Notice2021-18335
Notice of Substituted Compliance Application Submitted by the Spanish Financial Conduct Authority in Connection With Certain Requirements Applicable to Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the Kingdom of Spain; Proposed Order
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 26, 2021
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission" or "SEC") is soliciting public comment on an application by the Spanish Comisi[oacute]n Nacional del Mercado de Valores ("CNMV") requesting that, pursuant to rule 3a71-6 under the Securities Exchange Act of 1934 ("Exchange Act"), the Commission determine that registered security- based swap dealers and registered major security-based swap participants (together, "SBS Entities") that are not U.S. persons and that are subject to certain regulation in the Kingdom of Spain ("Spain") may comply with certain requirements under the Exchange Act via compliance with corresponding requirements of Spain and the European Union ("EU"). The Commission also is soliciting comment on a proposed Order providing for conditional substituted compliance in connection with the application.
Full Text
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<title>Federal Register, Volume 86 Issue 163 (Thursday, August 26, 2021)</title>
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[Federal Register Volume 86, Number 163 (Thursday, August 26, 2021)]
[Notices]
[Pages 47668-47696]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-18335]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92716; S7-09-21]
Notice of Substituted Compliance Application Submitted by the
Spanish Financial Conduct Authority in Connection With Certain
Requirements Applicable to Security-Based Swap Dealers and Major
Security-Based Swap Participants Subject to Regulation in the Kingdom
of Spain; Proposed Order
August 20, 2021.
AGENCY: Securities and Exchange Commission.
ACTION: Notice of application for substituted compliance determination;
proposed order.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is soliciting public comment on an application by the Spanish
Comisi[oacute]n Nacional del Mercado de Valores (``CNMV'') requesting
that, pursuant to rule 3a71-6 under the Securities Exchange Act of 1934
(``Exchange Act''), the Commission determine that registered security-
based swap dealers and registered major security-based swap
participants (together, ``SBS Entities'') that are not U.S. persons and
that are subject to certain regulation in the Kingdom of Spain
(``Spain'') may comply with certain requirements under the Exchange Act
via compliance with corresponding requirements of Spain and the
European Union (``EU''). The Commission also is soliciting comment on a
proposed Order providing for conditional substituted compliance in
connection with the application.
DATES: Submit comments on or before September 20, 2021.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#cfbdbaa3aae2aca0a2a2aaa1bbbc8fbcaaace1a8a0b9"><span class="__cf_email__" data-cfemail="344641585119575b5959515a4047744751571a535b42">[email protected]</span></a>. Please include
File Number S7-09-21 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-09-21. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Typically, comments are also available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Due to pandemic conditions, however, access
to the Commission's public reference room is not permitted at this
time. All comments received will be posted without change. Persons
submitting comments are cautioned that the Commission does not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director,
Laura Compton, Senior Special Counsel, or James Curley, Special
Counsel, at 202-551-5870, Office of Derivatives Policy, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment
on an application by the CNMV requesting that the Commission determine
that SBS Entities that are not U.S. persons and that are subject to
certain regulation in Spain may satisfy certain requirements under the
Exchange Act by complying with comparable requirements in Spain,
including relevant EU requirements. The Commission also is soliciting
comment on a proposed Order, set forth in Attachment A, providing for
conditional substituted compliance in connection with the CNMV
application.
I. Background
On August 6, 2021, market participants began to count security-
based swap positions toward the thresholds for registration with the
Commission as an SBS Entity.\1\ Exchange Act rule 3a71-6 \2\
conditionally provides that non-U.S. SBS Entities may satisfy certain
requirements under Exchange Act section 15F \3\ by complying with
comparable regulatory requirements of a
[[Page 47669]]
foreign jurisdiction.\4\ Substituted compliance potentially is
available in connection with requirements regarding business conduct
and supervision; \5\ chief compliance officers; \6\ trade
acknowledgment and verification; \7\ non-prudentially regulated capital
and margin; \8\ recordkeeping and reporting; \9\ portfolio
reconciliation and dispute reporting, portfolio compression and trading
relationship documentation.\10\
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\1\ See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR
43872, 53954 (Aug. 22, 2019) (``Capital and Margin Adopting
Release''); see also Exchange Act Release No. 87780 (Dec. 18, 2019),
85 FR 6270, 6345-49 (Feb. 4, 2020).
\2\ 17 CFR 240.3a71-6.
\3\ 15 U.S.C. 78o-10.
\4\ The Commission also has discussed the parameters of
substituted compliance in connection with substituted compliance
requests for other jurisdictions. 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. 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. 92494 (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'').
\5\ See Exchange Act rule 3a71-6(d)(1) (requirements regarding
business conduct and supervision, including internal risk
management, internal supervision, antitrust considerations,
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, disclosure of clearing rights, eligible contract
participant verification, special entities, and political
contributions).
\6\ See Exchange Act rule 3a71-6(d)(2).
\7\ See Exchange Act rule 3a71-6(d)(3).
\8\ See Exchange Act rule 3a71-6(d)(4)-(5).
\9\ See Exchange Act rule 3a71-6(d)(6) (requirements regarding
record creation, record maintenance, reporting, notification, and
securities counts).
\10\ See Exchange Act rule 3a71-6(d)(7). Substituted compliance
is not available for antifraud prohibitions and information-related
requirements under section 15F. See Exchange Act rule 3a71-6(d)(1)
(specifying that substituted compliance is not available in
connection with the antifraud provisions of Exchange Act section
15F(h)(4)(A) and Exchange Act rule 15Fh-4(a), 17 CFR 240.15Fh-4(a),
and the information-related provisions of Exchange Act sections
15F(j)(3) and 15F(j)(4)(B)). Substituted compliance under rule 3a71-
6 also does not extend to certain other provisions of the federal
securities laws that apply to security-based swaps, such as: (1)
Additional antifraud prohibitions (see Exchange Act section 10(b),
15 U.S.C. 78j(b), Exchange Act rule 10b-5, 17 CFR 240.10b-5, and
Securities Act of 1933 section 17(a), 15 U.S.C. 77q(a)); (2)
requirements related to transactions with counterparties that are
not eligible contract participants (``ECPs'') (see Exchange Act
section 6(l), 15 U.S.C. 78f(l); Securities Act of 1933 section 5(e),
15 U.S.C. 77e(e)); (3) segregation of customer assets (see Exchange
Act section 3E, 15 U.S.C. 78c-5; Exchange Act rule 18a-4, 17 CFR
240.18a-4); (4) required clearing upon counterparty election (see
Exchange Act section 3C(g)(5), 15 U.S.C. 78c-3(g)(5)); (5)
regulatory reporting and public dissemination (see generally
Regulation SBSR, 17 CFR 242.900 et seq. ); (6) SBS Entity
registration (see Exchange Act section 15F(a) and (b)); and (7)
registration of offerings (see Securities Act of 1933 section 5, 15
U.S.C. 77e).
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Substituted compliance in part is predicated on the Commission
determining the analogous foreign requirements are ``comparable'' to
the applicable requirements under the Exchange Act, after accounting
for factors such as the ``scope and objectives'' of the relevant
foreign regulatory requirements and the effectiveness of the relevant
foreign authority's or authorities' supervisory and enforcement
frameworks.\11\ Substituted compliance further requires that the
Commission and the relevant foreign financial regulatory authorities
have entered into an effective supervisory and enforcement memorandum
of understanding and/or other arrangement addressing cooperation and
other matters related to substituted compliance.\12\ 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.'' \13\
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\11\ See Exchange Act rule 3a71-6(a)(2)(i).
\12\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission, the
CNMV and the Bank of Spain are in the process of negotiating a
memorandum of understanding to address cooperation matters related
to substituted compliance. 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 have entered into a memorandum of
understanding to address cooperation matters related to substituted
compliance. These memoranda of understanding or other arrangements
will need to be in place before the Commission may allow Covered
Entities to use substituted compliance to satisfy obligations under
the Exchange Act. The memorandum of understanding with the ECB can
be found on its website at <a href="http://www.sec.gov">www.sec.gov</a> 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. The Commission expects to publish any memorandum of
understanding with the CNMV and the Bank of Spain at the same
location on the Commission's website.
\13\ See Exchange Act rule 3a71-6(a)(3). The CNMV has 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, Covered Entities (as defined in the proposed Order).
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Commission rule 0-13 \14\ addresses procedures for filing
substituted compliance applications. The rule provides that the
Commission will publish a notice when a completed 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.'' \15\
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\14\ 17 CFR 240.0-13.
\15\ 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.
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II. The CNMV's Substituted Compliance Request
The CNMV has submitted a complete substituted compliance
application to the Commission (``CNMV Application'').\16\ Pursuant to
rule 0-13, the Commission is publishing notice of the CNMV Application
together with a proposed Order to conditionally grant substituted
compliance to an entity that (1) is a security-based swap dealer or
major security-based swap participant registered with the Commission;
(2) is not a ``U.S. person,'' as that term is defined in rule 3a71-
3(a)(4) under the Exchange Act; \17\ (3) is an investment firm
authorized by the CNMV or a credit institution authorized by the ECB to
provide investment services or perform investment activities in Spain;
and (4) is a significant institution supervised by the CNMV and the ECB
(with the participation of the Bank of Spain) (each, a ``Covered
Entity'').\18\ In making its substituted compliance determination, the
Commission will consider public comments on the CNMV Application and
the proposed Order.
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\16\ See Letter from Rodrigo Buenaventura, Chair, CNMV, dated
August 20, 2021 (``CNMV Application''). The CNMV Application is
available on the Commission's website at: <a href="https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap">https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap</a>.
\17\ CFR 240.3a71-3(a)(4).
\18\ See para. (f)(1) of the proposed Order.
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The CNMV seeks substituted compliance for Covered Entities in
connection with a number of requirements under Exchange Act section
15F.
A. Relevant Market Participants and General Conditions
The Commission will consider whether to allow substituted
compliance to be used by any Covered Entity.
B. Relevant Section 15F Requirements
The CNMV requests that the Commission issue an order determining
[[Page 47670]]
that--for substituted compliance purposes--applicable requirements in
Spain are comparable with the following requirements under Exchange Act
section 15F:
<bullet> Risk control requirements--Requirements related to
internal risk management, trade acknowledgment and verification,
portfolio reconciliation and dispute resolution, portfolio compression,
and trading relationship documentation.\19\
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\19\ See part IV, infra. The CNMV is not requesting substituted
compliance in connection with capital and margin requirements
applicable to non-prudentially regulated SBS Entities (Exchange Act
section 15F(e) and Exchange Act rules 18a-1 through 18a-1d, 18a-2,
and 18a-3, 17 CFR 240.18a-1 through 18a-1d, 240.18a-2, and 240.18a-
3).
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<bullet> Internal supervision, chief compliance officer and
antitrust requirements--Requirements related to diligent supervision,
conflicts of interest, information gathering, chief compliance
officers, and antitrust considerations.\20\
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\20\ See part V, infra.
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<bullet> Counterparty protection requirements--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.\21\
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\21\ See part VI, infra. The CNMV is not requesting substituted
compliance in connection with: eligible counterparty verification
requirements (Exchange Act section 15F(h)(3)(A) and Exchange Act
rule 15Fh-3(a)(1), 17 CFR 240.15Fh-3(a)(1)); ``special entity''
provisions (Exchange Act sections 15F(h)(4) and (5); Exchange Act
rule 15Fh-3(a)(2) and (3); and Exchange Act rules 15Fh-4(b) and
15Fh-5, 17 CFR 240.15Fh-4(b) and 240.15Fh-5); and political
contribution provisions (Exchange Act rule 15Fh-6, 17 CFR 240.15Fh-
6).
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<bullet> Recordkeeping, reporting, and notification requirements--
Requirements related to making and keeping current certain prescribed
records, preservation of records, reporting, and notification.\22\
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\22\ See part VII, infra.
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C. Comparability Considerations and Proposed Order
Because Spain is a member of the European Union, market
participants in Spain are subject to Spanish requirements implemented
pursuant to EU directives and to applicable EU regulations. Those
include requirements related to: Organization, compliance, and conduct;
\23\ risk mitigation; \24\ prudential matters; \25\ and certain other
matters relevant to the application.\26\ In the view of the Spanish
Authorities, Spanish and EU requirements taken as a whole produce
regulatory outcomes that are comparable to those of the relevant
requirements under the Exchange Act.\27\
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\23\ See Markets in Financial Instruments Directive, Directive
2014/65/EU (``MiFID'') (implemented in Spain by the Spanish
Securities Market Act, Royal Legislative Decree 4/2015, of October
23 (``SSMA''), and Royal Decree 217/2008, of February 15 (``RD 217/
2008'')); see also Commission Delegated Regulation (EU) 2017/565
(``MiFID Org Reg''); Markets in Financial Instruments Regulation,
Regulation (EU) 648/2012 (``MiFIR''); Commission Delegated Directive
(EU) 2017/593 (``MiFID Delegated Directive'') (implemented in Spain
in relevant part by the SSMA and RD 217/2008).
\24\ See European Market Infrastructure Regulation, Regulation
(EU) 648/2012 (``EMIR''); see also Regulation (EU) 149/2013 (``EMIR
RTS''); Delegated Regulation (EU) 2016/2251 (``EMIR Margin RTS'').
\25\ See Capital Requirements Directive, Directive 2013/36/EU
(``CRD'') (implemented in Spain by the Act on Regulation,
Supervision, and Solvency of Credit Institutions, Law 10/2014, of
June 26 (``LOSSEC''), Royal Decree 84/2015, of February 13 (``RD 84/
2015''), and Circular 2/2016, of February 2, of the Bank of Spain
(``BoS Circular 2/2016''), as well as in some portions of the SSMA
and RD 217/2008); see also Capital Requirements Regulation,
Regulation (EU) 575/2013 (``CRR''); Commission Implementing
Regulation (EU) 680/2014 (``CRR Reporting ITS'').
\26\ See Market Abuse Regulation, Regulation (EU) 596/2014
(``MAR''); Commission Delegated Regulation (EU) 2016/958 (``MAR
Investment Recommendations Regulation''); Anti-Money Laundering
Directive, Directive (EU) 2015/849 (``MLD'') (implemented in Spain
by the Spanish Anti-Money Laundering Act, Law 10/2010, of April 28
(``SMLA'')).
\27\ In support, the CNMV Application incorporates and relies on
a series of European Commission analyses that compare EU
requirements with applicable requirements under the Exchange Act, in
addition to analyses specific to Spanish law and practices, in the
areas of: risk control (see CNMV Application Appendix B category 1);
recordkeeping, reporting, and notification (see the CNMV Application
Appendix B category 2), internal supervision, chief compliance
officer, and antitrust (see CNMV Application Appendix B category 3);
and counterparty protection (see CNMV Application Appendix B
category 4).
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In the Commission's preliminary view, requirements under the
Exchange Act and requirements under Spanish and EU law maintain similar
approaches with respect to achieving regulatory goals in several
respects, but follow differing approaches or incorporate disparate
elements in certain other respects. The Commission has considered those
similarities and differences when analyzing comparability and
developing preliminary 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.\28\
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\28\ In this context, the Commission recognizes 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 preliminarily has found
that the Spanish regime produces comparable outcomes notwithstanding
those particular differences, the Commission proposes to make a
positive determination on substituted compliance. Where the
Commission preliminarily has found that those exclusions,
exemptions, and exceptions lead to outcomes that are not comparable,
however, the Commission does not propose to provide for substituted
compliance.
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Based on the Commission's analysis of the application and review of
relevant Spanish and EU requirements, the proposed Order, located at
Attachment A, would grant substituted compliance subject to specific
conditions and limitations. When Covered Entities seek 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 substituted compliance order).
III. Scope of and Conditions to Substituted Compliance
A. Covered Entities for Which the Commission Is Proposing a Positive
Conditional Substituted Compliance Determination
Under the proposed Order, substituted compliance could be applied
by ``Covered Entities''--a term that would limit the scope of the
substituted compliance determination to SBS Entities that are subject
to applicable Spanish requirements and oversight. Consistent with the
parameters of substituted compliance under Exchange Act rule 3a71-6,
the proposed ``Covered Entity'' definition provides that the relevant
entity must be a security-based swap dealer or major security-based
swap participant registered with the Commission, and that the entity
cannot be a U.S. person.\29\ The proposed ``Covered Entity'' definition
further would provide that the entity must be an investment firm or a
credit institution authorized by the CNMV and the ECB to provide
investment services or perform investment activities in the Kingdom of
Spain and also must be a significant institution supervised by the CNMV
and the ECB (with the participation of the Bank of Spain).\30\ These
prongs of the definition are intended to help ensure that Covered
Entities are subject to
[[Page 47671]]
relevant Spanish and EU requirements and oversight.
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\29\ See paras. (f)(1)(i) and (ii) of the proposed Order.
\30\ See paras. (f)(1)(iii) and (iv) of the proposed Order.
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B. Conditions to Substituted Compliance
Substituted compliance under the proposed Order would be subject to
a number of conditions and other prerequisites, to help ensure that the
relevant Spanish 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.
1. ``Subject to and Complies With'' Relevant Spanish and EU
Requirements
Each relevant section of the proposed Order would be subject to the
condition that the Covered Entity ``is subject to and complies with''
the Spanish and EU requirements that are needed to establish
comparability. Accordingly, the proposed Order would not provide
substituted compliance when a Covered Entity is excused from compliance
with relevant foreign provisions, such as, for example, if relevant
Spanish or EU requirements do 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.\31\
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\31\ An SBS Entity's ``voluntary'' compliance with the relevant
Spanish requirements 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.
Moreover, 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, which would not be expected to promote comparable
outcomes when compliance merely is ``voluntary.''
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2. Additional General Conditions To Help Ensure Applicability of
Relevant Spanish and EU Requirements
Substituted compliance under the proposed Order further would be
subject to general conditions intended to help ensure the applicability
of relevant Spanish and EU requirements, and to facilitate the
Commission's oversight of firms that avail themselves of substituted
compliance. In particular:
<bullet> Activities as MiFID ``investment services or
activities''--The Covered Entity's security-based swap activities must
constitute ``investment services or activities'' for purposes of
applicable provisions under 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 firm's
authorization from the CNMV and the ECB.\32\
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\32\ See para. (a)(1) of the proposed Order. Under this
condition, a Covered Entity's relevant security-based swap
activities must constitute investment services or activities only to
the extent that the relevant part of the proposed Order would
require the Covered Entity to be subject to and comply with
provisions of MiFID, SSMA, RD 217/2008 or related EU and Spanish
requirements. The security-based swap activities need not be
``investment services or activities'' when the relevant part of the
proposed Order would not require compliance with one of those
provisions (e.g., paragraph (d)(6) of the proposed Order addressing
substituted compliance for daily mark disclosure requirements).
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<bullet> 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; provisions of SSMA and/or RD 217/2008 that implement MiFID; and/
or other EU and Spanish requirements adopted pursuant to those
provisions.\33\
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\33\ See para. (a)(2) of the proposed Order.
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<bullet> Security-based swaps as MiFID ``financial instruments''--
The relevant security-based swap must be a ``financial instrument'' for
purposes of applicable provisions under MiFID; provisions of SSMA and/
or RD 217/2008 that implement MiFID; and/or other EU and Spanish
requirements adopted pursuant to those provisions.\34\
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\34\ See para. (a)(3) of the proposed Order.
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<bullet> Covered Entity as CRD ``institutions''--The Covered Entity
must be an ``institution'' for purposes of applicable provisions under
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.\35\
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\35\ See para. (a)(4) of the proposed Order.
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<bullet> Counterparties as EMIR ``counterparties''--If an
applicable provision under EMIR, EMIR RTS, 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 to the Covered Entity is not
any of the specified types of counterparty, the Covered Entity must
comply with the applicable provision as if the counterparty were the
specified type of counterparty.\36\ 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.\37\
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\36\ See para. (a)(5)(i) of the proposed Order. 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 (including Member
State authorities), it must treat the counterparty as if the
counterparty were a financial counterparty.
\37\ See para. (a)(5)(ii) of the proposed Order.
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<bullet> 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) 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) cleared by a central
counterparty that is authorized or recognized to clear derivatives
contracts by a relevant authority in the EU.\38\
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\38\ See para. (a)(6) of the proposed Order.
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<bullet> 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.\39\ 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.\40\ To ensure the
Commission's ability to receive information about these Covered
Entities that may belong to the ECB, the proposed Order would require
that, at the time such a Covered Entity makes use of substituted
compliance with respect to those requirements, the Commission and the
ECB also must have a memorandum of understanding and/or other
arrangement addressing cooperation with respect to the Order as it
pertains to this ECB-owned information.\41\
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\39\ See para. (a)(7) of the proposed Order.
\40\ For example, the proposed Order would make substituted
compliance for Exchange Act internal risk management, internal
supervision, chief compliance officer, and ``know your
counterparty'' requirements available to Covered Entities that are
subject to and comply with, among other requirements, certain
provisions of CRD, provisions of Spanish law that implement CRD, and
related EU requirements. The CNMV, Bank of Spain, and ECB share
responsibility for supervising compliance with each of these
requirements. See paras. (b)(1), (c)(3), (d)(3) of the proposed
Order.
\41\ See para. (a)(8) of the proposed Order. In accordance with
the terms of the proposed Order, this arrangement will need to be in
place at the time a Covered Entity makes use of substituted
compliance by complying with any EU or Spanish requirements for
which the CNMV, Bank of Spain, and ECB share supervisory
responsibility. The Commission and the ECB have entered into a
memorandum of understanding to address substituted compliance
cooperation, a copy of which is on the Commission's website at
<a href="http://www.sec.gov">www.sec.gov</a> 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.
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[[Page 47672]]
<bullet> Notice of reliance on substituted compliance--A Covered
Entity must notify the Commission of its intent to use substituted
compliance.\42\ 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.\43\ If a
Covered Entity elects not to apply substituted compliance with respect
to a specific substituted compliance determination in the proposed
Order, it must comply with the Exchange Act requirements subject to
that determination. 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. Therefore, if a Covered Entity elects to
apply substituted compliance to these entity-level requirements, the
Commission is proposing that it must do so at the entity level.\44\
Finally, a Covered Entity must promptly update the notice if it intends
to modify its reliance on the positive substituted compliance
determinations in the proposed Order.\45\
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\42\ See para. (a)(9) of the proposed Order.
\43\ If the Covered Entity intends to rely on all the
substituted compliance determinations in a given paragraph of the
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.B, the recordkeeping,
reporting, notification, and securities count determinations in the
proposed Order have been 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
sets 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 are set forth
in paragraphs (e)(1)(i)(A) through (O). 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 (d)(1)(i)(A), (B), (C), (D),
(G), (H), (I), and (O)). For any determinations excluded from the
notice, the Covered Entity would need to comply with the Exchange
Act rule 18a-5 requirement.
\44\ See part III.C, infra.
\45\ A Covered Entity would modify its reliance on the positive
substituted compliance determinations in the proposed Order, and
thereby trigger the requirement to update its notice, if it adds or
subtracts determinations for which it is applying substituted
compliance or completely discontinues its reliance on the proposed
Order.
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<bullet> 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). 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).\46\ 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.\47\ 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.
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\46\ 17 CFR 240.18a-8(c).
\47\ See LOSSEC articles 116, 119, 121, and 122; and SSMA
articles 276bis, 276ter, 276qu[aacute]ter, and 276quinquies.
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3. European Union Cross-Border Matters
The cross-border application of MiFID, MiFIR, MAR and EU and Member
State requirements adopted pursuant to MiFID, MiFIR, or MAR raises
special issues. For some provisions of MiFID and MiFIR (and other EU
and Spanish requirements adopted pursuant to those provisions of MiFID
and MiFIR), EU law allocates the responsibility for supervising and
enforcing those requirements to authorities of the Member State in
whose territory a Covered Entity provides certain services.\48\ To help
ensure that the prerequisites to substituted compliance with respect to
supervision and enforcement are satisfied in fact, when the proposed
Order requires a Covered Entity to be subject to or comply with one of
those MiFID or MiFIR provisions (or other EU or Spanish requirements
adopted pursuant to those provisions of MiFID or MiFIR), the CNMV must
be the authority responsible for supervision and enforcement of those
requirements in relation to the particular service for which
substituted compliance is used.\49\ Similarly, for some of the EU
requirements under MAR (and other EU 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 requires a Covered Entity to be subject to or comply
with one of those MAR requirements (or other EU requirements adopted
pursuant to MAR), the Covered Entity may use substituted compliance
only if one of the authorities responsible for supervision and
enforcement of those requirements is the CNMV.\50\
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\48\ See MiFID article 35(8).
\49\ See para. (a)(10)(i) of the proposed Order.
\50\ See para. (a)(10)(ii) of the proposed Order.
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C. Substituted Compliance for Entity-Level and Transaction-Level
Requirements
The proposed Order would permit a Covered Entity to use substituted
compliance for one or more sets of entity-level Exchange Act
requirements.\51\ For example, a Covered
[[Page 47673]]
Entity could use substituted compliance for internal risk management
requirements but comply directly with Exchange Act trade acknowledgment
and verification; portfolio reconciliation and dispute reporting;
portfolio compression; trading relationship documentation; internal
supervision; chief compliance officer; and recordkeeping, reporting,
and notification requirements. For any one set of entity-level
requirements for which a Covered Entity uses substituted compliance,
however, a Covered Entity must 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 may not choose to apply substituted
compliance 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.\52\ 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 requirements, the
Covered Entity must either comply directly with the Exchange Act for
that business or comply with the terms of another applicable
substituted compliance order.\53\ For transaction-level Exchange Act
requirements,\54\ 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.
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\51\ The entity-level requirements for which the Commission is
proposing to make a positive substituted compliance determination
are: Risk control requirements related to internal risk management,
trade acknowledgement and verification, portfolio reconciliation and
dispute resolution, portfolio compression, and trading relationship
documentation; internal supervision and chief compliance officer
requirements; and recordkeeping, reporting, notification, and
securities count requirements (other than those linked to the
counterparty protection rules). See Exchange Act Release No. 87005
(June 19, 2019) 84 FR 68550, 68596 (Dec. 16, 2019) (``Recordkeeping
Adopting Release''); Exchange Act Release No. 78011 (June 8, 2016)
81 FR 39808, 39827 (June 17, 2016) (``Trade Acknowledgment and
Verification Adopting Release''); Exchange Act Adopting Release No.
87782 (Dec. 18, 2019) 85 FR 6359, 6378 (Feb. 4, 2020) (``Risk
Mitigation Adopting Release''); Business Conduct Adopting Release,
81 FR 30064.
\52\ For example, the proposed Order would require a Covered
Entity applying substituted compliance for internal risk management
requirements to comply with the comparable Spanish requirements with
respect to all of its internal risk management systems.
\53\ In the context of the EMIR counterparties condition in
paragraph (a)(5), a Covered Entity must choose: (1) To apply
substituted compliance pursuant to the 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.
\54\ The transaction-level requirements for which the Commission
is proposing to make a positive substituted compliance determination
are: Counterparty protection 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,
and disclosure of daily marks; and the recordkeeping requirements
related to those counterparty protection requirements. See Business
Conduct Adopting Release, 81 FR 30065.
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The Commission preliminarily believes that this 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.
IV. Substituted Compliance for Risk Control Requirements
A. CNMV Request and Associated Analytic Considerations
The CNMV Application in part requests substituted compliance in
connection with risk control requirements under the Exchange Act
relating to:
<bullet> 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).\55\ 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.\56\
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\55\ The CNMV is not requesting substituted compliance in
connection with Exchange Act rule 18a-1(f) or 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.
\56\ 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). The CNMV Application discusses Spanish and EU
internal risk management requirements. See CNMV Application Appendix
B category 1 at 2-20.
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<bullet> Trade acknowledgment and verification--Trade
acknowledgment and verification requirements pursuant to Exchange Act
section 15F(i) and Exchange Act rule 15Fi-2.\57\ 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.\58\
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\57\ 17 CFR 240.15Fi-2.
\58\ See Trade Acknowledgment and Verification Adopting Release,
81 FR 39808, 39809, 39820. The CNMV Application discusses Spanish
and EU trade acknowledgment and verification requirements. See CNMV
Application Appendix B category 1 at 21-34.
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<bullet> Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting requirements pursuant to Exchange
Act section 15F(i) and Exchange Act rule 15Fi-3.\59\ 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.\60\
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\59\ 17 CFR 240.15Fi-3.
\60\ See Risk Mitigation Adopting Release, 85 FR 6359, 6360-61.
The CNMV Application discusses Spanish and EU portfolio
reconciliation and dispute resolution requirements. See CNMV
Application Appendix B category 1 at 35-44.
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<bullet> Portfolio compression--Portfolio compression requirements
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-
4.\61\ Those provisions require that SBS Entities have procedures
addressing bilateral offset, bilateral compression and multilateral
compression in connection with uncleared security-based swaps.\62\
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\61\ 17 CFR 240.15Fi-4.
\62\ See Risk Mitigation Adopting Release, 85 FR 6361. The CNMV
Application discusses Spanish and EU portfolio compression
requirements. See CNMV Application Appendix B category 1 at 44-46.
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<bullet> Trading relationship documentation--Trading relationship
documentation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-5.\63\ 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.\64\
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\63\ 17 CFR 240.15Fi-5.
\64\ See Risk Mitigation Adopting Release, 85 FR 6361. The CNMV
Application discusses Spanish and EU trading relationship
documentation requirements. See CNMV Application Appendix B category
1 at 46-51.
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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. The Commission's comparability assessment accordingly
focuses on whether the analogous foreign requirements--taken as a
whole--produce comparable outcomes
[[Page 47674]]
with regard to providing that Covered Entities follow risk mitigation
and documentation practices that are appropriate to the risks
associated with their security-based swap businesses.
B. Preliminary Views and Proposed Order
1. General Considerations
In the Commission's preliminary view based on the CNMV Application
and the Commission's review of applicable provisions, 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. Substituted compliance
accordingly would 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.\65\
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\65\ See para. (b)(1) of the proposed Order.
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While the Commission recognizes these and certain other differences
between Spanish and EU requirements and the applicable risk control
requirements under the Exchange Act, in the Commission's preliminary
view those differences on balance would not preclude substituted
compliance for these requirements, particularly as requirement-by-
requirement similarity is not needed for substituted compliance.
2. Additional Conditions and Scope Issues
Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Trading Relationship Documentation--Disclosure Regarding Legal and
Bankruptcy Status
Under the proposed Order, 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.\66\ 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 disclosure
would not appear to preclude a comparable regulatory outcome when the
counterparty is not a U.S. person, because the insolvency-related
consequences that are the subject of the disclosure would not be
applicable to non-U.S. counterparties in most cases.\67\
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\66\ Those disclosures address information regarding the status
of the SBS Entity or its counterparty as an insured depository
institution or financial counterparty, and regarding the possibility
that in certain circumstances the SBS Entity or its counterparty may
be subject to the insolvency regime set forth under Title II of the
Dodd-Frank 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 (discussing
potential application of alternatives to the liquidation schemes
established under the Securities Investor Protection Act of 1970 or
the U.S. Bankruptcy Code). The absence of such disclosure 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 be
applicable to non-U.S. counterparties in most cases. See also EMIR
Margin RTS (in part addressing procedures providing for or
specifying the terms of agreements entered into by counterparties,
including applicable governing law for non-cleared derivatives, and
further providing that counterparties entering into a netting or
collateral exchange agreement must perform an independent legal
review regarding enforceability).
\67\ See also UK EMIR Margin RTS (in part addressing procedures
providing for or specifying the terms of agreements entered into by
counterparties, including applicable governing law for non-centrally
cleared derivatives, and further providing that counterparties which
enter into a netting or collateral exchange agreement must perform
an independent legal review regarding enforceability).
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b. Portfolio Reconciliation and Dispute Reporting--EU Law-Required
Dispute Reports to the Commission
Under the proposed Order, substituted compliance further 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.\68\ This condition promotes comparability with the Exchange
Act requirements to report significant valuation disputes to the
Commission,\69\ while leveraging EU reporting provisions to avoid the
need for Covered Entities to create additional de novo reporting
frameworks.\70\
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\68\ See para. (b)(3)(ii) of the proposed Order.
\69\ In proposing this dispute reporting requirement, the
Commission recognized that valuation inaccuracies may lead to
uncollaterialized 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 is important that the
Commission be informed regarding valuation disputes affecting SBS
Entities.
\70\ The principal difference between the two sets of
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 [euro]15 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 preliminary 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.
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V. Substituted Compliance for Internal Supervision, Chief Compliance
Officers and Antitrust Requirements
A. CNMV Request and Associated Analytic Considerations
The CNMV also requests substituted compliance in connection with
requirements under the Exchange Act relating to:
<bullet> 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.\71\
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\71\ The CNMV Application addresses Spanish and EU requirements
that address Covered Entities'' obligations related to internal
supervision. See CNMV Application Appendix B category 3 at 1-59.
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<bullet> Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and Exchange
Act rule 15Fk-1.\72\ 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.\73\
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\72\ 17 CFR 240.15Fk-1.
\73\ The CNMV Application discusses Spanish and EU chief
compliance officer requirements. See CNMV Application Appendix B
category 3 at 60-89.
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<bullet> Antitrust requirements--Additional requirements related to
antitrust prohibitions specified by Exchange Act section 15F(j)(6).\74\
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\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. The CNMV Application addresses EU antitrust requirements.
See CNMV Application Appendix B category 3 at 26.
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[[Page 47675]]
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. The comparability assessment accordingly may
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that Covered
Entities have structures and processes reasonably designed to promote
compliance with applicable law; identify and cure instances of non-
compliance; and to manage conflicts of interest, in part through the
designation of an individual with responsibility and authority over
compliance matters.
B. Preliminary Views and Proposed Order
1. General Considerations
Based on the CNMV Application and the Commission's review of
applicable provisions, in the Commission's preliminary view the
relevant Spanish and EU requirements would produce regulatory outcomes
that are comparable to those associated with the above-described
internal supervision, chief compliance officer, conflict of interest,
and information-related 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.\75\ As elsewhere, this
part of the proposed Order conditions substituted compliance on Covered
Entities being subject to and complying with specified Spanish and EU
requirements that are necessary to establish comparability.\76\
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\75\ This portion of the proposed Order accordingly would extend
generally to the 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).
See para. (c)(1) of the proposed Order. This portion of the proposed
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 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 is not proposing to provide substituted compliance). See
para. (c)(1)(iii) of the proposed Order.
\76\ See paras. (c)(1)(i), (c)(2)(i), and (c)(3) of the proposed
Order.
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The Commission recognizes that certain differences are present
between those Spanish requirements and the applicable requirements
under the Exchange Act. In the Commission's preliminary view, on
balance, however, those differences would not preclude substituted
compliance within the relevant outcomes-oriented context.
2. Additional Conditions and Scope Issues
Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Internal Supervision--Application of Spanish and EU Supervisory and
Compliance Requirements to Residual U.S. Requirements and Order
Conditions
Under the proposed Order, substituted compliance for 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.\77\
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\77\ See paras. (c)(1)(ii) and (c)(4) of the proposed Order.
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Even with substituted compliance, Covered Entities still would be
subject directly to a number of requirements under the Exchange Act and
to the conditions of the proposed Order. In some cases, particular
requirements under the Exchange Act are outside the ambit of
substituted compliance.\78\ In other cases, certain requirements under
the Exchange Act may not have comparable Spanish and EU requirements or
may be outside the scope of the CNMV Application,\79\ or the Covered
Entity may decide not to use substituted compliance for certain
requirements under the Exchange Act. 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. This condition would
address this issue, while still allowing 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 supervision
and compliance frameworks.
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\78\ As noted, substituted compliance does not extend to
antifraud prohibitions or to certain other requirements under the
Exchange Act (e.g., requirements related to transactions with
counterparties that are not ECPs and segregation requirements). See
note 10, supra.
\79\ For example, the CNMV is not requesting substituted
compliance in connection with eligible counterparty verification
requirements, ``special entity'' provisions, and political
contribution provisions. See note 21, supra.
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b. Chief Compliance Officers--Compliance Reports
Under the proposed Order, substituted compliance in connection with
the compliance report requirements under Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) also would be subject to the conditions
that the 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; \80\ (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; \81\ (3) address the Covered Entity's compliance
with applicable requirements under the Exchange Act and other
applicable conditions of the proposed Order; \82\ (4)
[[Page 47676]]
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; \83\ 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.\84\ Although certain Spanish and EU requirements address a
Covered Entity's use of internal compliance reports, those provisions
do not require it to submit compliance reports to the Commission. Under
this condition, a Covered Entity could leverage the compliance reports
that it otherwise must produce, by extending those reports to address
compliance with the conditions of the proposed Order.\85\
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\80\ See para. (c)(2)(ii)(A) of the proposed Order.
\81\ See para. (c)(2)(ii)(B) of the proposed Order.
\82\ See para. (d)(2)(ii)(C) of the proposed Order. 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). The Commission believes that
this condition is necessary to promote comparable regulatory
outcomes, particularly in light of the granular approach to
substituted compliance, 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.
\83\ See para. (c)(2)(ii)(D) of the proposed Order. The
Commission believes 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. The
Commission views 15 days as providing a reasonable time to translate
reports, if needed, and convey them to the Commission. This deadline
is 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.
\84\ See para. (c)(2)(ii)(E) of the proposed Order. This
requirement prevents 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.
\85\ In practice, a Covered Entity may satisfy this condition 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.
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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 believes that these elements are
necessary to achieve a regulatory outcome comparable to the Exchange
Act.
c. No Substituted Compliance in Connection With Antitrust Requirements
Under the proposed Order, substituted compliance would not extend
to Exchange Act section 15F(j)(6) (and related internal supervision
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an
alternative means of compliance would not lead to outcomes comparable
to that statutory prohibition.\86\
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\86\ See also German Substituted Compliance Order, 85 FR 85691-
92; French Substituted Compliance Order, 86 FR 41642-43. 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.
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VI. Substituted Compliance for Counterparty Protection Requirements
A. CNMV Request and Associated Analytic Considerations
The CNMV further requests substituted compliance in connection with
provisions under the Exchange Act relating to:
<bullet> 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.\87\
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\87\ See Business Conduct Adopting Release, 81 FR 29983-86. The
CNMV Application discusses Spanish and EU requirements that address
disclosure of material risks and characteristics and material
incentives or conflicts of interest. See CNMV Application Appendix B
category 4 at 16-33.
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<bullet> ``Know your counterparty''--Exchange Act rule 15Fh-3(e)
requires that SBS Entities 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.\88\
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\88\ See Business Conduct Adopting Release, 81 FR 29993-94. The
CNMV Application discusses Spanish and EU ``know your counterparty''
requirements. See CNMV Application Appendix B category 4 at 41-48.
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<bullet> 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.\89\ This provision accounts for the need to guard against
security-based swap dealers making unsuitable recommendations.\90\
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\89\ See Business Conduct Adopting Release, 81 FR 29994-30000.
\90\ See Business Conduct Adopting Release, 81 FR 29994-30000.
The CNMV Application discusses Spanish and EU suitability
requirements. See CNMV Application Appendix B category 4 at 49-60.
---------------------------------------------------------------------------
<bullet> 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.\91\
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\91\ See Business Conduct Adopting Release, 81 FR 30000-02. The
CNMV Application discusses Spanish and EU fair and balanced
communications requirements. See CNMV Application Appendix B
category 4 at 1-15.
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<bullet> Daily mark disclosure--Exchange Act rule 15Fh-3(c)
requires that SBS Entities provide daily mark information to certain
counterparties. These provisions address t he need for market
participants to have effective access to daily mark information
necessary to manage their security-based swap positions.\92\
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\92\ See Business Conduct Adopting Release, 81 FR 29986-91. The
CNMV Application discusses Spanish and EU daily mark disclosure
requirements. See CNMV Application Appendix B category 4 at 34-40.
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<bullet> 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.\93\
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\93\ See Business Conduct Adopting Release, 81 FR 29991-93.
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. The CNMV Application discusses Spanish and EU
clearing rights. See CNMV Application Appendix B category 4 at 61-
69.
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[[Page 47677]]
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.'' \94\ The comparability assessment accordingly
may focus on whether the analogous foreign requirements--taken as a
whole--produce similar outcomes with regard to promoting professional
standards of conduct, increasing transparency, and requiring Covered
Entities to treat parties fairly.
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\94\ See 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 Exchange Act rule 3a71-3(a)(3), (8) and (9)
(definitions of ``transaction conducted through a foreign branch,''
``U.S. business'' and ``foreign business'').
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B. Preliminary Views and Proposed Order
1. General Considerations
Based on the CNMV Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant Spanish and EU requirements produce regulatory outcomes that
are comparable to counterparty protection requirements under Exchange
Act section 15F(h) related to 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, by subjecting Covered
Entities to obligations that promote standards of professional conduct,
transparency, and the fair treatment of parties. The proposed Order
accordingly would provide conditional substituted compliance in
connection with those requirements.\95\ The proposed Order
preliminarily does not provide substituted compliance in connection
with requirements related to clearing rights disclosure, however, for
reasons addressed below.
---------------------------------------------------------------------------
\95\ See para. (d) of the proposed Order.
---------------------------------------------------------------------------
In taking this proposed approach, the Commission recognizes that
there are certain differences between relevant Spanish and EU
requirements, on the one hand, and the relevant disclosure, ``know your
counterparty,'' suitability, and communications requirements under the
Exchange Act, on the other hand. On balance, however, in the
Commission's preliminary 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. As elsewhere, the counterparty protection
provisions of the proposed Order in part condition substituted
compliance on Covered Entities being subject to, and complying with,
specified Spanish and EU requirements that are necessary to establish
comparability.\96\ Substituted compliance in connection with these
counterparty protection requirements also would be subject to specific
conditions and limitations necessary to promote consistency in
regulatory outcomes.
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\96\ See paras. (d)(1) through (3), (d)(4)(i), and (d)(5) of the
proposed Order (requirement to be subject to and comply with
relevant Spanish and EU requirements in connection with substituted
compliance for Exchange Act disclosure of material risks and
characteristics, disclosures of material incentives or conflicts of
interest, ``know your counterparty,'' suitability, and fair and
balanced communications requirements); para. (d)(6) of the proposed
Order (requirement to be required under Spanish and EU requirements
to reconcile, and in fact reconcile, the portfolio containing the
security-based swap for which substituted compliance is applied, on
each business day in connection with substituted compliance for
daily mark disclosure requirements).
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2. Additional Conditions and Scope Issues
a. Suitability--Limitation to per se Professional Clients
Under the proposed Order, substituted compliance in connection with
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would
be conditioned on the requirement that the counterparty be a per se
``professional client'' as defined in MiFID and not be a ``special
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange
Act rule 15Fh-2(d).\97\ Accordingly, the proposed Order would not
provide substituted compliance for Exchange Act suitability
requirements for a recommendation made to a counterparty that is a
``retail client'' or an elective ``professional client,'' as such terms
are defined in MiFID,\98\ or for a ``special entity'' as defined in the
Exchange Act. In the Commission's preliminary view, absent such a
condition the MiFID 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.\99\
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\97\ 17 CFR 240.15Fh-2(d). See para. (d)(4)(ii) of the proposed
Order.
\98\ 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. A
retail client is a client who is not a professional client. See
MiFID article 4(1)(11).
\99\ 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 would remain 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.
---------------------------------------------------------------------------
b. Daily Mark Disclosure--Limitation to Security-Based Swaps in
Portfolios Required To Be Reconciled and in Fact Reconciled Each
Business day
The proposed Order would provide substituted compliance in
connection with daily mark disclosure requirements pursuant to Exchange
Act rule 15Fh-3(c) to the extent that the Covered Entity participates
in daily portfolio reconciliation exercises that include the relevant
security-based swap pursuant to Spanish and EU requirements.\100\
[[Page 47678]]
Spanish and EU portfolio reconciliation requirements for uncleared OTC
derivative contracts include a requirement to exchange valuations of
those contracts directly between counterparties. The required frequency
of portfolio reconciliations varies depending on the types of
counterparties and the size of the portfolio of OTC derivatives between
them, with daily reconciliation required only for the largest
portfolios. For security-based swaps to which the EU's daily portfolio
reconciliation requirements apply (i.e., security-based swaps of a
financial counterparty or non-financial counterparty subject to the
clearing obligation in EMIR, if the counterparties have 500 or more OTC
derivatives contracts outstanding with each other \101\), the
Commission preliminarily views these requirements as comparable to
Exchange Act requirements. For all other security-based swaps in
portfolios that are not required to be reconciled on each business day,
the Commission preliminarily views the EU's portfolio reconciliation
requirements as not comparable to Exchange Act requirements and is
proposing not to make a positive substituted compliance determination.
---------------------------------------------------------------------------
\100\ See para. (d)(6) of the proposed Order. This approach
would provide substituted compliance for daily mark requirements
based on comparability of outcomes without the need to distinguish
between U.S. person counterparties and other counterparties, and
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.
\101\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
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c. No Substituted Compliance in Connection With Clearing Rights
Disclosure Requirements
The proposed Order would not provide substituted compliance in
connection with clearing rights disclosure requirements pursuant to
Exchange Act rule 15Fh-3(d). The CNMV Application cites certain
provisions related to clearing rights in the EU that are unrelated to,
and do not require disclosure of, the clearing rights provided by
Exchange Act section 3C(g)(5).\102\ Moreover, unlike the rule 15Fh-3(d)
disclosure requirements, the section 3C(g)(5) clearing rights
themselves are not eligible for substituted compliance. Accordingly, in
the Commission's preliminary view, substituted compliance based on EU
clearing provisions would not lead to comparable disclosure of a
counterparty's Exchange Act clearing rights and is not proposing to
make a positive substituted compliance determination for clearing
rights disclosure requirements.
---------------------------------------------------------------------------
\102\ See note 93, supra.
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VII. Substituted Compliance for Recordkeeping, Reporting, and
Notification Requirements
A. CNMV Request and Associated Analytic Considerations
The CNMV Application in part requests substituted compliance for
requirements applicable to SBS Entities with a prudential regulator
under the Exchange Act relating to:
<bullet> Record Making--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\103\
---------------------------------------------------------------------------
\103\ 17 CFR 240.18a-5. The CNMV Application discusses Spanish
and EU recordmaking requirements. See CNMV Application Appendix B
category 2 at 3-27, 55-57.
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<bullet> Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\104\
---------------------------------------------------------------------------
\104\ 17 CFR 240.18a-6. The CNMV Application discusses Spanish
and EU record preservation requirements. See CNMV Application
Appendix B category 2 at 28-54, 57-58.
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<bullet> Reporting--Exchange Act rule 18a-7 requires certain
reports.\105\
---------------------------------------------------------------------------
\105\ 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 2 at 59-62.
---------------------------------------------------------------------------
<bullet> Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\106\
---------------------------------------------------------------------------
\106\ 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 62-64.
---------------------------------------------------------------------------
<bullet> Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\107\
---------------------------------------------------------------------------
\107\ 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 2 at 2-3.
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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. The comparability assessment accordingly may focus on
whether the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to recordkeeping, reporting,
notification, and related practices that support the Commission's
oversight of these registrants. A foreign jurisdiction need not have
analogues to every requirement under Commission rules to receive a
positive substituted compliance determination.
B. Preliminary Views and Proposed Order
1. General Considerations
Based on the CNMV Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant EU and Spanish requirements, subject to the conditions and
limitations of the proposed Order, would produce regulatory outcomes
that are comparable to the outcomes associated with the vast majority
of the recordkeeping, reporting, and notification requirements under
the Exchange Act applicable to SBS Entities with a prudential regulator
pursuant to Exchange Act section 15F(g) and Exchange Act rules 18a-5,
18a-6, 18a-7, and 18a-8.
In reaching this preliminary conclusion, the Commission recognizes
that there are certain differences between the EU and Spanish
requirements and the Exchange Act requirements. In the Commission's
preliminary view, on balance, those differences generally would not be
inconsistent with substituted compliance for these requirements.
Requirement-by-requirement similarity is not needed for substituted
compliance.
However, the Commission is structuring its preliminary substituted
compliance determinations in the proposed Order to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader rule for which they would apply substituted
compliance. 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
granular approach to making substituted compliance determinations with
respect to discrete requirements within Exchange Act rules 18a-5, 18a-
6, 18a-7, and 18a-8 (collectively, the ``recordkeeping, reporting, and
notification rules'') is 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 and reporting requirements
applicable to SBS Entities
[[Page 47679]]
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 is consistent with the approach taken by the
Commission in the French and UK Substituted Compliance Orders.\108\
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\108\ See French Substituted Compliance Order, 86 FR at 41649;
UK Substituted Compliance Order, 86 FR at 43360.
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As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility results in preliminary substituted
compliance determinations with respect to the different categories of
records these rules require SBS Entities with a prudential regulator to
make, keep current, and/or preserve. 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 with a prudential regulator (e.g., business
conduct requirements) as well as to promote the prudent operation of
these firms.\109\ The Commission preliminarily believes the comparable
EU and Spanish recordkeeping rules achieve these outcomes with respect
to compliance with substantive EU and Spanish requirements for which
preliminary positive substituted compliance determinations are being
made in this 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, it may be appropriate to make
substituted compliance determinations at this level of Exchange Act
rules 18a-5 and 18a-6.
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\109\ See, e.g. , Exchange Act Release No. 71958 (Apr. 17,
2014), 79 FR 25194, 25199-200 (May 2, 2014).
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As discussed in more detail below, the Commission's preliminary
view is that substituted compliance is appropriate for most of the
requirements applicable to SBS Entities with a prudential regulator
within the recordkeeping, reporting, and notification rules. However,
certain of the discrete requirements in these rules are fully or
partially linked to substantive Exchange Act requirements for which
substituted compliance is not available or for which a positive
substituted compliance determination would not be made under the
proposed Order. In these cases, a preliminary positive substituted
compliance determination is not be made for the requirement that is
fully linked to the substantive requirement or to the part of the
requirement that is linked to the substantive requirement. In
particular, a preliminary positive substituted compliance determination
is not being 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 is not being made: (1)
Exchange Act rule 15Fh-4 (``Rule 15Fh-4 Exclusion''); (2) Exchange Act
rule 15Fh-5 (``Rule 15Fh-5 Exclusion''); (3) Exchange Act rule 15Fh-6
(``Rule 15Fh-6 Exclusion''); (4) Exchange Act rule 18a-4 (``Rule 18a-4
Exclusion''); (5) Regulation SBSR (``Regulation SBSR Exclusion''); (6)
Form SBSE and its variations (``Form SBSE Exclusion''); (7) Exchange
Act rule 15Fh-1 Exclusion (``Rule 15Fh-1 Exclusion''), and (8) Exchange
Act rule 15Fh-2 (``Rule 15Fh-2 Exclusion''). This proposed approach is
consistent with the approach taken by the Commission in the French and
UK Substituted Compliance Orders.\110\
---------------------------------------------------------------------------
\110\ See French Substituted Compliance Order, French
Substituted Compliance Order, 86 FR at 41650; UK Substituted
Compliance Order, 86 FR at 43361.
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In addition, certain of the requirements in the recordkeeping,
reporting, and notification rules are expressly linked to substantive
Exchange Act requirements where a preliminary positive substituted
compliance determination is being made under the proposed Order. In
these cases, substituted compliance with the linked requirement in the
recordkeeping, reporting, or notification rule is conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement. This is the case regardless of
whether the requirement is fully or partially linked to the substantive
Exchange Act requirement. The recordkeeping, reporting, and
notification requirements that are linked to a substantive Exchange Act
requirement are designed and tailored to assist the Commission in
monitoring and examining an SBS Entity's compliance with the
substantive Exchange Act requirement. EU and Spanish recordkeeping,
reporting, and notification requirements are designed to perform a
similar role with respect to the substantive EU and Spanish
requirements to which they are linked. Consequently, this condition is
designed to ensure that the records, reports, and notifications of a
Covered Entity align with the substantive Exchange Act or EU or Spanish
requirement to which they are linked. For these reasons, under the
proposed Order, substituted compliance for recordkeeping, reporting,
and notification requirements linked to the following Exchange Act
rules would be conditioned on the Covered 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 (``Rule 15Fh-3 Condition''); (2) Exchange
Act rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act rule
15Fi-3 (``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4
(``Rule 15Fi-4 Condition''); (5) Exchange Act rule 15Fi-5 (``Rule 15Fi-
5 Condition''); and (6) Exchange Act rule 15Fk-1 (``Rule 15Fk-1
Condition''). This proposed approach is consistent with the approach
taken by the Commission in the French and UK Substituted Compliance
Orders.\111\
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\111\ See French Substituted Compliance Order, 86 FR at 41650;
UK Substituted Compliance Order, 86 FR at 43361.
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2. Exchange Act Rule 18a-5
Exchange Act rule 18a-5 requires SBS Entities to make and keep
current various types of records. The requirements for SBS Entities
without a prudential regulator are set forth in paragraph (a) of the
rule.\112\ The requirements for SBS Entities with a prudential
regulator are set forth in paragraph (b) of the rule.\113\ The
Commission is making a preliminary positive substituted compliance
determination for many of the requirements of paragraph (b) of Exchange
Act rule 18a-5 in the granular manner discussed above.\114\
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\112\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
\113\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
\114\ See para. (e)(1) of the proposed Order.
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However, certain of the requirements in these paragraphs are linked
to substantive Exchange Act requirements for which substituted
compliance is not available or a preliminary positive substituted
compliance determination would not be made under the proposed
[[Page 47680]]
Order. In these cases, a positive substituted compliance determination
would not be made for the linked requirement in Exchange Act rule 18a-5
or the portion of the requirement in Exchange Act rule 18a-5 that is
linked to the substantive Exchange Act requirement.\115\
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\115\ A positive preliminary substituted compliance
determination would not be made for the following requirements of
Exchange Act rule 18a-5 because they are linked to a substantive
Exchange Act requirement for which the proposed Order would not
provide substituted compliance: (1) Exchange Act rules 18a-5(b)(9)
and (10) are fully linked to Exchange Act rule 18a-4 and, therefore,
would be subject to the Rule 18a-4 Exclusion; (2) Exchange Act rule
18a-5(b)(12) is fully linked to Exchange Act rule 15Fh-6 and,
therefore, would be subject to the Rule 15F-6 Exclusion; (3) the
portions of Exchange Act rule 18a-5(b)(13) that relates to Exchange
Act rule 15Fh-4 would be subject to the Rule 15Fh-4 Exclusion; (4)
the portion of Exchange Act rule 18a-5(b)(13) that relates to
Exchange Act rule 15Fh-5 would be subject to the 15Fh-5 Exclusion;
(5) the portion of Exchange Act rule 18a-5(b)(13) that relates to
Exchange Act rule 15Fh-1 would be subject to the 15Fh-1 Exclusion;
and (6) the portion of Exchange Act rule 18a-5(b)(13) that relates
to Exchange Act rule 15Fh-2 would be subject to the 15Fh-2
Exclusion.
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In addition, certain of the requirements in Exchange Act rule 18a-5
are fully or partially linked to substantive Exchange Act requirements
where a preliminary positive substituted compliance determination would
be made under the proposed Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-5 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\116\
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\116\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rules 18a-5(b)(6) and (b)(11) are
linked to Exchange Act rule 15Fi-2 and, therefore, would be subject
to the Rule 15Fi-2 Condition; (2) Exchange Act rule 18a-5(b)(13) is
linked to Exchange Act rule 15Fh-3 and, therefore, would be subject
to the Rule 15Fh-3 Condition; (3) Exchange Act rule 18a-5(b)(13) is
linked to Exchange Act rule 15Fk-1, and therefore, would be subject
to the Rule 15Fk-1 Condition; (4) Exchange Act rules 18a-5(b)(14)(i)
and (ii) are linked to Exchange Act rule 15Fi-3 and, therefore,
would be subject to the Rule 15Fi-3 Condition; and (5) Exchange Act
rule 18a-5(b)(14)(iii) is linked to Exchange Act rule 15Fi-4 and,
therefore, would be subject to the Rule 15Fi-4 Condition.
---------------------------------------------------------------------------
In addition, the proposed Order would allow a Covered Entity to
apply substituted compliance on a transaction-by-transaction basis for
the Commission's recordkeeping requirements that are linked with the
counterparty protection requirements in Exchange Act rule 15Fh-3.\117\
This approach is intended to be consistent with the Commission
preliminarily allowing Covered Entities to apply substituted compliance
on a transaction-by-transaction basis for the Commission's counterparty
protection requirements.
---------------------------------------------------------------------------
\117\ See para. (e)(1)(ii)(B) of the proposed Order.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the record making requirements of Exchange Act rule 18a-5 would be
subject to the condition that the Covered Entity: (1) Preserves all of
the data elements necessary to create the records required by Exchange
Act rules 18a-5(b)(1), (2), (3), and (7); and (2) upon request
furnishes promptly to representatives of the Commission the records
required by those rules (``SEC Format Condition'').\118\ This proposed
condition is modeled on the alternative compliance mechanism in
paragraph (c) of Exchange Act rule 18a-5. In effect, a Covered Entity
applying substituted compliance with respect to these requirements of
Exchange Act rule 18a-5 would need to comply with the comparable EU and
Spanish requirements. However, under the SEC Format Condition, the
Covered Entity would need to produce a record that is formatted in
accordance with the requirements of Exchange Act rule 18a-5 at the
request of Commission staff. The objective is to require--on a very
limited basis--the production of a record that consolidates the
information required by Exchange Act rules 18a-5(b)(1), (2), (3), and
(7) in a single record and, as applicable, in a blotter or ledger
format. This will assist the Commission staff in reviewing the
information on the record.
---------------------------------------------------------------------------
\118\ See para. (e)(1)(ii)(A) of the proposed Order.
---------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-5 by listing in each row: (1) The
paragraph of the proposed Order that sets forth the preliminary
determination; (2) the paragraph(s) of Exchange Act rule 18a-5 to which
the preliminary determination applies; (3) a brief description of the
records required by the paragraph(s); and (4) a brief description of
any additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Order would not provide substituted compliance.\119\
---------------------------------------------------------------------------
\119\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-5;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) as discussed
below, must promptly furnish to a representative of the Commission
upon request an English translation of a record. See para. (e)(7) of
the proposed Order (setting forth the English translation
requirement).
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
Additional conditions
Order paragraph Rule paragraph Rule description and partial exclusions
----------------------------------------------------------------------------------------------------------------
(e)(1)(i)(A)......................... (b)(1)................. Trade blotters......... SEC Format Condition.
(e)(1)(i)(B)......................... (b)(2)................. Account ledgers........ SEC Format Condition.
(e)(1)(i)(C)......................... (b)(3)................. Stock record........... SEC Format Condition.
(e)(1)(i)(D)......................... (b)(4)................. Memoranda of brokerage N/A.
orders.
(e)(1)(i)(E)......................... (b)(5)................. Memoranda of N/A.
proprietary orders.
(e)(1)(i)(F)......................... (b)(6)................. Confirmations, trade Rule 15Fi-2 Condition.
(b)(11)................ verification.
(e)(1)(i)(G)......................... (b)(7)................. Accountholder SEC Format Condition.
information.
(e)(1)(i)(H)......................... (b)(8)................. Associated person's N/A.
employment application.
(e)(1)(i)(I)......................... (b)(13)................ Compliance with (1) Rule 15Fh-3
business conduct Condition.
requirements. (2) Rule 15Fk-1
Condition.
(3) Rule 15Fh-1
Exclusion.
(4) Rule 15Fh-2
Exclusion.
(5) Rule 15Fh-4
Exclusion.
(6) Rule 15Fh-5
Exclusion.
[[Page 47681]]
(e)(1)(i)(J)......................... (b)(14)(i)............. Portfolio Rule 15Fi-3 Condition.
(b)(14)(ii)............ reconciliation.
(e)(1)(i)(K)......................... (b)(14)(iii)........... Portfolio compression.. Rule 15Fi-4 Condition.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-5
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-5 to which the determination applies; (3) a brief
description of the records required by the paragraph; and (4) a brief
description of why the requirement is excluded from substituted
compliance.
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(1)(ii)(C)........................ (b)(9)................. Possession or control Rule 18a-4 Exclusion.
records.
(e)(1)(ii)(C)........................ (b)(10)................ Reserve computations... Rule 18a-4 Exclusion.
(e)(1)(ii)(C)........................ (b)(12)................ Political contribution Rule 15Fh-6 Exclusion.
records.
----------------------------------------------------------------------------------------------------------------
3. Exchange Act Rule 18a-6
Exchange Act rule 18a-6 requires an SBS Entity to preserve certain
types of records if it makes or receives them (in addition to the
records the SBS Entity is required to make and keep current pursuant to
Exchange Act rule 18a-5).\120\ Exchange Act rule 18a-6 also prescribes
the time period that these additional records and the records required
to be made and kept current pursuant to Exchange Act rule 18a-5 must be
preserved and the manner in which they must be preserved.
---------------------------------------------------------------------------
\120\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------
Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the
records that an SBS Entity must retain if it makes or receives them and
prescribes the retention periods for these records as well as for the
records that must be made and kept current pursuant to Exchange Act
rule 18a-5. Certain of these paragraphs prescribe requirements
separately for SBS Entities without a prudential regulator and SBS
Entities with a prudential regulator.\121\ The proposed Order would
make substituted compliance available for the requirements of these
paragraphs applicable to SBS Entities with a prudential regulator. As
discussed below, the Commission is making a preliminary positive
substituted compliance determination for many of the requirements of
these paragraphs applicable to SBS Entities with a prudential
regulator.
---------------------------------------------------------------------------
\121\ Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a-6 apply to SBS Entities without a prudential
regulator. Paras. (a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of
Exchange Act rule 18a-6 apply to SBS Entities with a prudential
regulator. Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act
rule 18a-6 apply to SBS Entities irrespective of whether they have a
prudential regulator.
---------------------------------------------------------------------------
However, certain of these requirements are fully or partially
linked to substantive Exchange Act requirements for which a preliminary
positive substituted compliance determination would not be made under
the proposed Order. In these cases, a positive substituted compliance
determination would not be made for the linked requirement in Exchange
Act rule 18a-6.\122\
---------------------------------------------------------------------------
\122\ A positive substituted compliance determination would not
be made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which the proposed Order would not provide substituted
compliance: (1) Exchange Act rule 18a-6(b)(2)(vi) is fully linked to
Regulation SBSR and, therefore, would be subject to the Regulation
SBSR Exclusion; (2) Exchange Act rule 18a-6(b)(2)(viii) is fully
linked to Exchange Act rule 15Fh-4 and, therefore, would be subject
to the Rule 15Fh-4 Exclusion; (3) Exchange Act rule 18a-
6(b)(2)(viii) is fully linked to Exchange Act rule 15Fh-5 and,
therefore, would be subject to the Rule 15Fh-5 Exclusion; (4)
Exchange Act rule 18a-6(b)(2)(v) is fully linked to Exchange Act
rule 18a-4 and, therefore, would be subject to the Rule 18a-4
Exclusion; (5) the portion of Exchange Act rule 18a-6(c) relating to
Form SBSE and its variations would be subject to the Form SBSE
Exclusion; (6) the portion of Exchange Act rule 18a-6(b)(2)(vii)
that relates to Exchange Act rule 15Fh-1 would be subject to the
15Fh-1 Exclusion; (7) the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fh-2 would be
subject to the 15Fh-2 Exclusion; (8) the portion of Exchange Act
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-4 would
be subject to the 15Fh-4 Exclusion; (9) the portion of Exchange Act
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-5 would
be subject to the 15Fh-5 Exclusion; and (10) the portion of Exchange
Act rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-6
would be subject to the 15Fh-6 Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-6
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination would be made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-6 would be conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement.\123\
---------------------------------------------------------------------------
\123\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rule 18a-6(b)(2)(vii) is linked to
Exchange Act rule 15Fh-3 and, therefore, would be subject to the
Rule 15Fh-3 Condition; (2) Exchange Act rule 18a-6(b)(2)(vii) is
linked to Exchange Act rule 15Fk-1 and, therefore, would be subject
to the Rule 15Fk-1 Condition; (3) Exchange Act rules 18a-6(d)(4) and
(d)(5) are linked to Exchange Act rule 15Fi-3 and, therefore, would
be subject to the Rule 15Fi-3 Condition; (4) Exchange Act rules 18a-
6(d)(4) and (d)(5) are linked to Exchange Act rule 15Fi-4 and,
therefore, would be subject to the Rule 15Fi-4 Condition; and (5)
Exchange Act rules 18a-6(d)(4) and (d)(5) are linked to Exchange Act
rule 15Fi-5 and, therefore, would be subject to the Rule 15Fi-5
Condition.
---------------------------------------------------------------------------
Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for preserving records electronically. Paragraph (f) sets
forth requirements for
[[Page 47682]]
when records are prepared or maintained by a third party. The Order
would make substituted compliance available for the requirements of
paragraphs (e) and (f) of Exchange Act rule 18a-6 with respect to
Covered Entities with a prudential regulator.\124\
---------------------------------------------------------------------------
\124\ See paras. (e)(2)(i)(L) and (M) of the proposed Order.
---------------------------------------------------------------------------
Paragraph (g) of Exchange Act rule 18a-6 requires an SBS Entity to
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the SBS Entity that
are required to be preserved under Exchange Act rule 18a-6, or any
other records of the SBS Entity that are subject to examination or
required to be made or maintained pursuant to section 15F of the
Exchange Act that are requested by a representative of the Commission.
The proposed Order would not make substituted compliance available for
the requirements of paragraph (g) of Exchange Act rule 18a-6 because
there is no comparable requirement in the EU or Spain to produce these
records to a representative of the Commission.
The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-6 by listing in each row: (1) The
paragraph of the proposed Order that sets forth the determination; (2)
the paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by the
paragraph(s); and (4) a brief description of any additional conditions
to applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which the proposed Order
would not provide substituted compliance.\125\
---------------------------------------------------------------------------
\125\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-6;
namely that the Covered Entity: (1) Must be subject to and complies
with the requirements of foreign law; and (2) must promptly furnish
to a representative of the Commission upon request an English
translation of a record. See para. (e)(7) of the proposed Order
(setting forth the English translation requirement).
Exchange Act Rule 18a-6
[Record preservation]
----------------------------------------------------------------------------------------------------------------
Conditions and partial
Order paragraph Rule paragraph Rule description exclusions
----------------------------------------------------------------------------------------------------------------
(e)(2)(i)(A)......................... (a)(2)................. 6 year record N/A.
preservation.
(e)(2)(i)(B)......................... (b)(2)(i).............. 3 year record N/A.
preservation.
(e)(2)(i)(C)......................... (b)(2)(ii)............. Communications......... N/A.
(e)(2)(i)(D)......................... (b)(2)(iii)............ Account documents...... N/A.
(e)(2)(i)(E)......................... (b)(2)(iv)............. Written agreements..... N/A.
(e)(2)(i)(F)......................... (b)(2)(vii)............ Business conduct (1) Rule 15Fh-3
standard records. Condition.
(2) Rule 15Fk-1
Condition.
(3) Rule 15Fh-1
Exclusion.
(4) Rule 15Fh-2
Exclusion.
(5) Rule 15Fh-4
Exclusion.
(6) Rule 15Fh-5
Exclusion.
(7) Rule 15Fh-6
Exclusion.
(e)(2)(i)(G)......................... (c).................... Corporate documents.... Form SBSE Exclusion.
(e)(2)(i)(H)......................... (d)(1)................. Associated person's N/A.
employment application.
(e)(2)(i)(I)......................... (d)(2)(ii)............. Regulatory authority N/A.
reports.
(e)(2)(i)(J)......................... (d)(3)(ii)............. Compliance, N/A.
supervisory, and
procedures manuals.
(e)(2)(i)(K)......................... (d)(4), (d)(5)......... Portfolio (1) Rule 15Fi-3
reconciliation. Condition.
(2) Rule 15Fi-4
Condition.
(3) Rule 15Fi-5
Condition.
(e)(2)(i)(L)......................... (e).................... Electronic storage N/A.
system.
(e)(2)(i)(M)......................... (f).................... Third-party N/A.
recordkeeper.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-6
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-6 to which the determination applies; (3) a brief
description of the records required by those paragraph; and (4) a brief
description of why the requirement is excluded from substituted
compliance.
Exchange Act Rule 18a-6
[Preservation]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(2)(ii)........................... (b)(2)(v).............. Information supporting Rule 18a-4 Exclusion.
financial reports.
(e)(2)(ii)........................... (b)(2)(vi)............. Regulation SBSR Regulation SBSR
information. Exclusion.
(e)(2)(ii)........................... (b)(2)(viii)........... Special entity (1) Rule 15Fh-4
documents. Exclusion.
(2) Rule 15Fh-5
Exclusion.
----------------------------------------------------------------------------------------------------------------
[[Page 47683]]
4. Exchange Act Rule 18a-7
Exchange Act rule 18a-7 requires SBS Entities, on a monthly basis
(if not prudentially regulated) or on a quarterly basis (if
prudentially regulated), to file an unaudited financial and operational
report on the FOCUS Report Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated). The Commission will use the FOCUS
Reports filed by the SBS Entities to both monitor the financial and
operational condition of individual SBS Entities and to perform
comparisons across SBS Entities. The FOCUS Report Part IIC elicits less
information than the FOCUS Report Part II because the Commission does
not have responsibility for overseeing the capital and margin
requirements applicable to these entities.
The FOCUS Report Parts II and IIC are standardized forms that
elicit specific information through numbered line items. This
facilitates cross-firm analysis and comprehensive monitoring of all SBS
Entities registered with the Commission. Further, the Commission has
designated the Financial Industry Regulatory Authority, Inc.
(``FINRA'') to receive the FOCUS Reports from SBS Entities.\126\
Broker-dealers registered with the Commission currently file their
FOCUS Reports with FINRA through the eFOCUS system it administers.
Using FINRA's eFOCUS system will enable broker-dealers, security-based
swap dealers, and major security-based swap participants to file FOCUS
Reports on the same platform using the same preexisting templates,
software, and procedures.
---------------------------------------------------------------------------
\126\ See Order Designating Financial Industry Regulatory
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------
Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS Entities
with a prudential regulator to file the FOCUS Report Part IIC on a
quarterly basis. The proposed Order would provide substituted
compliance for this requirement subject to the condition that the
Covered Entity file with the Commission periodic unaudited financial
and operational information in the manner and format specified by the
Commission by order or rule (``Manner and Format Condition'') and
present the financial information in accordance with generally accepted
accounting principles (``GAAP'') that the firm uses to prepare general
purpose publicly available or available to be issued financial
statements in Spain (``Spanish GAAP Condition'').\127\ The Commission
believes that it would be appropriate to condition substituted
compliance with respect to Exchange Act rule 18a-7 on the Covered
Entity filing unaudited financial and operational information in a
manner and format that facilitates cross-firm analysis and
comprehensive monitoring of all SBS Entities registered with the
Commission.\128\ For example, the Commission could by order or rule
require Covered Entities with a prudential regulator to file the
financial and operational information with FINRA using the FOCUS Report
Part IIC but permit the information input into the form to be the same
information the SBS Entity reports to the CNMV.
---------------------------------------------------------------------------
\127\ Under the proposed Order, Covered Entities with a
prudential regulator would need to present the information reported
in the FOCUS Report in accordance with GAAP that the firm uses to
prepare publicly available or available to be issued general purpose
financial statements in its home jurisdiction instead of U.S. GAAP
if other GAAP, such as International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board
(IASB), is used by the Covered Entity in preparing publicly
available or available to be issued general purpose financial
statements in Spain.
\128\ The Manner and Format condition is included in the French
and UK Substituted Compliance Orders. See French Substituted
Compliance Order, 86 FR at 41651; UK Substituted Compliance Order,
83 FR at 43361-62.
---------------------------------------------------------------------------
The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-7 by listing in each row: (1)
The paragraph of the proposed Order that sets forth the determination;
(2) the paragraph of Exchange Act rule 18a-7 to which the determination
applies; (3) a brief description of the report required by the
paragraph; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements.\129\
---------------------------------------------------------------------------
\129\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a report. See para. (e)(7) of the proposed
Order (setting forth the English translation requirement).
Exchange Act Rule 18a-7
[Reporting]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Conditions
----------------------------------------------------------------------------------------------------------------
(e)(3)(i)............................ (a)(2)................. File FOCUS Reports..... (1) Manner and Format
Condition.
(2) Spanish GAAP
Condition.
----------------------------------------------------------------------------------------------------------------
5. Exchange Act Rule 18a-8
Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\130\ The proposed
Order would provide substituted compliance for the requirements of
Exchange Act rule 18a-8 applicable to SBS Entities with a prudential
regulator (subject to conditions and limitations). In particular, the
requirements of: (1) Paragraph (c) of Exchange Act Rule 18a-8 that an
SBS Entity that is a security-based swap dealer and that files a notice
of adjustment to its reported capital category with a U.S. prudential
regulator must transmit a copy of the notice to the Commission; (2)
paragraph (d) of the rule that an SBS Entity provide notification to
the Commission if it fails to make and keep current books and records
under Exchange Act rule 18a-5 and to transmit a subsequent report on
steps being taken to correct the situation; and (3) paragraph (h) of
the rule setting forth how to make the notifications required by
Exchange Act 18a-8.
---------------------------------------------------------------------------
\130\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the notification requirements of Exchange Act rule 18a-8 would be
subject to the condition that the Covered Entity: (1) Simultaneously
sends a copy of any notice required to be sent by EU or Spanish
notification laws to the Commission in the manner specified on the
Commission's website (i.e., the ``SEC Filing Condition''); 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 (i.e., the ``Contact Information Condition'').
The purpose of this condition is to alert the Commission to financial
or operational problems that
[[Page 47684]]
could adversely affect the firm--the objective of Exchange Act rule
18a-8.
In addition, the Order does not provide substituted compliance for
paragraph (g) of Exchange Act rule 18a-8 that an SBS Entity that is a
security-based swap dealer provide notification if it fails to make a
required deposit into its special reserve account for the exclusive
benefit of security-based swap customers under Exchange Act rule 18a-4.
Substituted compliance is not available for Exchange Act rule 18a-4.
In addition, the proposed Order would not provide substituted
compliance for paragraph (g) of Exchange Act rule 18a-8 that an SBS
Entity that is a security-based swap dealer provide notification if it
fails to make a required deposit into its special reserve account for
the exclusive benefit of security-based swap customers under Exchange
Act rule 18a-4. Substituted compliance is not available for Exchange
Act rule 18a-4.
The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-8 by listing in each row: (1)
The paragraph of the proposed Order that sets forth the determination;
(2) the paragraph of Exchange Act rule 18a-8 to which the determination
applies; (3) a brief description of the notification required by the
paragraph; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements.\131\
---------------------------------------------------------------------------
\131\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a notification. See para. (e)(7) of the
proposed Order (setting forth the English translation requirement).
Exchange Act Rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Conditions
----------------------------------------------------------------------------------------------------------------
(e)(4)(i)(B)......................... (c).................... Prudential regulator (1) SEC Filing
capital category Condition.
adjustment notices. (2) Contact Information
Condition.
(e)(4)(i)(C)......................... (d).................... Books and records (1) SEC Filing
notices. Condition.
(2) Contact Information
Condition.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-8
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-8 to which the determination applies; (3) a brief
description of the notification required by the paragraph; and (4) the
exclusion from substituted compliance.
Exchange Act Rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(4)(ii)(C)........................ (g).................... Reserve account notices Rule 18a-4 Exclusion.
----------------------------------------------------------------------------------------------------------------
6. Exchange Act Section 15F(g)
Exchange Act Section 15F(g) requires SBS Entities, including SBS
Entities with a prudential regulator, to maintain daily trading
records.\132\ The Commission preliminarily believes EU and Spanish laws
produce a comparable result in terms of its daily trading recordkeeping
requirements.\133\ Accordingly, the Commission preliminarily is making
a positive substituted compliance determination for the self-executing
requirements in this paragraph.\134\
---------------------------------------------------------------------------
\132\ See 15 U.S.C. 78o-10(g).
\133\ See SSMA Article 194(1); and RD 217/2008 Article 32(1).
\134\ See para. (e)(5) to the proposed Order.
---------------------------------------------------------------------------
7. Examination and Production of Records
The proposed Order would not extend to, and Covered Entities would
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.\135\
---------------------------------------------------------------------------
\135\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g). French and UK Substituted Compliance Orders do not extend
substituted compliance to these requirements. See French Substituted
Compliance Order, 86 FR at 41650; UK Substituted Compliance Order,
86 FR at 43361.
---------------------------------------------------------------------------
Consequently, every Covered Entity registered with the Commission,
whether complying directly with Exchange Act requirements or relying on
substituted compliance as a means of complying with the Exchange Act,
would be required to satisfy the inspection and production requirements
imposed on such entities under the Exchange Act. Covered Entities would
be able to make, keep, and preserve records, subject to the proposed
conditions described above, in a manner prescribed by applicable EU and
Spanish requirements. As an element of its substituted compliance
application, the CNMV has provided the Commission with adequate
assurances that no law or policy would impede the ability of any entity
that is directly supervised by the authority and that
[[Page 47685]]
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. Consistent with those
assurances and the requirements that apply to all Covered Entities
under the Exchange Act, Covered Entities operating under the proposed
Order would need to keep books and records open to inspection by any
representative of the Commission and to furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the firm that these entities are required to
preserve under Exchange Act rule 18a-6 (which would include records for
which a positive substituted compliance determination is being made
with respect to Exchange Act rule 18a-6 under the Order), or any other
records of the firm 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.
8. English Translations
The proposed Order provides that to the extent documents are not
prepared in the English language, Covered Entities would need to
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 or the proposed
Order.\136\ This condition would be designed to addresses difficulties
that Commission examinations staff would have examining Covered
Entities that furnish documents in a foreign language. The English
translations would need to be provided promptly. This condition is
included in the French and UK Substituted Compliance Orders.\137\
---------------------------------------------------------------------------
\136\ See para. (e)(7) to the proposed Order.
\137\ See French Order, 86 FR at 41651; UK Order, 86 FR at
43361.
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VIII. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness in Spain
A. General Considerations
As noted above, Exchange Act rule 3a71-6 provides that the
Commission's assessment of the comparability of the requirements of the
foreign financial regulatory system must account for ``the
effectiveness of the supervisory program administered, and the
enforcement authority exercised'' by the foreign financial regulatory
authority. This prerequisite accounts for the understanding that
substituted compliance determinations should reflect the reality of the
foreign regulatory framework, in that rules that appear high-quality on
paper nonetheless should not form the basis for substituted compliance
if--in practice--market participants are permitted to fall short of
their regulatory obligations. This prerequisite, however, also
recognizes that differences among the supervisory and enforcement
regimes should not be assumed to reflect flaws in one regime or
another.\138\
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\138\ See generally Business Conduct Adopting Release, 81 FR
30079.
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In connection with these considerations, the CNMV Application
includes information regarding the Spanish supervisory and enforcement
framework applicable to derivatives markets and market participants.
This includes information regarding the supervisory and enforcement
authority afforded to authorities in Spain to promote compliance with
applicable requirements, applicable supervisory and enforcement tools
and capabilities, consequences of non-compliance, and the application
of supervisory and enforcement practices in the cross-border context.
After review of this information, the Commission preliminarily believes
that the framework is reasonably designed to promote compliance with
the laws where substituted compliance has been requested.
In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission particularly has considered the following factors:
B. Supervisory Framework in Spain
Supervision of Covered Entities located in Spain is conducted by
the CNMV and the ECB. The Bank of Spain informed the staff that it does
not have supervisory authority over significant credit institutions in
the areas where substituted compliance has been requested, although, as
explained below, it does play a role in the supervision of anti-money
laundering laws. In addition, the CNMV and the Bank of Spain cooperate
closely and have frequent communications regarding the supervision of
firms to accomplish their respective missions. The ECB, through joint
supervisory teams (``JSTs''), supervises firms for compliance with the
CRD and CRR, including all capital requirements. The CNMV and the ECB
have the ability to request records needed for supervision from firms
through the supervisory process. In addition, the CNMV and the ECB set
annual priorities and conduct thematic reviews, which are used to
enhance supervision in specific regulatory areas. The results of these
thematic reviews are made public to provide transparency to the
industry.
The CNMV uses a risk-based approach to supervision to determine
which firms will receive the most supervisory attention. Under the
CNMV's risk framework, the largest banks providing investment services
are included in the top tier. The CNMV is in daily contact with the
largest firms through phone calls and emails and also conducts meetings
with senior management. The CNMV uses a number of tools to supervise
Covered Entities. For the largest firms, the CNMV conducts periodic
monitoring of the confidential reports submitted by the firms to the
CNMV regarding the conduct of business rules. This information is
analyzed against existing information at the CNMV and, if red flags are
spotted, different actions can be taken. For example, the information
in the reports may be used to determine whether the firm should undergo
an onsite inspection or a limited review. If red flags are spotted at
several firms, a thematic review may be launched to obtain more
information from these entities.
The CNMV creates an annual supervision plan based on the
information available on each one of the entities under the CNMV's
supervision (e.g., systemic and financial risk, complaints received,
previous supervisory experience with the firm, etc.) and the time that
has passed since the last visit. This plan is based on an analysis of
the potential risks in the sector and is shared with the Bank of Spain
but is not otherwise made public. The CNMV uses a risk-based process to
determine when it will conduct an onsite examination looking at factors
such as systemic risks, types of services provided, types of products
distributed, complaints, and the time since the last on-site
inspection. The CNMV plans its onsite examinations as part of the
annual supervision plan but can also decide to conduct a limited review
of certain areas if issues or concerns arise during the year. At the
end of the onsite portion of the examination, a report is issued and a
formal Letter of Findings (``LoF'') is communicated to the firm. The
LoF is addressed to the Compliance Officer who must inform the firm's
Board of Directors. A copy of the LoF is also sent to the Bank of
Spain.
Firms are required to give a formal response to the LoF containing
their
[[Page 47686]]
observations, a commitment that the firm will change its procedures and
resolve any deficiencies observed, and confirmation that the entity's
Board of Directors has been informed of the CNMV LoF and of the
response given. Within six months, the firm must provide a compliance
report describing how the firm has corrected deficiencies observed
during the inspection. The CNMV verifies that changes have been made
through desk reviews or in a subsequent onsite visit. If follow-up
measures are deemed necessary, the CNMV will launch a supervisory
activity to assess the new procedures in place at the firm. If
appropriate changes have not been made or the conduct is severe, the
CNMV may refer the matter to CNMV's enforcement program.
The coordination of compliance with the anti-money laundering laws
is done by the Commission for the Prevention of Money Laundering and
Monetary Offenses (``COPBLAC''), through cooperation arrangements with
the Bank of Spain and the CNMV. The Executive Service of the Commission
for the Prevention of Money Laundering and Monetary Offences
(``SEPBLAC'') works with the Bank of Spain and the CNMV to supervise
Covered Entities for compliance with the anti-money laundering laws.
The Bank of Spain and CNMV follow a risk-based approach to perform
supervisory activities, with their main supervisory task to determine
the AML/CFT risk profile of the firm. The Bank of Spain and CNMV also
conduct onsite inspections based on an annual supervisory plan, which
is approved by COPBLAC. After an inspection, the Bank of Spain and CNMV
share a summary of conclusions and, where appropriate, recommendations,
with the firm. The firm addresses the recommendations through a
remediation plan that is monitored by the Bank of Spain or CNMV. The
inspection report is shared with COPBLAC, who ultimately decides on
what binding supervisory measures or sanctions to impose.
Supervision of the CRD and CRR is conducted through the ECB's
single supervisory mechanism and executed by JSTs comprising of ECB
staff, Bank of Spain staff, and staff from other countries in the EU
where the significant institution has a subsidiary or branch. The Bank
of Spain assigns multiple supervisors to the JST for a significant
institution headquartered in Spain. The head of the JST is from the ECB
and generally is not from the country where the significant institution
is located. As part of its day-to-day supervision, the JST analyzes the
supervisory reporting, financial statements, and internal documentation
of supervised entities. The JSTs hold regular and ad hoc meetings with
the supervised entities at various levels of staff seniority. They
conduct ongoing risk analyses of approved risk models, and analyze and
assess the recovery plans of supervised entities. The various
supervisory activities typically result in supervisory measures
addressed to the supervised institution. Supervisory activities and
decisions result in a number of routine steps such as the monitoring of
compliance by the JST and, if necessary, enforcement measures and
sanctions. In addition to ongoing supervision, the JST may conduct in-
depth reviews on certain topics by organizing a dedicated onsite
mission (e.g., an inspection or an internal model investigation). The
onsite inspections are carried out by an independent inspection team,
which works in close cooperation with the respective JST.
C. Enforcement Authority in Spain
CNMV is empowered to investigate and sanction very serious,
serious, and minor infringements of law. The most common source of
information regarding infringements is the supervisory activity of the
Supervision Department and the Secondary Markets Department. In
addition, CNMV may initiate investigations based on whistleblower
complaints. According to CNMV, when a breach is committed by a credit
institution, a report from the Bank of Spain is a prerequisite for
imposing sanctions for serious or very serious infringements. The Bank
of Spain has informed the staff that it does not have enforcement
authority over significant credit institutions in the areas where
substituted compliance has been requested. As described below,
enforcement of the CRD and CRR for violations detected by the joint
supervisory teams is conducted by the ECB. In addition, violations
related to anti-money laundering are investigated and sanctioned by
SEPBLAC, which has sole enforcement decision-making power with regard
to the Spanish Money Laundering Act.
CNMV has an array of investigative capacities that enable it to
detect and enforce against breaches of relevant laws. It is empowered
to perform its enforcement functions with respect to both legal and
natural persons, including those persons holding directorships or
executive positions in Covered Firms. Among the investigative tools
available to CNMV are: The power to inspect on premises of a Covered
Firm, the power to compel documents, information, and statements, and
the power to obtain electronic communications for third parties with
the subject's consent, or pursuant to judicial authorization. Upon
receiving and considering a supervisory report containing sound
evidence of a possible infringement, CNMV's enforcement unit prepares a
legal assessment regarding the findings contained the report, and
provides the assessment and the report to CNMV's Executive Committee.
The Executive Committee then determines whether to initiate a
sanctioning procedure. At the conclusion of such procedures, a wide
range of possible sanctions may be imposed including, among others:
Public reprimand, pecuniary sanctions up to 30M[euro], suspension or
restriction of the type or volume of transactions the sanctioned party
may carry out in the securities markets, disqualification from holding
a directorship or executive post a financial institution for up to ten
years, or disgorgement of profits made or losses avoided as a result of
the infringement. CNMV is not empowered to enter into settlement
agreements, but may impose a penalty discounted by 40% where the
sanctioned party undertakes early payment, recognizes liabilities and
waives the right to appeal within the administrative bodies. In the
event the procedure continues, a 20% discount may be granted upon early
payment (and waiver of the right to appeal the decision before the
administrative body) at any time prior to the adoption of final
decision. CNMV publicizes all serious and very serious infringements
without undue delay provided publication is proportionate and would not
jeopardize financial stability.
Misconduct detected by the JSTs is addressed primarily by the ECB.
Under the SSM Regulations, the ECB is empowered to address issues of
noncompliance with applicable European Union law by directly imposing
enforcement measures on supervised entities or requiring the CNMV to
use its national enforcement powers. It also may choose to impose
administrative penalties or request that the CNMV open sanctioning
proceedings. In particular, the ECB may impose administrative pecuniary
penalties, and may impose fines and periodic penalty payments per day
of infringement. Where appropriate, the ECB may exercise its
enforcement authority in parallel with supervisory measures.
Where infringements of the SMLA occur, the SEPBLAC is empowered to
conduct necessary inspections to verify compliance with the obligations
relating to the functions assigned to it. In this regard, the obliged
persons and their
[[Page 47687]]
employees, directors and agents are required to cooperate to the
fullest extent possible with the staff of the SEPBLAC, providing
unrestricted access to as much information or documentation as is
required, including books, accounts, records, software, magnetic files,
internal reports, minutes, official statements and any other related
matters subject to inspection. However, the SEPBLAC is not competent to
accede to obtain third party records (such as internet service
providers or telephone records). Various sanctions are available to the
SEPBLAC when infringements are determined to have occurred. Among the
sanctions that the SEPBLAC may impose are: Public reprimand, a fine of
no less than 150,000[euro] imposed against the Covered Entity, plus
additional fines against those individuals in administrative or
management positions who were responsible for the Covered Entity's
violation, and withdrawal of administrative authorization for the
Covered Entity.
IX. Request for Comment
Commenters are invited to address all aspects of the application,
the Commission's preliminary views and the proposed Order.
A. General Aspects of the Comparability Assessments and Proposed Order
The Commission requests comment regarding the preliminary views and
proposed Order in connection with each of the general ``regulatory
outcome'' categories addressed above. Commenters particularly are
invited to address, among other issues, whether the relevant Spanish
and EU provisions generally are sufficient to produce regulatory
outcomes that are comparable to the outcomes associated with
requirements under the Exchange Act, and whether the conditions and
limitations of the proposed Order would adequately address potential
gaps in the relevant regulatory outcomes or would otherwise result in
any implementation or other practical issues. Further, the Commission
requests comment regarding whether the proposed conditions and
limitations guard against comparability gaps arising from the cross-
border application of Spanish and EU requirements (including when SBS
Entities conduct security-based swap business through branches located
in the United States or in third countries). Should the Commission
require Covered Entities to be subject to and comply with additional or
alternative limitations and/or conditions to achieve a comparable
regulatory outcome, or are any of the proposed limitations or
conditions unnecessary to achieve a comparable regulatory outcome?
Explain why or why not.
With respect to the proposed conditions and limitations, commenters
also are invited to address 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 UK and/or
for the Commission's proposal to amend its conditional grant of
substituted compliance for Germany.\139\ Would the responses to any of
the questions that the Commission asked in connection with the German,
French, and/or UK notices and proposed orders differ if those questions
applied to Spanish regulatory requirements and frameworks? \140\
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\139\ See German Substituted Compliance Order, 85 FR 85688-89;
French Substituted Compliance Order, 86 FR 41616-22; UK Substituted
Compliance Order, 86 FR 43321-31; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46501-03.
\140\ See German Substituted Compliance Notice and Proposed
Order, 85 FR 72740-43; French Substituted Compliance Notice and
Proposed Order, 85 FR 85736-39; French Substituted Compliance Re-
Opening Release, 86 FR 18341-49; UK Substituted Compliance Notice
and Proposed Order, 86 FR 18406-11; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46523-27.
---------------------------------------------------------------------------
B. Risk Control Requirements
The Commission further requests comment regarding the proposed
grant of substituted compliance in connection with requirements under
the Exchange Act related to internal risk management, trade
acknowledgement and verification, portfolio reconciliation and dispute
reporting, portfolio reconciliation, and trading relationship
documentation. Commenters particularly are invited to address the basis
for substituted compliance in connection with those risk control
requirements, and the proposed conditions and limitations connected to
substituted compliance for those requirements. Do Spanish and EU laws
taken as a whole produce regulatory outcomes that are comparable to
Exchange Act requirements? In this regard, commenters are invited to
address the Spanish and EU laws that a Covered Entity would have to be
subject to and comply with in connection with each substituted
compliance determination for a particular set of risk control
requirements. With respect to each substituted compliance
determination, the Commission seeks comment on the following matters:
(1) Will the Covered Entity's status being subject to, and its
compliance with, the Spanish and EU laws listed in the determination
result in a comparable regulatory outcome; (2) are there additional or
alternative Spanish and/or EU laws that Covered Entities should be
required to be subject to and comply with to achieve a comparable
regulatory outcome; and (3) are any of the Spanish and/or EU laws
listed in the determination unnecessary to achieve a comparable
regulatory outcome? Explain why or why not.
With respect to trading relationship documentation requirements,
the Commission invites commenters to address the proposed exclusion of
certain legal and bankruptcy status disclosures from the proposed
substituted compliance for trading relationship documentation
requirements when the counterparty is a U.S. person. Do any additional
or alternative Spanish and/or EU requirements require Covered Entities
to make the legal and bankruptcy disclosures described in Exchange Act
rule 15Fi-5(b)(5)?
With respect to portfolio reconciliation and dispute reporting
requirements, the Commission also invites commenters to address the
condition requiring a Covered Entity to provide the Commission with
reports regarding disputes between counterparties on the same basis as
the Covered Entity provides those reports to competent authorities
pursuant to Spanish and EU law. Would differences in the timing of
dispute reports made pursuant to Exchange Act requirements as compared
to reports made pursuant to Spanish and EU law make Spanish and EU
portfolio reconciliation and dispute reporting requirements not
comparable to Exchange Act requirements?
Commenters further are invited to address any differences between
Spanish regulatory requirements and frameworks and the German, French,
and UK requirements and frameworks that formed the basis for the
Commission's conditional grants of substituted compliance for certain
risk control requirements in those countries and/or for the
Commission's proposal to amend its conditional grant of substituted
compliance for Germany.\141\ Would the responses to any of the
questions that the Commission asked in connection with the German,
French and/or UK notices and proposed orders
[[Page 47688]]
differ if those questions applied to Spanish regulatory requirements
and frameworks? \142\
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\141\ See German Substituted Compliance Order, 85 FR 85689-91;
French Substituted Compliance Order, 86 FR 41622-29; UK Substituted
Compliance Order, 86 FR at 43331-37; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46503-04.
\142\ See note 140, supra.
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C. Internal Supervision, Chief Compliance Officer and Antitrust
Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to internal supervision and chief compliance
officer requirements. Commenters particularly are invited to address
the basis for substituted compliance in connection with internal
supervision and chief compliance officer requirements, and the proposed
conditions and limitations connected to substituted compliance for
those requirements. Do Spanish and EU laws taken as a whole produce
regulatory outcomes that are comparable to Exchange Act requirements?
In this regard, commenters are invited to address the Spanish and EU
laws that a Covered Entity would have to be subject to and comply with
in connection with the substituted compliance determinations for
internal supervision and chief compliance officer requirements. With
respect to each substituted compliance determination, the Commission
seeks comment on the following matters: (1) Will the Covered Entity's
status being subject to, and its compliance with, the Spanish and EU
laws listed in the determination result in a comparable regulatory
outcome; (2) are there additional or alternative Spanish and/or EU laws
that Covered Entities should be required to be subject to and comply
with to achieve a comparable regulatory outcome; and (3) are any of the
Spanish and/or EU laws listed in the determination unnecessary to
achieve a comparable regulatory outcome? Explain why or why not.
With respect to internal supervision requirements, the Commission
invites commenters to address the proposed condition that would require
a Covered Entity to comply 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.
Should the Commission require additional or alternative conditions
relating to internal supervision of the Covered Entity's compliance
with the Exchange Act and the applicable conditions of the proposed
Order? Explain why or why not.
With respect to chief compliance officer requirements, the
Commission also invites commenters to address the proposed conditions
requiring the Covered Entity to provide the Commission with each of its
MiFID Org Reg compliance reports. The Commission seeks comment on the
following matters: (1) Would an additional or alternative certification
and/or scope of each compliance report produce a more comparable
outcome; (2) are the proposed certification and/or scope requirements
unnecessary to achieve a comparable regulatory outcome; (3) would an
alternative deadline for the Covered Entity to provide these reports to
the Commission produce a more comparable regulatory outcome? Explain
why or why not.
Commenters further are invited to address the Commission's
preliminary determination not to grant substituted compliance for
Exchange Act antitrust requirements. The Commission seeks comment on
the following matters: (1) Will the Covered Entity's status being
subject to, and its compliance with, the Spanish and EU laws listed in
the CNMV Application result in a comparable regulatory outcome; and (2)
are there additional or alternative Spanish and/or EU laws that Covered
Entities could be required to be subject to and comply with to achieve
a comparable regulatory outcome? Explain why or why not.
Commenters further are invited to address any differences between
Spanish regulatory requirements and frameworks and the German, French,
and/or UK requirements and frameworks that formed the basis for the
Commission's conditional grants of substituted compliance for certain
internal supervision and chief compliance officer requirements in those
countries and/or for the Commission's proposal to amend its conditional
grant of substituted compliance for Germany.\143\ Explain why or why
not. Would the responses to any of the questions about internal
supervision, chief compliance officer, and antitrust requirements that
the Commission asked in connection with the German, French, and/or UK
notices and proposed orders differ if those questions applied to
Spanish regulatory requirements and frameworks? \144\ Explain why or
why not.
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\143\ See German Substituted Compliance Order, 85 FR 85691-92;
French Substituted Compliance Order, 86 FR 41639-43; UK Substituted
Compliance Order, 86 FR 43347-53; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46503-04, 46511.
\144\ See note 140, supra.
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D. Counterparty Protection Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with certain counterparty
protection requirements under the Exchange Act. Commenters particularly
are invited to address the basis for substituted compliance in
connection with counterparty protection requirements, and the proposed
conditions and limitations connected to substituted compliance for
those requirements. Do Spanish and EU laws taken as a whole produce
regulatory outcomes that are comparable to Exchange Act requirements?
In this regard, commenters are invited to address the Spanish and EU
laws that a Covered Entity would have to be subject to and comply with
in connection with each substituted compliance determination for a
particular set of counterparty protection requirements. With respect to
each substituted compliance determination, the Commission seeks comment
on the following matters: (1) Will the Covered Entity's status being
subject to, and its compliance with, the Spanish and EU laws listed in
the determination result in a comparable regulatory outcome; (2) are
there additional or alternative Spanish and/or EU laws that Covered
Entities should be required to be subject to and comply with to achieve
a comparable regulatory outcome; and (3) are any of the Spanish and/or
EU laws listed in the determination unnecessary to achieve a comparable
regulatory outcome? Explain why or why not.
With respect to suitability requirements, the Commission also
invites commenters to address the proposed limitation of substituted
compliance to recommendations to counterparties that are per se
professional clients as defined in MiFID and that are not special
entities for purposes of the Exchange Act. Would Spanish and EU
suitability requirements for elective professional clients, retail
clients and/or special entities produce regulatory outcomes comparable
to Exchange Act suitability requirements? Explain why or why not.
With respect to daily mark disclosure requirements, the Commission
also invites commenters to address the proposed limitation of
substituted compliance to security-based swaps in portfolios that the
Covered Entity is required to reconcile, and in fact does reconcile, on
each business day. Are there additional or alternative Spanish and/or
EU laws that apply to a broader
[[Page 47689]]
range of security-based swaps? Explain why or why not.
Commenters further are invited to address the Commission's
preliminary determination not to grant substituted compliance for
Exchange Act clearing rights disclosure requirements. The Commission
seeks comment on the following matters: (1) Will the Covered Entity's
status being subject to, and its compliance with, the Spanish and EU
laws listed in the CNMV Application result in a comparable regulatory
outcome; and (2) are there additional or alternative Spanish and/or EU
laws that Covered Entities could be required to be subject to and
comply with to achieve a comparable regulatory outcome? Explain why or
why not.
Commenters further are invited to address any differences between
Spanish regulatory requirements and frameworks and the German, French,
and/or UK requirements and frameworks that formed the basis for the
Commission's conditional grants of substituted compliance for certain
of those counterparty protection requirements in those countries and/or
for the Commission's proposal to amend its conditional grant of
substituted compliance for Germany.\145\ Explain why or why not. Would
the responses to any of the questions about counterparty protection
requirements that the Commission asked in connection with the German,
French, and/or UK notices and proposed orders differ if those questions
applied to Spanish regulatory requirements and frameworks? \146\
Explain why or why not.
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\145\ See German Substituted Compliance Order, 85 FR 85692-95;
French Substituted Compliance Order, 86 FR 41643-48; UK Substituted
Compliance Order, 86 FR 43353-59; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46511-12.
\146\ See note 140, supra.
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E. Recordkeeping, Reporting, and Notification
The Commission requests comment regarding the proposed grants of
substituted compliance in connection with requirements under the
Exchange Act related to recordkeeping, reporting, and notification, as
well as the requirement of Exchange Act section 15F(g). Commenters
particularly are invited to address the basis for substituted
compliance in connection with those requirements, and the proposed
conditions and limitations connected to substituted compliance for
those requirements. Do EU and Spanish law taken as a whole produce
regulatory outcomes that are comparable to those of Exchange Act
section 15F(g) and Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8?
In this regard, commenters are invited to address the EU and Spanish
laws cited for each substituted compliance determination with respect
to the distinct requirements within the recordkeeping, reporting, and
notification rules (i.e., the rules for which a more granular approach
to substituted compliance is being taken). With respect to each
substituted compliance determination, the Commission seeks comment on
the following matters: (1) Will the EU and Spanish laws cited for the
determination result in a comparable regulatory outcome; (2) are there
additional or alternative EU or Spanish laws that should be cited to
achieve a comparable regulatory outcome; and (3) are any of the EU or
Spanish laws cited for the determination unnecessary to achieve a
comparable regulatory outcome?
Commenters particularly are invited to address the proposed
condition with respect to Exchange Act rule 18a-5 that the Covered
Entity: (1) Preserve all of the data elements necessary to create the
records required by Exchange Act rules 18a-5(b)(1), (2), (3), and (7);
and (2) upon request furnish promptly to representatives of the
Commission the records required by those rules. Do the relevant EU and
Spanish laws require Covered Entities to retain the data elements
necessary to create the records required by these rules? If not, please
identify which data elements are not preserved pursuant to the relevant
EU and Spanish laws. Further, how burdensome would it be for a Covered
Entity to format the data elements into the records required by these
rules (e.g., a blotter, ledger, or securities record, as applicable) if
the firm was requested to do so? In what formats do Covered Entities in
Spain produce this information to the CNMV or other EU or Spanish
authorities? How do those formats differ from the formats required by
Exchange Act rules 18a-5(b)(1), (2), (3), and (7)?
Is it appropriate to structure the Commission's substituted
compliance determinations in the proposed Order to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader recordkeeping, reporting, and notification rules for
which they want to apply substituted compliance? Explain why or why
not. For example, would it be more efficient for a Covered Entity to
comply with certain Exchange Act requirements within a given rule
(rather than apply substituted compliance) because it can utilize
systems that its affiliated broker-dealer has implemented to comply
with them? If so, explain why. If not, explain why not. Is it
appropriate to permit Covered Entities to take a more granular approach
to the requirements within the recordkeeping rules? For example, would
this approach make it more difficult for the Commission to get a
comprehensive understanding of the Covered Entity's security-based swap
activities and financial condition? Explain why or why not. Would it be
overly complex for the Covered Entity to administer a firm-wide
recordkeeping system under this approach? Explain why or why not.
Certain of the Commission's recordkeeping and notification
requirements are fully or partially linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
preliminarily would not be made under the proposed Order. In these
cases, should the Commission not make a positive substituted compliance
determination for the fully linked requirement in the recordkeeping or
notification rules or to the portion of the requirement that is linked
to a substantive Exchange Act requirement? In particular, should the
Commission not make a positive substituted compliance determination for
recordkeeping or notification requirements linked to the following
Exchange Act rules for which a positive substituted compliance
determination is preliminarily not being 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? If not, explain why.
Certain of the requirements in the Commission's recordkeeping rules
are linked to substantive Exchange Act requirements where a positive
substituted compliance determination is being made under the proposed
Order. In these cases, should a positive substituted compliance
determination for the linked requirement in the recordkeeping rule be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement? If not, explain why.
Should this be the case regardless of whether the requirement is fully
or partially linked to the substantive Exchange Act requirement? If
not, explain why. In particular, should substituted compliance for
recordkeeping, reporting, and notification requirements linked to the
following Exchange Act rules be conditioned on the Covered Entity
[[Page 47690]]
applying substituted compliance to the linked substantive Exchange Act
rule: (1) Exchange Act rule 15Fh-3; (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? If not, explain why.
Commenters also are invited to address the preliminary positive
substituted compliance determination with respect to Exchange Act rule
18a-7, which would be conditioned on the Covered Entity filing
financial and operational information with the Commission in the manner
and format specified by the Commission by order or rule. Should the
Commission require Covered Entities to file the financial and
operational information using the FOCUS Report Part IIC? Are there line
items on the FOCUS Report Part IIC that elicit information that is not
included in the reports Covered Entities with a prudential regulator
file with the CNMV or other EU or Spanish authorities? If so, do
Covered Entities with a prudential regulator record that information in
their required books and records? Please identify any information that
is elicited in the FOCUS Report Part IIC that is not: (1) Included in
the financial reports filed by Covered Entities with the CNMV; or (2)
recorded in the books and records required of Covered Entities. Would
the answer to these questions change if references to FFIEC Form 031
were not included in the FOCUS Report Part IIC? If so, how? As a
preliminary matter, as a condition of substituted compliance should
Covered Entities file a limited amount of financial and operational
information on the FOCUS Report Part IIC for a period of two years to
further evaluate the burden of requiring all applicable line items to
be filled out? If so, which line items should be required? To the
extent that Covered Entities otherwise report or record information
that is responsive to the FOCUS Report Part IIC, how could the
information on this report be integrated into a database of filings the
Commission or its designee will maintain for filers of the FOCUS Report
Parts IIC (e.g., the eFOCUS system) to achieve the objective of being
able to perform cross-form analysis of information entered into the
uniquely numbered line items on the forms?
Commenters further are invited to address any differences between
Spanish regulatory requirements and frameworks and the German, French,
and/or UK requirements and frameworks that formed the basis for the
Commission's conditional grants of substituted compliance for
recordkeeping, reporting, and notification requirements in those
countries and/or for the Commission's proposal to amend its conditional
grant of substituted compliance for Germany.\147\ Would the responses
to any of the questions about those requirements that the Commission
asked in connection with the German, French, and/or UK notices and
proposed orders differ if those questions applied to Spanish regulatory
requirements and frameworks?
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\147\ See German Substituted Compliance Order, 85 FR 85695-97;
French Substituted Compliance Order, 86 FR 41648-57; UK Substituted
Compliance Order, 86 FR 43359-69; German Substituted Compliance
Notice and Proposed Amended Order, 86 FR 46512-22.
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F. Supervisory and Enforcement Issues
The Commission further requests comment regarding how to weigh
considerations regarding supervisory and enforcement effectiveness in
Spain as part of the comparability assessments. Commenters particularly
are invited to address relevant issues regarding the effectiveness of
Spanish supervision and enforcement over firms that may register with
the Commission as SBS Entities, including but not limited to issues
regarding:
<bullet> The relevant Spanish authorities for the supervision and
enforcement of the areas of law where substituted compliance has been
requested and the supervision and enforcement role played by each
authority;
<bullet> Spanish supervisory and enforcement authority, supervisory
inspection practices, and the use of alternative supervisory and/or
enforcement tools and practices;
<bullet> Spanish supervisory and enforcement effectiveness with
respect to derivatives such as security-based swaps; and
<bullet> Spanish supervision and enforcement in the cross-border
context (e.g., any differences between the oversight of firms'
businesses within Spain and the oversight of activities and branches
outside of Spain, including within the United States).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\148\
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\148\ 17 CFR 200.30-3(a)(89).
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Jill M. Peterson,
Assistant Secretary.
Attachment A
It is hereby determined and ordered, pursuant to rule 3a71-6 under
the Exchange Act, that a Covered Entity (as defined in paragraph (g)(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.
(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/
[[Page 47691]]
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;
and
(ii) Without regard to the application of EMIR article 13.
(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, 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 C
[…truncated; see source link]Indexed from Federal Register on August 26, 2021.
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