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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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Commission continues to believe that UK portfolio compression 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 compression requirements consistent with the proposed Order.178
5. Trading Relationship Documentation The Commission continues to believe that UK trading relationship documentation requirements promote regulatory outcomes comparable to Exchange Act requirements, and is making a positive substituted compliance determination for trading relationship documentation requirements consistent with the proposed Order. The Commission details below its consideration of comments received.
One commenter stated that the Commission inappropriately attempted to compensate for inadequate UK
trading relationship documentation requirements by relying on guidance.179
The same commenter stated that, if the Commission nevertheless 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. 180 The commenter misinterpreted the role of guidance in the Commissions comparability analysis. The proposed Order would require a Covered Entity to be subject to and comply with UK EMIR article 111a, UK EMIR RTS article 12, and UK EMIR Margin RTS article 2. The Commission highlights the special importance of UK EMIR Margin RTS
article 2, which addresses risk management procedures related to the exchange of collateral, including procedures related to the terms of all necessary agreements to be entered into by counterparties e.g., payment obligations, netting conditions, events of default, calculation methods, transfers of rights and obligations upon termination, and governing law. Those obligations are denoted as being connected to collateral exchange obligations, and the Commission believes that they are necessary to help produce a regulatory outcome that mitigates risk in a manner that is comparable to the outcome associated 178 See
para. b4 of the Order.
Better Markets Letter at 56.
180 See Better Markets Letter at 2.
179 See
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with the Exchange Act trading relationship documentation requirements. To bridge any gap left by UK EMIR Margin RTS article 2, the Commission is also requiring compliance with UK EMIR article 111a and UK EMIR RTS article 12, which, as discussed in part IV.B.2
above, require the Covered Entity to confirm the transaction, with confirmation defined as documentation of the agreement of the counterparties to all the terms of the OTC derivative contract. Also as discussed in part IV.B.2 above, the Commission consulted guidance from the FCA and ESMA to confirm that the Commissions analysis of those complex UK requirements was consistent with the FCAs view of those requirements.181 The Commission thus agrees with the commenter that the proposed conditions to substituted compliance for trading relationship documentation requirements should be retained. To further ensure that a Covered Entity using substituted compliance for trading relationship documentation 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 two general conditions that will require the Covered Entity to treat its counterparty as a financial counterparty or nonfinancial counterparty when complying UK trade acknowledgment and verification requirements.182
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 trading relationship documentation requirements.183 For the reasons described in part IV.B.2 above, the Commission is retaining the reference to this provision.
Accordingly, the Commission continues to believe that UK
requirements promote regulatory outcomes comparable to Exchange Act trading relationship documentation requirements. While the Commission recognizes that these and certain other differences between UK requirements and Exchange Act trading relationship documentation requirements, in the Commissions view those differences on 181 See ESMA EMIR Q&A, OTC Answers 5a, 12b; FCA Brexit Guidance at paras. 9, 12.
182 See para. a13 of the Order.
183 See SIFMA 5/3/2021 Letter at 9 and Appendix A part b5.

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balance would not preclude substituted compliance, particularly as requirement-by-requirement similarity is not needed for substituted compliance.
V. Substituted Compliance for Capital and Margin Requirements A. Proposed Approach The FCA Application in part requested substituted compliance in connection with capital and margin requirements relating to:
CapitalCapital requirements pursuant to Exchange Act section 15Fe and Exchange Act rule 18a1 and its appendices collectively Exchange Act rule 18a1 applicable to certain SBS
Entities.184 Exchange Act rule 18a1
helps to ensure the SBS Entity maintains at all times sufficient liquid assets to promptly satisfy its liabilities, and to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks. The rules net liquid assets test standard protects customers and counterparties and mitigates the consequences of an SBS Entitys failure by promoting the ability of the firm to absorb financial shocks and, if necessary, to selfliquidate in an orderly manner.185 As part of the capital requirements, security-based swap dealers without a prudential regulator also must comply with the internal risk management control requirements of Exchange Act 184 17 CFR 240.18a1 through 18a1d. Exchange Act rule 18a1 applies to security-based swap dealers that: 1 Do not have a prudential regulator and 2 are either: a Not dually registered with the Commission as a broker-dealer; or b are dually registered with the Commission as a special purpose broker-dealer known as an OTC derivatives dealer. Security-based swap dealers that are dually registered with the Commission as a full-service broker-dealer are subject to the capital requirements of Exchange Act rule 15c31 17 CFR 240.15c31
for which substituted compliance is not available.
See 17 CFR 240.3a716d4i making substituted compliance available only with respect to the capital requirements of Exchange Act section 15Fe and Exchange Act rule 18a1.
185 See Exchange Act Release No. 86175 June 21, 2019, 84 FR 43872, 4387983 Aug. 22, 2019
Capital and Margin Adopting Release. The capital standard of Exchange Act rule 18a1 is based on the net liquid assets test of Exchange Act rule 15c31 applicable to broker-dealers. See Capital and Margin Adopting Release, 84 FR 43872, 4387983. The net liquid assets test seeks to promote liquidity by requiring that a firm maintain sufficient liquid assets to meet all liabilities, including obligations to customers, counterparties, and other creditors, and, in the event a firm fails financially, to have adequate additional resources to wind-down its business in an orderly manner without the need for a formal proceeding. See Capital and Margin Adopting Release, 84 FR at 43879. See FCA Application Appendix B, Annex V
Side Letter Addressing Capital Requirements.

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