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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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sets rules permit the use of a model including a third party model such as ISDAs SIMMTM model to calculate initial margin.297 The initial margin model under both sets of rules must meet certain minimum qualitative and quantitative requirements, including that the model must use a 99 percent, one-tailed confidence level with price changes equivalent to a 10-day movement in rates and prices.298 Both sets of rules have common exceptions to the requirements to collect and/or post initial or variation margin, including exceptions for certain commercial end users, the Bank for International Settlements, and certain multilateral development banks.299 Both sets of rules also permit a threshold below which initial margin is not required to be collected and incorporate a minimum transfer amount.300
In the UK Substituted Compliance Notice and Proposed Order, the Commission stated substituted compliance with respect to the margin requirements accordingly would be conditioned on Covered Entities being subject to those UK provisions that, the Commission has determined, in the aggregate, establish a framework that produces outcomes comparable to those associated with the requirements under the Exchange Act rule 18a3.301 A
commenter supported the proposed Order to grant substituted compliance in connection with margin requirements for Covered Entities, subject to technical comments with respect to refining the UK laws cited in the UK Order.302 In particular, this commenter recommended that the citations to the UK CRR, FCA IFPRU 2.2.18R, FCA
SYSC 4.1.1R, and PRA Internal Capital Adequacy Assessment Rule 4.2 be deleted from the final order, and that the Commission narrow the scope of the reference to UK EMIR article 11 to article 113.303
297 See 17 CFR 240.18a3d2i and FCA
Application at 21.
298 See 17 CFR 240.18a3d2i and FCA
Application at 2327. The Commission must approve the use of an initial margin model. 17 CFR
240.18a3d2i. UK EMIR article 1115 directs European supervisory authorities to develop regulatory technical standards under which initial margin models have to be approved initial and ongoing approval. UK requirements currently provide that, upon request, counterparties using an initial margin model shall provide the regulators with any documentation relating to the risk management procedures relating to such model at any time. UK EMIR Margin RTS article 26.
299 See 17 CFR 240.18a3c1iii and FCA
Application at 5260.
300 See 17 CFR 240.18a3c1iii and FCA
Application at 5260.
301 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18386.
302 See SIFMA 5/3/2021 Letter at 10, Appendix A.
303 See SIFMA 5/3/2021 Letter Appendix A.

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The Commission disagrees with the commenter that the scope of the citation to UK EMIR article 11 should be narrowed. Other provisions of UK EMIR
article 11 relate to margin requirements, including the provisions regarding intragroup transactions. Therefore, the Commission is not modifying this citation in the final order. Further, the Commission agrees with the commenter that it is appropriate to delete the citations to FCA IFPRU 2.2.18R and FCA SYSC 4.1.1R from the final order since it is likely that only PRAdesignated investment firms will rely on the substituted compliance determination for margin. These firms are not subject to FCA IFPRU
requirements, and are subject to general organizational requirements in the PRA
rulebook that were already included in the proposed Order.304 With respect to the remaining suggestions by the commenter to delete references to the UK CRR requirements and PRA Internal Capital Adequacy Assessment Rule 4.2, the Commission concludes that these requirements which were set out in the proposed Order, contribute to the conclusion that UK law produces a comparable regulatory outcome to the margin requirements under the Exchange Act.305 For the foregoing reasons, the first margin condition requires the covered entity to be subject to and comply with certain identified UK margin requirements.306
The proposed Order did not contain any additional conditions for substituted compliance with respect to the margin requirements of Exchange Act section 15Fe and Exchange Act rule 18a3. The Commission, however, requested comment on whether there were any conditions that should be applied to substituted compliance for the margin requirements to promote comparable regulatory outcomes.307 As discussed below, in response to comments received, the Order includes 304 See PRA General Organisational Requirements Rule 2.1.
305 The references to the UK CRR and PRA
Internal Capital Adequacy Assessment Rule 4.2
were included in the comparability assessment for margin requirements, and in the Commissions view the holistic approach for comparing regulatory outcomes should seek to reflect the whole of a jurisdictions relevant requirements, rather than select subsets of those requirements.
306 See para. c2i of the Order. The first margin condition requires that Covered Entities must be subject to and comply with UK EMIR
article 11; UK EMIR Margin RTS; UK CRR articles 103, 1053; 10510; 1112, 224, 285, 286, 2867, 290, 295, 2962b, 2971, 2973, and 2981; UK
MiFID Org Reg article 231; PRA General Organisational Requirements Rule 2.1; and PRA
Internal Capital Adequacy Assessment Rule 4.2.
307 French Substituted Compliance Notice and Proposed Order, 85 FR at 85737.

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two additional margin conditions designed to produce comparable regulatory outcomes with respect to collecting variation and initial margin from counterparties.308
In particular, a commenter raised general concerns with the Commissions regulatory outcomes approach to substituted compliance, and suggested additional general principles that the Commission should consider in evaluating applications for substituted compliance.309 This commenter believed regulatory arbitrage within and outside the United States was one of the key factors that led to and exacerbated the 2008 financial crisis, and stated that the Dodd-Frank Act was enacted in response, which includes the Commissions authority to promulgate capital, margin, and other rules for noncleared security-based swaps to reduce the possibility and severity of another crisis related to excessive buildup of risk in the swaps markets. 310
The Commission responds to the comments on the Commissions approach to substituted compliance in part II.C.1 above. However, as stated above, the commenter raises concerns about regulatory arbitrage and the potential impacts of differences in requirements that merit re-consideration of whether additional margin conditions are needed to produce comparable regulatory outcomes.311 When proposing margin requirements for noncleared security-based swaps, the Commission stated that the DoddFrank Act seeks to address the risk of uncollateralized credit risk exposure arising from OTC derivatives by, among other things, mandating margin requirements for non-cleared securitybased swaps and swaps. 312 Further, the comparability criteria for margin requirements under Exchange Act rule 3a716 provides that prior to making a substituted compliance determination, the Commission intends to consider in addition to any conditions imposed whether the foreign financial regulatory system requires registrants to adequately cover their current and future exposure to OTC derivatives counterparties, and ensures registrants safety and soundness, in a manner comparable to the applicable provisions arising under the Exchange Act and its rules and 308 See
paras. c2ii and iii of the Order.
Better Markets Letter at 3.
310 See Better Markets Letter at 2.
311 See Better Markets Letter at 23.
312 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers; Proposed Rule, Exchange Act Release No. 68071 Oct. 18, 2021, 77
FR 70214, 70258 Nov. 23, 2012.
309 See
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