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khammond on DSKJM1Z7X2PROD with NOTICES3

Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices part of this approach, the Commission also conditioned substituted compliance with certain of the discrete recordkeeping, reporting, and notification requirements on the Covered Entity applying substituted compliance with respect to the substantive Exchange Act requirement to which they were linked.108 This linked condition was designed to ensure that a Covered Entity consistently applies substituted compliance with respect to the substantive Exchange Act requirement and the Exchange Act recordkeeping, reporting, or notification requirement that complements the substantive requirement. The Commission sought comment in the Reopening Release on whether it should take a similar granular approach to the Exchange Act recordkeeping, reporting, and notification requirements.109
On further consideration and in light of the more granular approach requested by the commenter, the Commission believes it necessary to do the reverse with respect to certain substantive financial responsibility requirements:
Condition substituted compliance with respect to the substantive requirement on the Covered Entity applying substituted compliance with respect to the linked recordkeeping, reporting, or notification requirement. The Exchange Act financial responsibility requirements addressed in this Order capital, margin, recordkeeping, reporting, notification, and securities count requirements are highly integrated. Therefore, implementing the reverse conditional link is designed to ensure that the granular approach requested by the commenter results in comparable regulatory outcomes in terms of obligations to make and preserve records, and to submit reports and notifications to the Commission concerning the Covered Entitys compliance with the financial responsibility rules. It also is designed to provide clarity as to the obligations of a Covered Entity under this Order when using the granular approach to the Exchange Act recordkeeping, reporting, and notification requirements linked to the financial responsibility rules.
For example, because of the granular approach, a Covered Entity could elect to apply substituted compliance with respect to a substantive Exchange Act requirement such as the capital requirements of Exchange Act rule 18a 1 but elect not to apply substituted compliance with respect to a linked requirement under Exchange Act rule 18a8 to provide the Commission notice
of a capital deficiency under Exchange Act rule 18a1. In this scenario, the Covered Entity would not be subject to the condition for applying substituted compliance with respect to Exchange Act rule 18a8; namely, that the firm provide the Commission copies of notifications relating to French and EU
capital requirements required under French and EU law. Consequently, as discussed below in this section and other sections of this release, the Commission is conditioning substituted compliance with respect to certain substantive Exchange Act requirements on the Covered Entity applying substituted compliance with respect to linked recordkeeping reporting, or notification requirements.
Exchange Act Rule 18a8c Exchange Act rule 18a8c generally requires every security-based swap dealer with a prudential regulator that files a notice of adjustment of its reported capital category with the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation to give notice of this fact that same day by transmitting a copy of the notice of adjustment of reported capital category in accordance with Exchange Act rule 18a8h.110 Exchange Act rule 18a8h sets forth the manner in which every notice or report required to be given or transmitted pursuant to Exchange Act rule 18a8 must be made.111 While Exchange Act rule 18a8c is not linked to a substantive Exchange Act requirement, it is linked to substantive capital requirements applicable to prudentially regulated SBS Entities in the U.S. i.e., capital requirements of the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation.
Therefore, to implement the granular approach requested by the commenter, the Commission is adding a general condition that Covered Entities with a prudential regulator relying on the final Order for substituted compliance must apply substituted compliance with respect to the requirements of Exchange Act rule 18a8c and the requirements of Exchange Act rule 18a8h as applied to Exchange Act rule c.112
In their application, the French Authorities cited several French provisions as providing similar outcomes to the notifications requirements of Exchange Act rule 18a 8. Additionally, based on comments received, the Commission has identified 110 See
108 Id.
109 See
17 CFR 240.18a8c.
17 CFR 240.18a8h.
112 Better Markets Letter at 23.
111 See
Reopening Release, 86 FR at 1834748.

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additional provisions that are relevant.113 This general condition is necessary in order to clarify that a prudentially regulated Covered Entity must provide the Commission with copies of any notifications regarding changes in the Covered Entitys capital situation required by French and EU
law. In particular, a prudentially regulated Covered Entity could elect not to apply substituted compliance with respect to Exchange Act rule 18a8c.
However, because the Covered Entity is not required to provide any notifications to the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, compliance with the provisions of Exchange Act rule 18a 8c raises a question as to the Covered Entitys obligations under this Order to provide the Commission with notification of changes in capital.
Moreover, a commenter stated that foreign financial services firms were among the entities that used emergency lending facilities in the U.S. along with other U.S. measures to address the 2008
financial crisis.114 The Commission adopted Exchange Act rule 18a8c to require SBS Entities with a prudential regulator to give notice to the Commission when filing an adjustment of reported capital category because such notices may indicate that the entity is in or is approaching financial difficulty.115 The Commission has a regulatory interest in being notified of changes in the capital of a prudentially regulated Covered Entity, as it could signal the firm is in or approaching financial difficulty and presents a risk to U.S. security-based swap markets and participants. For the foregoing reasons, the Commission is conditioning applying substituted compliance pursuant to the Order on the general condition that a prudentially regulated Covered Entity apply substituted compliance with respect to Exchange Act rule 18a8c and the requirements 113 These French provisions include: 1 MFC
Articles L. 51133II, L. 6341, and L. 6342, which provide, among other things, that the staff of firms may report potential or actual breaches related to certain specified provisions, and provide for the establishment of procedures and secure communication channels through which French regulatory and prudential authorities can be informed of failures to comply with applicable regulations; and 2 Internal Control Order articles 249 and 2491, which require notification to the ACPR, without delay, of significant incidents with respect to certain thresholds related to the firms risk analysis and measurement systems, and with respect to operational incidents.
114 Better Markets Letter at 2.
115 See Exchange Act Release No. 71958 Sept. 19, 2019, 84 FR 68550, 6858990 Dec. 16, 2019
Recordkeeping and Reporting Adopting Release citing Exchange Act Release No. 71958 Aug. 17, 2014 79 FR 25193, 25249 May 2, 2014.

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