Je veux savoir à propos de…

Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices 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 UK 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 18a8c 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.128 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.129 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 of Exchange Act rule 18a8h as applied to Exchange Act rule 18a8c.
IV. Substituted Compliance for Risk Control Requirements
jbell on DSKJLSW7X2PROD with NOTICES2

A. Proposed Approach The FCA Application in part requested substituted compliance in connection with risk control requirements relating to:
to have arrangements or procedures in place for employees to report potential or actual breaches or reportable concerns.
128 Better Markets Letter at 2.
129 See Exchange Act Release No. 71958
September 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 May 2, 2014 at 25249.

VerDate Sep<11>2014

20:04 Aug 05, 2021

Jkt 253001

Internal risk managementInternal risk management system requirements that address the obligation of registered entities to follow policies and procedures reasonably designed to help manage the risks associated with their business activities.
Trade acknowledgment and verificationTrade acknowledgment and verification requirements intended to help avoid legal and operational risks by requiring definitive written records of transactions and procedures to avoid disagreements regarding the meaning of transaction terms.
Portfolio reconciliation and dispute reportingPortfolio reconciliation and dispute reporting provisions that require that counterparties engage in portfolio reconciliation and resolve discrepancies in connection with uncleared securitybased swaps, and to provide prompt notification to the Commission and applicable prudential regulators regarding certain valuation disputes.
Portfolio compressionPortfolio compression provisions that require that SBS Entities have procedures addressing bilateral offset, bilateral compression, and multilateral compression in connection with uncleared security-based swaps.
Trading relationship documentationTrading relationship documentation provisions that require SBS Entities to have procedures to execute written security-based swap trading relationship documentation with their counterparties prior to, or contemporaneously with, executing certain security-based swaps.130
Taken as a whole, these risk control requirements help to promote market stability by mandating that registered entities follow practices that are appropriate to manage the market, counterparty, operational, and legal risks associated with their securitybased swap businesses.
In proposing to provide conditional substituted compliance in connection with this part of the FCA Application, the Commission preliminarily concluded that the relevant UK
requirements in general would help to produce regulatory outcomes that are comparable to those associated with Exchange Act risk control requirements, by subjecting Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses.131 Substituted compliance under the proposed Order 130 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383.
131 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383.

PO 00000

Frm 00015

Fmt 4701

Sfmt 4703

43331

was to be conditioned in part on Covered Entities being subject to and complying with the specified UK
provisions that in the aggregate help to produce outcomes that are comparable to those associated with the risk control requirements under the Exchange Act.132
Substituted compliance under the proposed Order further would be subject to certain additional conditions to help ensure the comparability of outcomes. First, substituted compliance for Exchange Act trading relationship documentation requirements would not extend to certain disclosures regarding legal and bankruptcy status.133 Second, substituted compliance for portfolio reconciliation and dispute reporting requirements would be conditioned on the Covered Entity having to provide the Commission with reports regarding disputes between counterparties on the same basis as the Covered Entity provides those reports to the FCA
pursuant to UK law.134
132 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383 and n.61. Each of the comparable UK requirements listed in the proposed Order applies to a uniquely defined set of UK-authorized firms. See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1838485 and n.70. To assist UK firms in determining whether they are subject to these requirements, the Commission preliminarily determined that any Covered Entity that is an IFPRU investment firm, UK bank or UK
designated investment firm, each as defined for purposes of UK law, would be subject to all of the required UK requirements related to internal risk management requirements and thus eligible to apply substituted compliance for internal risk management requirements. The Commission also preliminarily determined that a Covered Entity that is a financial counterparty would be subject to the required UK requirements related to trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation and thus eligible to apply substituted compliance in these areas. See UK
Substituted Compliance Notice and Proposed Order, 86 FR at 1838485.
133 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383. The trading relationship documentation provisions of rule 15Fi5b5, 17 CFR 240.15Fi5b5, require certain disclosures regarding the status of the SBS
Entity or its counterparty as an insured depository institution or financial counterparty, and regarding the possible application of the insolvency regime set forth under Title II of the Dodd-Frank Act or the Federal Deposit Insurance Act. Documentation requirements under applicable UK law would not be expected to address the disclosure of information related to insolvency procedures under U.S. law.
134 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383. Under the Exchange Act requirement, SBS Entities must promptly report, to the Commission, valuation disputes in excess of $20 million that have been outstanding for three or five business days depending on counterparty types. UK
requirements provide that firms must report at least monthly, to the FCA, disputes between counterparties in excess of 15 million and outstanding for at least 15 business days.

E:FRFM06AUN2.SGM

06AUN2