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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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apply to, security-based swap business for which a Covered Entity could not apply substituted compliance under the proposed Order because the Covered Entity is not subject to the relevant UK
requirements listed in the Order with respect to that business.78
Consistent with the commenters request, for any particular set of entitylevel Exchange Act requirements,79 a Covered Entity must choose either 1 to apply substituted compliance pursuant to the Order with respect to all securitybased swap business that is subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK
requirements including any applicable UK territorial condition UK
business, or 2 to comply directly with the Exchange Act with respect to all UK business. A Covered Entity may not choose to apply substituted compliance for those entity-level requirements in respect of some of its UK business and comply directly with the Exchange Act in respect of another part of its UK business. However, if the conditions in the relevant part of the Order require the Covered Entity to comply with UK requirements that are subject to a UK territorial condition, the Covered Entitys UK business would not include business carried on from an establishment outside the UK, as that business would not be subject to the relevant UK requirements and would not satisfy the applicable UK territorial condition. Rather, the Covered Entity could apply substituted compliance for the Exchange Act requirements in that part of the Order so long as it applies substituted compliance for all of its business that is subject to the relevant UK requirements and can satisfy any general conditions related to those UK
requirements, which in this example would include only business that is carried on from an establishment in the UK and that otherwise is both subject to 78 For example, this approach did not address and would not apply to a Covered Entitys securitybased swap business carried on from an establishment outside the UK, when the relevant part of the proposed Order would require the Covered Entity to comply with one or more UK
requirements to which a UK territorial condition applies.
79 A Covered Entity may use substituted compliance consistent with the Order for any one or more sets of entity-level Exchange Act requirements specified in the Order. See supra note 74 and accompanying text. For example, a Covered Entity could use substituted compliance for internal risk management, trade acknowledgment and verification, internal supervision, and chief compliance officer requirements, but comply directly with Exchange Act portfolio reconciliation and dispute reporting, portfolio compression, trading relationship documentation, recordkeeping, reporting, notification, and securities count requirements.

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the relevant UK requirements and able to satisfy any other general conditions related to those requirements. Also consistent with the commenters request, for any particular set of entitylevel Exchange Act requirements, if the Covered Entity also has security-based swap business that is not subject to the relevant UK requirements 80 or that cannot satisfy an applicable general condition related to those UK
requirements including business carried on from an establishment outside the UK where the Order imposes a UK territorial condition the Covered Entity must either comply directly with the Exchange Act for that business or comply with the terms of another applicable substituted compliance order.81 Consistent with the 80 In the context of the UK EMIR counterparties condition in paragraph a13 of the Order, a Covered Entity must choose 1 to apply substituted compliance pursuant to the Orderincluding compliance with paragraph a13 as applicable for a particular set of entity-level requirements with respect to all of its business that would be subject to the relevant UK EMIR-based requirement if the counterparty were the relevant type of counterparty, or 2 to comply directly with the Exchange Act with respect to such business. See infra note 106
and accompanying text.
81 A third country investment firm regulated in the UK might be able to satisfy the definitions of Covered Entity in both this Order and the German Substituted Compliance Order, and thus may be eligible to apply substituted compliance under both orders. This Order defines Covered Entities to include both MiFID investment firms i.e., firms with a UK head office and third country investment firms i.e., firms with a head office outside the UK. The German Substituted Compliance Order defines Covered Entities to include only investment firms and credit institutions authorized by BaFin to provide investment services or perform investment activities in the Federal Republic of Germany. See German Substituted Compliance Order, 85 FR at 85700. A non-EU firm such as a UK firm registered by the European Securities and Markets Authority ESMA to provide investment services and/or perform investment activities to certain counterparties in the EU pursuant to articles 46
through 48 of the Markets in Financial Instruments Regulation is not authorized by BaFin and thus does not satisfy the Covered Entity definition in the German Substituted Compliance Order.
Accordingly, an investment firm or credit institution authorized by BaFin and regulated in the UK as a third country investment firm may, for example, be eligible for substituted compliance under both this Order and the German Substituted Compliance Order. If such a firm has security-based swap business that is not UK business, but is subject to the relevant German requirements under the German Substituted Compliance Order, it may choose to comply directly with the relevant Exchange Act requirements or to use substituted compliance pursuant to the terms of the German Substituted Compliance Order. If such a firm has security-based swap business that is both UK
business and subject to the relevant German requirements under the German Substituted Compliance Order, it may choose to comply with the conditions to both orders or, alternatively, it may choose one order that it will comply with in respect of that business. For each set of entity-level Exchange Act requirements, such a firm must apply this choice to all such dually regulated security-

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proposed Order, for transaction-level Exchange Act requirements, a Covered Entity may decide to apply substituted compliance for some of its securitybased swap business and to comply directly with the Exchange Act or comply with another applicable substituted compliance order for other parts of its security-based swap business.82 The Commission believes that this scope of substituted compliance strikes the right balance to ensure that substituted compliance is consistent with Commissions classification of Exchange Act requirements as either entity-level or transaction-level requirements. The Commission has made no changes to the text of the Order in connection with these issues.
In the Covered Entitys notice to the Commission pursuant to paragraph a16 of the Order, the Covered Entity must specify the parts of its securitybased swap business for which it will apply substituted compliance consistent with the individual parts of the Order.
Every SBS Entity registered with the Commission, whether complying directly with Exchange Act requirements or relying on substituted compliance as a means of complying with the Exchange Act, is required to satisfy the inspection and production requirements imposed on such entities under the Exchange Act,83 and specificity as to the scope of the entitys reliance on substituted compliance is based swap business. Such a firm must specify this choice in its notice to the Commission pursuant to para. a16 of the Order. A firms choice to comply with only one applicable substituted compliance order in respect of security-based swap business that is subject to the relevant foreign requirements listed in multiple substituted compliance orders will not affect the firms ability to apply substituted compliance for Exchange Act entity-level requirements in respect of other, nondually regulated security-based swap business under the other substituted compliance orders.
82 For example, a Covered Entity may use substituted compliance consistent with the Order for fair and balanced communications requirements in respect of communications with UK
counterparties that are subject to the Exchange Act and comply directly with Exchange Act fair and balanced communications requirements in respect of U.S. person counterparties. A Covered Entity also may use substituted compliance consistent with the Order for any one or more sets of transaction-level Exchange Act requirements specified in the Order.
See supra note 76 and accompanying text. For example, a Covered Entity could use substituted compliance for fair and balanced communications requirements, but comply directly with Exchange Act requirements related to disclosure of information regarding material risks and characteristics, disclosure of information regarding material incentives or conflicts of interest, know your counterparty, suitability, and daily mark disclosure.
83 See, e.g., Exchange Act section 15Ff;
Exchange Act rule 18a6g.

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