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43334

Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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Covered Entitys regulated activities, the nature and scale of the business, and the risks to the continuity of the Covered Entitys services. To have appropriate non-financial resources, the Covered Entity in particular must have resources to identify, monitor, measure, and take action to remove or reduce risks to the accuracy of the Covered Entitys valuation of its assets and liabilities, be managed to a reasonable standard of effectiveness and have non-financial resources sufficient to enable it to comply with applicable requirements of the PRA. PRA Fundamental Rules 3
through 6 similarly require the Covered Entity to act in a prudent manner, maintain adequate financial resources at all times, have effective risk strategies and risk management systems and organize and control its affairs responsibly and effectively.
UK 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. UK 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. UK 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 UK CRR article 287. UK
CRR article 293 addresses internal governance of the Covered Entitys internal risk management systems and validation of risk models that the Covered Entity uses.
UK 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.
UK MiFID Org Reg article 21 149
addresses a Covered Entitys systems, internal controls, and arrangements for management of a variety of risk areas, including internal decision-making, allocation, proper discharge of 149 The commenter stated that these requirements are more appropriately addressed in connection with substituted compliance for internal supervision and chief compliance officer requirements. As discussed below, the Commission believes that these UK requirements are relevant to substituted compliance for Exchange Act internal risk management requirements.

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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, and accounting policies and procedures, as well as regular evaluation of the adequacy and effectiveness of those systems, internal controls, and arrangements. UK 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 UK
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. UK MiFID Org Reg article 24 addresses a Covered Entitys internal audit function that evaluates the adequacy and effectiveness of the Covered Entitys systems, internal controls, and arrangements.
Taken as a whole, these UK
requirements help 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 UK 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 UK 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 UK provisions that most closely resemble the analogous Exchange Act requirements.150 Moreover, because Exchange Act internal risk management requirements serve the purpose of establishing internal systems to manage the Covered Entitys risks, including 150 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.

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risks of non-compliance with applicable laws, it would be paradoxical to conclude that an SBS Entity that fails to implement requisite internal supervision practices nonetheless may be considered to be following internal risk management standards that are sufficient to meet the regulatory outcomes required under the Exchange Act; an internal supervision-related failure necessarily also constitutes a risk management failure. For these reasons, the Commission concludes that these UK provisions appropriately constitute part of the substituted compliance conditions for internal risk management requirements and is retaining the references to these provisions. In reaching this conclusion, the Commission emphasizes the importance of ensuring that substituted compliance is grounded on the comparability of regulatory outcomes. Retaining the conditions of the Order related to these UK provisions also should address another commenters concern that any substituted compliance determination not weaken the internal risk management conditions in the proposed Order.151
In addition, the Commission is adding a requirement for a Covered Entity using substituted compliance for internal risk management requirements to be subject to and comply with provisions that implement MiFID articles 16 and 23, provisions of UK MiFID Org Reg related to MiFID articles 16 and 23, and provisions that implement CRD articles 881, 911, 2, and 7 through 9, 92, 94, and 95.152 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 UK
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 UK internal risk management requirements listed in paragraph b1
of the Order help to produce regulatory outcomes comparable to Exchange Act internal risk management requirements.
In deciding to make a positive substituted compliance determination for UK 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 UK
requirements listed in paragraph b1
151 See 152 See
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Better Markets Letter at 2.
para. b1 of the Order.

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