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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
EU provisions related to a counterpartys clearing rights in the European Union. However, those provisions do not require disclosure of Exchange Act section 3Cg5 clearing rights, and the Commission preliminarily viewed the EU clearing provisions as not comparable to Exchange Act clearing rights disclosure requirements.389

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B. Commenter Views and Final Provisions Having considered the commenter recommendations for the counterparty protection requirements, the Commission is making positive substituted compliance determinations in connection with disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, suitability, fair and balanced communications and daily mark disclosure requirements. The Order is largely consistent with the proposed Order, except for adding additional EU requirements in two sections of the Order, moving one EU
requirement from the fair and balanced communications section of the Order to the disclosure of material incentives and conflicts of interest section and adding text to clarify that substituted compliance for counterparty protection requirements is applied at the transaction level.390 This action is grounded in the Commissions conclusion that, taken as a whole, applicable requirements under French and EU law subject French Covered Entities to obligations that promote standards of professional conduct, transparency and the fair treatment of parties, and thus produce regulatory outcomes that are comparable to the outcomes associated with the relevant counterparty protection requirements under the Exchange Act.
To help ensure the comparability of outcomes, substituted compliance is subject to certain conditions.
Substituted compliance for disclosure of material risks and characteristics,391
disclosure of material incentives or conflicts of interest,392 know your counterparty,393 suitability 394 and fair and balanced communications 395
requirements is conditioned on a Covered Entity being subject to, and complying with, relevant French and 389 Id.

396 Covered Entities must be required to reconcile, and in fact reconcile, the portfolio containing the security-based swap for which substituted compliance is applied, on each business day pursuant to EMIR articles 111b and 112 and EMIR RTS article 13. See para. e6 of the Order.
397 See para. e4ii of the Order.

390 See
para. e of the Order.
para. e1 of the Order.
392 See para. e2 of the Order.
393 See para. e3 of the Order.
394 See para. e4i of the Order.
395 See para. e5 of the Order.
391 See
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EU requirements. Substituted compliance for daily mark disclosure requirements is conditioned on the Covered Entity being required to reconcile, and in fact reconciling, the portfolio containing the relevant security-based swap on each business day pursuant to relevant EU
requirements.396 Substituted compliance for suitability requirements is conditioned on the counterparty being a per se professional client as defined in MiFID i.e., not an elective professional client or a retail client and not a special entity as defined in Exchange Act section 15Fh2C and Exchange Act rule 15Fh2d.397 A
Covered Entity that is unable to comply with a conditionand thus is not eligible to use substituted compliance for the particular set of Exchange Act counterparty protection requirements related to that conditionnevertheless may use substituted compliance for another set of Exchange Act requirements addressed in the Order if it complies with the conditions to the relevant parts of the Order.
The Commission recognizes that there are differences between the approaches taken by disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, suitability, fair and balanced communications and daily mark disclosure requirements under the Exchange Act, on the one hand, and relevant French and EU
requirements, on the other hand. The Commission continues to view those differences, when coupled with the conditions described above, as not so material as to be inconsistent with substituted compliance within the requisite outcomes-oriented context.
With respect to Exchange Act clearing rights disclosure requirements, however, consistent with the proposed Order the Commission is not providing substituted compliance.
Under the Order, substituted compliance for counterparty protection requirements relating to disclosure of information regarding material risks and characteristics, disclosure of information regarding material incentives or conflicts of interest, know your counterparty, suitability, fair and balance communications and daily mark disclosure is not subject to a condition that the Covered Entity apply substituted compliance for related
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recordkeeping requirements in Exchange Act rules 18a5 and 18a6. A
Covered Entity that applies substituted compliance for one or more counterparty protection requirements, but does not apply substituted compliance for the related recordkeeping requirements in Exchange Act rules 18a5 and 18a6, will remain subject to the relevant provisions of Exchange Act rules 18a5
and 18a6. Those rules require the Covered Entity to make and preserve records of its compliance with Exchange Act counterparty protection requirements and of its security-based swap activities required or governed by those requirements. A Covered Entity that applies substituted compliance for a counterparty protection requirement, but complies directly with related recordkeeping requirements in rules 18a5 and 18a6, therefore must make and preserve records of its compliance with the relevant conditions of the Order and of its security-based swap activities required or governed by those conditions and/or referenced in the relevant parts of rules 18a5 and 18a 6.
One commenter requested that the Commission make several changes to the conditions in the proposed Order.398
The Commission details its response to each of those requests below.
1. Disclosure of Information Regarding Material Risks and Characteristics The commenter requested that the Commission not require a Covered Entity to be subject to and comply with MIFID Org Reg articles 49 and 50 and requested that the requirement for a Covered Entity to be subject to and comply with MiFID article 244 and MFC D. 53315 be narrowed to include only MiFID article 244b and MFC D.
53315.2, respectively.399 The commenter described the proposed removal of conditions as addressing requirements which do not correspond to, and go beyond, the requirements in Exchange Act rule 15Fh3b. 400
The commenter stated that MiFID Org Reg article 49 relates to information about the safeguarding of client financial instruments or client funds and thus goes beyond the scope of Exchange Act material risks and characteristics disclosure requirements.401 This provision would require a Covered Entity to inform its client about the risks of the Covered Entity placing client assets, which 398 See
SIFMA Letter II at Appendix A.

399 Id.
400 Id.
401 Id.

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