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Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

Exchange Act rule 15Fi3 requires SBSDs to 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.49 However, Swiss law lacks a specific requirement for reporting security-based swap valuation disputes in excess of $20 million.50 Therefore, substituted compliance in connection with dispute reporting requirements is preliminarily determined to not be available. To fulfill the requirements of Exchange Act section 15Fi and Exchange rule 15Fi3, a Swiss Covered Entity would be required to comply with the dispute reporting requirements of Exchange Act rule 15Fi3c directly.
In connection with portfolio reconciliation requirements, the Commission preliminarily believes that Swiss requirements are comparable to Exchange Act requirements when part of one of the applicable Swiss requirements is not applied. The proposed Order includes the requirement that a Covered Entity be subject to and comply with FinMIA
108b. However, the proposed Order also requires that Covered Entities not apply FinMIA article 108bs exception for small non-financial counterparties as defined in FinMIA article 98.
Requiring that Covered Entities not apply this exception helps ensures that the Swiss requirements for portfolio reconciliation are applied to Covered Entities in a manner comparable to the applicable Exchange Act requirements.
In connection with portfolio compression requirements, the Commission preliminarily believes that Swiss requirements are comparable to Exchange Act requirements but only when one of the applicable Swiss exclusions is not applied. The proposed Order includes the requirement that a Covered Entity be subject to and comply with FinMIA article 108d.51 However, the proposed Order also requires that Covered Entities not apply the portion of FinMIA article 108d that excludes application of its requirements when from the risk control provisions covered by the proposed Order.
49 See 17 CFR 240.15Fi3c.
50 See Swiss Application section II.1.c at 17, 22
23 noting that the key difference between Swiss and US portfolio reconciliation requirements is the reporting of valuation disputes, which Swiss law does not require to be reported to the Commission . . . the Commission may consider granting the requested substituted compliance determination on the condition that a Swiss bank would comply with the Commissions reporting requirement for disputes with respect to more than USD $20 million pursuant to Exchange Act rule 15Fi3c with respect to U.S. person counterparties.
51 See para. b4i of the proposed Order.

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there are fewer than 500 non-centrally cleared OTC derivatives transactions outstanding.52 Requiring that Covered Entities not apply this exclusion helps ensure that the Swiss requirements for portfolio compression are applied to Covered Entities in a manner comparable to the applicable Exchange Act requirements.
In connection with trading relationship documentation requirements, the Commission preliminarily believes that Swiss requirements are not comparable to Exchange Act requirements. Under Swiss law, there is no explicit requirement to agree in writing to all terms governing the trading relationship.53 By comparison, Exchange Act rule 15Fi5 requires that the security-based swap trading relationship documentation shall be in writing and shall include all terms governing the trading relationship between the security-based swap dealer . . . and its counterparty. 54 The Swiss Applications statement that even if OTC derivative transactions were to be initially traded on the basis of a purely verbal agreement, they would still be subject to the statutory requirements to have the key contractual terms confirmed and reconciled 55 is insufficient to produce a comparable regulatory outcome to Exchange Act rule 15Fi5, which specifically requires that the security-based swap trading relationship documentation shall be executed prior to, or contemporaneously with, executing a security-based swap with any counterparty. 56 Swiss law also does not require particularized disclosures regarding the status of a Swiss bank or its counterparty as an insured financial institution or financial company,57 as required by Exchange Act rule 15Fi5b5. Additionally, Swiss law does not require SBSDs to provide information regarding securitybased swaps that have been accepted for clearing,58 as required by Exchange Act rule 15Fi5b6. Given these discrepancies between the Swiss and U.S. trading relationship documentation requirements, the Commission 52 See
para. b4ii of the proposed Order.
voluntary standard Swiss market practice to document OTC derivatives transactions through written agreements described in the Swiss Application does not establish the requisite supervisory framework or enforcement authority to establish comparability with the specific regulatory requirements of Exchange Act section 15Fi5. See Swiss Application section II.1.c at 24.
54 17 CFR 240.15Fi5b1.
55 See Swiss Application section II.1.c at 24.
56 17 CFR 240.15Fi5a2.
57 See Swiss Application section II.1.c at 18, 28
29.
58 See id. at 30.
53 The
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preliminarily believes that the analogous Swiss requirementstaken as a wholecannot be determined to produce comparable outcomes.
Therefore the Commission is not proposing to make a positive substituted compliance determination for trading relationship documentation requirements. To fulfill the requirements of Exchange Act section 15Fi and Exchange rule 15Fi5, a Swiss Covered Entity would be required to comply with the trading relationship documentation requirements of Exchange Act rule 15Fi5 directly.
While the Commission recognizes these and certain other differences between Swiss requirements and the applicable risk control requirements under the Exchange Act, in the Commissions preliminary view those differences on balance would not preclude substituted compliance for internal risk management, trade acknowledgement and verification, portfolio reconciliation, and portfolio compression, particularly as requirement-by-requirement similarity is not needed for substituted compliance.
VI. Substituted Compliance for Internal Supervision, Chief Compliance Officer and Additional Exchange Act Section 15Fj Requirements A. The Swiss Firms Request and Associated Analytic Considerations The Swiss Firms also request substituted compliance in connection with requirements under the Exchange Act relating to:
Internal supervisionDiligent supervision is required pursuant to Exchange Act rule 15Fh3h,59 and Exchange Act section 15Fj5 requires conflict of interest systems and procedures. These provisions generally require that SBSDs establish, maintain and enforce supervisory policies and procedures that reasonably are designed to prevent violations of applicable law, and implement certain systems and procedures related to conflicts of interest.60
Chief compliance officersChief compliance officer requirements are set out in Exchange Act section 15Fk and 59 17

CFR 240.15Fh3h.
The Swiss Application addresses Swiss provisions that address firms supervisory systems, responsible individuals and qualification requirements for supervisors, supervisory system policies and procedures; the chief compliance officer and the chief compliance officers reporting authority and job security, chief compliance officer policies and procedures, and chief compliance officer reports. See Swiss Application section II.3 at 67109.
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