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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
rule 15c34 with respect to certain activities.186
MarginMargin requirements pursuant to Exchange Act section 15Fe and Exchange Act rule 18a3 for nonprudentially regulated SBS Entities.187
The margin requirements are designed to protect SBS Entities from the consequences of a counterpartys default.188
Taken as a whole, these capital and margin requirements help to promote market stability by mandating that SBS
Entities follow practices to manage the market, credit, liquidity, solvency, counterparty, and operational risks associated with their security-based swap businesses.
In proposing to provide conditional substituted compliance in connection with this part of the FCA Application, the Commission preliminarily concluded that substituted compliance with respect to the Exchange Act capital requirements would be subject to certain additional conditions.189 The conditions were designed to help ensure the comparability of regulatory outcomes between Exchange Act rule 18a1 which imposes a net liquid assets test and the capital requirements applicable to nonbank security-based swap dealers in the UK that are expected to register with the Commission. Those capital requirements are based on the international capital standard for banks Basel capital standard.190
In proposing to provide conditional substituted compliance in connection with this part of the FCA Application, the Commission preliminarily concluded that relevant UK margin requirements would produce regulatory outcomes that are comparable to those associated with the Exchange Act margin requirements.191
Finally, the proposed Order would permit a Covered Entity to apply substituted compliance for the capital 186 See
17 CFR 240.15c34 and 18a1f.
CFR 240.18a3.
188 See Capital and Margin Adopting Release, 84
FR at 43947, 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.
189 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1838589, 18413.
190 See, e.g., Basel Committee on Banking Supervision BCBS, The Basel Framework, available at: https www.bis.org/basel_framework/.
191 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18386, 18413.

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and/or margin requirements.192 Thus, a Covered Entity could apply substituted compliance for Exchange Act margin requirements by complying with UK
margin requirements but comply with Exchange Act capital requirements rather than applying substituted compliance to those requirements and vice versa. However, as to the various requirements within the capital and margin rules, the Commission found the rules to be entity-level when adopting amendments to Exchange Act rule 3a716 to make substituted compliance available with respect to them.
Consequently, under the proposed Order, a Covered Entity must apply substituted compliance with respect to capital and margin requirements at an entity level.
B. Commenter Views and Final Provisions 1. Capital Consistent with the proposed Order, the first capital condition requires the covered entity to be subject to and comply with certain identified UK
capital requirements.193 As discussed at the end of this section, the Commission made some modifications to the UK
laws and regulations cited in this condition.194 For the reasons discussed below, there are two additional conditions to applying substituted compliance with respect to Exchange Act rule 18a1.
For the reasons discussed above in part III.B.2.k of this release, the first additional capital condition is that the Covered Entity applies substituted compliance with respect to Exchange Act rules 18a5a9 a record making requirement, 18a6b1x a record preservation requirement, and 18a 8a1i, a1ii, b1, b2, and b4 notification requirements.195
These recordkeeping and notification requirements are directly linked to the capital requirements of Exchange Act rule 18a1. The proposed Order conditioned substituted compliance with respect to these recordkeeping and notification requirements on the Covered Entity applying substituted compliance with respect to Exchange Act rule 18a1.196 This additional capital condition is designed to provide 192 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1838687.
193 See para. c1i of the Order. See also UK
Substituted Compliance Notice and Proposed Order, 86 FR at 18386.
194 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18386, n.81.
195 See para. c1ii of the Order.
196 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1839518403, 1841617, 19419.

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clarity as to the Covered Entitys obligations under these recordkeeping and notification requirements when applying substituted compliance with respect to Exchange Act rule 18a1
pursuant this Order.
The second additional capital condition builds on and modifies the proposed capital condition that was designed to address potential different regulatory outcomes between Exchange Act rule 18a1and the UK capital requirements. In particular, the Commission proposed a four pronged condition with respect to applying substituted compliance to the capital requirements of Exchange Act rule 18a1.197 The first prong would require a Covered Entity to maintain an amount of assets that are allowable under Exchange Act rule 18a1, after applying applicable haircuts under the Basel capital standard, that equals or exceeds the Covered Entitys current liabilities coming due in the next 365 days.198 The second prong was linked to the first prong as it would require that a Covered Entity make a quarterly record listing:
1 The assets maintained pursuant to the first prong, their value, and the amount of their applicable haircuts; and 2 the aggregate amount of the liabilities coming due in the next 365
days. The third prong would require the Covered Entity to maintain at least $100
million of equity capital composed of highly liquid assets as defined in the Basel capital standard. The fourth prong would require the Covered Entity to include its most recently filed statement of financial condition whether audited or unaudited with its initial notice to the Commission of its intent to rely on substituted compliance.
One commenter recommended that the Commission consider denying substituted compliance for capital requirements on the basis that the UKs capital requirements do not produce comparable regulatory outcomes.199
This commenter stated that granting substituted compliance with multiple conditions intended to mimic the Commissions capital requirements would seem to undermine the entire point of substituted compliance in the first place; namely, protecting the stability of the U.S. financial system by allowing substituted compliance only 197 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1838789 discussing the additional conditions.
198 As used in this part V.B.1. of the release, the term Covered Entity refers to a security-based swap dealer located in the UK that does not have a prudential regulator.
199 See Better Markets Letter at 8.

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