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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
B. Commenter Views and Final Provisions After considering commenters recommendations regarding the risk control requirements, the Commission is making positive substituted compliance determinations in connection with internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements. As discussed below, the final Order has been changed from the proposed Order in certain respects in response to comments.135
One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.136 Another commenter stated that UK requirements are not sufficiently comparable to Exchange Act requirements.137 The Commission continues to conclude that, taken as a whole, applicable requirements under UK law subject Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses, and thus help to produce regulatory outcomes that are comparable to the outcomes associated with the relevant risk control requirements under the Exchange Act. Although the Commission recognizes that there are differences between the approaches taken by the relevant risk control requirements under the Exchange Act and relevant UK requirements, the Commission continues to believe that those differences on balance should not preclude substituted compliance for these requirements, as the relevant UK
requirements taken as a whole help to produce comparable regulatory outcomes.
To help ensure the comparability of outcomes, substituted compliance for risk control requirements is subject to certain conditions. Substituted compliance for internal risk management, trade acknowledgment 135 See
para. b of the Order.
SIFMA 5/3/2021 Letter at 9. The commenter also requested that the Commission not require a Covered Entity to be subject to and comply with some of the UK risk control requirements listed in the proposed Order. See SIFMA 5/3/2021 Letter at 9 and Appendix A part b. The Commission addresses those requests in the relevant sections of this part IV below.
137 See Better Markets Letter at 2. The commenter also stated that, if the Commission nevertheless makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order are applied with full force and without exceptions or dilution.
The Commission addresses that comment in the relevant sections of this part IV below.

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and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements is conditioned on the Covered Entity being subject to, and complying with, relevant UK requirements.138 In addition, consistent with the proposed Order, substituted compliance for portfolio reconciliation and dispute reporting requirements is conditioned on the Covered Entity providing the Commission with reports regarding disputes between counterparties on the same basis as the Covered Entity provides those reports to the FCA
pursuant to UK law.139 Finally, consistent with the proposed Order, substituted compliance for trading relationship documentation does not extend to disclosures regarding legal and bankruptcy status that are required by Exchange Act rule 15Fi5b5 when the counterparty is a U.S. person.140 A
138 See
paras. b1 through b5 of the Order.
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 UK 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 UK valuation dispute reporting requirements concerns the timing of notices. Exchange Act rule 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. UK EMIR RTS article 152 requires financial counterparties to report to the FCA 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 UK
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.
140 See para. b5 of the Order. The Exchange Act rule 15Fi-5 disclosures address information regarding 1 the status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty and 2 the possibility that in certain circumstances the SBS Entity or its counterparty may be subject to the insolvency regime set forth in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Federal Deposit Insurance Act, which may affect rights to terminate, liquidate, or net security-based swaps. See Exchange Act Release No. 87782 Dec.
18, 2019, 85 FR 6359, 6374 Feb. 4, 2020 Risk Mitigation Adopting Release. Documentation requirements under applicable UK law do not address the disclosure of information related to insolvency procedures under U.S. law. However, the absence of such disclosures would not appear to preclude a comparable regulatory outcome when the counterparty is not a U.S. person, as the 139 See
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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 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 to 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.
The Commission details below its consideration of comments on the proposed Order.
1. Internal Risk Management Exchange Act section 15Fj2
requires a registered SBS Entity to establish robust and professional risk insolvency-related consequences that are the subject of the disclosure would not apply to nonU.S. counterparties in most cases. Moreover, UK
EMIR Margin RTS article 2 requires counterparties to establish, apply, and document risk management procedures providing for or specifying the terms of agreements entered into by the counterparties, including applicable governing law for non centrally cleared derivatives. When counterparties enter into a netting or collateral exchange agreement, they also must perform an independent legal review of the enforceability of those agreements.

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