§ 240.3a71-6 - Substituted compliance for security-based swap dealers and major security-based swap participants.

§ 240.3a71-6 Substituted compliance for security-based swap dealers and major security-based swap participants.

Cross Reference

Link to an amendment published at 85 FR 6412, Feb. 4, 2020.

(a) Determinations -

(1) In general. Subject to paragraph (a)(2) of this section, the Commission may, conditionally or unconditionally, by order, make a determination with respect to a foreign financial regulatory system that compliance with specified requirements under such foreign financial regulatory system by a registered security-based swap dealer and/or by a registered major security-based swap participant (each a “security-based swap entity”), or class thereof, may satisfy the corresponding requirements identified in paragraph (d) of this section that would otherwise apply to such security-based swap entity (or class thereof).

(2) Standard. The Commission shall not make a substituted compliance determination under paragraph (a)(1) of this section unless the Commission:

(i) Determines that the requirements of such foreign financial regulatory system applicable to such security-based swap entity (or class thereof) or to the activities of such security-based swap entity (or class thereof) are comparable to otherwise applicable requirements, after taking into account such factors as the Commission determines are appropriate, such as the scope and objectives of the relevant foreign regulatory requirements (taking into account the applicable criteria set forth in paragraph (d) of this section), as well as the effectiveness of the supervisory compliance program administered, and the enforcement authority exercised, by a foreign financial regulatory authority or authorities in such system to support its oversight of such security-based swap entity (or class thereof) or of the activities of such security-based swap entity (or class thereof); and

(ii) Has entered into a supervisory and enforcement memorandum of understanding and/or other arrangement with the relevant foreign financial regulatory authority or authorities under such foreign financial regulatory system addressing supervisory and enforcement cooperation and other matters arising under the substituted compliance determination.

(3) Withdrawal or modification. The Commission may, on its own initiative, by order, modify or withdraw a substituted compliance determination under paragraph (a)(1) of this section, after appropriate notice and opportunity for comment.

(b) Reliance by security-based swap entities. A registered security-based swap entity may satisfy the requirements described in paragraph (d) of this section by complying with corresponding law, rules and regulations under a foreign financial regulatory system, provided:

(1) The Commission has made a substituted compliance determination pursuant to paragraph (a)(1) of this section regarding such foreign financial regulatory system providing that compliance with specified requirements under such foreign financial regulatory system by such registered security-based swap entity (or class thereof) may satisfy the corresponding requirements described in paragraph (d) of this section; and

(2) Such registered security-based swap entity satisfies any conditions set forth in a substituted compliance determination made by the Commission pursuant to paragraph (a)(1) of this section.

(c) Requests for determinations.

(1) A party or group of parties that potentially would comply with specified requirements pursuant to paragraph (a)(1), or any foreign financial regulatory authority or authorities supervising such a party or its security-based swap activities, may file an application, pursuant to the procedures set forth in § 240.0-13, requesting that the Commission make a substituted compliance determination pursuant to paragraph (a)(1) of this section, with respect to one or more requirements described in paragraph (d) of this section.

(2) Such a party or group of parties may make a request under paragraph (c)(1) of this section only if:

(i) Each such party, or the party's activities, is directly supervised by the foreign financial regulatory authority or authorities with respect to the foreign regulatory requirements relating to the applicable requirements described in paragraph (d) of this section; and

(ii) Each such party provides the certification and opinion of counsel as described in § 240.15Fb2-4(c), as if the party were subject to that requirement at the time of the request.

(3) Such foreign financial authority or authorities may make a request under paragraph (c)(1) of this section only if each such authority provides adequate assurances that no law or policy of any relevant foreign jurisdiction would impede the ability of any entity that is directly supervised by the foreign financial regulatory authority and that may register with the Commission as a security-based swap dealer or major security-based swap participant 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.

(d) Eligible requirements. The Commission may make a substituted compliance determination under paragraph (a)(1) of this section to permit security-based swap entities that are not U.S. persons (as defined in § 240.3a71-3(a)(4)), but not security-based swap entities that are U.S. persons, to satisfy the following requirements by complying with comparable foreign requirements:

(1) Business conduct and supervision. The business conduct and supervision requirements of sections 15F(h) and (j) of the Act (15 U.S.C. 78o-10(h) and (j)) and §§ 240.15Fh-3 through 15Fh-6, other than the antifraud provisions of section 15F(h)(4)(A) of the Act and § 240.15Fh-4(a), and other than the provisions of sections 15F(j)(3) and 15F(j)(4)(B) of the Act; provided, however, that prior to making such a substituted compliance determination the Commission intends to consider whether the information that is required to be provided to counterparties pursuant to the requirements of the foreign financial regulatory system, the counterparty protections under the requirements of the foreign financial regulatory system, the mandates for supervisory systems under the requirements of the foreign financial regulatory system, and the duties imposed by the foreign financial regulatory system, are comparable to those associated with the applicable provisions arising under the Act and its rules and regulations.

(2) Chief compliance officer. The chief compliance officer requirements of section 15F(k) of the Act (15 U.S.C. 78o-10(k)) and § 240.15Fk-1; provided, however, that prior to making such a substituted compliance determination the Commission intends to consider whether the requirements of the foreign financial regulatory system regarding chief compliance officer obligations are comparable to those required pursuant to the applicable provisions arising under the Act and its rules and regulations.

(3) Trade acknowledgment and verification. The trade acknowledgment and verification requirements of section 15F(i) of the Act (15 U.S.C. 78o-10(i)) and § 240.15Fi-2; provided, however, that prior to making such a substituted compliance determination the Commission intends to consider whether the information that is required to be provided pursuant to the requirements of the foreign financial regulatory system, and the manner and timeframe by which that information must be provided, are comparable to those required pursuant to the applicable provisions arising under the Act and its rules and regulations.

(4) Capital -

(i) Security-based swap dealers. The capital requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and § 240.18a-1; provided, however, that prior to making such substituted compliance determination, the Commission intends to consider (in addition to any conditions imposed) whether the capital requirements of the foreign financial regulatory system are designed to help ensure the safety and soundness of registrants in a manner that is comparable to the applicable provisions arising under the Act and its rules and regulations.

(ii) Major security-based swap participants. The capital requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and § 240.18a-2; provided, however, that prior to making such substituted compliance determination, the Commission intends to consider (in addition to any conditions imposed) whether the capital requirements of the foreign financial regulatory system are comparable to the applicable provisions arising under the Act and its rules and regulations.

(5) Margin -

(i) Security-based swap dealers. The margin requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and § 240.18a-3; provided, however, that prior to making such substituted compliance determination, the Commission intends to consider (in addition to any conditions imposed) whether the foreign financial regulatory system requires registrants to adequately cover their current and potential future exposure to over-the-counter derivatives counterparties, and ensures registrants' safety and soundness, in a manner comparable to the applicable provisions arising under the Act and its rules and regulations.

(ii) Major security-based swap participants. The margin requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and § 240.18a-3; provided, however, that prior to making such substituted compliance determination, the Commission intends to consider (in addition to any conditions imposed) whether the foreign financial regulatory system requires registrants to adequately cover their current exposure to over-the-counter derivatives counterparties, and ensures registrants' safety and soundness, in a manner comparable to the applicable provisions arising under the Act and its rules and regulations.

(6) Recordkeeping and reporting. The recordkeeping and reporting requirements of Section 15F of the Act (15 U.S.C. 78o-10) and §§ 240.18a-5 through 240.18a-9; provided, however, that prior to making such a substituted compliance determination the Commission intends to consider (in addition to any conditions imposed), whether the foreign financial regulatory system's required records and reports, the timeframes for recording or reporting information, the accounting standards governing the records and reports, and the required format of the records and reports are comparable to applicable provisions arising under the Act and its rules and regulations and would permit the Commission to examine and inspect regulated firms' compliance with the applicable securities laws.

(7) Portfolio reconciliation, portfolio compression, and trading relationship documentation requirements. The portfolio reconciliation, portfolio compression, and trading relationship documentation requirements of section 15F(i) of the Act (15 U.S.C. 78o-10(i)) and §§ 240.15Fi-3 through 240.15Fi-5; provided, however, that prior to making such a substituted compliance determination the Commission intends to consider whether the requirements of the foreign financial regulatory system for engaging in portfolio reconciliation and portfolio compression and for executing trading relationship documentation with counterparties, the duties imposed by the foreign financial regulatory system, and the information that is required to be provided to counterparties pursuant to the requirements of the foreign financial regulatory system, are comparable to those required pursuant to the applicable provisions arising under the Act and its rules and regulations.

[81 FR 30143, May 13, 2016, as amended at 81 FR 39844, June 17, 2016; 84 FR 44041, Aug. 22, 2019; 84 FR 68646, Dec. 16, 2019; 85 FR 6412, Feb. 4, 2020]