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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices relying on third parties for the performance of operational functions that are critical to the continuous and satisfactory provision of service to clients and performance of investment services and activities.
CRR article 286 requires a Covered Entity to establish and maintain a counterparty credit risk management framework, including policies, processes and systems to ensure the identification, measurement, approval and internal reporting of counterparty credit risk and procedures for ensuring that those policies, processes and systems are complied with. CRR article 287 addresses the internal governance of risk control and collateral management functions for Covered Entities that use internal models to calculate capital requirements. CRR article 288 requires the Covered Entity to conduct regular, independent reviews of its counterparty credit risk management systems and any risk control and collateral management functions required by CRR article 287.
CRR article 293 addresses internal governance of the Covered Entitys internal risk management systems and validation of risk models that the Covered Entity uses.
EMIR Margin RTS article 2 requires counterparties to non-centrally cleared OTC derivative contracts to establish, apply and document risk management procedures for the exchange of collateral.
MiFID Org Reg article 21 addresses a Covered Entitys systems, internal controls and arrangements for management of a variety of risk areas, including internal decision-making, allocation and proper discharge of responsibilities, compliance with decisions and internal procedures, employment of personnel able to discharge their responsibilities, internal reporting and communication of information, adequate and orderly recordkeeping, safeguarding information, business continuity, accounting policies and procedures, as well as regular evaluation of the adequacy and effectiveness of those systems, internal controls and arrangements. MiFID Org Reg article 22
addresses a Covered Entitys policies and procedures for detecting and minimizing risk of failure to comply with its obligations under EU provisions that implement MiFID, as well as the Covered Entitys independent compliance function that monitors and assesses the adequacy and effectiveness of those policies and procedures. MiFID
Org Reg article 24 addresses a Covered Entitys internal audit function that evaluates the adequacy and effectiveness of the Covered Entitys
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systems, internal controls and arrangements.
Each of these requirements helps to produce regulatory outcomes comparable to Exchange Act requirements to establish robust and professional internal risk management systems adequate for managing the Covered Entitys day-to-day business.
The comparability analysis requires consideration of Exchange Act requirements as a whole against analogous French and EU requirements as a whole, recognizing that U.S. and non-U.S. regimes may follow materially different approaches in terms of specificity and technical content. This as a whole approachwhich the Commission is following in lieu of requiring requirement-by-requirement similarityfurther means that the conditions to substituted compliance should encompass all French and EU
requirements that establish comparability with the applicable regulatory outcome, and helps to avoid ambiguity in the application of substituted compliance. It would be inconsistent with the holistic approach to excise relevant requirements and leave only the residual French and EU
provisions that most closely resemble the analogous Exchange Act requirements.144 Accordingly, the Commission is retaining the references to these provisions. Retaining conditions of the Order necessary to help produce regulatory outcomes comparable to Exchange Act internal risk management requirements also should address another commenters concern that any substituted compliance determination not weaken the risk control conditions in the proposed Order.145
The Commission is making three changes from the proposed Order for this portion of the Order. First, the Commission concurs with a commenter recommendation that the prerequisites to substituted compliance for internal risk management should not extend to the Covered Entity being subject to and complying with French Prudential Supervision and Risk Assessment Order article 7, which does not impose obligations on regulated entities.146
Second, the Commission is incorporating, as part of the relevant conditions a Covered Entity using substituted compliance for internal risk management must be subject to and 144 The Commission further believes that those conditions to substituted compliance do not expand the scope of Exchange Act requirements because substituted compliance is an option available to non-U.S. person SBS Entitiesnot a mandate.
145 See Better Markets Letter at 12.
146 SIFMA Letter II at Appendix A.

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comply with, MFC L. 5332, which is the French implementation of the internal risk management requirements set forth in the second paragraph of MiFID article 165.147 Finally, the Commission is incorporating, as part of the relevant conditions, MiFID articles 16 and 23 and the related implementing provisions; 148 MiFID Org Reg articles 25
through 37, 72 through 76 and Annex IV; and CRD articles 881, 911 and 2, and 7 through 9, 92, 94, and 95 and the related implementing provisions.149
These provisions address additional aspects of a Covered Entitys management of the risks posed by internal governance and organization, business operations, conflicts of interest with and between clients and senior staff remuneration policies.
In deciding to make a positive substituted compliance determination for French and EU internal risk management requirements, the Commission considers that the Orders condition requiring a Covered Entity to be subject to and comply with all of the French and EU internal risk management requirements listed in paragraph b1 of the Order help to produce regulatory outcomes comparable to Exchange Act internal risk management requirements. The Commission recognizes that some of the French and EU requirements related to risk management follow a more granular approach than the high-level approach of Exchange Act internal risk management requirements, but these French and EU requirements, taken as a whole, are crafted to promote a Covered Entitys risk management. Within the requisite outcomes-oriented approach for analyzing comparability, the Commission concludes that a Covered Entitys failure to comply with any of those French and EU internal risk management requirements would be inconsistent with a Covered Entitys obligation under Exchange Act internal risk management requirements.150 In 147 That cross-reference inadvertently was omitted from the proposed Order, but was incorporated within the proposed conditions related to internal supervision and compliance see para. d3 of the Order, and was cited by the French Authorities Application as supporting comparability in connection with internal risk management system requirements see French Authorities Application at 68.
148 MFC articles L. 53310.II 1 through 3 and 6 through 9, L. 53310.III, L. 53324 and L. 533
241.
149 MFC articles L. 51151, L. 51152.I, L. 511
53, L. 51158, L. 51159, L. 51167 through L. 511
69, L. 51171 through L. 51185, L. 511102, R.
511182 and R. 511163.
150 One commenter recognized that the application addressed CRD requirements in connection with internal risk management
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