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jbell on DSKJLSW7X2PROD with NOTICES2

Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices regulated central counterparty, and to do so without affecting the Covered Entitys ability to apply substituted compliance for entity-level requirements with respect to other security-based swap business that does satisfy the condition.111 Consistent with the discussion of the scope of substituted compliance for entity-level requirements in part III.B.2.b above, for entity-level Exchange Act requirements, a Covered Entity must choose either 1
to apply substituted compliance pursuant to the Order with respect to all UK business that is, security-based swap business that is both subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK
requirements, including paragraph a14; or 2 to comply directly with the Exchange Act with respect to all UK
business. A transaction cleared by a non-UK-regulated central counterparty does not satisfy the condition in paragraph a14 of the Order. As a result, paragraph a14 would not permit a Covered Entity to use substituted compliance for any Exchange Act requirements that apply to that transaction if the relevant conditions in parts b through f of the Order include a requirement for the Covered Entity to be subject to and comply with provisions of UK EMIR, UK EMIR RTS, UK EMIR Margin RTS, and/or other UK requirements adopted pursuant to those provisions. Instead, a Covered Entity must either comply directly with the Exchange Act for such a transaction or comply with the terms of another applicable substituted compliance order that the transaction is able to satisfy.112 Such a transaction would not be included in the UK
business for which a Covered Entity must elect a single choiceuse substituted compliance under the Order or comply directly with the Exchange Actwhen complying with entity-level Exchange Act requirements.
The commenter also requested that the Commission revise the conditions description of UK-regulated central counterparties to clarify that it includes UK-regulated third country central counterparties, which may have a domicile outside the UK and thus may not be viewed as recognized to clear derivatives contracts in the UK. 113
Similarly, the commenter asked the Commission to further revise the description to encompass the UKs temporary recognition regime for third country central counterparties 111 See
SIFMA 5/3/2021 Letter at 7.
supra note 80.
113 See SIFMA 5/3/2021 Letter at 7.
112 See
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implemented as a consequence of the UKs exit from the European Union.114
The Commission intends the conditions description of UK-regulated central counterparties to include third country central counterparties that relevant UK
authorities allow to provide clearing services to UK clearing members or trading venues.115 These central counterparties include those taken to be recognized pursuant to the UKs temporary recognition regime for third country central counterparties.116
Accordingly, the Commission is amending the conditions description of UK-regulated central counterparties so that it describes a central counterparty that is authorized, recognized, or taken to be recognized by a relevant UK
authority to provide clearing services to clearing members or trading venues established in the UK. 117
Finally, the Commission is amending the condition to clarify that the condition applies only if the relevant UK EMIR-based requirement applies to OTC derivatives that have not been cleared by a central counterparty, as some provisions of UK EMIR cited in the Order, such as UK EMIR articles 394 and 5, are not limited in their application to non-centrally cleared OTC derivatives. Consistent with the condition in paragraph a13 of the Order, the Commission also is adding references to UK EMIR RTS and UK
EMIR Margin RTS.
i. Memorandum of Understanding As proposed, the Commission would need to have a supervisory and enforcement memorandum of understanding and/or other arrangement with the FCA and the PRA addressing cooperation with respect to the Order at the time the Covered Entity makes use of substituted compliance.118 This condition has been modified from the proposed Order to reflect that the executed version of the memorandum of 114 See
SIFMA 5/3/2021 Letter at 7.
UK EMIR article 251 a third country central counterparty may provide clearing services to UK clearing members or trading venues only if it is recognized by the Bank of England; see also The Over the Counter Derivatives, Central Counterparties and Trade Repositories Amendment, etc., and Transitional Provision EU
Exit Regulations 2020 2020/646, regulation 202.
116 See The Central Counterparties Amendment, etc., and Transitional Provision EU Exit Regulations 2018 2018/1184, part 6.
117 See para. a14ii of the Order. The Commission also is amending the condition so that it applies to conditions of the Order that require the application of, and the Covered Entitys compliance with, UK EMIR, UK EMIR RTS, UK EMIR Margin RTS, and/or other UK requirements adopted pursuant to those requirements.
118 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18412.
115 See
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understanding is between the Commission, on the one hand, and the FCA and the Bank of England including in its capacity as the PRA, on the other hand.
j. Notice of Reliance on Substituted Compliance Commenters did not address the requirement in paragraph a16 of the proposed Order for the Covered Entity to notify the Commission in writing of its intent to rely on substituted compliance, and the Commission is adopting this requirement as proposed.119
119 See para. a16 of the Order. If the Covered Entity intends to rely on all the substituted compliance determinations in a given paragraph of the Order, it can cite that paragraph in the notice.
For example, if the Covered Entity intends to rely on the capital and margin determinations in paragraph c of the Order, it can indicate in the notice that it is relying on the determinations in paragraph c. However, if the Covered Entity intends to rely on the margin determination but not the capital determination, it will need to indicate in the notice that it is relying on paragraph c2
of the Order the margin determination. In this case, paragraph c1 of the Order the capital determination will be excluded from the notice and the Covered Entity will need to comply with the Exchange Act capital requirements. Further, as discussed below in part VIII.B.1, the recordkeeping and reporting determinations in the Order have been structured to provide Covered Entities with a high level of flexibility in selecting specific requirements within those rules for which they want to rely on substituted compliance. For example, paragraph f1i of the Order sets forth the Commissions substituted compliance determinations with respect to the requirements of Exchange Act rule 18a5, 17 CFR 240.18a5. These determinations are set forth in paragraphs f1iA through O of the Order. If a Covered Entity intends to rely on some but not all of the determinations, it will need to identify in the notice the specific determinations in this paragraph it intends to rely on e.g., paragraphs f1iA, B, C, D, G, H, I, and O. For any determinations excluded from the notice, the Covered Entity will need to comply with the Exchange Act rule 18a5 requirement. Finally, a Covered Entity is able to apply substituted compliance at the transaction level rather than the entity level for certain counterparty protection requirements and the recordkeeping requirements that are linked to them. In this case, the notice will need to indicate the class of transactions e.g., transactions with UK counterparties for which the Covered Entity is applying substituted compliance with respect to the Exchange Act counterparty protection requirements and linked recordkeeping requirements. Similarly, as discussed above, a Covered Entity is able to apply substituted compliance for entity-level Exchange Act requirements to all of its security-based swap business that is eligible for substituted compliance under the Order, and may either comply directly with the Exchange Act or apply substituted compliance under another applicable order for its security-based swap business that is not eligible for substituted compliance under the Order. In this case, the notice will need to indicate the scope of security-based swap business e.g., security-based swap business carried on from an establishment in the UK for which the Covered Entity is applying substituted compliance with respect to the relevant Exchange Act entity-level requirements. A Covered
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