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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
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requirements under the Exchange Act rule 18a3.312 Commenters supported the Commissions proposed approach for substituted compliance with respect to margin requirements.313
One commenter suggested technical comments with respect to refining the French and EU laws cited in the proposed Order.314 In particular, this commenter recommended that the Commission 1 delete the citations to the CRR; 2 narrow the scope of the reference to EMIR Article 11 to Article 113; and 3 insert the phrase as applicable before the citations to the French laws.315 The Commission disagrees with the commenter that the scope of the citation to EMIR Article 11
should be narrowed. Other provisions of EMIR Article 11 relate to margin requirements, including the provisions regarding intragroup transactions.
Therefore, the Commission is not modifying this citation in the final order. With respect to the suggestion by the commenter to delete references to the CRR requirements, the Commission concludes that the requirements which were set out in the proposed Order, contribute to the conclusion that French and EU law produce a comparable regulatory outcome to the margin requirements under the Exchange Act.316 Finally, the Commission is not modifying the Order to insert the phrase as applicable because it is overly broad. The Commission acknowledges that some of the citations to the French laws apply only to specific types of institutions i.e., credit institutions or investment firms.317 In such cases, a Covered Entity would comply with the relevant citation in the MFC article that corresponds to its entity type. For the foregoing reasons, the first margin condition requires the covered entity to be subject to and comply with certain identified French and EU margin requirements.318
312 French Substituted Compliance Notice and Proposed Order, 85 FR at 85726.
313 FBF Letter I at 4; SIFMA Letter I at 13.
314 SIFMA Letter II, Appendix A.
315 SIFMA Letter II, Appendix A.
316 The references to the CRR were included in the comparability assessment for margin requirements, and in the Commissions view the holistic approach for comparing regulatory outcomes should seek to reflect the whole of a jurisdictions relevant requirements, rather than select subsets of those requirements.
317 For example Article L. 511411B of the MFC implements Article 73 of CRD Internal Capital for credit institutions, and MFC article L.
53322 implements it for investment firms.
318 See para. c2i of the order. The first margin condition requires that Covered Entities must be subject to and comply with EMIR article 11; EMIR
Margin RTS; CRR articles 103, 1053, 10510, 1112, 224, 285, 286, 2867, 290, 295, 2962b, 2971, 2973, and 2981; MiFID Org Reg. article
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The proposed Order did not contain any additional conditions for substituted compliance with respect to the margin requirements of Exchange Act section 15Fe and Exchange Act rule 18a3. The Commission, however, requested comment on whether there were any conditions that should be applied to substituted compliance for the margin requirements to promote comparable regulatory outcomes.319 As discussed below, in response to comments received, the Order includes two additional margin conditions designed to produce comparable regulatory outcomes with respect to collecting variation and initial margin from counterparties.320
In particular, a commenter raised general concerns with the Commissions regulatory outcomes approach to substituted compliance, and suggested additional general principles that the Commission should consider in evaluating applications for substituted compliance.321 This commenter believed regulatory arbitrage within and outside the United States was one of the key factors that led to and exacerbated the 2008 financial crisis, and stated that the Dodd-Frank Act was enacted in response, which includes the Commissions authority to promulgate capital, margin, and other rules for noncleared security-based swaps to reduce the possibility and severity of another crisis related to excessive buildup of risk in the swaps markets. 322
The Commission responds to the comments on the Commissions approach to substituted compliance in part II.D.2 above. However, as stated above, the commenter raises concerns about regulatory arbitrage and the potential impacts of differences in requirements that merit re-consideration of whether additional margin conditions are needed to produce comparable regulatory outcomes.323 When proposing margin requirements for noncleared security-based swaps, the Commission stated that the DoddFrank Act seeks to address the risk of uncollateralized credit risk exposure arising from OTC derivatives by, among other things, mandating margin requirements for non-cleared security231; CRD articles 74 and 79b; MFC articles L.
511411B, L. 53322, L. 53329, I al. 1, and L.
51155 al. 1; and Decree of 3 November 2014 on internal control, article 114.
319 French Substituted Compliance Notice and Proposed Order, 85 FR at 85737.
320 See paras. c2ii and iii of the order.
321 Better Markets Letter at 3.
322 Better Markets Letter at 2.
323 Better Markets Letter at 23.

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based swaps and swaps. 324 Further, the comparability criteria for margin requirements under Exchange Act rule 3a716 provides that prior to making a substituted compliance determination, the Commission intends to consider in addition to any conditions imposed whether the foreign financial regulatory system requires registrants to adequately cover their current and future exposure to OTC derivatives counterparties, and ensures registrants safety and soundness, in a manner comparable to the applicable provisions arising under the Exchange Act and its rules and regulations.325 In adopting this comparability criteria for margin requirements, the Commission stated that obtaining collateral is one of the ways OTC derivatives dealers manage their credit risk exposure to OTC
derivatives counterparties.326
To address the risk of uncollateralized exposures, Exchange Act rule 18a3
requires SBS entities without a prudential regulator to collect variation margin from all counterparties, including affiliates, unless an exception applies.327 Under the French and EU
margin requirements, there are exceptions from the variation margin requirements for certain intragroup transactions i.e., transactions between affiliates.328 In addition, Exchange Act rule 18a3 requires firms to collect initial margin from all counterparties, unless an exception applies.329 This initial margin requirement under Exchange Act rule 18a3 requires the firm to collect initial margin from a financial counterparty such as a hedge fund without regard to whether the counterparty has material exposures to non-cleared security-based swaps and uncleared swaps. In contrast, the French and EU margin requirements do not require Covered Entities to collect initial margin from financial counterparties, if their notional exposure to non-centrally 324 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers; Proposed Rule, Exchange Act Release No. 68071 Oct. 18, 2021, 77
FR 70214, 70258 Nov. 23, 2012.
325 See 17 CFR 240.3a716d5i and ii.
326 See Capital and Margin Adopting Release, 84
FR at 43949 Obtaining collateral is one of the ways OTC derivatives dealers manage their credit risk exposure to OTC derivatives counterparties.
Prior to the financial crisis, in certain circumstances, counterparties were able to enter into OTC derivatives transactions without having to deliver collateral. When trigger events occurred during the financial crisis, those counterparties faced significant liquidity strains when they were required to deliver collateral. Id.
327 See 17 CFR 240.18a3ciiA1 and 2.
328 French Authorities Application at 60.
329 See 17 CFR 240.18a3ciiB.

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