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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices section of the Order in response to comment and further analysis.278 In response to comments, the capital section of the Order does not cite recitals because they are not part of a legally binding regulation.279 A
commenter recommended that citations to FCA IFPRU and BIPRU rules be deleted since it is likely that only PRAdesignated investment firms will rely on the substituted compliance determination for capital.280 The FCA
similarly indicated that the only firms that will rely on a substituted compliance determination for capital are PRA-designated investment firms.
PRA-designated firms are not subject to FCA IFPRU and BIPRU firm requirements.281 Further, investment firms that are not PRA-designated i.e., that are MiFID investment firms prudentially regulated by the FCA in the UK will be subject in the near term to a new capital regime that is not based on the Basel Capital Standard, and is not addressed by the FCAs comparability analysis for capital in the FCA Application.282
A commenter recommended that the citations to FCA PRIN and CASS be deleted.283 The Commission agrees it is appropriate to delete references to FCA
PRIN since the entities relying on substituted compliance for capital in the UK will be PRA-designated investment firms. These firms are subject to the PRA Fundamental Rules. Therefore the Commission is deleting the references to FCA PRIN in the Order and replacing them with references to PRA
Fundamental Rules 2.3 and 2.4. These rules require that firms must at all times maintain adequate financial resources, and have effective risk strategies and risk management systems. Further, the Commission also agrees that it is appropriate to delete references to FCA
CASS in the Order because they relate to customer protection requirements, and not capital requirements, and Covered Entities also are subject to the Commissions segregation requirements under Exchange Act rule 18a4,284 as well as the segregation provisions under the UK EMIR Margin RTS.285
278 SIFMA

5/3/2021 Letter at 1011, Appendix A.
Better Markets Letter at 56.
280 SIFMA 5/3/2021 Letter at Appendix A.
281 See SIFMA 5/3/2021 Letter at Appendix A.
282 FCA Application Annex V Side Letter for Capital Requirements at 367 For the purposes of this application, we address the currently applicable UK Capital Frameworki.e., based on CRR as amended by the currently effective elements of CRR II and CRD IV.4..
283 See SIFMA 5/3/2021 Letter Appendix A.
284 17 CFR 240.18a4.
285 The Commission also is retaining the references to the UK EMIR Margin RTS in the final order as part of the capital condition. These
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Substituted compliance is not available for segregation requirements under Exchange Act rule 18a4.286
In addition, in response to a recommendation to delete references to the UK EMIR margin requirements, the Commission is retaining the references to the UK Margin RTS requirements as the UK Application states if liquidation did occur, UK regulations also protect counterparties and promote continued market liquidity through margin requirements.287 The Commission agrees with the commenter that the scope of the PRA Notifications Rule is overly broad and, in response, is narrowing the references to those citations included in the comparability analysis of Exchange Act rule 18a8.288
Further, the Commission agrees with the commenter that some of the citations do not relate to requirements imposed on Covered Entities, but generally relate to the powers of relevant authorities. In these cases, citations in the ordering language have been deleted or modified to reference requirements that a Covered Entity is subject to and must comply with.289
The Commission agrees with the comments that the specific provisions to the UK CRR cited in the proposed Order are not comprehensive.290 In response, the Commission has modified the final ordering language to use more comprehensive citations to the UK CRR
including the specific UK CRR
provisions cited in the proposed Order, as the capital analysis includes only discussion of entities that are fully subject to UK CRR and CRD IV.291 In standards require a Covered Entity to segregate initial margin from the firms assets by either placing it with a third-party holder or custodian or via other legally binding arrangements, making the initial margin remote in the case of the firms default or insolvency. FCA Application Annex V
Side Letter for Capital Requirements at 369.
286 See Capital and Margin Adopting Release, 84
FR at 4395051.
287 FCA Application Annex V Side Letter for Capital Requirements at 378.
288 17 CFR 240.18a8. Therefore, the references to the PRA Notifications Rule will be modified in the final order to read PRA Notifications Rule 2.1, 2.4
through 2.6, 2.8, 2.9.
289 More specifically, in the final order, the Commission is deleting references to the Banking Act of 2009, Capital Requirements Regulations 2013, Capital Requirements Capital Buffers and Macro-prudential Measures Regulations 2014, Part 8 of the Bank Recovery and Resolution No 2 Order 2014, Bank of England Act 1998 Macro-prudential Measures No 2 Order 2015, and Parts 4A and 12A
of FSMA.
290 See SIFMA 5/3/2021 Letter Appendix A.
291 See FCA Application Annex V Side Letter for Capital Requirements at 366, n.400. More specifically, in the final order, the Commission is including references to the UK CRR to read: UK
CRR, Part One General Provisions Article 61, Part Two Own Funds, Part Three Capital Requirements, Part Four Large Exposures, Part
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addition, this commenter recommended that the Commission modify the final ordering language to qualify the citations to the UK CRR with a reference to waivers and permissions.292 In response, the specific provisions in the UK CRR referenced in the capital comparability analysis were analysed without reference to waivers or permissions, and the condition states that the Covered Entity must be subject to and comply with these specific capital requirements. Therefore, the more comprehensive references to the UK CRR in the final order are cited without reference to waivers or permissions. Finally, the references to the UK CRR and the final references in the capital ordering language contribute to the conclusion that UK law produces a comparable regulatory outcome to the capital requirements under the Exchange Act.
2. Margin The Commissions preliminary view, based on the FCA Application and the Commissions review of applicable UK
laws, was that relevant UK margin requirements would produce regulatory outcomes that are comparable to those associated with Exchange Act margin requirements without the need for additional conditions.293 For example, in adopting final margin requirements for non-cleared security-based swaps, the Commission modified the rule to more closely align it with the margin rules of the Commodity Futures Trading Commission and the U.S. prudential regulators and, in doing so, with the recommendations made by the BCBS
and the Board of the International Organization of Securities Commissions IOSCO with respect to margin requirements for noncentrally cleared derivatives.294
Exchange Act rule 18a3 and the UK
margin rules require firms to collect liquid collateral from a counterparty to cover variation and/or initial margin requirements.295 Both sets of rules also require firms to deliver liquid collateral to a counterparty to cover variation margin requirements. Under both sets of rules, the fair market value of collateral used to meet a margin requirement must be reduced by a haircut.296 Further, both Five Exposures to Transferred Credit Risk, Part Six Liquidity, and Part Seven Leverage.
292 See SIFMA 5/3/2021 Letter Appendix A.
293 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18386.
294 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18386, n.82.
295 See 17 CFR 240.18a3c1ii and FCA
Application at 3235.
296 See 17 CFR 240.18a3c1ii and FCA
Application at 4043.

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