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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices regulations.313 In adopting this comparability criteria for margin requirements, the Commission stated that obtaining collateral is one of the ways OTC derivatives dealers manage their credit risk exposure to OTC
derivatives counterparties.314
To address the risk of uncollateralized exposures, Exchange Act rule 18a3
requires SBS Entities without a prudential regulator to collect variation margin from all counterparties, including affiliates, unless an exception applies.315 Under the UK margin requirements, there are exceptions from the variation margin requirements for certain intragroup transactions i.e., transactions between affiliates.316 In addition, Exchange Act rule 18a3
requires firms to collect initial margin from all counterparties, unless an exception applies.317 This initial margin requirement under Exchange Act rule 18a3 requires the firm to collect initial margin from a financial counterparty such as a hedge fund without regard to whether the counterparty has material exposures to non-cleared security-based swaps and uncleared swaps. In contrast, UK margin requirements do not require Covered Entities to collect initial margin from financial counterparties, if their notional exposure to noncentrally cleared derivatives does not exceed a certain threshold on a group basis.318
In some cases these differences may result in a Covered Entity not being adequately collateralized to cover its current or future exposure to these counterparties with respect to its OTC
derivatives transactions. In addition, differences in the counterparty exceptions could potentially incentivize market participants to engage in noncleared security-based swap transactions outside of the United States.319 Consequently, it is 313 See
17 CFR 240.3a716d5i and ii.
Capital and Margin Adopting Release, 84
FR at 43949 Obtaining collateral is one of the ways OTC derivatives dealers manage their credit risk exposure to OTC derivatives counterparties.
Prior to the financial crisis, in certain circumstances, counterparties were able to enter into OTC derivatives transactions without having to deliver collateral. When trigger events occurred during the financial crisis, those counterparties faced significant liquidity strains when they were required to deliver collateral..
315 See 17 CFR 240.18a3ciiA1 and 2.
316 See FCA Application at 57.
317 See 17 CFR 240.18a3ciiB.
318 See FCA Application at 20. These thresholds are being phased-in with the last initial margin threshold set at EUR 8 billion.
319 The Commission recognizes there are also cases where the UK margin rules are more restrictive than Exchange Act rule 18a3. UK
margin rules require Covered Entities to post initial margin to covered counterparties, while the Exchange Act rule 18a3 would permit posting but not require it. In addition, UK margin rules also
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appropriate to impose additional margin conditions to produce comparable regulatory outcomes in terms of counterparty exceptions between Exchange Act rule 18a3 and the UK
requirements.
The first additional condition addresses differences in the counterparty exceptions with respect to variation margin. It requires a Covered Entity to collect variation margin, as defined in the UK EMIR Margin RTS, from a counterparty with respect to a transaction in non-cleared securitybased swaps, unless the counterparty would qualify for an exception under Exchange Act rule 18a3 from the requirement to deliver variation margin to the Covered Entity.320 This condition defines variation margin by referencing UK EMIR Margin RTS to facilitate implementation of the condition by Covered Entities. Under this condition, for example, Covered Entities would be required to collect variation margin from their affiliates, but would be permitted to comply with all other UK
margin requirements, including calculation, collateral, documentation, and timing of collection requirements.
The first additional condition will close the gap between the counterparty exceptions of Exchange Act rule 18a3
and the UK margin rules with respect to variation margin.
The second additional condition addresses differences in the counterparty exceptions with respect to initial margin. It requires a Covered Entity to collect initial margin, as defined in the UK EMIR Margin RTS, from a counterparty with respect to transactions in non-cleared securitybased swaps, unless the counterparty would qualify for an exception under Exchange Act rule 18a3 from the requirement to deliver initial margin to Covered Entity.321 The condition defines initial margin by referencing UK
EMIR Margin RTS to facilitate implementation of the condition by Covered Entities. Under this condition, for example, Covered Entities would be required to collect initial margin from their certain counterparties, but would be permitted to comply with all other require a Covered Entity to collect and post initial margin to financial and non-financial counterparties if their notional exposure to noncentrally cleared derivatives exceeds a certain threshold on a group basis. In contrast, Exchange Act rule 18a3 does not require but permits a nonbank security-based swap dealer to collect initial margin from counterparties that are financial market intermediaries. 17 CFR 240.18a 3c1iiiB. The comparability analysis, however, focuses on determining whether the UK margin rules are comparable to Exchange Act rule 18a3.
320 See para. c2ii of the Order.
321 See para. c2iii of the Order.

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UK margin requirements, including calculation, collateral, documentation, and timing of collection requirements.
The second additional condition will close the gap between the counterparty exceptions of Exchange Act rule 18a3
and the UK margin rules with respect to initial margin.
Finally, for the reasons discussed above in part III.B.2.k of this release, the third additional condition is that the Covered Entity applies substituted compliance with respect to Exchange Act rules 18a5a12 a record making requirement.322 This record making requirement is directly linked to the margin requirements of Exchange Act rule 18a3. The proposed Order conditioned substituted compliance with respect to this record making requirement on the Covered Entity applying substituted compliance with respect to Exchange Act rule 18a3.323
This additional condition is designed to provide clarity as to the Covered Entitys obligations under this record making requirement when applying substituted compliance with respect to Exchange Act rule 18a3 pursuant this Order.
VI. Substituted Compliance for Internal Supervision, Chief Compliance Officers and Additional Exchange Act Section 15Fj Requirements A. Proposed Approach The FCA Application further requested substituted compliance in connection with requirements relating to:
Internal supervisionDiligent supervision and conflict of interest provisions that generally require SBS
Entities to establish, maintain, and enforce supervisory policies and procedures that reasonably are designed to prevent violations of applicable law, and implement certain systems and procedures related to conflicts of interest.
Chief compliance officersChief compliance officer provisions that generally require SBS Entities to designate individuals with the responsibility and authority to establish, administer, and review compliance policies and procedures, to resolve conflicts of interest, and to prepare and certify annual compliance reports to the Commission.
Additional Exchange Act section 15Fj requirementsCertain additional 322 See
para. c2iv of the Order.
UK Substituted Compliance Notice and Proposed Order, 86 FR at 1839698, 18416.
323 See
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