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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
for portfolio reconciliation and dispute reporting requirements consistent with the proposed Order.176 Substituted compliance in connection with the dispute reporting requirements is conditioned in part on the Covered Entities providing the Commission with reports regarding disputes between counterparties on the same basis as the entities provide those reports to competent authorities pursuant to EU
law, to allow the Commission to obtain notice regarding key information in a manner that makes use of existing obligations under EU law.177
4. Portfolio Compression In the French Substituted Compliance Notice and Proposed Order, the Commission proposed to make a positive substituted compliance determination conditioned on the Covered Entity being subject to and complying with specific French portfolio compression requirements.178
One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.179 Another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that it does not weaken the conditions any further. 180 The Commission continues to believe that French portfolio compression requirements promote regulatory outcomes comparable to Exchange Act requirements, by subjecting Covered Entities to risk mitigation practices that are appropriate to the risks associated with their security-based swap businesses, and is making a positive substituted compliance determination for portfolio compression requirements consistent with the proposed Order.181
5. Trading Relationship Documentation Under the proposed Order, substituted compliance in connection with the Exchange Act rule 15Fi5
176 See
para. b3 of the Order.
para. b3ii of the Order. The Commission recognizes the differences between the two sets of requirementsunder which Exchange Act rule 15Fi3 requires SBS Entities to report valuation disputes in excess of $20 million that have been outstanding for three or five business days depending on counterparty types, while EMIR RTS art. 152 requires firms to report disputes between counterparties in excess of 15
million and outstanding for at least 15 business days. In the Commissions view, the two requirements produce comparable regulatory outcomes notwithstanding those differences.
178 French Substituted Compliance Notice and Proposed Order, 85 FR at 85740.
179 See SIFMA Letter II at 6.
180 See Better Markets Letter at 2.
181 See para. b4 of the Order.

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trading relationship documentation requirement would have been conditioned on Covered Entities being subject to and complying with MiFID
and EMIR provisions that address records regarding counterparty relationships and entities.182
Substituted compliance under the proposed Order would not extend to rule 15Fi5b5 insolvency-related disclosures when the counterparty is a U.S. person.183
Consistent with the comments addressed above with respect to trade acknowledgement and verification, some commenters requested that substituted compliance for trading relationship documentation not incorporate conditions requiring compliance with MiFID documentation requirements.184 Those commenters expressed the view that compliance with MiFID requirements would not be feasible for Covered Entities that have branches in third countries, and that the EMIR risk management provisions connected to the exchange of collateral are sufficient to produce regulatory outcomes comparable to those under the Exchange Act trading relationship documentation rule.185
As noted above, 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.186 Some commenters generally supported the associated changes contemplated by the Commission in the Reopening Release 187 including the addition of two new EMIR-related general conditions addressed above,188 while one commenter opposed removal of the MiFID conditions.189
The Commission concludes that the implementation issues raised by commenters warrant removal of the MiFID-related condition, and that compliance with EMIR-based risk management requirements are sufficient to produce risk-mitigating outcomes that are comparable to those associated with the Exchange Act rule. The Order accordingly has been modified from the proposed Order to remove conditions requiring compliance with MiFID
para. b5 of the proposed Order.
Substituted Compliance Notice and Proposed Order, 85 FR at 85725.
184 See SIFMA Letter I at 6.
185 See SIFMA Letter I at 34.
186 See part III.B, supra.
187 See SIFMA Letter II at 6; see also FBF Letter II at 2.
188 See part III.B.2.d, supra.
189 See Better Markets Letter at 67.

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trading relationship documentation requirements, including corollary conditions related to the application of the MiFID to eligible counterparties. 190 In reaching this conclusion, the Commission highlights the special importance of EMIR Margin RTS article 2, which addresses risk management procedures related to the exchange of collateral, including procedures related to the terms of all necessary agreements to be entered into by counterparties e.g., payment obligations, netting conditions, events of default, calculation methods, transfers of rights and obligations upon termination, and governing law. Those obligations are denoted as being connected to collateral exchange obligations, and the Commission believes that they are necessary to help produce a regulatory outcome that mitigates risk in a manner that is comparable to the outcome associated with the Exchange Act trading relationship documentation rule. To bridge any gap left by EMIR Margin RTS
article 2, the Commission is also requiring compliance with EMIR article 111a and EMIR RTS article 12, which require the Covered Entity to confirm the transaction, with confirmation defined as documentation of the agreement of the counterparties to all the terms of the OTC derivative contract.191
To ensure that a Covered Entity using substituted compliance for trading relationship documentation requirements will be required to document the agreement of the counterparties to all the terms of the relevant transaction, the Commission is issuing the Order with two new general conditions that will require the Covered Entity to treat its counterparty as a financial counterparty or non-financial counterparty when complying French and EU trading relationship documentation requirements and to ensure that the relevant security-based swap is either non-centrally cleared and subject to EMIR or cleared by a central counterparty that has been authorized or recognized to clear derivatives contracts 190 See para. b5 of the Order. Consistent with the proposed Order, substituted compliance in connection with trading relationship documentation requirements does not extend to Exchange Act rule 15Fi5b5 provisions related to disclosures regarding legal and bankruptcy status when the counterparty is a U.S. person.
191 One commenter suggested including EMIR
article 111a and EMIR RTS article 121 through 3. The Commission agrees that these provisions are necessary to a finding of comparability. See SIFMA Letter II at Appendix A. As discussed in part IV.B.2 the Commission believes that EMIR RTS
article 124 is relevant to its holistic, outcomesoriented approach.

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