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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES3

law.137 A Covered Entity that is unable to comply with an applicable conditionand thus is not eligible to use substituted compliance for the particular set of Exchange Act risk control requirements related to that conditionnevertheless may use substituted compliance for another set of Exchange Act requirements addressed in the Order if it complies with the conditions to the relevant parts of the Order.
Under the Order, substituted compliance for risk control requirements relating to internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression and trading relationship documentation is not subject to a condition that the Covered Entity apply substituted compliance for related recordkeeping requirements in Exchange Act rules 18a5 and 18a6. A
Covered Entity that applies substituted compliance for one or more risk control requirements, but does not apply substituted compliance for the related recordkeeping requirements in Exchange Act rules 18a5 and 18a6, will remain subject to the relevant provisions of Exchange Act rules 18a5
and 18a6. Those rules require the Covered Entity to make and preserve records of its compliance with Exchange Act risk control requirements and of its security-based swap activities required or governed by those requirements. A
Covered Entity that applies substituted compliance for a risk control 137 See paras. b3ii of the Order. This condition promotes comparability with the Exchange Act rule requiring reports to the Commission regarding significant valuation disputes, while leveraging French and EU reporting provisions to avoid the need for Covered Entities to create additional reporting frameworks. When it proposed the condition to report valuation disputes, the Commission recognized that valuation inaccuracies may lead to uncollateralized credit exposure and the potential for loss in the event of default. See Exchange Act Release No. 84861 Dec.
19, 2018, 84 FR 4614, 4621 Feb. 15, 2019. It thus is important that the Commission be informed regarding valuation disputes affecting SBS Entities.
The principal difference between the Exchange Act and French and EU valuation dispute reporting requirements concerns the timing of notices.
Exchange Act rule 15Fi3, 17 CFR 240.15Fi3, requires SBS Entities to report promptly to the Commission valuation disputes in excess of $20
million that have been outstanding for three or five business days depending on the counterparty type. EMIR RTS article 152 requires financial counterparties to report to the relevant competent authority at least monthly any disputes between counterparties in excess of 15 million and outstanding for at least 15 business days. The Commission is mindful that the French and EU
provision does not provide for notice as quickly as rule 15Fi3, but in the Commissions view on balance this difference would not be inconsistent with the conclusion that the two sets of requirements, taken as a whole, promote comparable regulatory outcomes.

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requirement, but complies directly with related recordkeeping requirements in rules 18a5 and 18a6, therefore must make and preserve records of its compliance with the relevant conditions of the Order and of its security-based swap activities required or governed by those conditions and/or referenced in the relevant parts of rules 18a5 and 18a6.
1. Internal Risk Management Exchange Act section 15Fj2
requires a registered SBS Entity to establish robust and professional risk management systems adequate for managing its day-to-day business. In addition, Exchange Act rule 15Fh 3h2iiiI requires an SBS Entity to establish and maintain a system to supervise, and to diligently supervise, its business and the activities of its associated persons. This system of internal supervision must include, in relevant part, the establishment, maintenance and enforcement of written policies and procedures reasonably designed, taking into consideration the nature of the SBS Entitys business, to comply with its duty under Exchange Act section 15Fj2 to establish an internal risk management system.
Under the proposed Order, substituted compliance in connection with internal risk management requirements would have been conditioned on Covered Entities being subject to and complying with certain MiFID, CRD and EMIR requirements related to internal risk management.
One commenter expressed the view that the scope of this proposed condition would require SBS Entities to be subject to and comply with an expansive range of detailed and prescriptive requirements that are not necessary to produce comparable regulatory outcomes.138 The commenter further criticized conditions requiring compliance with certain internal risk management requirements prescribed by the CRD, stating that those prescriptive requirements go beyond the highlevel internal risk management requirements set forth by Exchange Act section 15Fj2.139 The commenter also expressed the view that the conditions should not extend to the compliance system requirements of MiFID Org Reg article 22, on the grounds that compliance system requirements do not relate to risk management.140
Commenters reiterated these same concerns following the reopening of the comment period, requesting the removal
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of specific MiFID, MFC, MiFID Org Reg, CRD, CRR, Prudential Supervision and Risk Assessment Order, and EMIR
Margin RTS requirements for internal risk management.141 By contrast, another commenter requested that the Commission not weaken the risk control conditions any further. 142
The proposed Order included CRD
articles 79 through 87, MiFID articles 164 and 5, CRR articles 286 through 288 and 293, EMIR Margin RTS article 2, MiFID Org Reg articles 21, 22 and 24, and the implementing provisions of French law. A commenter stated that the Commission should delete those provisions because they do not correspond to and go beyond Exchange Act internal risk management requirements.143 However:
CRD article 79 and the implementing provisions of French law address a Covered Entitys management of credit and counterparty risk. CRD
article 80 and the implementing provisions of French law address a Covered Entitys management of residual risk. CRD article 81 and the implementing provisions of French law address a Covered Entitys management of concentration risk. CRD article 82 and the implementing provisions of French law address a Covered Entitys management of securitization risk. CRD
article 83 and the implementing provisions of French law address a Covered Entitys management of market risk. CRD article 84 and the implementing provisions of French law address a Covered Entitys management of interest rate risk. CRD article 85 and the implementing provisions of French law address a Covered Entitys management of operational risk. CRD
article 86 and the implementing provisions of French law address a Covered Entitys management of liquidity risk and funding risk. CRD
article 87 and the implementing provisions of French law address a Covered Entitys management of risk from excessive leverage.
MiFID article 164 and the implementing provisions of French law require a Covered Entity to take reasonable steps to ensure continuity and regularity in the performance of investment services and activities, including by employing appropriate and proportionate systems, resources and procedures. MiFID article 165 and the implementing provisions of French law require a Covered Entity to ensure that it manages the operational risk of 141 SIFMA

138 SIFMA
139 Id.

Letter I at 45.

at 5.

142 Better
140 Id.

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Letter II at Appendix A; FBF Letter II

at 2.
Markets Letter at 2.
Letter II at Appendix A.

143 SIFMA

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