The SEC took a number of actions to address substituted compliance determinations for security-based swap dealers ("SBSDs"), including (i) amending orders previously granted covering Germany, France and the United Kingdom and (ii) adopting an additional determination for Spain.

  • The SEC amended a prior substituted compliance determination for Germany-based SBSDs to incorporate margin and capital substituted compliance for nonbank security-based swap entities. In addition, the SEC amended the German order to address: (i) risk control and internal supervision requirements; (ii) Chief Compliance Officer ("CCO") reports; (iii) counterparty protection requirements; and (iv) recordkeeping, reporting, notification and securities count requirements.
  • France and the United Kingdom. The SEC made amendments to previous substituted compliance determinations for Frenchand UK SBSDs, to, among other things, align with changes relating to the scope of counterparties captured for certain purposes and to include an additional capital condition that ensures comparable regulatory outcomes between French/UK and U.S. capital requirements.

For the three orders, the SEC extended the compliance date for certain aspects of the capital and margin requirements until January 1, 2022.

  • The SEC also granted Spanish SBSDs substituted compliance (subject to various conditions) for requirements related to internal risk management, confirmations, portfolio reconciliation and compression, trading relationship documentation, supervision, CCOs, external business conduct, recordkeeping and financial reporting.

Commentary

As with previous determinations, the SEC orders are lengthy and technical, and require close review for persons contemplating relying on the relief. Two points in particular jump out from the German/French/UK orders for their potential economic impact on persons who transact with these types of SBSDs: (1) the SEC stressed that, for "entity-level" requirements (including margin, risk mitigation and others), an SBSD firm relying on substituted compliance is not given an option as to any particular counterparty to choose between regulatory regimes (i.e., between applying substituted compliance or complying with the SEC requirements) and (2) for margin in particular, relying firms are given a roughly two-month extension to address the fact that the relevant SEC substituted compliance determination may require collection of margin from counterparties that are not in scope for margin requirements under local law.

Primary Sources

  1. Federal Register: 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 ...
  2. Federal Register: 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

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