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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
Release No. 3492529; File No. S70421

Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom July 30, 2021.

I. Overview The United Kingdom Financial Conduct Authority FCA has submitted a substituted compliance application FCA Application requesting that the Securities and Exchange Commission determine, pursuant to the Securities Exchange Act of 1934 Exchange Act rule 3a716,1
that security-based swap dealers and major-security based swap participants SBS Entities subject to regulation in the United Kingdom UK
conditionally may satisfy requirements under the Exchange Act by complying with comparable UK requirements.2 The FCA Application sought substituted compliance in connection with certain Exchange Act requirements related to risk control; capital and margin; internal supervision and compliance;
counterparty protection; and record keeping, reporting, notification, and securities counts.3 The FCA Application included comparability analyses between the relevant requirements in Exchange Act section 15F and the rules and regulations thereunder and 1 17

CFR 240.3a716.
Letter from Nausicaa Delfas, Executive Director of International, FCA, dated March 19, 2021. The FCA Application is available on the Commissions website at: https www.sec.gov/files/
uk-financial-conduct-authority-completeapplication-substituted-compliance-031921.pdf.
3 Risk control includes requirements related to internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute resolution, portfolio compression, and trading relationship documentation; capital and margin includes requirements related to capital applicable to security-based swap dealers without a prudential regulator and to margin applicable to SBS Entities without a prudential regulator;
internal supervision and compliance includes requirements related to diligent supervision, conflicts of interest, information gathering under Exchange Act section 15Fj, 15 U.S.C. 78o10j, and chief compliance officers; counterparty protection includes requirements related to disclosure of material risks and characteristics and material incentives or conflicts of interest, know your counterparty, suitability of recommendations, fair and balanced communications, disclosure of daily marks, and disclosure of clearing rights; and record keeping, reporting, notification, and securities counts includes requirements related to making and keeping current certain prescribed records, preservation of records, reporting, notification, and securities counts.

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applicable UK law,4 as well as information regarding UK supervisory and enforcement frameworks.
On April 5, 2021, the Commission issued a notice of the FCA Application, accompanied by a proposed order to grant substituted compliance with conditions in connection with the FCA
Application proposed Order.5 The proposed Order incorporated a number of conditions to tailor the scope of substituted compliance consistent with the prerequisite that relevant UK
requirements produce regulatory outcomes that are comparable to relevant requirements under the Exchange Act.
As discussed below, the Commission is adopting a final order Order that has been modified from the proposed Order in certain respects to address commenter concerns and to make clarifying changes.
II. Substituted Compliance Framework and Prerequisites A. Substituted Compliance Availability and Purpose As discussed in the UK Substituted Compliance Notice and Proposed Order, Exchange Act rule 3a716 provides a framework whereby non-U.S. SBS
Entities may satisfy certain requirements under Exchange Act section 15F by complying with comparable regulatory requirements of a foreign jurisdiction.6 Because substituted compliance does not constitute exemptive relief, but instead provides an alternative method by which non-U.S. SBS Entities may comply with applicable Exchange Act requirements, the non-U.S. SBS Entities 4 Though the UK ceased to be a member of the European Union EU on January 31, 2020, market participants in the UK remain subject to UK
requirements implemented pursuant to EU
directives, and to EU regulations that have been added to UK law. In adding EU regulations to UK
law, the UK in some cases has adopted UK versions of these regulations that differ from the original EU
versions as necessary to account for the effects of Brexit. See FCA Application Appendix A at 7. The Commission has reviewed the FCA Application in light of the UK versions of these regulations.
5 See Exchange Act Release No. 91476 Apr. 5, 2021, 86 FR 18378 Apr. 8, 2021 UK Substituted Compliance Notice and Proposed Order.
6 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18378; see also Exchange Act Release No. 90378 Nov. 9, 2020, 85 FR 72726, 72727 Nov. 13, 2020 German Substituted Compliance Notice and Proposed Order;
Exchange Act Release No. 90765 Dec. 22, 2020, 85
FR 85686 Dec. 29, 2020 German Substituted Compliance Order; Exchange Act Release No.
90766 Dec. 22, 2020, 85 FR 85720 Dec. 29, 2020
French Substituted Compliance Notice and Proposed Order; Exchange Act Release No. 91477
Apr. 5, 2021, 86 FR 18341 Apr. 8, 2021 French Substituted Compliance Re-Opening Release;
Exchange Act Release No. 92484 Jul. 23, 2021
French Substituted Compliance Order.

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would remain subject to the relevant requirements under section 15F. The Commission accordingly will retain the authority to inspect, examine, and supervise those SBS Entities compliance and take enforcement action as appropriate. Under the substituted compliance framework, failure to comply with the applicable foreign requirements and other conditions to a substituted compliance order would lead to a violation of the applicable requirements under the Exchange Act and potential enforcement action by the Commission as opposed to automatic revocation of the substituted compliance order.
Under rule 3a716, substituted compliance potentially is available in connection with certain section 15F
requirements,7 but is not available in connection with antifraud prohibitions and certain other requirements under the Federal securities laws.8 SBS
Entities in the UK accordingly must comply directly with those requirements notwithstanding the availability of substituted compliance for other requirements.
The substituted compliance framework reflects the cross-border nature of the security-based swap market, and is intended to promote efficiency and competition by helping to address potential duplication and inconsistency between relevant U.S. and foreign requirements.9 In practice, substituted compliance may be expected to help SBS Entities leverage their existing systems and practices to comply with relevant Exchange Act requirements in conjunction with their compliance with relevant foreign requirements. Market participants will begin to count security-based swap transactions toward the thresholds for registration with the Commission as an SBS Entity on August 6, 2021, and will be required to begin registering with the 7 See Exchange Act rule 3a716d; see also UK
Substituted Compliance Notice and Proposed Order, 86 FR at 18378.
8 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18378 n.5 addressing unavailability of substituted compliance in connection with certain information-related requirements under section 15F, as well as provisions related to anti-fraud, transactions with counterparties that are not eligible contract participants, segregation of customer assets, required clearing upon counterparty election, regulatory reporting and public dissemination, SBS
Entity registration, and registration of offerings.
9 See generally Exchange Act Release No. 77617
Apr. 14, 2016, 81 FR 29960, 30073 May 13, 2016
Business Conduct Adopting Release stating that U.S. security-based swap regulation has the potential to lead to requirements that are duplicative of or in conflict with applicable foreign business conduct requirements, even when the two sets of requirements implement similar goals and lead to similar results.

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