable to the outcomes associated with the relevant risk control requirements under the Exchange Act.
Although the Commission recognizes that there are differences between the approaches taken by the relevant risk control requirements under the 131 See FBF Letter I at 2. See also SIFMA Letter I at 3 noting that the application of certain proposed MiFID and EMIR rules would lead to an untenable patchwork of substituted compliance.
132 See Reopening Release, 86 FR at 18343.
133 See SIFMA Letter II at 6 stating that we generally support these proposed modifications to the French Order; see also FBF Letter II at 2. But see Better Markets Letter at 6 It is understandable that industry groups would urge the SEC to make it easier for more members of the industry to avail themselves of the privilege of substituted compliance . . . . However, easing regulatory burdens for the industry is not the SECs job..
134 See Better Markets Letter at 12.

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Exchange Act and relevant French and EU requirements, the Commission continues to believe that those differences on balance should not preclude substituted compliance for these requirements, as the relevant French and EU requirements taken as a whole help to produce comparable regulatory outcomes.
To help ensure the comparability of outcomes, substituted compliance for risk control requirements is subject to certain conditions. Substituted compliance for internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression and trading relationship documentation requirements is conditioned on the Covered Entity being subject to, and complying with, relevant French and EU requirements.135 In addition, consistent with the proposed Order, substituted compliance for trading relationship documentation does not extend to disclosures regarding legal and bankruptcy status that are required by Exchange Act rule 15Fi 5b5 when the counterparty is a U.S.
person.136 Finally, consistent with the proposed Order, substituted compliance for portfolio reconciliation and dispute reporting requirements is conditioned on the Covered Entity providing the Commission with reports regarding disputes between counterparties on the same basis as the Covered Entity provides those reports to its competent authority pursuant to French and EU
135 See
paras. b1 through 5 of the Order.
para. b5 of the Order. The Exchange Act rule 15Fi5, 17 CFR 240.15Fi5, disclosures address information regarding: 1 The status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty, and 2 the possibility that in certain circumstances the SBS Entity or its counterparty may be subject to the insolvency regime set forth in Title II of the DoddFrank Wall Street Reform and Consumer Protection Act or the Federal Deposit Insurance Act, which may affect rights to terminate, liquidate or net security-based swaps. See Exchange Act Release No. 87782 Dec. 18, 2019, 85 FR 6359, 6374 Feb.
4, 2020 Risk Mitigation Adopting Release.
Documentation requirements under applicable French and EU law do not address the disclosure of information related to insolvency procedures under U.S. law. However, the absence of such disclosures would not appear to preclude a comparable regulatory outcome when the counterparty is not a U.S. person, as the insolvencyrelated consequences that are the subject of the disclosure would not apply to non-U.S.
counterparties in most cases. Moreover, EMIR
Margin RTS article 2 requires counterparties to establish, apply and document risk management procedures providing for or specifying the terms of agreements entered into by the counterparties, including applicable governing law for noncentrally cleared derivatives. When counterparties enter into a netting or collateral exchange agreement, they also must perform an independent legal review of the enforceability of those agreements.
136 See
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