SEC Proposes to Modify Substituted Compliance Order Post BaFin Request
The U.S. Securities and Exchange Commission (SEC) is seeking comments on an application of the Federal Financial Supervisory Authority of Germany (BaFin), which requests SEC to amend an existing substituted compliance Order for Germany. The request is to extend the Order to non-bank capital and margin requirements (the Amended Application). SEC is proposing to amend and restate the Order, with the comment period ending on September 13, 2021. In light of the Amended Application, SEC is also proposing to add a new general condition that would predicate substituted compliance on the presence of a supervisory and enforcement memorandum of understanding between SEC and the European Central Bank (ECB) and/or BaFin, pertaining to information owned by ECB. SEC's access to this ECB information will assist in effective oversight of covered Entities that use substituted compliance in connection with capital and margin requirements.
Rule 3a71-6 under the Exchange Act provides a framework under which non-U.S. security-based swap dealers and major security-based swap participants (security-based swap entities) may satisfy certain requirements under Section 15F of Exchange Act by complying with comparable regulatory requirements of a foreign jurisdiction. Pursuant to rule 3a71-6, in December 2020, SEC issued a substituted compliance Order to provide that German security-based swap entities may use substituted compliance with conditions to satisfy certain requirements under the Exchange Act related to risk control, internal supervision and compliance, counterparty protection, and books and records. In the preliminary view of SEC, certain developments warrant modifications to the substituted compliance Order for Germany. Since finalizing the Order, SEC has finalized substituted compliance orders for security-based swap entities subject to regulation in France and UK. Given substantial similarity of the three regimes, SEC believes that modifications to the Order may be necessary for consistency. SEC is, therefore, proposing to amend this Order to align it with the French and UK orders, where appropriate.
Moreover, BaFin's amended application requests that SEC extend the Order to provide for substituted compliance for the capital requirements of Exchange Act Section 15F(e) and Exchange Act rules 18a-1 through 18a-1d, the margin requirements Exchange Act Section 15F(e) and Exchange Act rule 18a-3 and the related recordkeeping, reporting, notification, and securities count requirements. Thus, SEC is proposing to amend the Order to conditionally permit German security-based swap entities to comply with these requirements via substituted compliance. SEC is also proposing to modify the Order's general condition requiring that covered entities provide SEC with written notice of their intent to rely on substituted compliance. To promote clarity in the notice regarding the covered entity's intended use of substituted compliance, SEC is proposing to amend the general condition to require that the notice identify each specific substituted compliance determination for which the covered entity intends to apply substituted compliance.
Related Link: Federal Register Notice
Comment Due Date: September 13, 2021
Keywords: Americas, Europe, Germany, US, Banking, Regulatory Capital, Margin Requirements, Swaps, Substituted Compliance, Derivatives, ECB
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Previous Article
SAMA Issues Key Principles for Governance of Financial InstitutionsRelated Articles
APRA Publishes Results of Climate Risk Self-Assessment Survey
The Australian Prudential Regulation Authority (APRA) has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance, and superannuation industries.
ACPR Publishes Updates Related to CRD IV and Covered Bonds
The French Prudential Supervisory Authority (ACPR) published a notice related to the methods for calculating and publishing prudential ratios under the Capital Requirements Directive (CRD IV) and the minimum requirement for own funds and eligible liabilities (MREL).
BIS Paper Contributes to Debate on Regulating NBFIs and Big Techs
The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based.
EIOPA Publishes Guidance on Climate Change Scenarios in ORSA
The European Insurance and Occupational Pension Authority (EIOPA) published the risk dashboard based on Solvency II data and the final version of the application guidance on climate change materiality assessments and climate change scenarios in the Own Risk and Solvency Assessment (ORSA).
EBA and ECB Respond to Proposals on Sustainability Disclosures
The European Banking Authority (EBA) and the European Central Bank (ECB) published their responses to the consultations of the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) on sustainability-related disclosure standards.
BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks
A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
EBA Publishes Multiple Regulatory Updates for Regulated Entities
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
EIOPA Issues SII Taxonomy and Guide on Sustainability Preferences
The European Insurance and Occupational Pensions Authority (EIOPA) published Version 2.8.0 of the Solvency II data point model (DPM) and XBRL taxonomy.
EESC Opines on Proposals on CRR and European Single Access Point
The European Union published, in the Official Journal of the European Union, an opinion from the European Economic and Social Committee (EESC); the opinion is on the proposal for a regulation to amend the Capital Requirements Regulation (CRR).
HM Treasury Publishes Multiple Regulatory Updates in July 2022
HM Treasury published a draft statutory instrument titled “The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022,” along with the related explanatory memorandum and impact assessment.