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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
counterparty as if the counterparty were the type of counterparty specified in the relevant UK EMIR-based requirement.
The Commission also is amending the Order to clarify that the condition applies only if the relevant UK EMIRbased requirement applies solely to the Covered Entitys activities with specified types of counterparties. If the relevant UK EMIR-based requirement applies to a Covered Entitys activities without regard to the status of its counterparty,105 the Covered Entity would not be required to treat its counterparty as any particular type of counterparty for purposes of that UK
EMIR-based requirement.
As discussed in part III.B.2.b above, for any particular set of entity-level Exchange Act requirements, a Covered Entity must choose either 1 to apply substituted compliance pursuant to the Order with respect to all UK business, i.e., security-based swap business that is subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK requirements; or 2 to comply directly with the Exchange Act with respect to all UK business. In the context of the UK EMIR counterparties condition in paragraph a13, this scoping means that a Covered Entitys UK business includes security-based swap business that, but for the counterpartys failure to qualify as a type of counterparty specified in the relevant UK EMIR-based requirement, would be subject to the relevant UK
EMIR-based requirement, and otherwise is subject to all other relevant UK
requirements listed in the Order and can satisfy any other applicable general conditions.106 Accordingly, a Covered Entity must choose 1 to apply substituted compliance pursuant to the Orderincluding compliance with paragraph a13 as applicablefor a particular set of entity-level requirements with respect to all UK
business, including its business that would be subject to the relevant UK
105 See,
e.g., UK EMIR articles 394 and 5.
Covered Entitys business that is not subject to other non-UK EMIR-based requirements listed in the Order or that does not satisfy any other applicable general condition would not form part of a Covered Entitys UK business for which the Covered Entity must make a single choice between using substituted compliance or complying directly with the Exchange Act. For example, for purposes of its choice to apply substituted compliance or comply directly with Exchange Act internal risk management requirements, a Covered Entity need not treat as UK business a transaction that is not subject to FCA SYSC 4.1.1R1 or that cannot satisfy the general conditions in paragraphs a1 and a10 of the Order, even if the sole reason the transaction is not subject to UK EMIR Margin RTS
article 2 is that the counterparty is not the type of counterparty to which that requirement applies.

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EMIR-based requirement if the counterparty were the relevant type of counterparty; or 2 to comply directly with the Exchange Act with respect to all UK business.
H. Security-Based Swap Status Under UK EMIR
A commenter asked the Commission to amend the condition in paragraph a14 of the proposed Order to permit a Covered Entity to apply substituted compliance for transactions cleared by a non-UK-regulated central counterparty.107 As proposed, the condition helps to ensure that the relevant UK EMIR-based requirements will require the Covered Entity to treat its security-based swap in a manner comparable to Exchange Act requirements, while also clarifying that a Covered Entity still may apply substituted compliance in respect of transactions cleared by a UK-regulated central counterparty, even if the relevant UK EMIR-based requirements do not require the Covered Entity to take any action in respect of such a centrally cleared transaction. Many of the UK
EMIR-based requirements cited in the Order relate to risk mitigation techniques for non-centrally cleared transactions and apply only to a noncentrally cleared OTC derivative,108
consistent with analogous Exchange Act risk mitigation and margin requirements for non-centrally cleared security-based swaps.109 However, transactions that have been cleared by any central counterparty, whether or not it is regulated by UK authorities, are exempt from these UK EMIR-based requirements, while only transactions that have been cleared by an SECregistered or exempt clearing agency are exempt from their Exchange Act analogues. With respect to non-centrally cleared security-based swaps, the Commission believes that these UK
requirements produce comparable outcomes to the analogous Exchange Act requirements, as both sets of requirements impose similar obligations on the Covered Entity. In addition, to the extent that these UK EMIR-based requirements do not require the Covered Entity to apply risk mitigation techniques to a security-based swap cleared by a UK-regulated central counterparty, the Commission also believes that these UK requirements produce comparable outcomes to the analogous Exchange Act requirements.
107 See
SIFMA 5/3/2021 Letter at 67.
e.g., UK EMIR article 11.
109 See, e.g., Exchange Act rules 15Fi2, 17 CFR
240.15Fi2 through 15Fi4, 17 CFR 240.15Fi4;
Exchange Act rule 18a3, 17 CFR 240.18a3.
108 See,
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The Commission reached this conclusion because neither set of requirements imposes risk mitigation techniques on transactions that have been cleared by central counterparties subject to regulation in the jurisdiction of the authority that supervises compliance with the risk mitigation requirements. However, to the extent that these UK EMIR-based requirements do not require the Covered Entity to apply risk mitigation techniques to the relevant security-based swap because it has been cleared by a non-UK-regulated central counterparty, the Commission does not believe that these UK
requirements produce comparable outcomes to Exchange Act trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements for non-centrally cleared security-based swaps. The Commission reached this conclusion because these Exchange Act requirements exempt centrally cleared security-based swaps only if they have been cleared by an SEC-registered clearing agency or, in the case of portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements, a clearing agency that the Commission has exempted from registration. Securitybased swaps that have been cleared by a central counterparty that is not SECregistered or exempt or UK-regulated are subject to those Exchange Act requirements, but are not subject to the UK EMIR-based risk mitigation requirements. Accordingly, the Commission is issuing the condition as proposed to require that the relevant security-based swap is either a an OTC
derivative or OTC derivative contract that has not been cleared by any central counterparty and is otherwise subject to the relevant UK EMIR-based requirements or b cleared by a UKregulated central counterparty.110
As an alternative to its suggested amendments to the condition, the commenter asked the Commission to permit the Covered Entity to comply directly with the Exchange Act or with another applicable substituted compliance order with respect to transactions cleared by a non-UK110 See para. a14 of the Order. To correct a typographical error in the UK Substituted Compliance Notice and Proposed Order, in paragraph a14 of the Order the Commission is changing the phrase paragraphs b through e of this Order to paragraphs b through f of this Order. This correction is consistent with the description of the proposed condition in the UK
Substituted Compliance Notice and Proposed Order. See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

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