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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
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EU.96 The conditions are not based upon the concern that some industry participants may not be able to take advantage of substituted compliance, but rather the conditions are intended to help ensure that the relevant EMIR
requirements will apply in practice regardless of the counterpartys location or status as an undertaking. As such, the condition provides that the Covered Entity must comply with the applicable condition of this Order as if the counterparty were the type of counterparty that would trigger the application of the relevant EMIR-based requirements. If the Covered Entity reasonably determines that its counterparty would be a financial counterparty if not for the counterpartys location and/or lack of authorization in the EU, the condition further requires the Covered Entity to treat the counterparty as if the counterparty were a financial counterparty, rather than as another type of counterparty to which the relevant EMIR-based requirements apply.97 By requiring a Covered Entity to treat its counterparty as the type of counterparty that would trigger the application of the relevant EMIR-based requirements, the EMIR-based requirements require the Covered Entity to act in a way that is comparable to Exchange Act requirements. The Commission is modifying the Order to include this condition to ensure that a Covered Entity can apply substituted compliance only when it treats its counterparty as a type that will trigger the Covered Entitys performance of obligations pursuant to those EMIRbased requirements.98 Because each EMIR-based requirement applies to different types of counterparties, the Commission is amending the condition to make clear that a Covered Entity must treat its counterparty as if the counterparty were the type of counterparty specified in the relevant EMIR-based requirement and that a Covered Entity may not rely on EMIR
article 13 to comply with another jurisdictions requirement.
Another commenter requested that the Commission clarify that this condition would not require a Covered Entity to treat as financial counterparties or non-financial 96 See
EMIR articles 28 and 29.
article 28 defines financial counterparty to encompass investment firms, credit institutions, insurers and certain other types of businesses that have been authorized in accordance with EU directives. The distinction between financial and non-financial counterparties under EMIR is manifested, inter alia, in connection with confirmation timing standards see EMIR RTS article 12.
98 See para. a5 of the Order.
97 EMIR

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counterparties certain public sector counterparties, such as multilateral development banks, that are exempt from EMIR or counterparties that are not undertakings for purposes of EMIRs definitions of financial counterparty and non-financial counterparty. 99
The Commission declines to do so, given that the relevant requirements under the Exchange Act lack analogous carve-outs based on counterparty status.
The Commission is, however, clarifying that the condition applies only if the relevant EMIR-based provision applies to the Covered Entitys activities with specified types of counterparties.100
The second new general condition accounts for the fact that: a The relevant trade acknowledgement and verification and trading relationship documentation rules under the Exchange Act do not apply to securitybased swaps cleared by a clearing agency registered with the Commission or a clearing agency that is exempt from registration with the Commission, and b the analogous EMIR provisions only apply to over-the-counter derivatives that are not cleared on a CCP as defined in EMIR article 21. To help ensure that substituted compliance is not precluded in connection with instruments that have been cleared in the EU, this second condition provides that for the applicable EMIR-related conditions, the relevant security-based swap must be an OTC derivative or OTC derivative contract as defined under EMIR that has not been cleared and otherwise is subject to the provisions of the relevant requirements under EMIR, or else that the relevant security-based swap must have been cleared by a central counterparty that has been authorized or recognized by a relevant authority to clear derivatives contracts in the EU.101
One commenter requested that the second new general condition be revised to include transactions cleared by any central counterpartynot merely central counterparties authorized or recognized by the EU.102 The commenter stated that in certain circumstances French and EU law permit counterparties to agree to submit Letter II at 4.
para. a5 of the Order.
101 See para. a6 of the Order. Absent this type of condition, instruments that have been cleared at an EU-authorized or recognized central counterparty neither would be excluded from the application of those Exchange Act rules nor would be subject to the EMIR requirements that otherwise would underpin substituted compliance. That would make direct compliance with the Exchange Act rules problematic, but compliance with the conditions of a positive substituted compliance order unworkable.
102 SIFMA Letter II at 45.

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99 SIFMA
100 See
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certain transactions to third-country central counterparties, and that it would be impractical to require Covered Entities to satisfy Exchange Act requirements that are principally targeted to non-cleared security-based swaps in relation to these transactions. 103 The Commission has modified the condition to clarify that it extends to instruments cleared by central counterparties that have been authorized or recognized by a relevant authority in the EU, but the Commission declines to extend it to instruments cleared on any central counterparty, as such a standard would provide no safeguard against the risks potentially associated with central counterparties that are not subject to adequate safeguards. In application, the central counterparties described by the provision would extend to those that have been authorized by a competent authority pursuant to EMIR article 14, and those that have been recognized by the European Securities and Markets Authority ESMA pursuant to EMIR
article 25.104
Finally, the Commission is amending the condition to clarify that the condition applies only if the relevant EMIR-based provision applies to OTC
derivatives that have not been cleared by a central counterparty, as some provisions of EMIR cited in the Order, such as EMIR articles 394 and 5, are not limited in their application to noncentrally cleared OTC derivatives.
Consistent with the condition in paragraph a6 of the Order, the Commission is also adding to the condition references to EMIR RTS and EMIR Margin RTS.
e. Notification Requirements Related to Changes in Capital A commenter requested that the Commission make more granular substituted compliance determinations with respect to the Exchange Act recordkeeping requirements.105 The commenter stated that for operational reasons a Covered Entity may prefer to comply directly with certain Exchange Act requirements i.e., not to rely on substituted compliance with those requirements. 106 The Commission took this approach in the UK Proposed Order with respect to the Exchange Act recordkeeping, reporting, and notification requirements.107 As 103 Id.

at 4.
light of these considerations, the condition does not extend to clearing permitted pursuant to the equivalence framework of EMIR article 13.
105 See SIFMA Letter I at 8.
106 Id.
107 See UK Substituted Compliance Notice and Proposed Order, 86 FR 18394403, 18415420.
104 In
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