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    SEC Proposes to Modify Substituted Compliance Order Post BaFin Request

    August 18, 2021

    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

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