Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the Kingdom of Spain

CourtSecurities And Exchange Commission
Citation86 FR 59776
Publication Date28 October 2021
Record Number2021-23444
59776
Federal Register / Vol. 86, No. 206 / Thursday, October 28, 2021 / Notices
15
17 CFR 200.30–3(a)(12).
1
17 CFR 240.3a71–6.
2
See Letter from Rodrigo Buenaventura, Chair,
CNMV, dated August 20, 2021 (‘‘CNMV
Application’’). The CNMV Application is available
on the Commission’s website at: https://
www.sec.gov/page/exchange-act-substituted-
compliance-and-listed-jurisidction-applications-
security-based-swap.
3
Risk control requirements include requirements
related to internal risk management, trade
acknowledgement and verification, portfolio
reconciliation and dispute resolution, portfolio
compression, and trading relationship
documentation; internal supervision, chief
compliance officer, and antittrust requirements
include requirements related to diligent
supervision, conflicts of interest, information
gathering, chief compliance officers, and antitrust
considerations; counterparty protection
requirements include requirements related to
disclosure of material risks and characteristics,
disclosure of material incentives or conflicts of
interest, ‘‘know your counterparty,’’ suitability of
recommendations, fair and balanced
communications, disclosure of daily marks, and
disclosure of clearing rights; and recordkeeping,
reporting, and notification requirements include
requirements related to making and keeping current
certain prescribed records, preservation of records,
reporting, and notificiation.
4
15 U.S.C. 78o–10.
5
See Exchange Act Release No. 92716 (Aug. 20,
2021), 86 FR 47668 (Aug. 26, 2021) (‘‘Spanish
Substituted Compliance Notice and Proposed
Order’’).
6
See, e.g., Exchange Act Release No. 90378 (Nov.
9, 2020), 85 FR 72726 (Nov. 13, 2020) (‘‘German
Substituted Compliance Notice and Proposed
Order’’); Exchange Act Release No. 90765 (Dec. 22,
2020), 85 FR 85686 (Dec. 29, 2020) (‘‘German
Substituted Compliance Order’’) Exchange Act
Release No. 92647 (Aug. 12, 2021), 86 FR 46500
(Aug. 18, 2021) (‘‘German Substituted Compliance
Notice and Proposed Amended Order’’); Exchange
Act Release No. 93411 (Oct. 22, 2021) (‘‘German
Amended Substituted Compliance Order’’);
Exchange Act Release No. 90766 (Dec. 22, 2020), 85
FR 85720 (Dec. 29, 2020) (‘‘French Substituted
Compliance Notice and Proposed Order’’);
Exchange Act Release No. 91477 (Apr. 5, 2021), 86
FR 18341 (Apr. 8, 2021) (‘‘French Substituted
Compliance Re-Opening Release’’); Exchange Act
Release No. 92484 (July 23, 2021), 86 FR 41612
(Aug. 2, 2021) (‘‘French Substituted Compliance
Order’’); Exchange Act Release No. 91476 (Apr. 5,
2021), 86 FR 18378 (Apr. 8, 2021) (‘‘UK Substituted
Compliance Notice and Proposed Order’’);
Exchange Act Release No. 92529 (July 30, 2021), 86
FR 43318 (August 6, 2021), ‘‘UK Substituted
Compliance Order’’); Exchange Act Release No.
92632 (Aug. 10, 2021), 86 FR 45770 (Aug. 16, 2021)
(‘‘Swiss Substituted Compliance Notice and
Proposed Order’’); Exchange Act Release No. 93284
(Oct. 8, 2021), 86 FR 57455 (Oct. 15, 2021) (‘‘Swiss
Substituted Compliance Order’’); Spanish
Substituted Compliance Notice and Proposed
Order, 86 FR 47668.
7
See Exchange Act Release No. 77617 (Apr. 14,
2016), 81 FR 29960, 30079 (May 13, 2016)
(‘‘Business Conduct Adopting Release’’).
8
17 CFR 240.3a71–6(d).
9
See Spanish Substituted Compliance Notice and
Proposed Order, 86 FR 47669 n.10 (addressing
unavailability under Rule 3a71–6 of substituted
compliance for information-related requirements
under Exchange Act section 15F, as well as for
provisions related to anti-fraud, transactions with
counterparties that are not eligible contract
participants, segregation of customer assets,
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR- NYSE–2021–61, and
should be submitted on or before
November 18, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
15
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–23532 Filed 10–27–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93412; File No. S7–09–21]
Order Granting Conditional
Substituted Compliance in Connection
With Certain Requirements Applicable
to Non-U.S. Security-Based Swap
Dealers and Major Security-Based
Swap Participants Subject to
Regulation in the Kingdom of Spain
October 22, 2021.
I. Overview
The Spanish Comisio
´n Nacional del
Mercado de Valores (‘‘CNMV’’) has
submitted a ‘‘substituted compliance’’
application requesting that the
Securities and Exchange Commission
(‘‘Commission’’) determine, pursuant to
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) rule 3a71–6,
1
that
security-based swap dealers and major
security-based swap participants (‘‘SBS
Entities’’) subject to regulation in the
Kingdom of Spain (‘‘Spain’’)
conditionally may satisfy requirements
under the Exchange Act by complying
with comparable Spanish and European
Union (‘‘EU’’) requirements.
2
The
CNMV sought substituted compliance in
connection with certain Exchange Act
requirements related to risk control,
internal supervision, chief compliance
officer, antitrust, counterparty
protection, recordkeeping, reporting,
and notification.
3
The CNMV
Application incorporated comparability
analyses between the relevant
requirements in Exchange Act section
15F
4
and the rules and regulations
thereunder and applicable Spanish and
EU law, as well as information regarding
Spanish and EU supervisory and
enforcement frameworks.
On August 20, 2021, the Commission
issued a notice of the CNMV
Application, accompanied by a
proposed order to grant substituted
compliance with conditions in
connection with the CNMV Application
(‘‘proposed Order’’).
5
The proposed
Order incorporated a number of
conditions to tailor the scope of
substituted compliance consistent with
the prerequisite that relevant Spanish
and EU requirements produce
regulatory outcomes that are comparable
to relevant requirements under the
Exchange Act.
As discussed below, the Commission
is adopting a final order (‘‘Order’’) that
has been modified from the proposal in
certain respects to address commenter
concerns and to make clarifying
changes.
II. Substituted Compliance Framework
and Prerequisites
A. Substituted Compliance Framework
and Purpose
As the Commission has discussed
previously,
6
Exchange Act rule 3a71–6
provides a framework whereby non-U.S.
SBS Entities may satisfy certain
requirements under Exchange Act
section 15F by complying with
comparable regulatory requirements of a
foreign jurisdiction.
7
Because
substituted compliance does not
constitute exemptive relief, but instead
provides an alternative method by
which non-U.S. SBS Entities may
comply with applicable Exchange Act
requirements, the non-U.S. SBS Entities
would remain subject to the relevant
requirements under section 15F. The
Commission accordingly will retain the
authority to inspect, examine, and
supervise those SBS Entities’
compliance and take enforcement action
as appropriate. Under the substituted
compliance framework, failure to
comply with the applicable foreign
requirements and other conditions to a
substituted compliance order would
lead to a violation of the applicable
requirements under the Exchange Act
and potential enforcement action by the
Commission (as opposed to automatic
revocation of the substituted
compliance order).
Under rule 3a71–6, substituted
compliance potentially is available in
connection with certain section 15F
requirements,
8
but is not available in
connection with antifraud prohibitions
and certain other requirements under
the Federal securities laws.
9
SBS
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required clearing upon counterparty election,
regulatory reporting and public dissemination, SBS
Entity registration, and registration of offerings).
10
See generally Business Conduct Adopting
Release, 81 FR 30073 (stating that the cross-border
nature of the security-based swap market poses
special regulatory challenges, in that relevant U.S.
requirements ‘‘have the potential to lead to
requirements that are duplicative of or in conflict
with applicable foreign business conduct
requirements, even when the two sets of
requirements implement similar goals and lead to
similar results’’).
11
See ‘‘Key Dates for Registration of Security-
Based Swap Dealers and Major Security-Based
Swap Participants,’’ available at https://
www.sec.gov/page/key-dates-registration-security-
based-swap-dealers-and-major-security-based-
swap-participants.
12
Exchange Act rule 3a71–6(a)(2)(i).
13
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47670; see also Business
Conduct Adopting Release, 81 FR 30078–79
(recognizing that ‘‘different regulatory systems may
be able to achieve some or all of those regulatory
outcomes by using more or fewer specific
requirements than the Commission, and that in
assessing comparability the Commission may need
to take into account the manner in which other
regulatory systems are informed by business and
market practices in those jurisdictions’’). The
Commission’s assessment of a foreign authority’s
supervisory and enforcement effectiveness—as part
of the broader comparability analysis—would be
expected to consider not only overall oversight
activities, but also oversight specifically directed at
conduct and activity relevant to the substituted
compliance determination. ‘‘For example, it would
be difficult for the Commission to make a
comparability determination in support of
substituted compliance if oversight is directed
solely at the local activities of foreign security-
based swap dealers, as opposed to the cross-border
activities of such dealers.’’ Business Conduct
Adopting Release, 81 FR 30079 (footnote omitted).
In the Spanish Substituted Compliance Notice and
Proposed Order, the Commission preliminarily
concluded that this comparability prerequisite was
met in connection with a number of requirements
under the Exchange Act, in some cases with the
addition of conditions to help ensure the
comparability of regulatory outcomes.
14
Exchange Act rule 3a71–6(a)(2)(ii).
15
The Commission expects to publish a copy of
the memorandum of understanding on its website
at www.sec.gov under the ‘‘Substituted
Compliance’’ tab, which is located on the ‘‘Security-
Based Swap Markets’’ page in the Division of
Trading and Markets section of the site.
16
The memorandum of understanding sets forth
the conditions under which the Commission nay
request, share, use, and protect from unauthorized
disclosure supervisory and enforcement inform
ation that is owned by the ECB. The memorandum
of understanding also serves as a framework for
consultation, cooperation, and exchange of
information between the Commission and the ECB
in the supervision, enforcement, and oversight of
Spanish firms that are registered with the
Commission as SBS Entities. A copy of the
meorandum of understanding is available on the
Commision’s website oat https://www.sec.gov/files/
8162021-exec7ted-ecb-mou-redacted-annex-
secured_0.pdf.
17
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47669 n.12.
18
See Exchange Act rule 3a71–6(c)(3).
19
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47669 n.13.
20
17 CFR 240.0–13.
Entities in Spain accordingly must
comply directly with those
requirements notwithstanding the
availability of substituted compliance
for other requirements.
The substituted compliance
framework reflects the cross-border
nature of the security-based swap
market, and is intended to promote
efficiency and competition by helping to
address potential duplication and
inconsistency between relevant U.S. and
foreign requirements.
10
In practice,
substituted compliance may be expected
to help SBS Entities leverage their
existing systems and practices to
comply with relevant Exchange Act
requirements in conjunction with their
compliance with relevant foreign
requirements. Market participants began
to count security-based swap
transactions towards the thresholds for
registration with the Commission as an
SBS Entity on August 6, 2021. Security-
based swap dealers and major security-
based swap participants who met or
exceeded one of the relevant de minimis
thresholds for registration by the end of
August are required to be registered
with the Commission by November 1,
2021, or December 1, 2021,
respectively.
11
Substituted compliance
should assist relevant non-U.S. security-
based swap market participants in
preparing for registration.
B. Specific Prerequisites
1. Comparability of Regulatory
Outcomes
Rule 3a71–6, adopted by the
Commission in 2016, describes the
requirements for the Commission to
make a substituted compliance
determination. Under the rule, the
Commission must determine that the
analogous foreign requirements are
comparable to otherwise applicable
requirements under the Exchange Act
(i.e., the relevant requirements in the
Exchange Act and the rules and
regulations thereunder), after
accounting for factors such as ‘‘the
scope and objectives of the relevant
foreign regulatory requirements’’ and
‘‘the effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised’’ by
the foreign authority.
12
The
comparability assessments are to be
based on a ‘‘holistic approach’’ that
‘‘will focus on the comparability of
regulatory outcomes rather than
predicating substituted compliance on
requirement-by-requirement
similarity.’’
13
2. Memoranda of Understanding
Exchange Act rule 3a71–6(a)(2)(ii)
further predicates the availability of
substituted compliance on the
Commission and the foreign financial
regulatory authority or authorities
having entered into a memorandum of
understanding and/or other arrangement
with the relevant foreign financial
regulatory authority or authorities
‘‘addressing supervisory and
enforcement cooperation and other
matters arising under the substituted
compliance determination.’’
14
The
CNMV Application asked the
Commission to permit certain entities
regulated and supervised by the CNMV
and/or the Bank of Spain to use
substituted compliance. Accordingly,
the Commission recently entered into a
memorandum of understanding with the
CNMV and the Bank of Spain.
15
Moreover, because the CNMV, Bank of
Spain, and European Central Bank
(‘‘ECB’’) share responsibility for
supervising compliance with certain
provisions of EU and Spanish law, the
Commission and the ECB also have
entered into a memorandum of
understanding to address cooperation
matters related to substituted
compliance.
16
Those memoranda of
understanding or other arrangements
must be in place before Covered Entities
may use substituted compliance to
satisfy obligations under the Exchange
Act.
17
3. ‘‘Adequate Assurances’’
A foreign financial regulatory
authority may submit a substituted
compliance application only if the
authority provides ‘‘adequate
assurances’’ that no law or policy would
impede the ability of any entity that is
directly supervised by the authority and
that may register with the Commission
‘‘to provide prompt access to the
Commission to such entity’s books and
records or to submit to onsite inspection
or examination by the Commission.’’
18
In the Spanish Substituted Compliance
Notice and Proposed Order, the
Commission stated that the CNMV had
satisfied this prerequisite in the
Commission’s preliminary view, taking
into account information and
representations that the CNMV provided
regarding certain Spanish and EU
requirements that are relevant to the
Commission’s ability to inspect, and
access the books and records of, firms
using substituted compliance pursuant
to the Order.
19
The Commission
received no comments on this
preliminary view and has not changed
its view.
Commission rule 0–13
20
addresses
procedures for filing substituted
compliance applications. The rule
provides that the Commission will
publish a notice when a completed
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21
See Commission rule 0–13(h). The Commission
may take final action on a substituted compliance
application no earlier than 25 days following
publication of the notice in the Federal Register.
22
See paras. (b) through (e) of the Order (internal
risk management, trade acknowledgment and
verification, portfolio reconciliation and dispute
reporting, portfolio compression, trading
relationship documentation, internal supervision,
chief compliance officers, disclosure of material
risks and characteristics, disclosure of material
incentives or conflicts of interest, ‘‘know your
counterparty,’’ suitability, fair and balanced
communications, daily mark disclosure,
recordkeeping, reporting, and notification
requirements).
23
See Parts V.B (antitrust requirements), VI.B
(clearing rights disclosure and certain ‘‘know your
counterparty’’ requirements), and VII.B (certain
recordkeeping requirements), infra.
24
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47670.
25
See para. (f)(1) of the Order.
26
Firms authorized as investment firms or credit
institutions by authorities of other EU Member
States, whose authorization to provide investment
services and/or perform investment activities in
Spain derives from the single market ‘‘passport’’
under EU law, are not able to qualify as Covered
Entities under the Order.
27
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.31. The
Commission stated, as an example, that this
proposed condition would not be satisfied when the
comparable Spanish or EU requirements would not
apply to the security-based swap activities of a
third-country branch of a Spanish SBS Entity. In
that event, the Covered Entity would not be
‘‘subject to’’ those requirements, and the Covered
Entity could not rely on substituted compliance in
connection with those activities. Moreover, an SBS
Entity’s ‘‘voluntary’’ compliance with the relevant
Spanish requirements also would not suffice for
these purposes. Substituted compliance reflects an
alternative means by which an SBS Entity may
comply with applicable requirements under the
Exchange Act, and thus mandates that the SBS
Entity be subject to the requirements needed to
establish comparability and face consequences
arising from any failure to comply with those
requirements. The comparability assessment takes
into account the effectiveness of the supervisory
compliance program administered and the
enforcement authority exercised by the CNMV, the
Bank of Spain, and the ECB, and Spanish and EU
requirements would not be expected to promote
comparable outcomes when compliance merely is
‘‘voluntary.’’
28
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.32. Under
this condition, a Covered Entity’s security-based
swap activities would have to constitute
‘‘investment services or activities’’ only to the
extent that the relevant part of the Order requires
the Covered Entity to be subject to and comply with
a provision of MiFID, Spanish requirements that
implement MiFID, and/or related EU and/or
Spanish requirements. If the relevant part of the
Order does not require the Covered Entity to be
subject to and comply with one of those provisions,
then the Covered Entity’s security-based swap
activities would not have to constitute ‘‘investment
services or activities’’ to be able to use substituted
compliance under that part of the Order.
application has been submitted and that
any person may submit to the
Commission ‘‘any information that
relates to the Commission action
requested in the application.’’
21
III. Scope of and Conditions to
Substituted Compliance Under the
Order
A. Comparability Considerations
In considering the CNMV’s request for
substituted compliance, the
Commission viewed requirements under
the Exchange Act and requirements
under Spanish and EU law to maintain
similar approaches with respect to
achieving regulatory goals in several
respects, though they follow differing
approaches or incorporate disparate
elements in certain other respects. The
Commission considered those
similarities and differences when
analyzing comparability and developing
its views, while recognizing that
differences in approach do not
necessarily preclude substituted
compliance in light of the Commission’s
holistic, outcomes-oriented framework
for assessing comparability. In this
context, the Commission recognized
that other regulatory regimes will have
exclusions, exceptions, and exemptions
that may not align perfectly with the
corresponding requirements under the
Exchange Act. Where the Commission
found that the Spanish regime produces
comparable outcomes notwithstanding
those particular differences, the
Commission has made a positive
determination on substituted
compliance.
22
Where the Commission
found that those exclusions,
exemptions, and exceptions lead to
outcomes that are not comparable, the
Commission has not provided for
substituted compliance.
23
When a
Covered Entity seeks to rely on
substituted compliance to satisfy
particular requirements under the
Exchange Act, non-compliance with the
applicable Spanish requirements would
lead to a violation of those Exchange
Act requirements and potential
enforcement action by the Commission
(as opposed to automatic revocation of
the Order).
B. Covered Entities
1. Proposed Approach
Under the proposed Order, the
definition of ‘‘Covered Entity’’ specified
which entities could make use of
substituted compliance. Consistent with
the availability of substituted
compliance under Exchange Act rule
3a71–6, the proposed definition would
limit the availability of substituted
compliance to registered SBS Entities
that are not U.S. persons. In addition, to
help ensure that firms that rely on
substituted compliance are subject to
relevant Spanish and EU requirements
and oversight, the proposed definition
would require a Covered Entity to be an
investment firm or credit institution
authorized by the CNMV and the ECB
to provide investment services or
perform investment activities in Spain.
In addition, the proposed definition
would require a Covered Entity to be a
significant institution supervised by the
CNMV and the ECB (with the
participation of the Bank of Spain).
24
2. Commenter Views and Final
Provisions
Commenters did not address the
proposed ‘‘Covered Entity’’ definition,
and the Commission is issuing the
definition as proposed.
25
Substituted
compliance accordingly is available
only to non-U.S. SBS Entities that have
the relevant Spanish and EU regulatory
permission and are subject to Spanish
and EU oversight. Because the Covered
Entity definition requires the firm to be
‘‘authorized by the CNMV. . . to
provided investment services and/or
perform investment activities in’’ Spain,
only firms for whom the CNMV is the
competent authority to grant such
permission are able to qualify as
Covered Entities.
26
C. General Conditions to Substituted
Compliance
1. Proposed Approach
The proposed Order incorporated a
number of additional general conditions
and other prerequisites, to help ensure
that the relevant Spanish and EU
requirements that form the basis for
substituted compliance in practice will
apply to the Covered Entity’s security-
based swap business and activities, and
to promote the Commission’s oversight
over entities that avail themselves of
substituted compliance:
‘‘Subject to and complies with’’
applicability condition—For each
relevant section of the proposed Order,
a positive substituted compliance
determination would be predicated on
the Covered Entity being subject to and
complying with the applicable Spanish
and EU requirements needed to
establish comparability.
27
Activities as MiFID ‘‘investment
services or activities’’—The Covered
Entity’s security-based swap activities
would have to constitute ‘‘investment
services or activities’’ for purposes of
applicable provisions under the Markets
in Financial Instruments Directive,
Directive 2014/65/EU (‘‘MiFID’’),
Spanish requirements that implement
MiFID, and/or other EU and/or Spanish
requirements adopted pursuant to those
provisions, and must fall within the
scope of the Covered Entity’s
authorization from the CNMV and the
ECB.
28
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29
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.33.
30
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.34.
31
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.35.
32
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and nn.36–37.
The Commission proposed that, if the Covered
Entity reasonably determines that the counterparty
would be a financial counterparty if it were
established in the EU and authorized by appropriate
EU authority (including Member State authorities),
it must treat the counterparty as if the counterparty
were a financial counterparty, rather than as
another type of counterparty to which the relevant
EMIR-based requirements apply. EMIR article 2(8)
defines a ‘‘financial counterparty’’ as including
investment firms, credit institutions, insurers, and
certain other types of businesses that have been
authorized in accordance with EU directives.
33
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and n.38.
34
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47671 and nn.39–41.
The Commission, CNMV and Bank of Spain have
entered into a memorandum of understanding to
address substituted compliance cooperation. The
Commission and the ECB also have entered into a
memorandum of understanding to address
substituted compliance cooperation with respect to
information owned by the ECB. See also supra notes
15 through 17 and accompanying text. The
proposed Order would require Covered Entities to
ensure that these memoranda of understanding
remain in place at the time the Covered Entity relies
on substituted compliance.
35
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672 and n.42.
36
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672 and n.43. The
Commission stated that, if the Covered Entity
intends to rely on all the substituted compliance
determinations in a given paragraph of the
proposed Order, it can cite that paragraph in the
notice. For example, if the Covered Entity intends
to rely on the substituted compliance
determinations for Exchange Act risk control
requirements in paragraph (b) of the proposed
Order, it would indicate in the notice that it is
relying on the determinations in paragraph (b).
However, if the Covered Entity intends to rely on
the internal risk management, trade
acknowledgement and verification, and portfolio
reconciliation and dispute resolution
determinations, but not the portfolio compression
and trading relationship documentation
determinations, it would need to indicate in the
notice that it is relying on paragraphs (b)(1) through
(3) of the proposed Order. In this case, paragraphs
(b)(4) and (b)(5) of the proposed Order (the portfolio
compression and trading relationship
documentation determinations, respectively) would
be excluded from the notice and the Covered Entity
would need to comply with Exchange Act portfolio
compression and trading relationship
documentation requirements. Further, as discussed
below in Part VII, the recordkeeping, reporting, and
notification determinations in the proposed Order
were structured to provide Covered Entities with a
high level of flexibility in selecting specific
requirements within those requirements for which
they want to rely on substituted compliance. For
example, paragraph (e)(1)(i) of the proposed Order
set forth the Commission’s preliminary substituted
compliance determinations with respect to the
requirements of Exchange Act rule 18a 5, 17 CFR
240.18a–5. These proposed determinations were set
forth in proposed paragraphs (e)(1)(i)(A) through
(M). If a Covered Entity intends to rely on some but
not all of the determinations, it would need to
identify in the notice the specific determinations in
this paragraph it intends to rely on (e.g., paragraphs
(e)(1)(i)(A), (B), (C), (D), (G), (H), (I), and (M)). For
any determinations excluded from the notice, the
Covered Entity would need to comply with the
Exchange Act rule 18a–5 requirement.
37
See Part III.E, infra; Spanish Substituted
Compliance Notice and Proposed Order, 86 FR
47672 and n.44.
38
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672 and n.45. A
Covered Entity would modify its reliance on
substituted compliance, and thus trigger the
requirement to update its notice, if it adds or
Continued
Counterparties as MiFID ‘‘clients’’—
The Covered Entity’s counterparty (or
potential counterparty) must be a
‘‘client’’ (or potential ‘‘client’’) for
purposes of applicable provisions under
MiFID, Spanish requirements that
implement MiFID, and/or other EU and
Spanish requirements adopted pursuant
to those provisions.
29
Security-based swaps as MiFID
‘‘financial instruments’’—The relevant
security-based swap must be a
‘‘financial instrument’’ for purposes of
applicable provisions under MiFID,
Spanish requirements that implement
MiFID, and/or other EU and Spanish
requirements adopted pursuant to those
provisions.
30
Covered Entity as CRD
‘‘institution’’—The Covered Entity must
be an ‘‘institution’’ for purposes of
applicable provisions under the Capital
Requirements Directive, Directive 2013/
36/EU (‘‘CRD’’), Spanish requirements
that implement CRD, and/or other EU
and Spanish requirements adopted
pursuant to those provisions.
31
Counterparties as EMIR
‘‘counterparties’’—If an applicable
provision under the European Market
Infrastructure Regulation, Regulation
(EU) 648/2012 (‘‘EMIR’’), Commission
(‘‘EMIR RTS’’), Delegated Regulation
(EU) 2016/2251 (‘‘EMIR Margin RTS’’),
and/or other EU requirements adopted
pursuant to those provisions applies
only to the Covered Entity’s activities
with specified types of counterparties,
and if the counterparty is not any of the
specified types of counterparties, the
Covered Entity must comply with the
applicable provision as if the
counterparty were the specified type of
counterparty. In addition, the proposed
Order would provide that a Covered
Entity could not satisfy a condition
requiring compliance with those EMIR-
based provisions by complying with
third country requirements that EU
authorities may determine to be
equivalent to EMIR.
32
Security-based swap status under
EMIR—The relevant security-based
swap must be, for purposes of
applicable provisions under EMIR,
EMIR RTS, EMIR Margin RTS, and/or
other EU requirements adopted
pursuant to those provisions, either (i)
and ‘‘OTC derivative’’ or ‘‘OTC
derivative contract,’’ as defined in EMIR
article 2(7), that has not been cleared by
a central counterparty and otherwise is
subject to the provisions of EMIR article
11, EMIR RTS articles 11 through 15,
and EMIR Margin RTS article 2; or (ii)
cleared by a central counterparty that is
authorized or recognized to clear
derivatives contracts by a relevant
authority in the EU.
33
Memoranda of understanding—The
Commission and the CNMV and the
Bank of Spain must have an applicable
memorandum of understanding or other
arrangement addressing cooperation
with respect to the Order at the time the
Covered Entity makes use of substituted
compliance. Because the CNMV, Bank
of Spain, and ECB share responsibility
for supervising compliance with some
of the provisions of EU and Spanish law
addressed by the proposed Order, at the
time the Covered Entity makes use of
substituted compliance the Commission
and the ECB also must have a
supervisory and enforcement
memorandum of understanding and/or
other arrangement addressing
cooperation with respect to the Order as
it pertains to information owned by the
ECB.
34
Notice of reliance on substituted
compliance—To assist the
Commission’s oversight of firms that
avail themselves of substituted
compliance, a Covered Entity would be
required to notify the Commission of its
intent to use substituted compliance.
35
In the notice, the Covered Entity would
need to identify each specific
substituted compliance determination
for which the Covered Entity intends to
apply substituted compliance.
36
If a
Covered Entity elects not to apply
substituted compliance with respect to
a specific substituted compliance
determination, it must instead comply
directly with the relevant Exchange Act
requirements. Further, except in the
case of the counterparty protection
requirements and linked recordkeeping
requirements discussed below, the
Commission has determined that the
Exchange Act requirements subject to
substituted compliance determinations
in the proposed Order are entity-level
requirements. The Commission thus
proposed that, if a Covered Entity elects
to apply substituted compliance to these
entity-level requirements, it must do so
at the entity level.
37
The Covered Entity
must promptly update the notice if it
intends to modify its reliance on
substituted compliance.
38
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subtracts substituted compliance determinations on
which it is relying or completely discontinues its
reliance on substituted compliance.
39
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672.
40
17 CFR 240.18a–8(c) and (h).
41
See Act on Regulation, Supervision, and
Solvency of Credit Institutions, Law 10/2014, of
June 26 (‘‘LOSSEC’’) articles 116, 119, 121, and 122;
and Spanish Securities Market Act, Royal
Legislative Decree 4/2015, of October 23 (‘‘SSMA’’)
articles 276bis, 276ter, 276qua
´ter, and
276quinquies.
42
See French Substituted Compliance Re-
Opening Release, 86 FR 19341–43; German
Substituted Compliance Notice and Proposed
Amended Order, 86 FR 46503.
43
See Letter from Kyle Brandon, Managing
Director, Head of Derivatives Policy, Securities and
Financial Markets Association, dated Jan. 25, 2021
(‘‘France SIFMA Letter’’) at 3–6 (cited in French
Substituted Compliance Re-opening Release, 86 FR
18341–42 and nn.5–6; German Substituted
Compliance Notice and Proposed Amended Order,
86 FR 46503 and nn.26–27); Letter from Etienne
Barel, Deputy Chief Executive Officer, French
Banking Federation, dated Jan. 25, 2021 (‘‘FBF
Letter’’) at 2 (cited in French Substituted
Compliance Re-opening Release, 86 FR 18341–42
and nn.5–6). These comment letters are available on
the Commission’s website at https://www.sec.gov/
comments/s7-22-20/s72220.htm.
44
See German Substituted Compliance Notice
and Proposed Amended Order, 86 FR 46503.
45
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47687–90.
46
See Letter from Kyle Brandon, Managing
Director, Head of Derivatives Policy, Securities
Industry and Financial Markets Association, dated
Sept. 13 2021 (‘‘Germany SIFMA Letter’’). The
Germany SIFMA Letter is available on the
Commission’s website at https://www.sec.gov/
comments/s7-08-21/s70821.htm.
47
See Germany SIFMA Letter at 2.
48
See Germany SIFMA Letter at 3.
49
See Germany SIFMA Letter at 3.
Notification related to changes in
capital category—Covered Entities with
a prudential regulator would need to
apply substituted compliance with
respect to the requirements of Exchange
Act rule 18a–8(c) and the requirements
of Exchange Act rule 18a–8(h) as
applied to Exchange Act rule 18a–8(c).
39
Exchange Act rule 18a–8(c) generally
requires every security-based swap
dealer with a prudential regulator that
files a notice of adjustment of its
reported capital category with the
Federal Reserve Board, the Office of the
Comptroller of the Currency, or the
Federal Deposit Insurance Corporation
to give notice of this fact to the that
same day by transmitting a copy to the
Commission of the notice of adjustment
of reported capital category in
accordance with Exchange Act rule 18a–
8(h).
40
Exchange Act rule 18a–8(h) sets
forth the manner in which every notice
or report required to be given or
transmitted pursuant to Exchange Act
rule 18a–8 must be made. While
Exchange Act rule 18a–8(c) is not linked
to an Exchange Act capital requirement,
it is linked to capital requirements in
the U.S. promulgated by the prudential
regulators. In its application, the CNMV
cited various Spanish provisions as
providing similar outcomes to the
notifications requirements of Exchange
Act rule 18a–8.
41
This general condition
would be designed to clarify that a
prudentially regulated Covered Entity
must provide the Commission with
copies of any notifications regarding
changes in the Covered Entity’s capital
situation required by Spanish law. The
intent is to align the notification
requirement with the EU and Spanish
capital requirements applicable to the
Covered Entity.
2. Commenter Views and Final
Provisions
In the proposed Order, the
Commission proposed to require
Covered Entities to comply with only
EMIR-based trade acknowledgement
and verification and trading relationship
documentation requirements, and not
with MiFID-based trade
acknowledgement and verification and
trading relationship documentation
requirements, in response concerns
expressed by commenters on prior
substituted compliance orders.
42
Commenters on those prior orders had
requested that the Commission delete
from those orders proposed conditions
that would require firms using
substituted compliance for trade
acknowledgment and verification and
trading relationship documentation
requirements to comply with MiFID-
based requirements.
43
Commenters
argued that those MiFID-based
conditions in practice would prevent
SBS Entities with branches in other EU
countries from relying on substituted
compliance for those requirements, and
that compliance with proposed EMIR
conditions would be sufficient to
produce the requisite regulatory
outcomes. The Commission amended
the prior orders to address these
concerns, but only with the addition of
the EMIR counterparties general
condition and a related condition
pertaining to EMIR. By requiring a
Covered Entity to treat its counterparty
as a type of counterparty that would
trigger the application of the relevant
EMIR-based requirements, the condition
will require the Covered Entity to
perform the relevant obligations
pursuant to those EMIR-based
requirements and thus act in a way that
is comparable to Exchange Act
requirements. Absent the condition, the
Commission would not find
comparability with regard to the
categories of counterparties, such as
U.S. persons and natural persons, to
which EMIR is not applicable for the
entity-level requirements and,
accordingly, would not have been able
to make a positive substituted
compliance determination for those
entity-level requirements. The EMIR
counterparties general condition was
intended to help ensure that, with the
heightened reliance on EMIR-based
requirements, there will be no
opportunity for gaps that may prevent
the EMIR-based requirements in
practice from producing outcomes
consistent with those of the Exchange
Act.
44
The Commission invited commenters
on the proposed Order to address
whether the responses to any of the
questions that the Commission asked in
connection with proposals to make
positive substituted compliance
determinations in respect of regulatory
requirements and frameworks in
Germany, France and the United
Kingdom would differ if those questions
applied to Spanish regulatory
requirements and frameworks. The
Commission also requested comment on
any differences between Spanish
regulatory requirements and frameworks
and the German, French, or UK
requirements and frameworks that
formed the basis for the Commission’s
conditional grant of substituted
compliance for Germany, France, and
the United Kingdom.
45
A commenter on the German
Substituted Compliance Notice and
Proposed Amended Order
46
stated that
the EMIR counterparties general
condition would override exemptions
and exclusions from EMIR for certain
public sector counterparties, such as
multilateral development banks, and
would expand the application of EMIR
to counterparties who are not
‘‘undertakings,’’ such as natural
persons.
47
That commenter noted that
compliance with the condition would
require the Covered Entity to ‘‘assess
whether these counterparties who are
not subject to EMIR would be so subject
as if it were the type of counterparty
specified by EMIR as well as, in many
cases, enter into documentation with
those counterparties compliant with
EMIR.’’
48
The commenter noted that
these counterparties would be confused
why an order of the Commission ‘‘now
deprives them of an exception or
exemption under EU law that has for
some time applied to them’’ and would
be reluctant to enter into new
documentation to enable a Covered
Entity to satisfy the Commission’s
substituted compliance order.
49
The
Commission did not intend for the
condition to require compliance with
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50
See German Amended Substituted Compliance
Order, Exchange Act Release No. 93411.
51
See German Amended Substituted Compliance
Order, Exchange Act Release No. 93411.
52
See Letter from Julia Bayo
´n, Head of Business
Legal and Vice-Secretary of the Board, Santander,
dated Sept. 20, 2021 (‘‘Santander Letter’’). The
Santander Letter is available on the Commission’s
website at https://www.sec.gov/comments/s7-09-21/
s70921.htm.
53
See Santander Letter at 1.
54
See para. (a)(5) of the Order.
55
See para. (a)(1) through (a)(9), and (a)(11) of the
Order.
56
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672 and nn.48–50.
57
See MiFID article 35(8).
58
See Business Conduct Adopting Release, 81 FR
30080.
59
See para. (a)(10) of the Order.
60
Entity-level requirements relevant to the
proposed Order relate to internal risk management,
trade acknowledgment and verification, portfolio
reconciliation and dispute resolution, portfolio
compression, trading relationship documentation,
internal supervision, chief compliance officers,
counterparty protection, recordkeeping (other than
Continued
EMIR-based requirements under
circumstances where neither those
requirements nor the Exchange Act
would apply. To clarify this intended
scope, the Commission modified the
EMIR counterparties general condition
in the German Amended Substituted
Compliance Order to clarify that this
condition applies only to the extent that
an Exchange Act section or rule cited in
the relevant part of the Order applies to
the security-based swap activities with
that counterparty.
50
The Commission
made conforming changes the UK
Substituted Compliance Order and the
French Substituted Compliance Order.
51
Returning to the Commission’s
consideration of the same EMIR
regulatory framework in Spain, one
commenter stated that proposed Order
‘‘reflects a thoughtful, holistic approach
to substituted compliance.’’
52
The
commenter noted in particular that the
Commission’s comparability
assessments and the conditions and
limitations in the proposed Order were
consistent with the UK Substituted
Compliance Order, French Substituted
Compliance Order, and the German
Substituted Compliance Notice and
Proposed Amended Order, and as a
result concluded that the proposed
Order ‘‘would facilitate an orderly
implementation of the Commission’s
[security-based swap] regulatory regime
among market participants across
different jurisdictions without creating
undue complexity or disparity.’’
53
In
the context of the EMIR counterparties
general condition, the Commission
agrees that consistency among
substituted compliance orders that
require firms to be subject to and
comply with EMIR and laws derived
from EMIR, where feasible, would
facilitate orderly implementation of
substituted compliance. The
Commission thus is changing the EMIR
counterparties general condition in the
Order to reflect the same changes made
in the German Amended Substituted
Compliance Order.
54
The Commission
believes this change will promote
consistency among substituted
compliance orders that require firms to
be subject to and comply with EMIR and
laws derived from EMIR, consistent
with the commenter’s concern and with
the Commission’s request for comment
on differences between the Spanish,
German, French, and UK regulatory
requirements and frameworks.
The Commission also is amending the
general condition in paragraph (a)(6) of
the Order to clarify that the condition
applies only if the relevant EMIR-based
requirement applies to OTC derivatives
that have not been cleared by a central
counterparty, as some provisions of
EMIR cited in the Order, such as EMIR
articles 39(4) and (5), are not limited in
their application to non-centrally
cleared OTC derivatives.
The Commission continues to believe
that the remaining general conditions
are structured appropriately to predicate
a positive substituted compliance
determination on the applicability of
relevant Spanish and EU requirements
needed to establish comparability, as
well as on the continued effectiveness of
the requisite memoranda of
understanding, and the provision of
appropriate notices to the Commission.
The Commission is issuing these
remaining general conditions as
proposed, and substituted compliance
accordingly is available only when the
Covered Entity satisfies all applicable
general conditions.
55
D. European Union Cross-Border
Matters
1. Proposed Approach
The proposed Order also included
general conditions to address the cross-
border application of MiFID, the
Markets in Financial Instruments
(‘‘MiFIR’’), and the Market Abuse
(‘‘MAR’’), along with EU and Spanish
requirements adopted pursuant to those
laws.
56
For some requirements under
MiFID and MiFIR (and other EU and
Member State requirements adopted
pursuant to MiFID and MiFIR), EU law
allocates the responsibility for
supervising and enforcing those
requirements to authorities of the
Member State where an entity provides
certain services.
57
Similarly, for some
requirements under MAR (and other EU
and Member State requirements adopted
pursuant to MAR), EU law allocates the
responsibility for supervising and
enforcing those requirements to
authorities of potentially multiple
Member States. To help ensure that the
prerequisites to substituted compliance
with respect to supervision and
enforcement are satisfied in fact, when
the proposed Order conditioned
substituted compliance on the Covered
Entity being subject to and complying
with those MiFID- and MiFIR-related
requirements, the proposed Order
would permit substituted compliance
only if the CNMV is the authority
responsible for supervision and
enforcement of those MiFID- and MiFIR-
related requirements in relation to the
particular service provided by the
Covered Entity. When the proposed
Order conditioned substituted
compliance on the Covered Entity being
subject to and complying with those
MAR-related requirements, the
proposed Order would permit
substituted compliance only if one of
the authorities responsible for
supervision and enforcement of those
requirements is the CNMV.
2. Commenter Views and Final
Provisions
Commenters did not address the
European Union cross-border
conditions. The Commission continues
to believe that requiring that the CNMV
have responsibility for applicable
MiFID, MiFIR, and MAR provisions will
help ensure that the supervision and
enforcement prerequisites to substituted
compliance are satisfied.
58
In the
Commission’s view, these conditions
are structured appropriately to permit
the use of substituted compliance only
when the CNMV is responsible for
supervising a Covered Entity’s
compliance with a relevant provision of
MiFID, MiFIR, MAR, or related EU or
Spanish requirements. Additionally, the
conditions help ensure that applicable
MiFID, MiFIR, and MAR provisions are
interpreted and applied in a consistent
manner by an entity that is party to the
memorandum of understanding and/or
other arrangement that are a prerequisite
to substituted compliance. Accordingly,
the Commission is issuing the
conditions as proposed.
59
E. Substituted Compliance for Entity-
Level and Transaction-Level
Requirements
1. Proposed Approach
For entity-level Exchange Act
requirements,
60
the proposed Order
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requirements linked to counterparty protection
requirements), reporting, and notification. See
Exchange Act Release No. 78011 (June 8, 2016) 81
FR 39808, 39827 (June 17, 2016) (‘‘TAV Adopting
Release’’); Business Conduct Adopting Release, 81
FR 30064; Exchange Act Release No. 87005 (June
19, 2019) 84 FR 68550, 68596 (Dec. 16, 2019)
(‘‘Books and Records Adopting Release’’); Exchange
Act Adopting Release No. 87782 (Dec. 18, 2019) 85
FR 6359, 6378 (Feb. 4, 2020) (‘‘Risk Mitigation
Adopting Release’’).
61
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47672–73 and n.51.
62
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47673 and n.53. In the
context of the EMIR counterparties condition in
paragraph (a)(5) of the proposed Order, a Covered
Entity would be required to choose: (1) To apply
substituted compliance pursuant to the proposed
Order-including compliance with paragraph (a)(5)
as applicable-for a particular set of entity-level
requirements with respect to all of its business that
would be subject to the relevant EMIR-based
requirement if the counterparty were the relevant
type of counterparty; or (2) to comply directly with
the Exchange Act with respect to such business.
63
Transaction-level requirements relevant to the
proposed Order are the counterparty protection
requirements and the recordkeeping requirements
related to those counterparty protection
requirements. See Business Conduct Adopting
Release, 81 FR 30065.
64
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47673 and n.54.
65
The CNMV did not request substituted
compliance in connection with Exchange Act rule
18a–1(f) Exchange Act rule 18a–2(c), which include
additional internal risk management system
requirements for non-prudentially regulated SBS
Entities subject to the Commission’s capital and
margin requirements.
66
See Exchange Act Release No. 68071 (Oct. 18,
2012), 77 FR 70214, 70250 (Nov. 23, 2012)
(proposing capital and margin requirements for SBS
Entities and discussing certain risk management
requirements); Spanish Substituted Compliance
Notice and Proposed Order, 86 FR 47673 and n.56.
67
17 CFR 240.15Fi–2.
68
See TAV Adopting Release, 81 FR 39808,
39809, 39820; Spanish Substituted Compliance
Notice and Proposed Order, 86 FR 47673 and n.58.
69
17 CFR 240.15Fi–3.
70
See Risk Mitigation Adopting Release, 85 FR
6359, 6360–61; Spanish Substituted Compliance
Notice and Proposed Order, 86 FR 47673 and n.60.
71
17 CFR 240.15Fi–4.
72
See Risk Mitigation Adopting Release, 85 FR
6361; Spanish Substituted Compliance Notice and
Proposed Order, 86 FR 47673 and n.62.
73
17 CFR 240.15Fi–5.
74
See Risk Mitigation Adopting Release, 85 FR
6361; Spanish Substituted Compliance Notice and
Proposed Order, 86 FR 47673 and n.64.
75
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674.
would require a Covered Entity to
choose either to apply substituted
compliance pursuant to the proposed
Order with respect to all security-based
swap business subject to the relevant
Spanish and EU requirements or to
comply directly with the Exchange Act
with respect to all such business; a
Covered Entity would not be able to
choose to apply substituted compliance
pursuant to the proposed Order for
some of the business subject to the
relevant Spanish or EU requirements
and comply directly with the Exchange
Act for another part of the business that
is subject to the relevant Spanish and
EU requirements.
61
Additionally, for
entity-level Exchange Act requirements,
if the Covered Entity also has security-
based swap business that is not subject
to the relevant Spanish and/or EU
requirements, the proposed Order
would require the Covered Entity either
to comply directly with the Exchange
Act for that business or to comply with
the terms of another applicable
substituted compliance order.
62
For
transaction-level Exchange Act
requirements,
63
a Covered Entity may
decide to apply substituted compliance
for some of its security-based swap
business and to comply directly with
the Exchange Act (or comply with
another applicable substituted
compliance order) for other parts of its
security-based swap business.
64
2. Commenter Views and Final
Provisions
Commenters did not address the
proposed approach to substituted
compliance for entity-level and
transaction-level requirements. The
Commission continues to believe that
the proposed scope of substituted
compliance strikes the right balance
between providing Covered Entities
flexibility to tailor the application of
substituted compliance to their business
needs and ensuring that substituted
compliance is consistent with the
Commission’s classification of the
relevant Exchange Act requirements as
either entity-level or transaction-level
requirements. The Commission
accordingly is issuing the Order with
the proposed approach to substituted
compliance for entity-level and
transaction-level requirements.
IV. Substituted Compliance for Risk
Control Requirements
A. Proposed Approach
The CNMV Application requested
substituted compliance in connection
with risk control requirements under
the Exchange Act relating to:
Internal risk management—Internal
risk management system requirements
pursuant to Exchange Act section
15F(j)(2) and relevant aspects of
Exchange Act rule 15Fh–3(h)(2)(iii)(I).
65
Those provisions address the obligation
of SBS Entities to follow policies and
procedures reasonably designed to help
manage the risks associated with their
business activities.
66
Trade acknowledgment and
verification—Trade acknowledgment
and verification requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–2.
67
Those
provisions help avoid legal and
operational risks by requiring definitive
written records of transactions and for
procedures to avoid disagreements
regarding the meaning of transaction
terms.
68
Portfolio reconciliation and dispute
reporting—Portfolio reconciliation and
dispute reporting requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–3.
69
Those
provisions require that counterparties
engage in portfolio reconciliation and
resolve discrepancies in connection
with uncleared security-based swaps
and promptly notify the Commission
and applicable prudential regulators
regarding certain valuation disputes.
70
Portfolio compression—Portfolio
compression requirements pursuant to
Exchange Act section 15F(i) and
Exchange Act rule 15Fi–4.
71
Those
provisions require that SBS Entities
have procedures addressing bilateral
offset, bilateral compression and
multilateral compression in connection
with uncleared security-based swaps.
72
Trading relationship
documentation—Trading relationship
documentation requirements pursuant
to Exchange Act section 15F(i) and
Exchange Act rule 15Fi–5.
73
Those
provisions require that SBS Entities
have procedures to execute written
security-based swap trading relationship
documentation with their counterparties
prior to, or contemporaneously with,
executing certain security-based
swaps.
74
Taken as a whole, these risk control
requirements help to promote market
stability by mandating that SBS Entities
follow practices that are appropriate to
manage the market, credit, counterparty,
operational, and legal risks associated
with their security-based swap
businesses. In considering conditional
substituted compliance for the risk
control portion of the CNMV
Application, the Commission
preliminarily concluded that the
relevant Spanish and EU requirements
would produce regulatory outcomes that
are comparable to those associated with
the above risk control requirements, by
subjecting Covered Entities to risk
mitigation and documentation practices
that are appropriate to the risks
associated with their security-based
swap businesses.
75
Substituted compliance under the
proposed Order was to be subject to
certain additional conditions to help
ensure the comparability of outcomes.
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76
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and n.65.
77
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and nn.66–67.
78
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and nn.68–70.
79
See Santander Letter at 1.
80
The comparability analysis requires
consideration of Exchange Act requirements as a
whole against analogous Spanish and EU
requirements as a whole, recognizing that U.S. and
non-U.S. regimes may follow materially different
approaches in terms of specificity and technical
content. This ‘‘as a whole’’ approach—which the
Commission is following in lieu of requiring
requirement-by-requirement similarity—further
means that the conditions to substituted
compliance should encompass all Spanish and EU
requirements that establish comparability with the
applicable regulatory outcome, and helps to avoid
ambiguity in the application of substituted
compliance.
81
See para. (b) of the Order.
82
See paras. (b)(1) through (5) of the Order.
83
See para. (b)(5) of the Order. The Exchange Act
rule 15Fi–5, 17 CFR 240.15Fi–5, disclosures
address information regarding: (1) The status of the
SBS Entity or its counterparty as an insured
depository institution or financial counterparty, and
(2) the possibility that in certain circumstances the
SBS Entity or its counterparty may be subject to the
insolvency regime set forth in Title II of the Dodd-
Frank Wall Street Reform and Consumer Protection
Act or the Federal Deposit Insurance Act, which
may affect rights to terminate, liquidate, or net
security-based swaps. See Risk Mitigation Adopting
Release, 85 FR 6374. Documentation requirements
under applicable Spanish and EU law do not
address the disclosure of information related to
insolvency procedures under U.S. law. However,
the absence of such disclosures would not appear
to preclude a comparable regulatory outcome when
the counterparty is not a U.S. person, as the
insolvency-related consequences that are the
subject of the disclosure would not apply to non-
U.S. counterparties in most cases. Moreover, EMIR
Margin RTS article 2 requires counterparties to
establish, apply, and document risk management
procedures providing for or specifying the terms of
agreements entered into by the counterparties,
including applicable governing law for non-
centrally cleared derivatives. When counterparties
enter into a netting or collateral exchange
agreement, they also must perform an independent
legal review of the enforceability of those
agreements.
84
See para. (b)(3)(ii) of the Order. This condition
promotes comparability with the Exchange Act rule
requiring reports to the Commission regarding
significant valuation disputes, while leveraging
Spanish and EU reporting provisions to avoid the
need for Covered Entities to create additional
reporting frameworks. When it proposed the
requirement for all SBS Entities to report valuation
disputes, the Commission recognized that valuation
inaccuracies may lead to uncollateralized credit
exposure and the potential for loss in the event of
default. See Exchange Act Release No. 84861 (Dec.
19, 2018), 84 FR 4614, 4621 (Feb. 15, 2019). It thus
is important that the Commission be informed
regarding valuation disputes affecting SBS Entities.
The principal difference between the Exchange Act
and EU valuation dispute reporting requirements
concerns the timing of notices. Under Exchange Act
rule 15Fi–3, SBS Entities must promptly report to
the Commission valuation disputes in excess of $20
million that have been outstanding for three or five
business days (depending on the counterparty
type). Under EMIR RTS article 15(2), firms must
report at least monthly, to competent authorities,
disputes between counterparties in excess of Ö15
million and outstanding for at least 15 business
days. The Commission is mindful that the EU
provision does not provide for notice as quickly as
rule 15Fi–3(c), but in the Commission’s view, on
balance this difference would not be inconsistent
with the conclusion that the two sets of risk control
requirements-taken as a whole-produce comparable
regulatory outcomes.
First, substituted compliance under the
proposed Order was to be conditioned
on Covered Entities being subject to the
Spanish and EU provisions that in the
aggregate establish a framework that
produces outcomes comparable to those
associated with these risk control
requirements under the Exchange Act.
76
Second, substituted compliance in
connection with trading relationship
documentation requirements would not
extend to disclosures regarding legal
and bankruptcy status that are required
by Exchange Act rule 15Fi–5(b)(5) when
the counterparty is a U.S. person.
77
Finally, substituted compliance in
connection with portfolio reconciliation
and dispute reporting requirements
would be conditioned on the Covered
Entity providing the Commission with
reports regarding disputes between
counterparties on the same basis as the
Covered Entity provides those reports to
competent authorities pursuant to EU
law.
78
B. Commenter Views and Final
Provisions
One commenter supported the
Commission’s proposal to make the
positive substituted compliance
determinations in the proposed Order,
79
including positive substituted
compliance determinations for internal
risk management, trade
acknowledgment and verification,
portfolio reconciliation and dispute
reporting, portfolio compression and
trading relationship documentation
requirements. The Commission
continues to conclude that, taken as a
whole, relevant Spanish and EU
requirements would produce regulatory
outcomes that are comparable to those
associated with these risk control
requirements, by subjecting Covered
Entities to risk mitigation and
documentation practices that are
appropriate to the risks associated with
their security-based swap businesses.
While the Commission recognizes
certain differences between Spanish and
EU requirements and the applicable risk
control requirements under the
Exchange Act, in the Commission’s
view those differences on balance
should not preclude substituted
compliance for these requirements, as
the relevant Spanish and EU
requirements taken as a whole help to
produce comparable regulatory
outcomes.
80
Accordingly, the
Commission is making positive
substituted compliance determinations
in connection with internal risk
management, trade acknowledgment
and verification, portfolio reconciliation
and dispute reporting, portfolio
compression and trading relationship
documentation requirements and is
issuing the risk control section of the
Order as proposed.
81
To help ensure the comparability of
outcomes, and consistent with the
proposed Order, substituted compliance
for risk control requirements is subject
to certain conditions. Substituted
compliance for internal risk
management, trade acknowledgment
and verification, portfolio reconciliation
and dispute reporting, portfolio
compression and trading relationship
documentation requirements is
conditioned on the Covered Entity being
subject to, and complying with, relevant
Spanish and EU requirements.
82
In
addition, substituted compliance for
trading relationship documentation
does not extend to disclosures regarding
legal and bankruptcy status that are
required by Exchange Act rule 15Fi–
5(b)(5) when the counterparty is a U.S.
person.
83
Finally, substituted
compliance in connection with portfolio
reconciliation and dispute reporting
requirements is conditioned on the
Covered Entity providing the
Commission with reports regarding
disputes between counterparties on the
same basis as the Covered Entity
provides those reports to competent
authorities pursuant to EU law.
84
A
Covered Entity that is unable to comply
with an applicable condition—and thus
is not eligible to use substituted
compliance for the particular set of
Exchange Act risk control requirements
related to that condition—nevertheless
may use substituted compliance for
another set of Exchange Act
requirements addressed in the Order if
it complies with the conditions to the
relevant parts of the Order.
Under the Order, substituted
compliance for risk control
requirements (relating to internal risk
management, trade acknowledgment
and verification, portfolio reconciliation
and dispute reporting, portfolio
compression, and trading relationship
documentation) is not subject to a
condition that the Covered Entity apply
substituted compliance for related
recordkeeping requirements in
Exchange Act rules 18a–5 and 18a–6. A
Covered Entity that applies substituted
compliance for one or more risk control
requirements, but does not apply
substituted compliance for the related
recordkeeping requirements in
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85
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and n.71.
86
17 CFR 240.15Fk–1.
87
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and n.73.
88
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47674 and n.74. Section
15F(j)(6) prohibits firms from adopting any process
or taking any action that results in any
unreasonable restraint of trade or imposing any
material anticompetitive burden on trading or
clearing.
89
The proposed Order would provide for
substituted compliance in connection with internal
supervision provisions of Exchange Act rule 15Fh–
3(h), the requirement in Exchange Act section
15F(j)(4)(A) to have systems and procedures to
obtain necessary information to perform functions
required under Exchange Act section 15F; and the
conflict of interest provisions of Exchange Act
section 15F(j)(5). The internal supervision portion
of the proposed Order did not extend to the
portions of rule 15Fh–3(h) that mandate
supervisory policies and procedures in connection
with: The internal risk management provisions of
Exchange Act section 15F(j)(2) (which were
addressed by paragraph (b)(1) of the proposed Order
in connection with internal risk management); the
information-related provisions of Exchange Act
sections 15F(j)(3) and (j)(4)(B) (for which
substituted compliance is not available); or the
antitrust provisions of Exchange Act section
15F(j)(6) (for which the Commission did not
propose to provide substituted compliance). See
Spanish Substituted Compliance Notice and
Proposed Order, 86 FR 47675 n.75.
90
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47675.
91
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.86.
92
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47675 and n.77. In other
words, the proposed Order would require that the
Covered Entity’s supervisory and compliance
program cover applicable requirements under the
Exchange Act and other applicable conditions of
the Order.
93
While the Spanish and EU regulatory
framework in general reasonably appears to
promote Covered Entities’ compliance with
applicable Spanish and EU laws, those
requirements do not appear to promote Covered
Entities’ compliance with requirements under the
Exchange Act that are not subject to substituted
compliance, or to promote Covered Entities’
compliance with the applicable conditions to the
proposed Order. These residual Exchange Act
requirements could, for example, relate to
requirements for which substituted compliance is
not available, requirements for which the Order
does not make a positive substituted compliance
determination, security-based swap business for
which the Covered Entity is unable to satisfy the
conditions of the Order, and/or requirements or
security-based swap business for which the Covered
Entity decides not to use substituted compliance.
The condition was designed to allow Covered
Entities to use their existing internal supervision
and compliance frameworks to comply with the
relevant Exchange Act requirements and proposed
Order conditions, rather than having to establish
separate special-purpose internal supervision
frameworks.
94
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47675–76 and nn.80–
85. Although certain Spanish and EU requirements
address a Covered Entity’s use of internal
compliance reports, those requirements do not
require it to submit compliance reports to the
Commission. These conditions would allow a
Covered Entity to leverage the compliance reports
that it otherwise must produce, by extending those
reports to address compliance with the conditions
of the proposed Order. The Commission stated that,
in practice, a Covered Entity may satisfy these
conditions by identifying relevant Exchange Act
requirements and proposed Order conditions and
reporting on the implementation and effectiveness
of its controls with regard to compliance with those
requirements and conditions.
Exchange Act rules 18a–5 and 18a–6,
will remain subject to the relevant
provisions of Exchange Act rules 18a–5
and 18a–6. Those rules require the
Covered Entity to make and preserve
records of its compliance with Exchange
Act risk control requirements and of its
security–based swap activities required
or governed by those requirements. A
Covered Entity that applies substituted
compliance for a risk control
requirement, but complies directly with
related recordkeeping requirements in
rules 18a–5 and 18a–6, therefore must
make and preserve records of its
compliance with the relevant conditions
of the Order and of its security–based
swap activities required or governed by
those conditions and/or referenced in
the relevant parts of rules 18a–5 and
18a–6.
V. Substituted Compliance for Internal
Supervision and Compliance
Requirements
A. Proposed Approach
The CNMV Application requested
substituted compliance in connection
with requirements under the Exchange
Act relating to:
Internal supervision—Diligent
supervision is required pursuant to
Exchange Act rule 15Fh–3(h) and
Exchange Act section 15F(j)(5) requires
conflict of interest systems and
procedures. These provisions generally
require that SBS Entities 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. Exchange Act
section 15F(j)(4)(A) additionally
requires systems and procedures to
obtain necessary information to perform
functions required under section 15F.
85
Chief compliance officers—Chief
compliance officer requirements are set
out in Exchange Act section 15F(k) and
Exchange Act rule 15Fk–1.
86
These
provisions in general require that SBS
Entities 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 an annual compliance report to
the Commission.
87
Antitrust requirements—Additional
requirements related to antitrust
prohibitions specified by Exchange Act
section 15F(j)(6).
88
Taken as a whole, these internal
supervision, chief compliance officer,
and additional Exchange Act section
15F(j) requirements help to promote
SBS Entities’ use of structures,
processes, and responsible personnel
reasonably designed to promote
compliance with applicable law; to
identify and cure instances of non-
compliance; and to manage conflicts of
interest. In considering conditional
substituted compliance for this portion
of the CNMV Application, the
Commission preliminarily concluded
that the relevant Spanish and EU
requirements would produce regulatory
outcomes that are comparable to those
associated with Exchange Act internal
supervision
89
and chief compliance
officer requirements by providing that
Covered Entities have structures and
processes that reasonably are designed
to promote compliance with applicable
law and to identify and cure instances
of non-compliance and manage conflicts
of interest.
90
Substituted compliance under the
proposed Order was to be subject to
certain conditions to help ensure the
comparability of outcomes. First,
substituted compliance for internal
supervision and chief compliance
officer requirements under the proposed
Order was to be conditioned on Covered
Entities being subject to the Spanish and
EU requirements that in the aggregate
establish a framework that produces
outcomes comparable to those
associated with these internal
supervision, chief compliance officer,
conflict of interest, and information-
related requirements under the
Exchange Act.
91
Second, substituted
compliance in connection with internal
supervision requirements would be
conditioned on Covered Entities
complying with applicable Spanish and
EU internal supervision requirements as
if those provisions also require the
Covered Entity to comply with
applicable requirements under the
Exchange Act and the other applicable
conditions of the proposed Order.
92
This condition was intended to reflect
that, even with substituted compliance,
Covered Entities still directly would be
subject to a number of requirements
under the Exchange Act and to
conditions of the Order, all of which fall
outside the ambit of Spanish and EU
internal supervision requirements.
93
Finally, for similar reasons, substituted
compliance in connection with chief
compliance officer requirements would
be subject to the conditions
94
that
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95
MiFID Org Reg article 22(2)(c) particularly
requires that a Covered Entity’s compliance
function ‘‘report to the management body, on at
least an annual basis, on the implementation and
effectiveness of the overall control environment for
investment services and activities, on the risks that
have been identified and on the complaints-
handling reporting as well as remedies undertaken
or to be undertaken[.]’’ Under the proposed
condition, those reports, as submitted to the
Commission and the Covered Entity’s management
body, also would address the Covered Entity’s
compliance with applicable Exchange Act
requirements and other applicable conditions of the
proposed Order (in addition to addressing the
Covered Entity’s compliance with applicable
Spanish and EU provisions).
96
This deadline was intended to promote timely
notice of compliance matters in a manner
comparable to Exchange Act requirements, while
also accounting for the annual deadline required
under MiFID Org Reg article 22(2)(c) as well as the
possibility that the Covered Entity may submit
reports ahead of this annual deadline.
97
This requirement would prevent a Covered
Entity from notifying the Commission just prior to
the due date of its annual Exchange Act compliance
report that it will use substituted compliance for
chief compliance officer requirements and then
providing the Commission a Spanish compliance
report that covers only a part of the year that would
have been covered in the Exchange Act report.
98
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.86.
99
See Santander Letter at 1.
100
See para. (c) of the Order.
101
See paras. (c)(1) through (3) of the Order.
102
See paras. (c)(1)(ii) and (c)(4) of the Order. The
Order provides that the Covered Entity must
comply with relevant Spanish and EU provisions as
if those provisions address applicable conditions of
the Order connected to requirements for which the
Covered Entity is relying on substituted
compliance. That part of the condition does not
apply to parts of the Order for which the Covered
Entity does not rely on substituted compliance. In
other words, a Covered Entity’s reliance on
substituted compliance under para. (c)(4) requires
that the Covered Entity’s supervisory and
compliance programs cover applicable provisions
under the Exchange Act and other applicable
conditions of the Order.
103
See para. (c)(1)(iii) of the Order. In particular,
the Order does not extend to the portions of rule
15Fh–3(h) that mandate supervisory policies and
procedures in connection with: The internal risk
management provisions of Exchange Act section
15F(j)(2) (which are addressed by paragraph (b)(1)
of the Order in connection with internal risk
management); the information-related provisions of
Exchange Act sections 15F(j)(3) and (j)(4)(B) (for
which substituted compliance is not available); or
the antitrust provisions of Exchange Act section
15F(j)(6) (for which the Commission is not making
a positive substituted compliance determination).
104
The Commission recognizes that Covered
Entities preparing multiple Spanish compliance
reports each year may find it difficult to submit to
those reports to the Commission throughout the
year, each with a chief compliance officer or senior
officer certification and a section addressing the
Covered Entity’s compliance with U.S.
requirements. However, on balance the Commission
continues to believe that these elements are
necessary to achieve a regulatory outcome
comparable to the Exchange Act.
105
The Commission continues to believe that it
is appropriate for the Commission to receive
compliance reports shortly after their submission to
the management body. Providing these reports to
the Commission near the times that the Covered
Entity submits them to the management body also
will better align with the Spanish and EU regulatory
framework, which permits a Covered Entity to
prepare and submit to the management body
multiple compliance reports throughout the year.
Continued
compliance reports required pursuant to
Commission Delegated Regulation (EU)
2017/565 (‘‘MiFID Org Reg’’) article
22(2)(c) must: (1) Be provided to the
Commission at least annually and in the
English language; (2) include a
certification signed by the chief
compliance officer or senior officer of
the Covered Entity that, to the best of
the certifier’s knowledge and reasonable
belief and under penalty of law, the
report is accurate and complete in all
material respects; (3) address the
Covered Entity’s compliance with
applicable requirements under the
Exchange Act and other applicable
conditions of the proposed Order;
95
(4)
be provided to the Commission no later
than 15 days following the earlier of the
submission of the report to the Covered
Entity’s management body or the time
the report is required to be submitted to
the management body;
96
and (5)
together cover the entire period that the
Covered Entity’s annual compliance
report referenced in Exchange Act
section 15F(k)(3) and Exchange Act rule
15Fk–1(c) would be required to cover.
97
Finally, the Commission preliminarily
concluded that allowing an alternative
means of compliance with Exchange Act
antitrust requirements would not lead to
comparable outcomes, and the proposed
Order did not provide for substituted
compliance in connection with those
requirements.
98
B. Commenter Views and Final
Provisions
One commenter supported the
Commission’s proposal to make the
positive substituted compliance
determinations in the proposed Order,
99
including positive substituted
compliance determinations for internal
supervision and chief compliance
officer requirements. The Commission
continues to conclude that, taken as a
whole, relevant Spanish and EU
requirements would produce regulatory
outcomes that are comparable to those
associated with Exchange Act internal
supervision and chief compliance
officer requirements by providing that
Covered Entities have structures and
processes that reasonably are designed
to promote compliance with applicable
law and to identify and cure instances
of non-compliance and manage conflicts
of interest. While the Commission
recognizes certain differences between
Spanish and EU requirements and the
applicable internal supervision and
chief compliance officer requirements
under the Exchange Act, in the
Commission’s view those differences on
balance should not preclude substituted
compliance for these requirements, as
the relevant Spanish and EU
requirements taken as a whole help to
produce comparable regulatory
outcomes by requiring Covered Entities
to have structures and processes
reasonably designed to promote
compliance with applicable law,
identify and cure instances of non-
compliance, and manage conflicts of
interest. Accordingly, the Commission
is making positive substituted
compliance determinations in
connection with internal supervision
and chief compliance officer
requirements and is issuing the internal
supervision and compliance section of
the Order as proposed.
100
To help ensure the comparability of
outcomes, and consistent with the
proposed Order, substituted compliance
for internal supervision and chief
requirements is subject to certain
conditions. Substituted compliance for
both sets of requirements is conditioned
on the Covered Entity being subject to,
and complying with, relevant Spanish
and EU requirements.
101
In addition,
substituted compliance for internal
supervision requirements (1) is
conditioned on the Covered Entity’s
compliance with applicable Spanish
and EU internal supervision
requirements as if those provisions also
require the Covered Entity to comply
with applicable requirements under the
Exchange Act and the other applicable
conditions of the proposed Order
102
and (2) does not extend to certain
specified internal supervision
requirements.
103
Finally, substituted
compliance in connection with chief
compliance officer requirements is
subject to the conditions that
compliance reports required pursuant to
MiFID Org Reg article 22(2)(c) must: (1)
Be provided to the Commission at least
annually and in the English language;
(2) include a certification
104
signed by
the chief compliance officer or senior
officer of the Covered Entity that, to the
best of the certifier’s knowledge and
reasonable belief and under penalty of
law, the report is accurate and complete
in all material respects; (3) address the
Covered Entity’s compliance with
applicable requirements under the
Exchange Act and other applicable
conditions of the proposed Order; (4) be
provided to the Commission no later
than 15 days
105
following the earlier of
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The Commission views 15 days as providing a
reasonable time to translate reports, if needed, and
convey them to the Commission.
106
See para. (c)(2)(ii) of the Order. The
Commission continues to believe that these
conditions are necessary to promote comparable
regulatory outcomes, particularly in light of the
granular approach to substituted compliance, and to
ensure that the compliance report covers applicable
Exchange Act requirements and proposed Order
conditions if the Covered Entity uses substituted
compliance for chief compliance officer
requirements, whether or not the Covered Entity
relies on substituted compliance for internal
supervision.
107
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.86. The
Commission is not taking any position regarding the
applicability of the section 15F(j)(6) antitrust
prohibitions in the cross-border context. Non-U.S.
SBS Entities should assess the applicability of those
prohibitions to their security-based swap
businesses.
108
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.87.
109
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.88.
110
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and nn.89–90.
111
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.91.
112
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.92.
113
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47676 and n.93.
Exchange Act section 3C(g)(5) provides certain
rights for counterparties to select the clearing
agency at which a security-based swap is cleared.
For all security-based swaps that an SBS Entity
enters into with certain counterparties, the
counterparty has the sole right to select the clearing
agency at which the security-based swap is cleared.
For security-based swaps that are not subject to
mandatory clearing (pursuant to Exchange Act
sections 3C(a) and (b)) and that an SBS Entity enters
into with certain counterparties, the counterparty
also may elect to require clearing of the security-
based swap. Substituted compliance is not available
in connection with these provisions.
114
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677 and n.94;
Business Conduct Adopting Release, 81 FR 30065.
For non-U.S. SBS Entities, the counterparty
protection requirements under Exchange Act
section 15F(h) apply only to the SBS Entity’s
transactions with U.S. counterparties (apart from
certain transactions conducted through a foreign
branch of the U.S. counterparty), or to transactions
arranged, negotiated, or executed by personnel
located in a U.S. branch or office. See Exchange Act
rule 3a71–3(c), 17 CFR 240.3a71–3(c) (exception
from business conduct requirements for a security–
based swap dealer’s ‘‘foreign business’’); see also
the submission of the report to the
Covered Entity’s management body or
the time the report is required to be
submitted to the management body; and
(5) together cover the entire period that
the Covered Entity’s annual compliance
report referenced in Exchange Act
section 15F(k)(3) and Exchange Act rule
15Fk–1(c) would be required to
cover.
106
A Covered Entity that is
unable to comply with an applicable
condition—and thus is not eligible to
use substituted compliance for the
particular set of Exchange Act risk
control requirements related to that
condition—nevertheless may use
substituted compliance for another set
of Exchange Act requirements addressed
in the Order if it complies with the
conditions to the relevant parts of the
Order.
Under the Order, substituted
compliance for internal supervision and
chief compliance officer requirements is
not subject to a condition that the
Covered Entity apply substituted
compliance for related recordkeeping
requirements in Exchange Act rules
18a–5 and 18a–6. A Covered Entity that
applies substituted compliance for
internal supervision and/or chief
compliance officer requirements, but
does not apply substituted compliance
for the related recordkeeping
requirements in Exchange Act rules
18a–5 and 18a–6, will remain subject to
the relevant provisions of Exchange Act
rules 18a–5 and 18a–6. Those rules
require the Covered Entity to make and
preserve records of its compliance with
Exchange Act internal supervision and
chief compliance officer requirements
and of its security–based swap activities
required or governed by those
requirements. A Covered Entity that
applies substituted compliance for
internal supervision and/or chief
compliance officer requirements, but
complies directly with related
recordkeeping requirements in rules
18a–5 and 18a–6, therefore must make
and preserve records of its compliance
with the relevant conditions of the
Order and of its security–based swap
activities required or governed by those
conditions and/or referenced in the
relevant parts of rules 18a–5 and 18a–
6. Finally, for the reasons discussed in
the proposed Order,
107
the Order does
not extend to antitrust provisions under
the Exchange Act.
VI. Substituted Compliance for
Counterparty Protection Requirements
A. Proposed Approach
The CNMV requested substituted
compliance in connection with
counterparty protection requirements
under the Exchange Act relating to:
Disclosure of material risks and
characteristics and material incentives
or conflicts of interest—Exchange Act
rule 15Fh–3(b) requires that SBS
Entities disclose to certain
counterparties to a security–based swap
certain information about the material
risks and characteristics of the security-
based swap, as well as material
incentives or conflicts of interest that
the SBS Entity may have in connection
with the security-based swap. These
provisions address the need for security-
based swap market participants to have
information that is sufficient to make
informed decisions regarding potential
transactions involving particular
counterparties and particular financial
instruments.
108
‘‘Know your counterparty’’—
Exchange Act rule 15Fh–3(e) requires a
security-based swap dealer to establish,
maintain, and enforce written policies
and procedures to obtain and retain
certain information regarding a
counterparty that is necessary for
conducting business with that
counterparty. This provision accounts
for the need that SBS Entities obtain
essential counterparty information
necessary to promote effective
compliance and risk management.
109
Suitability—Exchange Act rule
15Fh–3(f) requires a security-based
swap dealer that recommends to certain
counterparties a security-based swap or
trading strategy involving a security-
based swap, to undertake reasonable
diligence to understand the potential
risks and rewards associated with the
recommendation and to have a
reasonable basis to believe that the
recommendation is suitable for the
counterparty. This provision accounts
for the need to guard against security-
based swap dealers making unsuitable
recommendations.
110
Fair and balanced
communications—Exchange Act rule
15Fh–3(g) requires that SBS Entities
communicate with counterparties in a
fair and balanced manner based on
principles of fair dealing and good faith.
These provisions promote complete and
honest communications as part of SBS
Entities’ security-based swap
businesses.
111
Daily mark disclosure—Exchange
Act rule 15Fh–3(c) requires that SBS
Entities provide daily mark information
to certain counterparties. These
provisions address the need for market
participants to have effective access to
daily mark information necessary to
manage their security-based swap
positions.
112
Clearing rights disclosure
Exchange Act rule 15Fh–3(d) requires
that SBS Entities provide certain
counterparties with information
regarding clearing rights under the
Exchange Act.
113
Taken as a whole, the counterparty
protection requirements under section
15F of the Exchange Act help to ‘‘bring
professional standards of conduct to,
and increase transparency in, the
security-based swap market and to
require [SBS Entities] to treat parties to
these transactions fairly.’’
114
The
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Exchange Act rule 3a71–3(a)(3), (8) and (9)
(definitions of ‘‘transaction conducted through a
foreign branch,’’ ‘‘U.S. business’’ and ‘‘foreign
business’’).
115
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677.
116
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677 and nn.97–99.
117
Annex II of MiFID describes which clients are
‘‘professional clients.’’ Section I of Annex II
describes the types of clients considered to be
professional clients unless the client elects non-
professional treatment; these clients are per se
professional clients. Section II of Annex II describes
the types of clients who may be treated as
professional clients on request; these clients are
elective professional clients. See MiFID Annex II.
Retail clients are those that are not professional
clients. See MiFID article 4(1)(11).
118
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677.
119
The Commission recognizes that Exchange Act
rules permit security-based swap dealers, when
making a recommendation to an ‘‘institutional
counterparty,’’ to satisfy some elements of the
suitability requirement if the security-based swap
dealer reasonably determines that the counterparty
or its agent is capable of independently evaluating
relevant investment risks, the counterparty or its
agent represents in writing that it is exercising
independent judgment in evaluating
recommendations, and the security-based swap
dealer discloses to the counterparty that it is acting
as counterparty and is not undertaking to assess the
suitability of the recommendation for the
counterparty. See Exchange Act rule 15Fh–3(f)(2).
However, the institutional counterparties to whom
this alternative applies are only a subset of the
‘‘professional clients’’ to whom more narrowly
tailored suitability requirements apply under
MiFID. The institutional counterparty alternative
under the Exchange Act remains available, in
accordance with its terms, for recommendations
that are not eligible for, or for which a Covered
Entity does not rely on, substituted compliance
under the Order.
120
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677–78.
121
See EMIR RTS article 13(3)(a)(i); EMIR article
10.
122
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677–78.
123
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47677–78. This
approach would avoid reliance on Spanish and EU
trade reporting or mark-to-market (or mark-to-
model) requirements. The Spanish and EU mark-to-
market (or mark-to-model) requirements direct
certain types of derivatives counterparties to mark-
to-market (or mark-to-model) uncleared transactions
each day but do not require disclosure of those
marks to counterparties. Moreover, though Spanish
and EU trade reporting requirements direct certain
derivatives counterparties to report to a EU trade
repository updated daily valuations for each OTC
derivative contract, in practice U.S. counterparties
may encounter challenges when attempting to
access daily marks reported to multiple EU trade
repositories with which they may not otherwise
have business relationships. In addition, the
information may be less current, given the time
necessary for reporting and for the trade repository
to make the information available.
124
Though the requirement to disclose a
counterparty’s Exchange Act section 3C(g)(5)
clearing rights is eligible for substituted
compliance, the section 3C(g)(5) clearing rights
themselves are not.
125
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47678 and n.102.
126
See Santander Letter at 1.
proposed Order provided for
conditional substituted compliance in
connection with disclosure of material
risks and characteristics, disclosure of
material incentives or conflicts of
interest, ‘‘know your counterparty,’’
suitability, fair and balanced
communications, and daily mark
disclosure requirements.
115
In
proposing to provide conditional
substituted compliance for these
counterparty protection requirements,
the Commission preliminarily
concluded that the relevant Spanish and
EU requirements produce regulatory
outcomes that are comparable to these
requirements under Exchange Act
section 15F(h), by subjecting Covered
Entities to obligations that promote
standards of professional conduct,
transparency, and the fair treatment of
parties.
As proposed, substituted compliance
for these requirements would be subject
to certain conditions to help ensure the
comparability of outcomes. First, under
the proposed Order, substituted
compliance for disclosure of material
risks and characteristics, disclosure of
material incentives or conflicts of
interest, ‘‘know your counterparty,’’
suitability, and fair and balanced
communications requirements would be
conditioned on Covered Entities being
subject to, and complying with, relevant
Spanish and EU requirements.
116
Second, the proposed Order
additionally would condition
substituted compliance for suitability
requirements on the counterparty being
a ‘‘professional client’’ as defined in
MiFID (rather than a ‘‘retail client’’ or an
elective ‘‘professional client’’
117
) and
not a ‘‘special entity’’ as defined in
Exchange Act section 15F(h)(2)(C) and
Exchange Act rule 15Fh–2(d).
118
The
Commission continues to believe that,
absent such a condition the MiFID-
based suitability requirements would
not be expected to produce a
counterparty protection outcome that is
comparable with the outcome produced
by the suitability requirements under
the Exchange Act.
119
Finally, in the
proposed Order the Commission
preliminarily viewed certain types of
EU daily portfolio reconciliation
requirements as comparable to
Exchange Act daily mark disclosure
requirements.
120
These daily portfolio
reconciliation requirements apply to
portfolios of a financial counterparty or
a non-financial counterparty subject to
the clearing obligation in EMIR in
which counterparties have 500 or more
OTC derivatives contracts outstanding
with each other.
121
The Commission
preliminarily viewed EU portfolio
reconciliation requirements for other
types of portfolios, which may be
reconciled less frequently than each
business day or may not require
disclosure to counterparties, as not
comparable to Exchange Act daily mark
requirements.
122
Accordingly, the
proposed Order would condition
substituted compliance for daily mark
requirements on the Covered Entity
being required to reconcile, and in fact
reconciling, the portfolio containing the
relevant security-based swap on each
business day pursuant to relevant EU
requirements.
123
The proposed Order would not
provide substituted compliance in
connection with Exchange Act
requirements for SBS Entities to
disclose a counterparty’s clearing rights
under Exchange Act section 3C(g)(5).
124
The CNMV Application cited certain EU
provisions related to a counterparty’s
clearing rights in the European Union.
However, those provisions do not
require disclosure of Exchange Act
section 3C(g)(5) clearing rights, and the
Commission preliminarily viewed the
EU clearing provisions as not
comparable to Exchange Act clearing
rights disclosure requirements.
125
B. Commenter Views and Final
Provisions
One commenter supported the
Commission’s proposal to make the
positive substituted compliance
determinations in the proposed
Order,
126
including positive substituted
compliance determinations for
disclosure of material risks and
characteristics, disclosure of material
incentives or conflicts of interest,
‘‘know your counterparty,’’ suitability,
fair and balanced communications, and
daily mark disclosure requirements. The
Commission continues to conclude that,
taken as a whole, relevant Spanish and
EU requirements would produce
regulatory outcomes that are comparable
to those associated with these
counterparty protection requirements,
by subjecting Covered Entities to
obligations that promote standards of
professional conduct, transparency, and
the fair treatment of parties. The
Commission recognizes that there are
certain differences between relevant
Spanish and EU requirements and
Exchange Act disclosure, ‘‘know your
counterparty,’’ suitability, and
communications requirements, but in
the Commission’s view those
differences, when coupled with the
conditions in the proposed Order, are
not so material as to be inconsistent
with substituted compliance within the
requisite outcomes-oriented framework.
Accordingly, the Commission is making
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127
See para. (d) of the Order.
128
See para. (d)(3) of the Order. Paragraph (d)(3)
of proposed Order cited the following MLD-based
requirements: MLD articles 11 and 13; SMLA
articles 3(1) and (2), 4, 5, 6, 7(1) through (4), 7(7),
7(8), and 8; MLD articles 8(3) and 8(4)(a) as applied
to internal policies, controls and procedures
regarding recordkeeping of customer due diligence
activities; and SMLA article 26 as applied to
policies and procedures regarding recordkeeping of
customer due diligence activities. The Commission
is replacing these requirements with MiFID article
16(6), MiFID Org Reg articles 72, 74, 75, and
applicable parts of Annex I, SSMA article 194(1),
and RD 217/2008 article 32(1) and (10).
129
See Parts II.B.1 and II.B.2, supra.
130
MiFID article 16(6), implemented in Spain in
SSMA article 194(1) and RD 217/2008 article 32(1)
and (10), requires a Covered Entity to arrange for
records to be kept of all services, activities, and
transactions undertaken by it that are sufficient to
enable the CNMV to fulfill its supervisory and
enforcement mandates, and in particular to
determine that the Covered Entity has complied
with all obligations including those with respect to
clients or potential clients and to the integrity of the
market. MiFID Org Reg articles 74 and 75 require
Covered Entities to record and keep at the CNMV’s
disposal certain information about client orders and
decisions to deal. Annex IV of MiFID Org Reg
describes that required client information and
includes a requirement to make a record of the
‘‘name and designation of any relevant person
acting on behalf of the client.’’ The CNMV
commented that this requirement to make a record
regarding persons acting on behalf of the client
‘‘implies that the investment firm or credit
institution for internal control reasons, must obtain
documentation of the powers/authorization of the
person to be represented which is verifiable y the
CNMV.’’ See Memorandum of Correspondence with
Santiago Yraola, Deputy Director of International
Affairs, CNMV, dated Sept. 24, 2021 (‘‘CNMV
Memorandum’’), at 2. Moreover, the CNMV
confirmed that in supervising compliance with this
requirement, it requires Covered Entities to provide
records of the power of attorney or public deed
establishing the authority of client representatives.
See CNMV Memorandum at 2. Finally, MiFID Org
Reg article 72 and Annex I require the Covered
Entity to maintain records in the medium, form,
and format that allow the CNMV to access the
records readily and to easily ascertain any
amendments, and that make it impossible to
manipulate or alter the records.
131
See para. (d)(1) of the Order.
132
See para. (d)(2) of the Order.
133
See para. (d)(3) of the Order.
134
See para. (d)(4)(i) of the Order.
135
See para. (d)(5) of the Order.
136
See para. (d)(4)(ii) of the Order.
137
See para. (d)(6) of the Order. A Covered Entity
must be required to reconcile, and in fact reconcile,
the portfolio containing the security-based swap for
which substituted compliance is used, on each
business day pursuant to EMIR articles 11(1)(b) and
11(2) and EMIR RTS article 13. A Covered Entity
may not use substituted compliance for daily mark
disclosure requirements if the relevant security-
based swap is in a portfolio that these EU
requirements do not require to be reconciled on
each business day.
positive substituted compliance
determinations in connection with
disclosure of material risks and
characteristics, disclosure of material
incentives or conflicts of interest,
‘‘know your counterparty,’’ suitability,
fair and balanced communications, and
daily mark disclosure requirements.
127
The Commission is amending the
substituted compliance determination
for ‘‘know your counterparty’’
requirements for the reasons discussed
below, and is issuing the remainder of
the counterparty protection section of
the Order as proposed.
The Commission is amending
paragraph (d)(3) of the Order to replace
the requirements of Directive (EU) 2015/
849 (‘‘MLD’’) and the Spanish Anti-
Money Laundering Act, Law 10/2010, of
April 28 (‘‘SMLA’’) with provisions of
MiFID, MiFID Org Reg, SSMA and
Royal Decree 217/2008, of February 15
(‘‘RD 217/2008’’).
128
Exchange Act rule
15Fh–3(e)(3) is one of three prongs of
the Exchange Act ‘‘know your
counterparty requirements,’’ and
requires a security-based swap dealer to
establish, maintain, and enforce written
policies and procedures to obtain and
retain a record of information regarding
the authority of any person acting for its
counterparty. Before making a positive
substituted compliance determination,
Exchange Act rule 3a71–6 requires the
Commission to determine that foreign
requirements are comparable to the
otherwise applicable Exchange Act
requirements, after accounting for
factors such as the effectiveness of the
supervisory compliance program
administered, and the enforcement
authority exercised, by the foreign
authority in respect of the relevant
requirements, as well as to enter into a
memorandum of understanding and/or
other arrangement with the relevant
foreign financial regulatory authority or
authorities addressing supervisory and
enforcement cooperation and other
matters arising under the substituted
compliance determination.
129
The
customer due diligence provisions in
the proposed Order’s MLD and SMLA
requirements are relevant to the
Exchange Act ‘‘know your
counterparty’’ requirements relating to
records of the authority of a person
acting on behalf of the counterparty.
However, in Spain supervision and
enforcement of these MLD and SMLA
requirements are within the jurisdiction
of the Servicio Ejecutivo de la Comisio
´n
de Prevencio
´n del Blanqueo de
Capitales e Infracciones Monetarias
(‘‘SEPBLAC’’) and the Comisio
´n de
Prevencio
´n del Blanqueo de Capitales e
Infracciones Monetarias (‘‘COPBLAC’’).
The CNMV and the Bank of Spain do
work closely with the SEPBLAC and
COPBLAC, but the substituted
compliance memorandum of
understanding between the Commission
and the CNMV and the Bank of Spain,
finalized after publication of the
Spanish Substituted Compliance Notice
and Proposed Order, does not provide
for ongoing sharing of supervisory and
enforcement information regarding
these MLD and SMLA requirements, as
neither the SEPBLAC nor the COPBLAC
is a party to the memorandum of
understanding. Other requirements
based on MiFID, as applied by the
CNMV, are, however, comparable to the
Exchange Act requirement to establish,
maintain, and enforce written policies
and procedures to obtain and retain a
record of information regarding the
authority of any person acting for its
counterparty.
130
The CNMV, rather than
SEPBLAC or COPBLAC, is responsible
for supervision and enforcement of
these MiFID-based requirements and the
memorandum of understanding would
provide for ongoing sharing of
supervisory and enforcement
information regarding these
requirements. Accordingly, the
Commission is replacing the MLD and
SMLA requirements listed in paragraph
(d)(3) of the proposed Order with these
MiFID-based requirements.
To help ensure the comparability of
outcomes, and consistent with the
proposed Order, substituted compliance
for these counterparty protection
requirements is subject to certain
conditions. First, substituted
compliance for disclosure of material
risks and characteristics,
131
disclosure
of material incentives or conflicts of
interest,
132
‘‘know your
counterparty,’’
133
suitability,
134
and fair
and balanced communications
135
requirements is conditioned on Covered
Entities being subject to, and complying
with, relevant Spanish and EU
requirements. Second, substituted
compliance for suitability requirements
is conditioned on the counterparty
being a ‘‘professional client’’ as defined
in MiFID (rather than a ‘‘retail client’’ or
an elective ‘‘professional client’’) and
not a ‘‘special entity’’ as defined in
Exchange Act section 15F(h)(2)(C) and
Exchange Act rule 15Fh–2(d).
136
Third,
substituted compliance for daily mark
disclosure requirements is conditioned
on the Covered Entity being required to
reconcile, and in fact reconciling, the
portfolio containing the relevant
security-based swap on each business
day pursuant to relevant EU
requirements.
137
A Covered Entity that
is unable to comply with an applicable
condition—and thus is not eligible to
use substituted compliance for the
particular set of Exchange Act
counterparty protection requirements
related to that condition—nevertheless
may use substituted compliance for
another set of Exchange Act
requirements addressed in the Order if
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138
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47678.
139
17 CFR 240.18a–5. The CNMV Application
discusses Spanish and EU recordmaking
requirements. See CNMV Application Appendix B,
Category: Recordkeeping and Reporting
Requirements; Subcategory: Record creation, at
1–27, 55–57.
140
17 CFR 240.18a–6. The CNMV Application
discusses Spanish and EU record preservation
requirements. See CNMV Application Appendix B,
Category: Recordkeeping and Reporting;
Subcategory: Record Preservation at 28–58.
141
17 CFR 240.18a–7. The CNMV Application
discusses Spanish and EU requirements that
address firms’ obligations to make certain reports.
See CNMV Application Appendix B, Category:
Reports and Notifications at 59–62.
142
17 CFR 240.18a–8. The CNMV Application
discusses Spanish and EU requirements that
address firms’ obligations to make certain
notifications. See CNMV Application Appendix B
category 2 at 62–65.
143
The CNMV Application discusses Spanish and
EU requirements that address firms’ record
preservation obligations related to records that
firms are required to create, as well as additional
records such as records of communications. See
CNMV Application Appendix B, Category:
Recordkeeping and Reporting Requirements;
Subcategory: Record Creation at 2–3.
144
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47678-85, 47693-95.
145
See paras. (e)(1)(i)(A), (e)(1)(i)(B), (e)(1)(i)(C),
(e)(1)(i)(D), (e)(1)(i)(E), (e)(1)(i)(F)(1), (e)(1)(i)(G),
(e)(1)(i)(H), (e)(1)(i)(I)(1), (e)(1)(i)(J)(1), (e)(1)(i)(K)(1),
(e)(2)(i)(A), (e)(2)(i)(B), (e)(2)(i)(C), (e)(2)(i)(D),
(e)(2)(i)(E), (e)(2)(i)(F)(1), (e)(2)(i)(G)(1), (e)(2)(i)(H),
(e)(2)(i)(I), (e)(2)(i)(J), (e)(2)(i)(K)(1), (e)(2)(i)(L),
(e)(2)(i)(M), (e)(3)(i), (e)(4)(i)(A), (e)(4)(i)(B)(1), and
(e)(5) of the Order.
146
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47678–79, 47693–95.
147
See French Substituted Compliance Order, 86
FR 41649; UK Substituted Compliance Order, 86 FR
43360.
it complies with the conditions to the
relevant parts of the Order.
Under the Order, substituted
compliance for counterparty protection
requirements (relating to disclosure of
information regarding material risks and
characteristics, disclosure of
information regarding material
incentives or conflicts of interest,
‘‘know your counterparty,’’ suitability,
fair and balanced communications and
daily mark disclosure) is not subject to
a condition that the Covered Entity
apply substituted compliance for related
recordkeeping requirements in
Exchange Act rules 18a–5 and 18a–6. A
Covered Entity that applies substituted
compliance for one or more
counterparty protection requirements,
but does not apply substituted
compliance for the related
recordkeeping requirements in
Exchange Act rules 18a–5 and 18a–6,
will remain subject to the relevant
provisions of Exchange Act rules 18a–5
and 18a–6. Those rules require the
Covered Entity to make and preserve
records of its compliance with Exchange
Act counterparty protection
requirements and of its security-based
swap activities required or governed by
those requirements. A Covered Entity
that applies substituted compliance for
a counterparty protection requirement,
but complies directly with related
recordkeeping requirements in rules
18a–5 and 18a–6, therefore must make
and preserve records of its compliance
with the relevant conditions of the
Order and of its security-based swap
activities required or governed by those
conditions and/or referenced in the
relevant parts of rules 18a–5 and 18a–
6. Finally, for the reasons discussed in
the proposed Order, the Order does not
extend to clearing rights disclosure
provisions under the Exchange Act.
138
VII. Substituted Compliance for
Recordkeeping, Reporting, Notification,
and Securities Count Requirements
A. CNMV Request and Associated
Analytic Considerations
The CNMV Application in part
requested substituted compliance for
requirements applicable to SBS Entities
with a prudential regulator under the
Exchange Act relating to:
Record Making—Exchange Act rule
18a–5 requires prescribed records to be
made and kept current.
139
Record Preservation—Exchange Act
rule 18a–6 requires preservation of
records.
140
Reporting—Exchange Act rule 18a–
7 requires certain reports.
141
Notification—Exchange Act rule
18a–8 requires notification to the
Commission when certain financial or
operational problems occur.
142
Daily Trading Records—Exchange
Act section 15F(g) requires SBS Entities
to maintain daily trading records.
143
Taken as a whole, the recordkeeping,
reporting, and notification requirements
that apply to SBS Entities with a
prudential regulator are designed to
promote the prudent operation of the
firm’s security-based swap activities,
assist the Commission in conducting
compliance examinations of those
activities, and alert the Commission to
potential financial or operational
problems that could impact the firm and
its customers.
B. Commenter Views and Final
Provisions
1. General Considerations
In proposing to provide conditional
substituted compliance in connection
with this part of the CNMV Application,
the Commission preliminarily
concluded that the relevant EU and
Spanish requirements, subject to
conditions and limitations, would
produce regulatory outcomes that are
comparable to the outcomes associated
with the vast majority of the
recordkeeping, reporting, notification,
and securities count requirements under
the Exchange Act applicable to SBS
Entities pursuant to Exchange Act rules
18a–5, 18a–6, 18a–7, 18a–8, and
Exchange Act section 15F(g)
(collectively, the recordkeeping,
reporting, and notification
requirements’’).
144
Substituted
compliance for the recordkeeping,
reporting, and notification requirements
accordingly is conditioned on Covered
Entities being subject to and complying
with the EU and Spanish provisions that
in the aggregate establish a framework
that produces outcomes comparable to
those associated with the analogous
recordkeeping, reporting, and
notification requirements under the
Exchange Act.
145
The proposed structure of the
substituted compliance determinations
with respect to the recordkeeping,
reporting, and notification requirements
would have provided Covered Entities
with greater flexibility to select distinct
requirements within the broader rules
for which they want to apply
substituted compliance.
146
This would
not preclude a Covered Entity from
applying substituted compliance for the
entire rule (subject to conditions and
limitations). However, it would permit
the Covered Entity to apply substituted
compliance with respect to certain
requirements of a given rule and to
comply directly with the remaining
requirements. This more granular
approach to the recordkeeping,
reporting, and notification rules was
intended to permit Covered Entities to
leverage existing recordkeeping and
reporting systems that are designed to
comply with the broker-dealer
recordkeeping and reporting
requirements on which the
recordkeeping, reporting, and
notification requirements applicable to
SBS Entities are based. For example, it
may be more efficient for a Covered
Entity to comply with certain Exchange
Act requirements within a given
recordkeeping, reporting, or notification
rule (rather than apply substituted
compliance) because it can utilize
systems that its affiliated broker-dealer
has implemented to comply with them.
This proposed approach was consistent
with the approach taken by the
Commission in the French Substituted
Compliance Order and UK Substituted
Compliance Order.
147
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148
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47679.
149
See, e.g., Exchange Act Release No. 71958
(Apr. 17, 2014), 79 FR 25194, 25199–200 (May 2,
2014).
150
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47679.
151
See paras. (e)(1)(i) and (e)(2)(ii) of the Order.
152
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47679 (discussing this
limitation).
153
See French Substituted Compliance Order, 86
FR 41650; UK Substituted Compliance Order, 86 FR
45778.
154
See para. (e) of the Order.
155
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47679 (discussing this
condition).
156
See para. (e) of the Order.
157
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47683 (discussing this
condition). See also Exchange Act Release No.
93335 (Oct. 14, 2021) (order specifying the manner
and format of filing unaudited financial and
operational information by Covered Entities relying
on substituted compliance determinations with
respect to Exchange Act rule 18a–7).
158
See para. (e)(3) of the Order.
159
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47683–84 (discussing
this condition).
160
See para. (e)(4)(ii)(A) of the Order.
161
See Spanish Substituted Compliance Notice
and Proposed Order, 86 FR 47685 (discussing this
condition).
162
See para. (e)(7) of the Order.
163
See Santander Letter at 1–2.
As applied to Exchange Act rules
18a–5 and 18a–6, this approach of
providing greater flexibility resulted in
preliminary substituted compliance
determinations with respect to the
different categories of records these
rules require SBS Entities to make, keep
current, and/or preserve.
148
The
objective of these rules—taken as a
whole—is to assist the Commission in
monitoring and examining for
compliance with substantive Exchange
Act requirements applicable to SBS
Entities (e.g., business conduct
requirements) as well as to promote the
prudent operation of these firms.
149
The
Commission believes the comparable
Spanish recordkeeping rules achieve
these outcomes with respect to
compliance with substantive Spanish
requirements for which preliminary
positive substituted compliance
determinations were being made in the
proposed Order (e.g., the preliminary
positive substituted compliance
determinations with respect to the
majority of the Exchange Act business
conduct requirements). At the same
time, the recordkeeping rules address
different categories of records through
distinct requirements within the rules.
Each requirement with respect to a
specific category of records (e.g.,
paragraph (b)(1) of Exchange Act rule
18a–5 addressing trade blotters) can be
viewed in isolation as a distinct
recordkeeping rule. Therefore, the
Commission made preliminary
substituted compliance determinations
at this level of Exchange Act rules 18a–
5 and 18a–6.
150
The Commission did
not receive comment on this granular
approach and is adopting it as
proposed.
151
Second, the Commission did not
make a preliminary positive substituted
compliance determination with respect
to a discrete provision of the
recordkeeping, reporting, and
notification requirements if it was fully
or partially linked to a substantive
Exchange Act requirement for which
substituted compliance was not
available or for which a preliminary
positive substituted compliance
determination was not being made.
152
In
particular, a preliminary positive
substituted compliance determination
was not made, in full or in part, for
recordkeeping, reporting, or notification
requirements linked to the following
Exchange Act rules for which
substituted compliance is not available
or a preliminary positive substituted
compliance determination was not
made: (1) Exchange Act rule 15Fh–4; (2)
Exchange Act rule 15Fh–5; (3) Exchange
Act rule 15Fh–6; (4) Exchange Act rule
18a–4; (5) Regulation SBSR; (6) Form
SBSE and its variations; (7) Exchange
Act rule 15Fh–1; and (8) Exchange Act
rule 15Fh–2. This proposed approach
was consistent with the approach taken
by the Commission in the French
Substituted Compliance Order and UK
Substituted Compliance Order.
153
The
Commission did not receive comment
on these limitations and the Order
includes them.
154
Third, the Commission conditioned
substituted compliance with discrete
provisions of the recordkeeping,
reporting, and notification requirements
that were fully or partially linked to a
substantive Exchange Act requirement
for which substituted compliance was
available on the Covered Entity
applying substituted compliance with
respect to the linked Exchange Act
requirement.
155
In particular,
substituted compliance for a provision
of the recordkeeping, reporting, and
notification requirements that is linked
to the following Exchange Act rules was
conditioned on the SBS Entity applying
substituted compliance to the linked
substantive Exchange Act rule: (1)
Exchange Act rule 15Fh–3, except
paragraphs (a) and (d) for which
substituted compliance was not
requested; (2) Exchange Act rule 15Fi–
2; (3) Exchange Act rule 15Fi–3; (4)
Exchange Act rule 15Fi–4; (5) Exchange
Act rule 15Fi–5; and (6) Exchange Act
rule 15Fk–1. The Commission did not
receive comment on these conditions
and the Order includes them.
156
Fourth, the Commission conditioned
substituted compliance with Exchange
Act rule 18a–7 on Covered Entities
filing periodic unaudited financial and
operational information with the
Commission or its designee in the
manner and format required by
Commission rule or order.
157
The
Commission did not receive comment
on this condition and the Order
includes it.
158
Fifth, the proposed Order conditioned
substituted compliance with Exchange
Act rule 18a–8 on Covered entities
simultaneously sending a copy of any
notice required to be sent by Spanish or
EU law to the Commission in the
manner specified on the Commission’s
website and including with the
transmission the contact information of
an individual who can provide further
information about the matter that is the
subject of the notice.
159
The
Commission did not receive comment
on these conditions and the Order
includes them.
160
Sixth, the proposed Order included a
condition that Covered Entities must
promptly furnish to a representative of
the Commission upon request an
English translation of any record, report,
or notification of the Covered Entity that
is required to be made, preserved, filed,
or subject to examination pursuant to
Exchange Act section 15F of this
Order.
161
The Commission did not
receive a comment on this condition
and the Order includes it.
162
2. Citations to EU and Spanish Law
The Commission received a comment
recommending changes to the proposed
Order to refine the scope of Spanish law
provisions that would operate as
conditions to substituted compliance.
163
The Commission reviewed each of the
Spanish law citations that the
commenter recommended removing
from the proposed Order for relevance
to the comparable Exchange Act
requirement while also keeping in mind
that each EU or Spanish law citation
was included in the CNMV Application
intentionally. The Commission’s
conclusion and reasoning with respect
to the commenter’s recommendations
are discussed in further detail below.
The commenter recommended
removing references to SSMA articles
276bis, 276ter, 276quater, and
276quinquies from paragraphs
(e)(1)(i)(F)(1), and (e)(2)(i)(A), (B), and
(C) of the proposed Order. The
commenter stated that SSMA articles
276bis, 276ter, 276quater, and
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164
Compare paras. (e)(1)(i)(F)(1), and (e)(2)(i)(A),
(B), and (C) of the proposed Order, with paras.
(e)(1)(i)(F)(1), and (e)(2)(i)(A), (B), and (C) of the
Order.
165
Compare paras. (e)(1)(i)(G), (e)(1)(i)(I), and
(e)(2)(i)(F) of the proposed Order, with paras.
(e)(1)(i)(G), (e)(1)(i)(I), and (e)(2)(i)(F) of the Order.
166
See French Substituted Compliance Notice
and Proposed Order, 85 FR 85734.
167
Id. at 85734–36.
276quinquies set out requirements
regarding notifications to the CNMV
about certain violations under Spanish
law and are unrelated to the
Commission’s recordkeeping
requirements addressed by paragraphs
(e)(1)(i)(F)(1), and (e)(2)(i)(A), (B), and
(C). Instead, the commenter states,
SSMA articles 276bis, 276ter, 276quater,
and 276quinquies should be, and are,
included in paragraph (e)(4)(i), which
addresses the Commission’s notification
requirements. The Commission agrees
with the commenter’s reasoning and is
therefore removing references to SSMA
articles 276bis, 276ter, 276quater, and
276quinquies from paragraphs
(e)(1)(i)(F)(1), and (e)(2)(i)(A), (B), and
(C) of the Order.
164
In addition, as discussed in Part VI.B.
above, MLD and SMLA are supervised
by SEPBLAC and COPBLAC which are
not signatories to the supervisory and
enforcement memorandum of
understanding with the Commission.
Accordingly, paragraphs (e)(1)(i)(G),
(e)(1)(i)(I), and (e)(2)(i)(F) of the Order
no longer require a Covered Entity to be
subject to and comply with MLD articles
11 and 13 and SMLA articles 3–7 and
instead require the Covered Entity to be
subject to and comply with comparable
MiFID-based requirements.
165
No other comments were received
regarding any other Spanish law
provisions that would operate as
conditions to substituted compliance.
Accordingly, the Commission is issuing
these remaining conditions as proposed.
VIII. Supervisory and Enforcement
Considerations
A. Proposed Approach
Exchange Act rule 3a71–6(a)(2)(i)
provides that the Commission’s
assessments regarding the comparability
of foreign requirements in part should
take into account ‘‘the effectiveness of
the supervisory program administered,
and the enforcement authority
exercised’’ by the foreign financial
regulatory authority. This provision is
intended to help ensure that substituted
compliance is not predicated on rules
that appear high-quality on paper if
market participants in practice are
allowed to fall short of their obligations,
while also recognizing that differences
among supervisory and enforcement
regimes should not be assumed to
reflect flaws in one regime or
another.
166
The CNMV Application
accordingly included information
regarding the supervisory and
enforcement framework applicable to
derivatives markets and market
participants in Spain.
In proposing to grant substituted
compliance in connection with the
CNMV Application, the Commission
preliminarily concluded that the
relevant supervisory and enforcement
considerations were consistent with
substituted compliance. That
preliminary conclusion took into
account information regarding the
CNMV and the Bank of Spain (together,
the ‘‘Spanish Authorities’’) and the
ECB’s roles and practices in supervising
investment firms and credit institutions
located in Spain, as well as their
enforcement-related authority and
practices.
167
B. Commenter Views and Final
Provisions
Commenters did not address the
Commission’s preliminary conclusions
regarding supervisory and enforcement
considerations, and the Commission
continues to conclude that the relevant
supervisory and enforcement
considerations in Spain are consistent
with substituted compliance. In
particular, based on the available
information regarding the Spanish
Authorities’ and the ECB’s authority and
practices to oversee market participants’
compliance with applicable
requirements and to take action in the
event of violations, the Commission
remains of the view that, consistent
with rule 3a71–6, comparability
determinations reflect Spain and EU
requirements as they apply in practice.
To be clear, the supervisory and
enforcement considerations addressed
by rule 3a71–6 do not mandate that the
Commission make judgments regarding
the comparative merits of U.S. and
foreign supervisory and enforcement
frameworks, or to require specific
findings regarding the supervisory and
enforcement effectiveness of a foreign
regime. The rule 3a71–6 considerations
regarding supervisory and enforcement
effectiveness instead address whether
comparability analyses related to
substituted compliance reflect
requirements that market participants
must follow, and for which market
participants are subject to enforcement
consequences in the event of violations.
Those considerations are satisfied here.
IX. Conclusion
It is hereby determined and ordered,
pursuant to rule 3a71–6 under the
Exchange Act, that a Covered Entity (as
defined in paragraph (f)(1) of this Order)
may satisfy the requirements under the
Exchange Act that are addressed in
paragraphs (b) through (e) of this Order
so long as the Covered Entity is subject
to and complies with relevant
requirements of the Kingdom of Spain
and the European Union and with the
conditions of this Order, as amended or
superseded from time to time.
(a) General conditions.
This Order is subject to the following
general conditions, in addition to the
conditions specified in paragraphs (b)
through (e):
(1) Activities as MiFID ‘‘investment
services or activities.’’ For each
condition in paragraphs (b) through (e)
of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of MiFID;
provisions of SSMA and/or RD 217/
2008 that implement MiFID; and/or
other EU and Spanish requirements
adopted pursuant to those provisions,
the Covered Entity’s relevant security-
based swap activities constitute
‘‘investment services’’ or ‘‘investment
activities,’’ as defined in MiFID article
4(1)(2) and in SSMA article 140, and fall
within the scope of the Covered Entity’s
authorization from the CNMV and the
ECB to provide investment services and/
or perform investment activities in the
Kingdom of Spain.
(2) Counterparties as MiFID ‘‘clients.’’
For each condition in paragraphs (b)
through (e) of this Order that requires
the application of, and the Covered
Entity’s compliance with, provisions of
MiFID; provisions of SSMA and/or RD
217/2008 that implement MiFID; and/or
other EU and Spanish requirements
adopted pursuant to those provisions,
the relevant counterparty (or potential
counterparty) to the Covered Entity is a
‘‘client’’ (or potential ‘‘client’’), as
defined in MiFID article 4(1)(9) and in
the First Additional Provision of Royal
Decree Law 14/2018, of 28 September.
(3) Security-based swaps as MiFID
‘‘financial instruments.’’ For each
condition in paragraphs (b) through (e)
of this Order that requires the
application of, and the Covered Entity’s
compliance with, provisions of MiFID;
provisions of SSMA and/or RD 217/
2008 that implement MiFID; and/or
other EU and Spanish requirements
adopted pursuant to those provisions,
the relevant security-based swap is a
‘‘financial instrument,’’ as defined in
MiFID article 4(1)(15) and in the Annex
to SSMA.
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(4) Covered Entity as CRD/CRR
‘‘institution.’’ For each condition in
paragraph (b) through (e) of this Order
that requires the application of, and the
Covered Entity’s compliance with, the
provisions of CRD; provisions of
LOSSEC, RD 84/2015, BoS Circular 2/
2016, SSMA, and/or RD 217/2008 that
implement CRD; CRR; and/or other EU
and Spanish requirements adopted
pursuant to those provisions, the
Covered Entity is an ‘‘institution,’’ as
defined in CRD article 3(1)(3) and CRR
article 4(1)(3), and either a credit
institution, as defined in LOSSEC article
1 (in the case of a provision of LOSSEC,
RD 84/2015, and/or BoS Circular 2/
2016), or an investment firm, as defined
in SSMA article 138 (in the case of a
provision of SSMA and/or RD 217/2008
that implements CRD).
(5) Counterparties as EMIR
‘‘counterparties.’’ For each condition in
paragraphs (b) through (e) of this Order
that requires the application of, and the
Covered Entity’s compliance with,
provisions of EMIR, EMIR RTS, EMIR
Margin RTS, and/or other EU
requirements adopted pursuant to those
provisions, if the relevant provision
applies only to the Covered Entity’s
activities with specified types of
counterparties, and if the counterparty
to the Covered Entity is not any of the
specified types of counterparty, the
Covered Entity complies with the
applicable condition of this Order:
(i) As if the counterparty were the
specified type of counterparty; in this
regard, if the Covered Entity reasonably
determines that the counterparty would
be a financial counterparty if it were
established in the EU and authorized by
an appropriate EU authority, it must
treat the counterparty as if the
counterparty were a financial
counterparty;
(ii) Without regard to the application
of EMIR article 13; and
(iii) Only to the extent that an
Exchange Act section or rule cited in
paragraphs (b) through (e) of this Order
applies to the security-based swap
activities with that counterparty.
(6) Security-based swap status under
EMIR. For each condition in paragraphs
(b) through (e) of this Order that
requires the application of, and the
Covered Entity’s compliance with,
provisions of EMIR, EMIR RTS, EMIR
Margin RTS, and/or other EU
requirements adopted pursuant to those
provisions, if the relevant provision
applies to the Covered Entity’s OTC
derivatives or OTC derivative contracts
that have not been cleared by a central
counterparty, then either:
(i) The relevant security-based swap is
an ‘‘OTC derivative’’ or ‘‘OTC derivative
contract,’’ as defined in EMIR article
2(7), that has not been cleared by a
central counterparty and otherwise is
subject to the provisions of EMIR article
11, EMIR RTS articles 11 through 15,
and EMIR Margin RTS article 2; or
(ii) The relevant security-based swap
has been cleared by a central
counterparty that is authorized or
recognized to clear derivatives contracts
by a relevant authority in the EU.
(7) Memorandum of Understanding
with the Spanish Authorities. The
Commission and the CNMV and the
Bank of Spain have a supervisory and
enforcement memorandum of
understanding and/or other arrangement
addressing cooperation with respect to
this Order at the time the Covered Entity
complies with the relevant requirements
under the Exchange Act via compliance
with one or more provisions of this
Order.
(8) Memorandum of Understanding
Regarding ECB-Owned Information. The
Commission and the ECB have a
supervisory and enforcement
memorandum of understanding and/or
other arrangement addressing
cooperation with respect to this Order
as it pertains to information owned by
the ECB at the time the Covered Entity
complies with the relevant requirements
under the Exchange Act via compliance
with one or more provisions of this
Order.
(9) Notice to Commission. A Covered
Entity relying on this Order must
provide notice of its intent to rely on
this Order by notifying the Commission
in writing. Such notice must be sent to
the Commission in the manner specified
on the Commission’s website. The
notice must include the contact
information of an individual who can
provide further information about the
matter that is the subject of the notice.
The notice must also identify each
specific substituted compliance
determination within paragraphs (b)
through (e) of this Order for which the
Covered Entity intends to apply
substituted compliance. A Covered
Entity must promptly provide an
amended notice if it modifies its
reliance on the substituted compliance
determinations in this Order.
(10) European Union Cross-Border
Matters.
(i) If, in relation to a particular service
provided by a Covered Entity,
responsibility for ensuring compliance
with any provision of MiFID or MiFIR
or any other EU or Spanish requirement
adopted pursuant to MiFID or MiFIR
listed in paragraphs (b) through (e) of
this Order is allocated to an authority of
the Member State of the European
Union in whose territory a Covered
Entity provides the service, the CNMV
must be the authority responsible for
supervision and enforcement of that
provision or requirement in relation to
the particular service.
(ii) If responsibility for ensuring
compliance with any provision of MAR
or any other EU requirement adopted
pursuant to MAR listed in paragraphs
(b) through (e) of this Order is allocated
to one or more authorities of a Member
State of the European Union, one of
such authorities must be the CNMV.
(11) Notification Requirements
Related to Changes in Capital. A
Covered Entity that is prudentially
regulated relying on this Order must
apply substituted compliance with
respect to the requirements of Exchange
Act rule 18a–8(c) and the requirements
of Exchange Act rule 18a–8(h) as
applied to Exchange Act rule 18a–8(c).
(b) Substituted compliance in
connection with risk control
requirements.
This Order extends to the following
provisions related to risk control:
(1) Internal risk management. The
requirements of Exchange Act section
15F(j)(2) and related aspects of
Exchange Act rule 15Fh–3(h)(2)(iii)(I),
provided that
(i) The Covered Entity is subject to
and complies with the requirements of:
(A) MiFID articles 16 and 23; SSMA
articles 193, 194, 208bis, 220bis, 221,
222, 223, and 224; and RD 217/2008
articles 30, 30bis, 30ter, 30qua
´ter,
30quinqies, 30sexies, 32, 41, 42, 43, 44,
45, 46, 47, 48, 61, 66, 67, 68, 69, 70, 71,
72, 72bis, 72ter, 73, 74, 74bis, 74ter, 75,
75bis, 76, 76bis, and 79; and, if the
Covered Entity is a credit institution,
also BoS Circular 2/2016 article 43 and
RD 84/2015 article 22;
(B) MiFID Org Reg articles 21 through
37, 72 through 76 and Annex IV;
(C) CRD articles 74, 76, 79 through 87,
88(1), 91(1) and (2), 91(7) through (9),
92, 94, and 95; SSMA articles 182(1)
and (2) and 183(1) and (2); and RD 217/
2008 article 35; and, if the Covered
Entity is a credit institution, also
LOSSEC articles 24, 25, 26, 27, 28, 29,
32, 33, 34, 36, 37, and 38; RD 84/2015
articles 29, 30, 31, 32, 33, 34, 35, 36, 37,
39, 41, 42, 43, 44, 46, 47, 48, 49, 50, 51,
52, 53, and 54; and BoS Circular 2/2016
articles 26, 27, 28, 29, 30, 31, 32, 33(4),
34, 35, 36, 37, 38, 39, 40, 41, 46, 47, 48,
49, 50, 51, 52, and 60; and, if the
Covered Entity is an investment firm,
also SSMA articles 183(3), 184, 184bis,
185, 185bis, 186, 188, 189(1) through (3)
and (5), 189bis, 189ter, and 192bis; and
RD 217/2008 articles 14(1)(f), 20, 20bis,
21, 22, 24, 31, 31bis, 36, 38, 39(1) and
(2), 40, 88, 90, 91, 92, 93, 94, 95, 96,
97(1) through (3), and 98;
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(D) CRR articles 286 through 288 and
293; and
(E) EMIR Margin RTS article 2;
(ii) If the Covered Entity is an
investment firm, the Covered Entity is
not exempt from certain provisions of
RD 217/2008 pursuant to RD 217/2008
article 87(2) and/or (3) and/or exempt
from SSMA article 189 pursuant to
SSMA article 189(6) and/or (7); and
(iii) If the Covered Entity is an
investment firm, the Covered Entity
establishes, maintains, and implements
policies and procedures for management
of residual risk associated with the use
of recognized credit risk mitigation
techniques described in RD 217/2008
article 103(1)(c).
(2) Trade acknowledgement and
verification. The requirements of
Exchange Act rule 15Fi–2, provided that
the Covered Entity is subject to and
complies with the requirements of EMIR
article 11(1)(a) and EMIR RTS article 12.
(3) Portfolio reconciliation and
dispute reporting. The requirements of
Exchange Act rule 15Fi–3, provided
that:
(i) The Covered Entity is subject to
and complies with the requirements of
EMIR article 11(1)(b) and EMIR RTS
articles 13 and 15; and
(ii) The Covered Entity provides the
Commission with reports regarding
disputes between counterparties on the
same basis as it provides those reports
to competent authorities pursuant to
EMIR RTS article 15(2).
(4) Portfolio compression. The
requirements of Exchange Act rule
15Fi–4, provided that the Covered
Entity is subject to and complies with
the requirements of EMIR RTS article
14.
(5) Trading relationship
documentation. The requirements of
Exchange Act rule 15Fi–5, other than
paragraph (b)(5) to that rule when the
counterparty is a U.S. person, provided
that the Covered Entity is subject to and
complies with the requirements of EMIR
article 11(1)(a), EMIR RTS article 12,
and EMIR Margin RTS article 2.
(c) Substituted compliance in
connection with internal supervision
and compliance requirements and
certain Exchange Act section 15F(j)
requirements.
This Order extends to the following
provisions related to internal
supervision and compliance and
Exchange Act section 15F(j)
requirements:
(1) Internal supervision. The
requirements of Exchange Act rule
15Fh–3(h) and Exchange Act sections
15F(j)(4)(A) and (j)(5), provided that:
(i) The Covered Entity is subject to
and complies with the requirements
identified in paragraph (c)(3) of this
Order and complies with the other
conditions in that paragraph;
(ii) The Covered Entity complies with
paragraph (c)(4) of this Order; and
(iii) This paragraph (c) does not
extend to the requirements of paragraph
(h)(2)(iii)(I) to rule 15Fh–3 to the extent
those requirements pertain to
compliance with Exchange Act sections
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to
the general and supporting provisions of
paragraph (h) to rule 15Fh–3 in
connection with those Exchange Act
sections.
(2) Chief compliance officers. The
requirements of Exchange Act section
15F(k) and Exchange Act rule 15Fk–1,
provided that:
(i) The Covered Entity is subject to
and complies with the requirements
identified in paragraph (c)(3) of this
Order and complies with the other
conditions in that paragraph;
(ii) All reports required pursuant to
MiFID Org Reg article 22(2)(c) must
also:
(A) Be provided to the Commission at
least annually, and in the English
language;
(B) Include a certification signed by
the chief compliance officer or senior
officer (as defined in Exchange Act rule
15Fk–1(e)(2)) of the Covered Entity that,
to the best of the certifier’s knowledge
and reasonable belief and under penalty
of law, the report is accurate and
complete in all material respects;
(C) Address the Covered Entity’s
compliance with:
(i) Applicable requirements under the
Exchange Act; and
(ii) The other applicable conditions of
this Order in connection with
requirements for which the Covered
Entity is relying on this Order;
(D) Be provided to the Commission no
later than 15 days following the earlier
of:
(i) The submission of the report to the
Covered Entity’s management body; or
(ii) The time the report is required to
be submitted to the management body;
and
(E) Together cover the entire period
that the Covered Entity’s annual
compliance report referenced in
Exchange Act section 15F(k)(3) and
Exchange Act rule 15Fk–1(c) would be
required to cover.
(3) Applicable supervisory and
compliance requirements. (i) Paragraphs
(c)(1) and (c)(2) are conditioned on the
Covered Entity being subject to and
complying with the following
requirements:
(A) MiFID articles 16 and 23; SSMA
articles 193, 194, 208bis, 220bis, 221,
222, 223, and 224; and RD 217/2008
articles 30, 30bis, 30ter, 30qua
´ter,
30quinqies, 30sexies, 32, 41, 42, 43, 44,
45, 46, 47, 48, 61, 66, 67, 68, 69, 70, 71,
72, 72bis, 72ter, 73, 74, 74bis, 74ter, 75,
75bis, 76, 76bis, and 79; and, if the
Covered Entity is a credit institution,
also BoS Circular 2/2016 article 43 and
RD 84/2015 article 22;
(B) MiFID Org Reg articles 21 through
37, 72 through 76 and Annex IV;
(C) CRD articles 74, 76, 79 through 87,
88(1), 91(1) and (2), 91(7) through (9),
92, 94, and 95; SSMA articles 182(1)
and (2) and 183(1) and (2); and RD 217/
2008 article 35; and, if the Covered
Entity is a credit institution, also
LOSSEC articles 24, 25, 26, 27, 28, 29,
32, 33, 34, 36, 37, and 38; RD 84/2015
articles 29, 30, 31, 32, 33, 34, 35, 36, 37,
39, 41, 42, 43, 44, 46, 47, 48, 49, 50, 51,
52, 53, and 54; and BoS Circular 2/2016
articles 26, 27, 28, 29, 30, 31, 32, 33(4),
34, 35, 36, 37, 38, 39, 40, 41, 46, 47, 48,
49, 50, 51, 52, and 60; and, if the
Covered Entity is an investment firm,
also SSMA articles 183(3), 184, 184bis,
185, 185bis, 186, 188, 189(1) through (3)
and (5), 189bis, 189ter, and 192bis; and
RD 217/2008 articles 14(1)(f), 20, 20bis,
21, 22, 24, 30, 31, 31bis, 36, 38, 39(1)
and (2), 40, 88, 90, 91, 92, 93, 94, 95,
96, 97(1) through (3), and 98;
(D) CRR articles 286 through 288 and
293; and
(E) EMIR Margin RTS article 2.
(ii) Paragraphs (c)(1) and (c)(2) also
are conditioned on the Covered Entity’s
compliance with the following
conditions:
(A) If the Covered Entity is an
investment firm, the Covered Entity is
not exempt from certain provisions of
RD 217/2008 pursuant to RD 217/2008
article 87(2) and/or (3) and/or exempt
from SSMA article 189 pursuant to
SSMA article 189(6) and/or (7); and
(B) If the Covered Entity is an
investment firm, the Covered Entity
establishes, maintains, and implements
policies and procedures for management
of residual risk associated with the use
of recognized credit risk mitigation
techniques described in RD 217/2008
article 103(1)(c).
(4) Additional condition to paragraph
(c)(1). Paragraph (c)(1) further is
conditioned on the requirement that the
Covered Entity complies with the
provisions specified in paragraph (c)(3)
as if those provisions also require
compliance with:
(i) Applicable requirements under the
Exchange Act; and
(ii) The other applicable conditions of
this Order in connection with
requirements for which the Covered
Entity is relying on this Order.
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(d) Substituted compliance in
connection with counterparty protection
requirements.
This Order extends to the following
provisions related to counterparty
protection:
(1) Disclosure of information
regarding material risks and
characteristics. The requirements of
Exchange Act rule 15Fh–3(b) relating to
disclosure of material risks and
characteristics of one or more security-
based swaps subject thereto, provided
that the Covered Entity, in relation to
that security-based swap, is subject to
and complies with the requirements of
MiFID article 24(4); SSMA articles
209(1) and (3) and 210(1); RD 217/2008
articles 65 and 77(1); and MiFID Org
Reg articles 48–50.
(2) Disclosure of information
regarding material incentives or
conflicts of interest. The requirements of
Exchange Act rule 15Fh–3(b) relating to
disclosure of material incentives or
conflicts of interest that a Covered
Entity may have in connection with one
or more security-based swaps subject
thereto, provided that the Covered
Entity, in relation to that security-based
swap, is subject to and complies with
the requirements of either:
(i) MiFID article 23(2) and (3); RD
217/2008 article 61(2) and (3); and
MiFID Org Reg articles 33–35;
(ii) MiFID article 24(9); MiFID
Delegated Directive article 11(5); and
SSMA articles 220ter, 220qua
´ter, and
220quinquies; RD 217/2008 articles 62,
63, and 64; or
(iii) MAR article 20(1) and MAR
Investment Recommendations
Regulation articles 5 and 6.
(3) ‘‘Know your counterparty.’’ The
requirements of Exchange Act rule
15Fh–3(e), as applied to one or more
security-based swap counterparties
subject thereto, provided that the
Covered Entity, in relation to the
relevant security-based swap
counterparty, is subject to and complies
with the requirements of MiFID article
16(2) and (6); SSMA articles 193(2)(a)
and 194(1); RD 217/2008 articles 30 and
32(1) and (10); MiFID Org Reg articles
21, 22, 25, 26, 72, 74, 75 and applicable
parts of Annexes I and IV; CRD articles
74(1) and 85(1); SSMA articles 182(1)
and 193(3)(b); and RD 217/2008 article
35 and, if the Covered Entity is a credit
institution, also LOSSEC article 29(1);
RD 84/2015 articles 43 and 52(1); BoS
Circular 2/2016 article 28; and, if the
Covered Entity is an investment firm,
also SSMA article 189bis and RD 217/
2008 article 96(1).
(4) Suitability. The requirements of
Exchange Act rule 15Fh–3(f), as applied
to one or more recommendations of a
security-based swap or trading strategy
involving a security-based swap subject
thereto, provided that:
(i) The Covered Entity, in relation to
the relevant recommendation, is subject
to and complies with the requirements
of MiFID articles 24(2) and (3) and 25(1)
and (2); SSMA articles 208ter(1) and (2),
209(2), 212, 213, and 220sexies; RD 217/
2008 articles 66, 71, 72, 72bis, 72ter, 73,
74, 74bis, 74ter, 75, 75bis, 76bis, and 80;
CNMV Technical Guide 4/2017; and
MiFID Org Reg articles 21(1)(b) and (d),
54, and 55; and
(ii) The counterparty to which the
Covered Entity makes the
recommendation is a ‘‘professional
client’’ mentioned in MiFID Annex II
section I and in SSMA article 205 and
RD 217/2008 article 58 and is not a
‘‘special entity’’ as defined in Exchange
Act section 15F(h)(2)(C) and Exchange
Act rule 15Fh–2(d).
(5) Fair and balanced
communications. The requirements of
Exchange Act rule 15Fh–3(g), as applied
to one or more communications subject
thereto, provided that the Covered
Entity, in relation to the relevant
communication, is subject to and
complies with the requirements of:
(i) Either MiFID articles 24(1) and (3)
and SSMA articles 208 and 209(2) or
MiFID article 30(1) and SSMA article
207(4); and
(ii) MiFID articles 24(4) and (5);
SSMA articles 209(1) and (3) and 210(1);
RD 217/2008 article 77; MiFID Org Reg
articles 46–48; MAR articles 12(1)(c), 15
and 20(1); and MAR Investment
Recommendations Regulation articles 3
and 4.
(6) Daily mark disclosure. The
requirements of Exchange Act rule
15Fh–3(c), as applied to one or more
security-based swaps subject thereto,
provided that the Covered Entity is
required to reconcile, and does
reconcile, the portfolio containing the
relevant security-based swap on each
business day pursuant to EMIR articles
11(1)(b) and 11(2) and EMIR RTS article
13.
(e) Substituted compliance in
connection with recordkeeping,
reporting, and notification
requirements.
This Order extends to the following
provisions that apply to a Covered
Entity related to recordkeeping,
reporting, and notification:
(1)(i) Make and keep current certain
records. The requirements of the
following provisions of Exchange Act
rule 18a–5, provided that the Covered
Entity complies with the relevant
conditions in this paragraph (e)(1)(i) and
with the applicable conditions in
paragraph (e)(1)(ii):
(A) The requirements of Exchange Act
rule 18a–5(b)(1), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 74, 75, and
Annex IV; MiFIR article 25(1);
(B) The requirements of Exchange Act
rule 18a–5(b)(2), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Delegated Directive article 2;
MiFID Org Reg articles 72, 74 and 75;
EMIR article 39(4); RD 217/2008 article
41;
(C) The requirements of Exchange Act
rule 18a–5(b)(3), provided that the
Covered Entity is subject to and
complies with the requirements of CRR
article 103; MiFID articles 16(6), 25(5),
and 25(6); MiFID Org Reg articles 59, 74,
75 and Annex IV; MiFIR article 25(1);
EMIR articles 9(2) and 11(1)(a); SSMA
articles 194(1), 218, and 211; and RD
217/2008 articles 3, 32(1), and 82;
(D) The requirements of Exchange Act
rule 18a–5(b)(4), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg article 59; EMIR articles
9(2) and 11(1)(a); MiFID articles 16(6),
25(5), and 25(6); SSMA articles 194(1),
218, and 211; and RD 217/2008 articles
3, 32(1), and 82;
(E) The requirements of Exchange Act
rule 18a–5(b)(5), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 74, 75, and
Annex IV; and MiFIR article 25(1);
(F) The requirements of Exchange Act
rules 18a–5(b)(6) and (b)(11), provided
that:
(1) The Covered Entity is subject to
and complies with the requirements of
CRR articles 103, 105(3), and 105(10);
CRD article 73; MiFID articles 16(6),
25(5), 25(6); MiFID Delegated Directive
article 2; MiFID Org Reg articles 59, 74,
75, and Annex IV; MiFIR article 25(1);
EMIR articles 9(2), 11(1)(a), and 39(4);
SSMA articles 194(1), 218, 211; and RD
217/2008 articles 3, 32(1), 41, and 82;
and
(2) The Covered Entity applies
substituted compliance for the
requirements of Exchange Act rule 15Fi-
2 pursuant to this Order;
(G) The requirements of Exchange Act
rule 18a–5(b)(7), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFIR article 25(1); MiFID article 25(2);
MiFID Org Reg article 74 and section 1
of Annex 4; and SSMA article 213; (H)
The requirements of Exchange Act rule
18a–5(b)(8), provided that the Covered
Entity is subject to and complies with
the requirements of MiFID Org Reg
articles 21(1)(d), 35; CRD articles 88,
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91(1), 91(8); MiFID articles 9(1) and
16(3); SSMA articles 193(2)(b) and
208bis; LOSSEC articles 24(1) and 29(2);
and BoS Circular 2/2016 Rule 32(1);
(I) The requirements of Exchange Act
rule 18a–5(b)(13), regarding one or more
provisions of Exchange Act rules 15Fh–
3 or 15Fk–1 for which substituted
compliance is available under this
Order, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
MiFID Org Reg articles 72, 73, 74, 75,
and Annexes I and IV; MiFID articles
16(6) and 25(2); EMIR article 39(5);
SSMA articles 194(1) and 213; and RD
217/2008 article 32(1) and (10), in each
case with respect to the relevant
security-based swap or activity;
(2) With respect to the portion of
Exchange Act rule 18a-5(b)(13) that
relates to one or more provisions of
Exchange Act rule 15Fh–3 for which
substituted compliance is available
under this Order, the Covered Entity
applies substituted compliance for such
business conduct standard(s) of
Exchange Act rule 15Fh–3 pursuant to
this Order, as applicable, with respect to
the relevant security-based swap or
activity; and
(3) With respect to the portion of
Exchange Act rule 18a–5(b)(13) that
relates to Exchange Act rule 15Fk–1, the
Covered Entity applies substituted
compliance for Exchange Act section
15F(k) and Exchange Act rule 15Fk–1
pursuant to this Order;
(J) The requirements of Exchange Act
rule 18a–5(b)(14)(i) and (ii), provided
that:
(1) The Covered Entity is subject to
and complies with the requirements of
EMIR article 11(1)(b) and EMIR RTS
article 15(1)(a); and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rule 15Fi–3 pursuant to this Order;
and
(K) The requirements of Exchange Act
rule 18a–5(b)(14)(iii), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
EMIR article 11(1)(b) and EMIR RTS
article 15(1)(a), in each case with
respect to such security-based swap
portfolio(s); and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rule 15Fi–4 pursuant to this Order.
(ii) Paragraph (e)(1)(i) is subject to the
following further conditions:
(A) Paragraphs (e)(1)(i)(A) through (C)
and (G) are subject to the condition that
the Covered Entity preserves all of the
data elements necessary to create the
records required by the applicable
Exchange Act rules cited in such
paragraphs and upon request furnishes
promptly to representatives of the
Commission the records required by
those rules;
(B) A Covered Entity may apply the
substituted compliance determination
in paragraph (e)(1)(i)(I) to records of
compliance with Exchange Act rule
15Fh–3(b), (c), (e), (f) and (g) in respect
of one or more security-based swaps or
activities related to security-based
swaps; and
(C) This Order does not extend to the
requirements of Exchange Act rule 18a–
5(b)(9), (b)(10) or (b)(12).
(2)(i) Preserve certain records. The
requirements of the following
provisions of Exchange Act rule 18a–6,
provided that the Covered Entity
complies with the relevant conditions in
this paragraph (e)(2)(i) and with the
applicable conditions in paragraph
(e)(2)(ii):
(A) The requirements of Exchange Act
rule 18a–6(a)(2), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 72, 74, 75, and
Annex IV; CRR article 103; MiFIR article
25(1); EMIR article 9(2); MiFID articles
16(6) and 69(2); CRD article 73; MiFID
Delegated Directive article 2; SSMA
articles 194(1), 234; and RD 217/2008
articles 32(1) and 41;
(B) The requirements of Exchange Act
rule 18a–6(b)(2)(i), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 72, 74, 75, and
Annex IV; CRR article 103; MiFIR article
25(1); EMIR article 9(2); MiFID articles
16(6) and 69(2); CRD article 73; MiFID
Delegated Directive article 2; SSMA
articles 194(1), 234; and RD 217/2008
articles 32(1) and 41;
(C) The requirements of Exchange Act
rule 18a–6(b)(2)(ii), provided that the
Covered Entity is subject to and
complies with the requirements of CRR
article 103; MiFID Org Reg articles 72,
73, 74, 75, 76, Annex I and Annex IV;
MiFIR article 25(1); EMIR article 9(2);
CRD article 73; MiFID articles 16(6),
16(7); MiFID Delegated Directive article
2; SSMA articles 194(1) through (3); and
RD 217/2008 articles 32(1) through (8)
and 41;
(D) The requirements of Exchange Act
rule 18a–6(b)(2)(iii), provided that the
Covered Entity is subject to and
complies with the requirements of EMIR
article 9(2); MiFID Org Reg articles 72(1)
and 73; MiFID article 16(6); SSMA
articles 194(1); and RD 217/2008 article
32(1);
(E) The requirements of Exchange Act
rule 18a–6(b)(2)(iv), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 72(1) and 73;
MiFIR article 25(1); EMIR article 9(2);
MiFID article 16(6); SSMA articles
194(1); and RD 217/2008 article 32(1);
(F) The requirements of Exchange Act
rule 18a–6(b)(2)(vii), regarding one or
more provisions of Exchange Act rules
15Fh–3 or 15Fk–1 for which substituted
compliance is available under this
Order, provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
EMIR article 9(2); MiFID Org Reg
articles 72, 74, and 75 and Annexes I
and IV; MiFID article 16(6); SSMA
articles 194(1); and RD 217/2008 article
32(1) and (10), in each case with respect
to the relevant security-based swap or
activity;
(2) With respect to the portion of
Exchange Act rule 18a–6(b)(2)(vii) that
relates to one or more provisions of
Exchange Act rule 15Fh–3 for which
substituted compliance is available
under this Order, the Covered Entity
applies substituted compliance for such
business conduct standard(s) of
Exchange Act rule 15Fh–3 pursuant to
this Order, as applicable, with respect to
the relevant security-based swap or
activity; and
(3) With respect to the portion of
Exchange Act rule 18a–6(b)(2)(vii) that
relates to Exchange Act rule 15Fk–1, the
Covered Entity applies substituted
compliance for Exchange Act section
15F(k) and Exchange Act rule 15Fk–1
pursuant to this Order;
(G) The requirements of Exchange Act
rule 18a–6(c), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
MiFID Org Reg articles 21(1)(f) and
72(1); MiFID article 16(6); SSMA
articles 194(1); and RD 217/2008 article
32(1); and
(2) This Order does not extend to the
requirements of Exchange act rule 18a–
6(c) relating to Forms SBSE, SBSE–A,
SBSE–C, SBSE–W, all amendments to
these forms, and all other licenses or
other documentation showing the
registration of the Covered Entity with
any securities regulatory authority or
the U.S. Commodity Futures Trading
Commission;
(H) The requirements of Exchange Act
rule 18a–6(d)(1), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 35 and 72(1);
CRD articles 88, 91(1), 91(8); MiFID
article 9(1), 16(3), 16(6); LOSSEC
articles 24(1) and 29(1) and (2); SSMA
articles 193(2)(b), 194(1), and 208bis; RD
217/2008 articles 30, 31, and 32(1); and
BoS Circular 2/2016 Rule 32(1);
(I) The requirements of Exchange Act
rule 18a–6(d)(2)(ii), provided that the
Covered Entity is subject to and
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complies with the requirements of EMIR
article 9(2); MiFID Org Reg articles 72(1)
and 72(3); MiFID article 16(6); SSMA
articles 194(1); and RD 217/2008 article
32(1);
(J) The requirements of Exchange Act
rule 18a–6(d)(3)(ii), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg articles 21(1)(f), 72, 73,
and Annex I; MiFID article 16(6); SSMA
articles 194(1); and RD 217/2008 article
32(1);
(K) The requirements of Exchange Act
rule 18a–6(d)(4) and (d)(5), provided
that:
(1) The Covered Entity is subject to
and complies with the requirements of
EMIR article 9(2); MiFID Org Reg
articles 24, 25(2), 72(1) and 73; MiFID
articles 16(2), 16(6), and 25(5); SSMA
articles 193(2)(a), 194(1), and 218; and
RD 217/2008 articles 30(2), 32(1), and
82; and
(2) The Covered Entity applies
substituted compliance for Exchange
Act rules 15Fi–3, 15Fi–4, and 15Fi–5
pursuant to this Order;
(L) The requirements of Exchange Act
rule 18a–6(e), provided that the Covered
Entity is subject to and complies with
the requirements of MiFID Org Reg
articles 21(2), 58, 72(1) and 72(3); MiFID
articles 16(5), 16(6); SSMA articles
193(3) and 194(1); and RD 217/2008
article 32(1); and
(M) The requirements of Exchange
Act rule 18a–6(f), provided that the
Covered Entity is subject to and
complies with the requirements of
MiFID Org Reg article 31(1); MiFID
article 16(5); and SSMA article 193(3).
(ii) Paragraph (e)(2)(i) is subject to the
following further conditions:
(A) A Covered Entity may apply the
substituted compliance determination
in paragraph (e)(2)(i)(F) to records
related to Exchange Act rule 15Fh–3(b),
(c), (e), (f) and (g) in respect of one or
more security-based swaps or activities
related to security-based swaps; and
(B) This Order does not extend to the
requirements of Exchange Act rule 18a–
6(b)(2)(v), (b)(2)(vi), or (b)(2)(viii).
(3) File Reports. The requirements of
Exchange Act rule 18a–7(a)(2) and the
requirements of Exchange Act rule 18a–
7(j) as applied to the requirements of
Exchange Act rule 18a–7(a)(2), provided
that:
(i) The Covered Entity is subject to
and complies with the requirements of
CRR articles 99, 394, 430 and Part Six:
Title II and Title III; CRR Reporting ITS
annexes I, II, III, IV, V, VIII, IX, X, XI,
XII and XIII, as applicable; and
(ii) The Covered Entity files periodic
unaudited financial and operational
information with the Commission or its
designee in the manner and format
required by Commission rule or order
and presents the financial information
in the filing in accordance with
generally accepted accounting
principles that the Covered Entity uses
to prepare general purpose publicly
available or available to be issued
financial statements in Spain.
(4)(i) Provide Notification. The
requirements of the following
provisions of Exchange Act rule 18a–8,
provided that the Covered Entity
complies with the relevant conditions in
this paragraph (e)(4)(i) and with the
applicable conditions in paragraph
(e)(4)(ii):
(A) The requirements of Exchange Act
rule 18a–8(c) and the requirements of
Exchange Act rule 18a–8(h) as applied
to the requirements of Exchange Act
rule 18a–8(c), provided that the Covered
Entity is subject to and complies with
the requirements of LOSSEC articles
116, 119, 121, and 122; and SSMA
articles 276bis, 276ter, 276qua
´ter, and
276quinquies;
(B) The requirements of Exchange Act
rule 18a–8(d) and the requirements of
Exchange Act rule 18a–8(h) as applied
to the requirements of Exchange Act
rule 18a–8(d), provided that:
(1) The Covered Entity is subject to
and complies with the requirements of
LOSSEC articles 116, 119, 121, and 122;
and SSMA articles 276bis, 276ter,
276qua
´ter, and 276quinquies; and
(2) This Order does not extend to the
requirements of Exchange Act rule 18a–
8(d) to give notice with respect to books
and records required by Exchange Act
rule 18a–5 for which the Covered Entity
does not apply substituted compliance
pursuant to this Order;
(ii) Paragraph (e)(4)(i) is subject to the
following further conditions:
(A) The Covered Entity:
(1) Simultaneously sends a copy of
any notice required to be sent by
Spanish law cited in this paragraph of
the Order to the Commission in the
manner specified on the Commission’s
website; and
(2) Includes with the transmission the
contact information of an individual
who can provide further information
about the matter that is the subject of
the notice; and
(B) This Order does not extend to the
requirements of paragraph (g) of rule
18a–8 or to the requirements of
Exchange Act rule 18a–8(h) as applied
to such requirements.
(5) Daily Trading Records. The
requirements of Exchange Act section
15F(g), provided that the Covered Entity
is subject to and complies with the
requirements of SSMA Article 194(1);
and RD 217/2008 Article 32(1).
(6) Examination and Production of
Records. Notwithstanding the forgoing
provisions of paragraph (e) of this
Order, this Order does not extend to,
and Covered Entities remain subject to,
the requirement of Exchange Act section
15F(f) to keep books and records open
to inspection by any representative of
the Commission and the requirement of
Exchange Act rule 18a–6(g) to furnish
promptly to a representative of the
Commission legible, true, complete, and
current copies of those records of the
Covered Entity that are required to be
preserved under Exchange Act rule 18a–
6, or any other records of the Covered
Entity that are subject to examination or
required to be made or maintained
pursuant to Exchange Act section 15F
that are requested by a representative of
the Commission.
(7) English Translations.
Notwithstanding the forgoing provisions
of paragraph (e) of this Order, to the
extent documents are not prepared in
the English language, Covered Entities
must promptly furnish to a
representative of the Commission upon
request an English translation of any
record, report, or notification of the
Covered Entity that is required to be
made, preserved, filed, or subject to
examination pursuant to Exchange Act
section 15F of this Order.
(f) Definitions.
(1) ‘‘Covered Entity’’ means an entity
that:
(i) Is a security-based swap dealer or
major security-based swap participant
registered with the Commission;
(ii) Is not a ‘‘U.S. person,’’ as that term
is defined in rule 3a71–3(a)(4) under the
Exchange Act; and
(iii) Is an investment firm or a credit
institution authorized by the CNMV and
the ECB to provide investment services
and/or perform investment activities in
the Kingdom of Spain; and
(iv) Is a significant institution
supervised by the CNMV and the ECB
(with the participation of the BoS).
(2) ‘‘MiFID’’ means the ‘‘Markets in
Financial Instruments Directive,’’
Directive 2014/65/EU, as amended from
time to time.
(3) ‘‘MiFID Org Reg’’ means
Commission Delegated Regulation (EU)
2017/565, as amended from time to
time.
(4) ‘‘MiFID Delegated Directive’’
means Commission Delegated Directive
(EU) 2017/593, as amended from time to
time.
(5) ‘‘MiFIR’’ means Regulation (EU)
600/2014, as amended from time to
time.
(6) ‘‘EMIR’’ means the ‘‘European
Market Infrastructure Regulation,’’
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1
See Exchange Act Release No. 90765 (Dec. 22,
2020), 85 FR 85686 (Dec. 29, 2020) (‘‘German
Order’’).
2
‘‘Risk control’’ includes requirements related to
internal risk management, trade acknowledgment
and verification, portfolio reconciliation and
dispute resolution, portfolio compression and
trading relationship documentation; ‘‘internal
supervision and compliance’’ includes
requirements related to diligent supervision,
conflicts of interest, information gathering under
Exchange Act section 15F(j), 15 U.S.C. 78o–10(j),
and chief compliance officers; ‘‘counterparty
protection’’ includes requirements related to
disclosure of material risks and characteristics and
material incentives or conflicts of interest, ‘‘know
your counterparty,’’ suitability of recommendations,
fair and balanced communications, disclosure of
daily marks and disclosure of clearing rights; and
‘‘books and records’’ includes requirements related
to making and keeping current certain prescribed
records, preservation of records, reporting,
notification and securities counts.
3
See Letter from Thorsten Po
¨tzsch, Chief
Executive Director of BaFin’s Resolution Sector,
BaFin, to Vanessa Countryman, Secretary,
Commission, dated August 12, 2021. The Amended
Application is available on the Commission’s
website at: https://www.sec.gov/page/exchange-act-
substituted-compliance-and-listed-jurisdiction-
applications-security-based-swap.
4
‘‘Capital and margin’’ includes requirements
related to capital applicable to non-prudentially
regulated security-based swap dealers and to
margin applicable to non-prudentially regulated
SBS Entities. More specifically, the Amended
Application requested that the Commission extend
the German Order to also provide for substituted
compliance for the capital requirements of
Exchange Act section 15F(e) and Exchange Act
rules 18a–1 through 18a–1d (collectively,
‘‘Exchange Act Rule 18a–1’’), the margin
requirements of Exchange Act section 15F(e) and
Exchange Act rule 18a–3, and related
recordkeeping, reporting, notification, and
securities count requirements.
5
See Exchange Act Release No. 92647 (Aug. 12,
2021), 86 FR 46500 (Aug. 18, 2021) (‘‘German
Substituted Compliance Notice and Proposed
Amended Order’’).
6
See Exchange Act Release No. 92484 (July 23,
2021), 86 FR 41612 (Aug. 2, 2021) (‘‘French
Order’’). See also Exchange Act Release No. 90766
(Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020)
(‘‘French Substituted Compliance Notice and
Proposed Order’’); Exchange Act Release No. 91477
(Apr. 5, 2021), 86 FR 18341 (Apr. 8, 2021) (‘‘French
Reopening Release’’).
7
See Exchange Act Release No. 92529 (July 30,
2021), 86 FR 43318 (Aug. 6, 2021) (‘‘UK Order’’).
See also Exchange Act Release No. 91476 (Apr. 5,
2021), 86 FR 18378 (Apr. 8, 2021) (‘‘UK Substituted
Compliance Notice and Proposed Order’’).
from time to time.
(7) ‘‘EMIR RTS’’ means Commission
amended from time to time.
(8) ‘‘EMIR Margin RTS’’ means
Commission Delegated Regulation (EU)
2016/2251, as amended from time to
time.
(9) ‘‘CRD’’ means Directive 2013/36/
EU, as amended from time to time.
(10) ‘‘CRR’’ means Regulation (EU)
575/2013, as amended from time to
time.
(11) ‘‘CRR Reporting ITS’’ means
Commission Implementing Regulation
(EU) 680/2014, as amended from time to
time.
(12) ‘‘MAR’’ means the ‘‘Market
Abuse Regulation,’’ Regulation (EU)
596/2014, as amended from time to
time.
(13) ‘‘MAR Investment
Recommendations Regulation’’ means
Commission Delegated Regulation (EU)
2016/958, as amended from time to
time.
(14) ‘‘CNMV’’ means the Spanish
Comisio
´n Nacional del Mercado de
Valores.
(15) ‘‘BoS’’ means the Spanish Banco
de Espan
˜a.
(16) ‘‘ECB’’ means the European
Central Bank.
(17) ‘‘Accounting Directive’’ means
Directive 2013/34/EU of the European
Parliament and of the Council of 26 June
2013, as amended from time to time.
(18) ‘‘BRRD’’ means Bank Recovery
and Resolution Directive 2014/59/EU of
the European Parliament and of the
Council of 15 May 2014, as amended
from time to time.
(19) ‘‘SSMA’’ means the Spanish
Securities Market Act, Royal Legislative
Decree 4/2015, of October 23, as
amended from time to time.
(20) ‘‘RD 217/2008’’ means Royal
Decree 217/2008, of February 15, as
amended from time to time.
(21) ‘‘LOSSEC’’ means the Act on
Regulation, Supervision, and Solvency
of Credit Institutions, Law 10/2014, of
June 26, as amended from time to time.
(22) ‘‘RD 84/2015’’ means Royal
Decree 84/2015, of February 13, as
amended from time to time.
(23) ‘‘BoS Circular 2/2016’’ means
Circular 2/2016, of February 2, of the
Bank of Spain, as amended from time to
time.
(24) ‘‘Prudentially regulated’’ means a
Covered Entity that has a ‘‘prudential
regulator’’ as that term is defined in
Exchange Act section 3(a)(74).
By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021–23444 Filed 10–27–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93411; File No. S7–08–21]
Amended and Restated Order Granting
Conditional Substituted Compliance in
Connection With Certain Requirements
Applicable to Non-U.S. Security-Based
Swap Dealers and Major Security-
Based Swap Participants Subject to
Regulation in the Federal Republic of
Germany; Amended Orders
Addressing Non-U.S. Security-Based
Swap Entities Subject to Regulation in
the French Republic or the United
Kingdom; and Order Extending the
Time To Meet Certain Conditions
Relating to Capital and Margin
October 22, 2021.
I. Overview
A. Amended and Restated Order
Pursuant to Securities Exchange Act
of 1934 (‘‘Exchange Act’’) rule 3a71–6,
in December 2020, the Securities and
Exchange Commission (‘‘Commission’’)
issued a substituted compliance order
1
providing that security-based swap
dealers and major security-based swap
participants (‘‘SBS Entities’’) subject to
regulation in the Federal Republic of
Germany (‘‘Germany’’) conditionally
may satisfy certain requirements under
the Exchange Act related to risk control,
internal supervision and compliance,
counterparty protection, and books and
records by complying with comparable
German and European Union (‘‘EU’’)
requirements.
2
The German Order did
not address substituted compliance for
Exchange Act capital and margin
requirements applicable to SBS Entities
without a prudential regulator.
In August 2021, the Bundesanstalt fu
¨r
Finanzdienstleistungsaufsicht (‘‘BaFin’’)
submitted an amended ‘‘substituted
compliance’’ application (‘‘Amended
Application’’) requesting that the
Commission amend the existing German
Order
3
to address nonbank capital and
margin requirements.
4
The Amended
Application incorporated comparability
analyses between the relevant
requirements in Exchange Act section
15F and the rules and regulations
thereunder for which BaFin is seeking
substituted compliance determinations
and applicable German and EU law, as
well as information regarding German
supervisory and enforcement
frameworks.
On August 12, 2021, the Commission
issued a notice of the Amended
Application, accompanied by a
proposed amended and restated
substituted compliance order (the
‘‘proposed Amended Order’’).
5
In
addition to addressing margin and
capital requirements, the proposed
Amended Order proposed changes the
Commission preliminarily viewed as
necessary to align the German Order
with substituted compliance orders for
SBS Entities subject to regulation in the
French Republic (‘‘France’’)
6
and the
United Kingdom (‘‘UK’’)
7
which the
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jspears on DSK121TN23PROD with NOTICES1

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