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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
applying substituted compliance to Exchange Act rule 18a1:
A condition that would require a Covered Entity to maintain an amount of assets that are allowable under Exchange Act rule 18a1, after applying applicable haircuts under the Basel capital standard, that equals or exceeds the Covered Entitys current liabilities coming due in the next 365 days.
A condition that would require a Covered Entity to make a quarterly record listing: 1 The assets maintained pursuant to the above condition, their value, and the amount of their applicable haircuts; and 2 the aggregate amount of the liabilities coming due in the next 365 days.
A condition that would require a Covered Entity to maintains at least $100 million of equity capital composed of highly liquid assets, as defined in the Basel capital standard.
A condition that would require a Covered Entity to include its most recent statement of financial condition i.e., balance sheet filed with its local supervisor whether audited or unaudited with its written notice to the Commission of its intent to rely on substituted compliance.

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B. Commenter Views and Final Provisions 1. Capital Consistent with the proposed Order, the first capital condition requires the covered entity to be subject to and comply with certain identified French and EU capital requirements.204 As discussed at the end of this section, the Commission made some modifications to the French and EU laws and regulations cited in this condition.205
For the reasons discussed below, there are two additional conditions to applying substituted compliance with respect to Exchange Act rule 18a1.
For the reasons discussed above in part III.B.2.e of this release, the first additional capital condition is that the Covered Entity applies substituted compliance with respect to Exchange Act rules 18a5a9 a record making requirement, 18a6b1x a record preservation requirement, and 18a 8a1i, a1ii, b1, b2, and b4 notification requirements.206
These recordkeeping and notification requirements are directly linked to the capital requirements of Exchange Act rule 18a1. The UK Proposed Order 204 See
para. c1i of the order. See also French Substituted Compliance Notice and Proposed Order, 85 FR at 85726.
205 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85726, n.49.
206 See para. c1ii of the Order.

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conditioned substituted compliance with respect to these recordkeeping and notification requirements on the Covered Entity applying substituted compliance with respect to Exchange Act rule 18a1.207 This additional capital condition is designed to provide clarity as to the Covered Entitys obligations under these recordkeeping and notification requirements when applying substituted compliance with respect to Exchange Act rule 18a1
pursuant this Order.
The second additional capital condition builds on and modifies the proposed capital condition that was the subject of the Commissions questions in the Reopening Release and that was designed to address potential different regulatory outcomes between Exchange Act rule 18a1 and the French and EU
capital requirements. In particular, the Commission asked questions about a four pronged condition with respect to applying substituted compliance to the capital requirements of Exchange Act rule 18a1.208 The first prong would require a Covered Entity to maintain an amount of assets that are allowable under Exchange Act rule 18a1, after applying applicable haircuts under the Basel capital standard, that equals or exceeds the Covered Entitys current liabilities coming due in the next 365
days.209 The second prong was linked to the first prong as it would require that a Covered Entity make a quarterly record listing: 1 The assets maintained pursuant to the first condition, their value, and the amount of their applicable haircuts; and 2 the aggregate amount of the liabilities coming due in the next 365 days. The third prong would require the Covered Entity to maintain at least $100 million of equity capital composed of highly liquid assets as defined in the Basel capital standard. The fourth prong would require the Covered Entity to include its most recently filed statement of financial condition whether audited or unaudited with its initial notice to the Commission of its intent to rely on substituted compliance.
One commenter recommended that the Commission consider denying substituted compliance for capital requirements on the basis that Frances 207 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18395403, 1841617, 19419. The Commission sought comment in the Reopening Release on whether this approach should be taken in the final Order. See Reopening Release, 86 FR at 18348.
208 See id. at 1838789 discussing the additional conditions.
209 As used in this part V.B.1 of the release, the term Covered Entity refers to a security-based swap dealer located in the UK that does not have a prudential regulator.

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capital requirements do not produce comparable regulatory outcomes.210
This commenter stated that granting substituted compliance with multiple conditions intended to mimic the Commissions capital requirements would seem to undermine the entire point of substituted compliance in the first place; namely, protecting the stability of the U.S. financial system by allowing substituted compliance only when foreign regimes are comparable. 211
In describing the differences in the capital frameworks between the net liquid assets test and the Basel capital standard, this commenter highlighted the treatment of initial margin posted to a counterparty.212 Specifically, the commenter stated that in France initial margin posted to a counterparty counts as capital for that entity, while in the U.S. initial margin only counts as capital if the security-based swap dealer has a special loan agreement with an affiliate. The commenter stated that the U.S. requirement is intended to mitigate counterparty credit risk with respect to the return of the initial margin. The commenter argued that the result is that, not only are the French requirements different from the Commissions in both form and substance, but the regulatory outcome is not comparable.
This commenter also stated that if a positive substituted compliance determination is made regarding capital, the Commission should not weaken the potential additional capital condition discussed in the Reopening Release in response to industry commenters, because these market participants are primarily concerned with reducing their own operational costs, without any regard to the systemic risk that would doing so would pose.213 This commenter also stated that any determination to find Francess capital requirements comparable to and as comprehensive as the Commissions capital framework without conditions at least as strong as proposed would not only contravene the Commissions own conception of substituted compliance but expose the U.S. financial system to very risks Dodd-Frank instructed the SEC to contain. 214
Another commenter supported the potential capital condition.215 This commenter stated that the Commission should require Covered Entities to 210 Better 211 Better
Markets Letter at 78.
Markets Letter at 8 emphasis in the
original.
212 Better Markets Letter at 78.
213 Better Markets Letter at 78.
214 Better Markets Letter at 78.
215 AFREF Letter at 1.

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