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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
guidance thus is consistent with the Commissions analysis of the legally binding UK requirements discussed above, and provides the Commission additional comfort that its analysis of complex UK requirements is consistent with the FCAs view of those requirements. For these reasons, the Commission disagrees with the commenter and believes that the UK
trade acknowledgment and verification requirements promote regulatory outcomes comparable to Exchange Act requirements.
The Commission agrees with the comments in the Better Markets Letter that the proposed conditions to substituted compliance for trade acknowledgment and verification requirements should be retained. To further ensure that a Covered Entity using substituted compliance for trade acknowledgment and verification requirements will be required to document the agreement of the counterparties to all the terms of the relevant transaction, the Commission is issuing the Order as proposed with general conditions that will require the Covered Entity to treat its counterparty as a counterparty with whom UK trade acknowledgment and verification requirements require the Covered Entity to reach an agreement to all the terms of the OTC derivative contract and to ensure that the relevant security-based swap is either non-centrally cleared and subject to UK EMIR or centrally cleared by a UK central counterparty.167
Another commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions, but requested that the Commission not require a Covered Entity to be subject to and comply with UK EMIR RTS article 124
because it does not relate to and goes beyond Exchange Act trade acknowledgment and verification requirements.168 As part of the UKs framework for trade acknowledgment and verification, UK EMIR RTS article 124 requires a Covered Entity to have the necessary procedure to report on a monthly basis to the FCA the number of unconfirmed, non-centrally cleared OTC
derivative transactions that have been outstanding for more than five business days. Though Exchange Act rule 15Fi 2 does not have a similar requirement to report unconfirmed trades, the Commission considers that UK EMIR
RTS article 124s requirement to report unconfirmed trades to the FCA is an inseparable part of the UKs framework 167 See
paras. a13 and a14 of the Order.
SIFMA 5/3/2021 Letter at 9 and Appendix A part b2.
168 See
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for trade acknowledgment and verification, as those reports support the UK frameworks mandate to confirm transactions. Requiring a Covered Entity to be subject to and comply with UK
EMIR RTS article 124 thus is consistent with a holistic approach for comparing regulatory outcomes that reflects the whole of a jurisdictions relevant requirements. Accordingly, the Order retains as a condition to substituted compliance for trade acknowledgment and verification requirements the requirement that the Covered Entity be subject to and comply with the entirety of UK EMIR RTS
article 12.
In summary, the Commission continues to believe that UK
requirements promote the goal of avoiding legal and operational risks through requirements for written records of transactions and procedures to avoid disagreements regarding the meaning of transaction terms, in a manner that is comparable to the purpose of Exchange Act rule 15Fi2.
The Commission is retaining the proposed conditions to substituted compliance for trade acknowledgment and verification, consistent with the approach advocated by a commenter.169
While the Commission recognizes the differences between UK requirements and Exchange Act trade acknowledgment and verification requirements, in the Commissions view those differences on balance would not preclude substituted compliance, particularly as requirement-byrequirement similarity is not needed for substituted compliance. The commenters request for a wellsupported, evidence-based determination has been met here in the context of the requisite holistic analysis,170 and the commenters suggestion that there is a need for analysis regarding protection of the American financial system has been addressed above.171
169 See
Better Markets Letter at 2.
Better Markets Letter at 4 requesting the Commission make a well-supported, evidencebased determination. As discussed in part II.C.1
above, the Commission believes that the present approach toward comparability analyseswhich are based on a close reading of relevant foreign requirements and careful consideration of regulatory outcomesappropriately reflects the holistic comparability approach and the rejection of requirement-by-requirement similarity.
171 See Better Markets Letter at 34 stating that the Commission must provide analysis that the substituted compliance determination would protect the American financial system. As discussed in part II.C.1 above, the Commission believes that additional conditions related to protection of the American financial system would not be useful.
170 See
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3. Portfolio Reconciliation and Dispute Reporting One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.172 Another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order are applied with full force and without exceptions or dilution. 173 The Commission continues to believes that UK portfolio reconciliation and dispute reporting requirements promote regulatory outcomes comparable to Exchange Act requirements, by subjecting Covered Entities to risk mitigation practices that are appropriate to the risks associated with their security-based swap businesses, and is making a positive substituted compliance determination for portfolio reconciliation and dispute reporting requirements consistent with the proposed Order.174 Substituted compliance in connection with the dispute reporting requirements is conditioned in part on the Covered Entities providing the Commission with reports regarding disputes between counterparties on the same basis as the entities provide those reports to competent authorities pursuant to UK
law, to allow the Commission to obtain notice regarding key information in a manner that makes use of existing obligations under UK law.175
4. Portfolio Compression One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.176 Another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order are applied with full force and without exceptions or dilution. 177 The 172 See
SIFMA 5/3/2021 Letter at 9.
Better Markets Letter at 2.
174 See para. b3 of the Order.
175 See para. b3ii of the Order. The Commission recognizes the differences between the two sets of requirementsunder which Exchange Act rule 15Fi3 requires SBS Entities to report valuation disputes in excess of $20 million that have been outstanding for three or five business days depending on counterparty types, while UK
EMIR RTS article 152 requires firms to report disputes between counterparties in excess of 15
million and outstanding for at least 15 business days. In the Commissions view, the two requirements produce comparable regulatory outcomes notwithstanding those differences.
176 See SIFMA 5/3/2021 Letter at 9.
177 See Better Markets Letter at 2.
173 See
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