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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices internal supervision and/or chief compliance officer 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 internal supervision and chief compliance officer requirements and of its security-based swap activities required or governed by those requirements. A Covered Entity that applies substituted compliance for internal supervision and/or chief compliance officer requirements, 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 of 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 18a 6.
Finally, for the reasons discussed in the proposed Order, moreover, the substituted compliance Order does not extend to antitrust provisions under the Exchange Act.379

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VII. Substituted Compliance for Counterparty Protection Requirements A. Proposed Approach The French Authorities Application in part requested substituted compliance in connection with counterparty protection requirements relating to:
Disclosure of material risks and characteristics and material incentives or conflicts of interestRequirements that an SBS Entity disclose to certain security-based swap counterparties certain information about the material risks and characteristics of the securitybased swap, as well as material incentives or conflicts of interest that the SBS Entity may have in connection with the security-based swap.
Know your counterparty Requirements that an SBS Entity establish, maintain and enforce written policies and procedures to obtain and retain certain information regarding a security-based swap counterparty that is necessary for conducting business with that counterparty.
SuitabilityRequirements for a security-based swap dealer to undertake reasonable diligence to understand the potential risks and rewards of any recommendation of a security-based 379 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85728.

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swap or trading strategy involving a security-based swap that it makes to certain counterparties and to have a reasonable basis to believe that the recommendation is suitable for the counterparty Fair and balanced communicationsRequirements that an SBS Entity communicate with securitybased swap counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
Daily mark disclosure Requirements that an SBS Entity provide daily mark information to certain security-based swap counterparties.
Clearing rights disclosure Requirements that an SBS Entity provide certain counterparties with information regarding clearing rights under the Exchange Act.
Taken as a whole, these counterparty protection requirements help to bring professional standards of conduct to, and increase transparency in, the security-based swap market and to require registered SBS Entities to treat parties to these transactions fairly. 380
The proposed Order provided for conditional substituted compliance in connection with fair and balanced communications, disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, suitability and daily mark disclosure requirements.381 In proposing to provide conditional substituted compliance for these requirements, the Commission preliminarily concluded that the relevant French and EU
requirements in general would produce regulatory outcomes that are comparable to requirements under the Exchange Act, by subjecting French Covered Entities to obligations that promote standards of professional conduct, transparency and the fair treatment of parties.
As proposed, substituted compliance for these requirements would be subject to certain conditions to help ensure the comparability of outcomes. First, under the proposed Order, substituted compliance for fair and balanced communications, disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, and suitability requirements would be conditioned on Covered Entities being subject to, and complying with, relevant 380 See Business Conduct Adopting Release, 81
FR at 30065.
381 See French Substituted Compliance Notice and Proposed Order, 85 FR at 8572829.

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French and EU requirements.382
Second, the proposed Order would additionally condition substituted compliance for suitability requirements on the counterparty being a professional client as defined in MiFID rather than a retail client or an elective professional client 383 and not a special entity as defined in Exchange Act section 15Fh2C and Exchange Act rule 15Fh2d.384
Finally, in the proposed Order the Commission preliminarily viewed certain types of EU daily portfolio reconciliation requirements as comparable to Exchange Act daily mark disclosure requirements.385 These daily portfolio reconciliation requirements apply to portfolios of a financial counterparty or a non-financial counterparty subject to the clearing obligation in EMIR in which counterparties have 500 or more OTC
derivatives contracts outstanding with each other.386 The Commission preliminarily viewed EU portfolio reconciliation requirements for other types of portfolios, which may be reconciled less frequently than each business day or may not require disclosure to counterparties, as not comparable to Exchange Act daily mark requirements.387 Accordingly, the proposed Order would condition substituted compliance for daily mark requirements on the Covered Entity being required to reconcile, and in fact reconciling, the portfolio containing the relevant security-based swap on each business day and exchanging valuations of those contracts directly between counterparties, pursuant to relevant EU
requirements.388
The Order would not provide substituted compliance in connection with Exchange Act requirements for SBS Entities to disclose a counterpartys clearing rights under Exchange Act section 3Cg5. The French Authorities Application cited certain 382 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85729 n.72.
383 Annex II of MiFID describes which clients are professional clients. Section I of Annex II
describes the types of clients considered to be professional clients unless the client elects nonprofessional treatment; these clients are per se professional clients. Section II of Annex II describes the types of clients who may be treated as professional clients on request; these clients are elective professional clients. See MiFID Annex II.
Retail clients are those that are not professional clients. See MiFID article 4111.
384 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85730.
385 Id. at 8572985730.
386 See EMIR RTS article 133ai; EMIR article 10.
387 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85730.
388 Id.

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