Notice2021-22475
Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers Subject to Regulation in the Swiss Confederation
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
October 15, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 197 (Friday, October 15, 2021)</title>
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[Federal Register Volume 86, Number 197 (Friday, October 15, 2021)]
[Notices]
[Pages 57455-57469]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-22475]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93284; File No. S7-07-21]
Order Granting Conditional Substituted Compliance in Connection
With Certain Requirements Applicable to Non-U.S. Security-Based Swap
Dealers Subject to Regulation in the Swiss Confederation
October 8, 2021.
I. Overview
UBS AG and Credit Suisse AG (the ``Swiss Firms'') submitted an
application requesting that the Securities and Exchange Commission
(``Commission'') determine, pursuant to the Securities Exchange Act of
1934 (``Exchange Act'') rule 3a71-6, that security-based swap dealers
(``SBSDs'') subject to regulation in the Swiss Confederation
(``Switzerland'') conditionally may satisfy requirements under the
Exchange Act by complying with comparable Swiss requirements.\1\ The
Swiss Firms sought substituted compliance in connection with certain
Exchange Act requirements related to risk control, internal supervision
and compliance, and record keeping, reporting, and notification.\2\ The
Swiss Application incorporated comparability analyses between the
relevant requirements in Exchange Act section 15F and the rules and
regulations thereunder and applicable Swiss law, as well as information
regarding Swiss supervisory and enforcement frameworks.
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\1\ See Letter from Colin Lloyd of Cleary Gottlieb Steen &
Hamilton LLP on behalf of UBS AG and Credit Suisse AG to Vanessa
Countryman, Secretary, Commission, dated August 10, 2021 (the
``Swiss Application''). The Swiss 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>.
\2\ ``Risk control'' includes requirements related to internal
risk management, trade acknowledgment and verification, portfolio
reconciliation and dispute resolution, portfolio compression and
trading relationship documentation; ``internal supervision and
compliance'' includes requirements related to diligent supervision,
conflicts of interest, information gathering under Exchange Act
section 15F(j), 15 U.S.C. 78o-10(j), and chief compliance officers;
``record keeping, reporting, and notification'' includes
requirements related to making and keeping current certain
prescribed records, preservation of records, reporting, and
notification.
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On August 10, 2021, the Commission issued a notice of the Swiss
Application, accompanied by a proposed order (the ``proposed Order'')
to make a positive substituted compliance determination in
[[Page 57456]]
connection with the Swiss Application.\3\ The proposed Order
incorporated a number of conditions to tailor the scope of substituted
compliance consistent with the prerequisite that relevant Swiss
requirements produce regulatory outcomes that are comparable to
relevant requirements under the Exchange Act.
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\3\ See Exchange Act Release No. 92632 (Aug. 10, 2021), 86 FR
45770, 45792 (``Swiss Substituted Compliance Notice and Proposed
Order'').
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As discussed below, the Commission is adopting a final Order that
has been modified from the proposal to make clarifying changes in
response to comments.
II. Substituted Compliance Framework and Prerequisites
A. Substituted Compliance Framework and Purpose
As the Commission has discussed previously,\4\ Exchange Act rule
3a71-6 provides a framework whereby non-U.S. SBSDs and major security-
based swap participants (``MSBSPs'') (together, ``SBS Entities'') may
satisfy certain requirements under Exchange Act section 15F by
complying with comparable regulatory requirements of a foreign
jurisdiction.\5\ Because substituted compliance does not constitute
exemptive relief, but instead provides an alternative method by which
non-U.S. SBS Entities may comply with applicable Exchange Act
requirements, the non-U.S. SBS Entities would remain subject to the
relevant requirements under section 15F. The Commission accordingly
will retain the authority to inspect, examine and supervise those SBS
Entities' compliance and take enforcement action as appropriate. Under
the substituted compliance framework, failure to comply with the
applicable foreign requirements and other conditions to a substituted
compliance order would lead to a violation of the applicable
requirements under the Exchange Act and potential enforcement action by
the Commission (as opposed to automatic revocation of the substituted
compliance order).
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\4\ See Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR
85686, 85687 (Dec. 29, 2020) (``German Substituted Compliance
Order''); Exchange Act Release No. 92484 (July 23, 2021), 86 FR
41612, 41612-13 (Aug. 2, 2021) (``French Substituted Compliance
Order''); Exchange Act Release No. 92529 (July 30, 2021), 86 FR
43318, 43318-19 (Aug. 6, 2021) (``UK Substituted Compliance
Order''); Exchange Act Release No. 47668 (August 20, 2021), 85 FR
47668, 47668-69 (Aug. 26, 2021) (``Spanish Substituted Compliance
Notice and Proposed Order'').
\5\ See Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR
29960, 30079 (May 13, 2016) (``Business Conduct Adopting Release'').
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Under rule 3a71-6, substituted compliance potentially is available
in connection with certain section 15F requirements,\6\ but is not
available in connection with antifraud prohibitions and certain other
requirements under the Federal securities laws.\7\ SBS Entities in
Switzerland accordingly must comply directly with those requirements
notwithstanding the availability of substituted compliance for other
requirements.
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\6\ 17 CFR 240.3a71-6(d).
\7\ Swiss Substituted Compliance Notice and Proposed Order, 86
FR at 45771 n.5 (addressing unavailability of substituted compliance
in connection with antifraud provisions, as well as provisions
related to transactions with counterparties that are not eligible
contract participants (``ECPs''), segregation of customer assets,
required clearing upon counterparty election, regulatory reporting
and public dissemination, and registration of offerings).
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The substituted compliance framework reflects the cross-border
nature of the security-based swap market, and is intended to promote
efficiency and competition by helping to address potential duplication
and inconsistency between relevant U.S. and foreign requirements.\8\ In
practice, substituted compliance may be expected to help SBS Entities
leverage their existing systems and practices to comply with relevant
Exchange Act requirements in conjunction with their compliance with
relevant foreign requirements. As of August 6, 2021, market
participants have been required to assess whether their security-based
swap activities meet or exceed certain thresholds for registration with
the Commission as SBS Entities, with the first registrations by SBSDs
required by November 1, 2021, and by MSBSPs by December 1, 2021.\9\
Substituted compliance may be expected to assist such market
participants in preparing for registration.
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\8\ See generally Business Conduct Adopting Release, 81 FR at
30073 (noting that the cross-border nature of the security-based
swap market poses special regulatory challenges, in that relevant
U.S. requirements ``have the potential to lead to requirements that
are duplicative of or in conflict with applicable foreign business
conduct requirements, even when the two sets of requirements
implement similar goals and lead to similar results'').
\9\ See ``Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants,'' available at
<a href="https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants">https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants</a>.
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B. Scope of Substituted Compliance
The Swiss Application relates solely to entity-level requirements
and for entity-level Exchange Act requirements a Covered Entity must
choose either to apply substituted compliance pursuant to the Order
with respect to all security-based swap business subject to the
relevant Swiss 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 Swiss requirements and comply directly with the Exchange Act
for another part of the business that is subject to the relevant Swiss
requirements. Additionally, for entity-level Exchange Act requirements,
if the Covered Entity also has security-based swap business that is not
subject to the relevant Swiss 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.
C. Specific Prerequisites
1. Comparability of Regulatory Outcomes
Rule 3a71-6, adopted by the Commission in 2016, describes the
requirements for the Commission to make a substituted compliance
determination. Under the rule, the Commission must determine that the
analogous foreign requirements are comparable to otherwise applicable
requirements under the Exchange Act (i.e., the relevant requirements in
the Exchange Act and the rules and regulations thereunder), after
accounting for factors such as ``the scope and objectives of the
relevant foreign regulatory requirements'' and ``the effectiveness of
the supervisory compliance program administered, and the enforcement
authority exercised'' by the foreign authority.\10\ The comparability
assessments are to be based on a ``holistic approach'' that ``will
focus on the comparability of regulatory outcomes rather than
predicating substituted compliance on requirement-by-requirement
similarity.'' \11\
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\10\ Exchange Act rule 3a71-6(a)(2)(i).
\11\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45772; see also Business Conduct Adopting Release, 81 FR at
30078-79 (further recognizing that ``different regulatory systems
may be able to achieve some or all of those regulatory outcomes by
using more or fewer specific requirements than the Commission, and
that in assessing comparability the Commission may need to take into
account the manner in which other regulatory systems are informed by
business and market practices in those jurisdictions''). The
Commission's assessment of a foreign authority's supervisory and
enforcement effectiveness--as part of the broader comparability
analysis--would be expected to consider not only overall oversight
activities, but also oversight specifically directed at conduct and
activity relevant to the substituted compliance determination. ``For
example, it would be difficult for the Commission to make a
comparability determination in support of substituted compliance if
oversight is directed solely at the local activities of foreign
security-based swap dealers, as opposed to the cross-border
activities of such dealers.'' Business Conduct Adopting Release, 81
FR at 30079 (footnote omitted). In the Swiss Substituted Compliance
Notice and Proposed Order, the Commission preliminarily concluded
that this comparability prerequisite was met in connection with a
number of requirements under the Exchange Act, in some cases with
the addition of conditions to help ensure the comparability of
regulatory outcomes.
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[[Page 57457]]
2. Memorandum of Understanding
Exchange Act rule 3a71-6(a)(2)(ii) further predicates the
availability of substituted compliance on the Commission and the
foreign financial regulatory authority or authorities entering into a
supervisory and enforcement memorandum of understanding and/or other
arrangement with the relevant foreign financial regulatory authorities
``addressing supervisory and enforcement cooperation and other matters
arising under the substituted compliance determination.'' \12\
Accordingly, the Commission and FINMA recently entered into a relevant
memorandum of understanding.\13\ The memorandum of understanding must
be in place when Covered Entities use substituted compliance to satisfy
obligations under the Exchange Act.\14\
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\12\ See Exchange Act rule 3a71-6(a)(2)(ii).
\13\ The Commission and FINMA 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.
\14\ See para. (a)(8) of the Order.
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3. Certification and Opinion of Counsel
A party or group of parties that may potentially rely on a
substituted compliance order may submit a substituted compliance
application only if each such party provides a certification and
opinion of counsel that the entity can, ``as a matter of law, provide
the Commission with prompt access to its books and records, and can, as
a matter of law, submit to onsite inspection and examination by the
Commission.'' \15\ The Swiss Application included a certification and
opinion of counsel and, in the Commission's preliminary view, met this
requirement.\16\ The Commission received no comments on this
preliminary view and has not changed its view.
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\15\ See Exchange Act rule 3a71-6(c)(1)(ii).
\16\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45771 n.8.
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III. General Availability of Substituted Compliance Under the Order
A. Covered Entities
1. Proposed Approach
Under the proposed Order, substituted compliance was only made
available to ``Covered Entities''--a defined term that would limit the
scope of the substituted compliance determination to SBSDs that are
subject to applicable Swiss requirements and oversight. Consistent with
the parameters of substituted compliance under Exchange Act rule 3a71-
6, the proposed ``Covered Entity'' definition provided that the
relevant entity must be a security-based swap dealer registered with
the Commission, and that the entity cannot be a U.S. person.\17\ The
proposed ``Covered Entity'' definition further provided that the entity
must be a systemically important bank authorized by FINMA to conduct
banking activities in Switzerland.\18\ Each entity would also have to
be supervised by FINMA under the intensive and continual supervision
model as a Category 1 firm as that term is defined in BO Annex 3.\19\
These prongs of the definition were intended to help ensure that
Covered Entities are subject to relevant Swiss requirements and
oversight.
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\17\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45791.
\18\ Id.
\19\ Id.
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2. Commenter Views and Final Provisions
No commenters addressed the proposed Covered Entity definition and
the Commission is adopting the definition as proposed.
B. Additional General Conditions
1. Proposed Approach
The proposed Order incorporated a number of additional general
conditions and other prerequisites, to help ensure that the relevant
Swiss 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:
<bullet> ``Subject to and Complies with'' applicability condition--
For each relevant section of the proposed Order, a positive substituted
compliance determination would be predicated on the entity being
subject to and complying with the applicable Swiss requirements needed
to establish comparability.\20\
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\20\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45788.
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<bullet> Security-based swaps and transactions as ``derivatives''
or ``derivative transactions''--For each relevant section of the
proposed Order that requires the application of, and the Covered
Entity's compliance with, provisions of FinMIA and FMIO, a positive
substituted compliance determination would require that the relevant
security-based swaps and security-based swap transactions are
``derivatives'' and/or ``derivative transactions'' for purposes of
FinMIA article 2(c), or otherwise is described by the relevant language
of that provision.\21\
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\21\ Id.
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<bullet> ``Counterparty'' status--For each section of the proposed
Order that requires the application of, and the Covered Entity's
compliance with, the provisions of FinMIA and FMIO, the proposed Order
would require that the Covered Entity comply with the applicable
conditions of the Order regardless of whether the Covered Entity's
counterparty is a ``counterparty'' for purposes of FinMIA article 93,
or otherwise is described by the relevant language of that
provision.\22\
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\22\ Id.
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<bullet> Counterparty status as ``company''--For each section of
the proposed Order that requires the application of, and the Covered
Entity's compliance with, the provisions of FMIO, the Covered Entity
would be required to comply with the applicable conditions of the
proposed Order regardless of whether a Covered Entity's counterparty
were a ``company'' for purposes of FMIO article 77, or otherwise is
described by the relevant language of that provision.\23\
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\23\ Id.
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<bullet> Covered Entity as ``bank''--For each condition of the
proposed Order that requires the application of, and the Covered
Entity's compliance with, the provisions of the BA and BO and/or other
Swiss requirements adopted pursuant to those provisions, the Covered
Entity would be required to be a ``bank'' for purposes of BA article
1a, or otherwise is described by the relevant language of that
provision.\24\
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\24\ Id.
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<bullet> Covered Entity as ``systemically important''--For each
condition of the proposed Order that requires the application of, and
the Covered Entity's compliance with, the provisions of FINMA Circular
2017/1, the Covered
[[Page 57458]]
Entity would be required to be ``systemically important'' for purposes
of BA article 8(3), or otherwise is described by the relevant language
of that provision.\25\
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\25\ Id.
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<bullet> Covered Entity as ``category 1''--For each condition of
the proposed Order that required the application of, and the Covered
Entity's compliance with, the provisions of FINMA Circular 2017/1, the
Covered Entity would be required to be supervised as ``category 1,'' as
defined in BO articles 2(2) and 2(3) and BO Annex 3, or otherwise is
described by the relevant language of those provisions.\26\
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\26\ Id.
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<bullet> ``Institution-specific approach'' to operational risk
quantification--For each condition in the proposed Order that requires
the application of, and the Covered Entity's compliance with, the
provisions of FINMA Circular 2008/21 margins 45-107, the Covered Entity
would be required to apply he ``institution-specific approach'' to
quantifying capital requirements for operational risk, as defined in
CAO article 94, or otherwise is described by the relevant language of
those provisions, and as approved by FINMA.\27\
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\27\ Id.
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<bullet> Memorandum of understanding--Consistent with the
requirements of rule 3a71-6 and the Commission's need for access to
information regarding registered entities, substituted compliance under
the proposed Order would be conditioned on the Commission having an
applicable memorandum of understanding or other arrangement with FINMA
addressing cooperation with respect to the Order at the time the
Covered Entity makes use of substituted compliance.\28\
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\28\ Id.
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<bullet> Notice of reliance on substituted compliance--To assist
the Commission's oversight of firms that avail themselves of
substituted compliance, a Covered Entity relying on the Order would
have to provide notice of its intent to rely on the Order by notifying
the Commission in the manner specified on the Commission's website.\29\
In the notice, the Covered Entity would need to identify each specific
substituted compliance determination in the proposed Order for which
the Covered Entity intends to apply substituted compliance.\30\ If a
Covered Entity were to elect not to apply substituted compliance with
respect to a specific substituted compliance determination in the
proposed Order, it would be required to comply with the Exchange Act
requirements subject to that determination. Finally, a Covered Entity
would have to promptly update its notice to the Commission if it
intended to modify its reliance on the positive substituted compliance
determinations in the proposed Order.\31\
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\29\ Id.
\30\ See para. (a)(9) of the Order. 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
risk control determinations in paragraph (b) of the 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 determinations but not the portfolio
compression determination, it would need to indicate in the notice
that it is relying on paragraphs (b)(1)-(3) of the Order. In this
case, paragraph (b)(4) of the Order (the portfolio compression
determination) would be excluded from the notice and the Covered
Entity would need to comply with the Exchange Act portfolio
compression requirements. Further, as discussed below in section
VI.B, the recordkeeping and reporting determinations in the Order
have been structured to provide Covered Entities with a high level
of flexibility in selecting specific requirements within those rules
for which they want to rely on substituted compliance. For example,
paragraph (d)(1)(i) of the 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
determinations are set forth in paragraphs (d)(1)(i)(A) through (K).
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 (K)). For
any determinations excluded from the notice, the Covered Entity
would need to comply with the Exchange Act rule 18a-5 requirement.
\31\ A Covered Entity would modify its reliance on the positive
substituted compliance determinations in the 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 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 (c).\32\ 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).\33\ 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 Swiss
Firms cited various Swiss provisions as providing similar outcomes to
the notifications requirements of Exchange Act Rule 18a-8.\34\ 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 Swiss law. The intent is to align the
notification requirement with the Swiss capital requirements applicable
to the Covered Entity.
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\32\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45788.
\33\ 17 CFR 240.18a-8(c) and (h).
\34\ See FINMASA article 29(2); CAO articles 14, 42(3), 101, and
130(4); and Liquidity Ordinance articles 17b and 26(2).
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2. Commenter Views and Final Provisions
The Commission did not receive comments addressing the substance of
the proposed Order's additional general conditions, and the Commission
is issuing those general conditions largely as proposed.\35\ In the
Commission's view, the conditions are structured appropriately to
predicate a positive substituted compliance determination on the
applicability of relevant Swiss requirements needed to establish
comparability, as well as on the continued effectiveness of the
requisite memorandum of understanding, and the provision of notice to
the Commission regarding the Covered Entity's intent to rely on
substituted compliance. The Commission did receive one comment
recommending two typographical changes to the general conditions, which
the Commission is incorporating in the Order.\36\
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\35\ See paras. (a)(1) through (10) of the Order.
\36\ See Letter from Gordon Kiesling, Managing Director, UBS AG,
Thomas Bischof, Managing Director, UBS AG, Maria Chiodi, Managing
Director, Credit Suisse AG, and Drew Shoemaker, Managing Director,
Credit Suisse AG (Sept. 10, 2021) (``Swiss Firms' Letter'') at Annex
(proposing edits to paragraphs (a)(2) and (a)(6) of the Order to add
the word ``whether'' to (a)(2) and to change ``is'' to ``are'' in
(a)(6)).
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[[Page 57459]]
IV. Substituted Compliance for Risk Control Requirements
A. Proposed Approach
The Swiss Application in part requested substituted compliance in
connection with risk control requirements relating to:
<bullet> Internal risk management--Internal risk management system
requirements that address the obligation of registered entities to
follow policies and procedures reasonably designed to help manage the
risks associated with their business activities.
<bullet> Trade acknowledgment and verification--Trade
acknowledgment and verification requirements intended to help avoid
legal and operational risks by requiring definitive written records of
transactions and procedures to avoid disagreements regarding the
meaning of transaction terms.
<bullet> Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting provisions that require that
counterparties engage in portfolio reconciliation and resolve
discrepancies in connection with uncleared security-based swaps, and to
provide prompt notification to the Commission and applicable prudential
regulators regarding certain valuation disputes.
<bullet> Portfolio compression--Portfolio compression provisions
that require that SBS Entities have procedures addressing bilateral
offset, bilateral compression and multilateral compression in
connection with uncleared security-based swaps.
<bullet> Trading relationship documentation--Trading relationship
documentation provisions that require SBS Entities to have procedures
to execute written security-based swap trading relationship
documentation with their counterparties prior to, or contemporaneously
with, executing certain security-based swaps.\37\
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\37\ See Exchange Act Release No. 87782 (Dec. 18, 2019) 85 FR
6359, 6361 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').The
Swiss Application discusses Swiss requirements regarding records of
agreements with counterparties. See Swiss Application section II.1.c
at 17-19, 24-31.
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Taken as a whole, these risk control requirements help to promote
market stability by mandating that registered entities follow practices
that are appropriate to manage the market, counterparty, operational,
and legal risks associated with their security-based swap businesses.
No Proposed Positive Substituted Compliance Determination--Dispute
Reporting and Trading Relationship Documentation: In connection with
dispute reporting and trading relationship documentation, the
Commission stated a preliminary view that the Swiss requirements were
not comparable to Exchange Act requirements.\38\ The Commission noted
in its initial assessment of the comparability of dispute reporting
requirements that paragraph (c) of Exchange Act rule 15Fi-3 requires
SBSDs to promptly report to the Commission valuation disputes in excess
of $20 million that have been outstanding for three or five business
days (depending on counterparty types),\39\ and that Swiss law lacks a
specific requirement for reporting security-based swap valuation
disputes in excess of $20 million.\40\ The Commission noted in its
initial assessment of trading relationship documentation requirements
that Exchange Act rule 15Fi-5 requires that ``security-based swap
trading relationship documentation shall be in writing and shall
include all terms governing the trading relationship between the
security-based swap dealer . . . and its counterparty,'' \41\ and that
under Swiss law there is no explicit requirement to agree in writing to
all terms governing the trading relationship.\42\ Considering these and
other differences described in the proposed Order,\43\ the Commission
did not propose to make a positive substituted compliance determination
with respect to dispute reporting or trading relationship documentation
requirements.
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\38\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45774-75 (excluding Exchange Act rule 15Fi-3(c) covering
reporting of security-based swap valuation disputes from the risk
control provisions covered by paragraph (b)(3) the proposed Order).
\39\ See 17 CFR 240.15Fi-3(c).
\40\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45774-75.
\41\ See 17 CFR 240.15Fi-5(b)(1).
\42\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775.
\43\ See id.
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Proposed Positive Substituted Compliance Determination--Internal
Risk Management, Trade Acknowledgement and Verification, Portfolio
Reconciliation and Portfolio Compression: With respect to these risk
control requirements, the Commission stated a preliminary view based on
the Swiss Application and the Commission's review of applicable
provisions, that relevant Swiss requirements would produce regulatory
outcomes that are comparable to those associated with the internal risk
management, trade acknowledgement and verification, portfolio
reconciliation, and portfolio compression risk control requirements.
Substituted compliance for those risk control requirements accordingly
would be conditioned on Covered Entities being subject to and complying
with the Swiss provisions that in the aggregate establish a framework
that produces outcomes comparable to those associated with the
analogous risk control requirements under the Exchange Act.\44\
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\44\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45788. (listing in paragraph (b)(1) of the proposed Order
the requirements a Covered Entity must be subject to and comply with
in connection with internal risk management, in paragraph (b)(2) the
requirements a Covered Entity must be subject to and comply with in
connection with trade acknowledgement and verification, in paragraph
(b)(3) the requirements a Covered Entity must be subject to and
comply with in connection with portfolio reconciliation, and
paragraph (b)(4) the requirements a Covered Entity must be subject
to and comply with in connection with portfolio compression).
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<bullet> Proposed Positive Substituted Compliance Determination
Conditions--Portfolio Reconciliation: In connection with portfolio
reconciliation requirements, the Commission stated a preliminarily view
that Swiss requirements are comparable to Exchange Act requirements,
but only when part of one of the applicable Swiss requirements is not
applied. The proposed Order therefore included the requirement that a
Covered Entity be subject to and comply with FinMIA 108(b) and also the
requirement that Covered Entities not apply FinMIA article 108(b)'s
exception for ``small non-financial counterparties'' as defined in
FinMIA article 98.\45\
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\45\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45788.
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<bullet> Proposed Positive Substituted Compliance Determination
Conditions--Portfolio Compression: In connection with portfolio
compression requirements, the Commission stated its preliminary view
that Swiss requirements were comparable to Exchange Act requirements,
but only when one of the applicable Swiss exclusions is not applied.
The proposed Order included the requirement that a Covered Entity be
subject to and comply with FinMIA article 108(d) and also include a
requirement that Covered Entities not apply the portion of FinMIA
article 108(d) that excludes application of its requirements when there
are fewer than 500 non-centrally cleared OTC derivatives transactions
outstanding.\46\
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\46\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45788.
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B. Commenter Views and Final Provisions
1. General Considerations
Trading Relationship Documentation: The Commission received one
comment
[[Page 57460]]
concerning the risk control requirements that specifically addressed
trading relationship documentation.\47\ In its letter, the commenter
disagreed with the Commission's preliminary view not to make a positive
substituted compliance determination for the trading relationship
documentation requirements of Exchange Act rule 15Fi-5.\48\ In support
of its position the commenter generally noted the ``various
documentation-related requirements as listed in the Swiss
Application,'' \49\ and cited as its primary example that Swiss law
``does impose an obligation on a Covered Entity to perform daily
internal valuations for risk management purposes.'' \50\ While the
described obligation may be relevant for requirements related to
portfolio reconciliation and internal risk management, it did not
address the Exchange Act's trading relationship documentation
requirement that SBSDs have procedures to ensure that trading
relationship documentation is executed with counterparties prior to, or
contemporaneously with, executing certain security-based swap
transactions.\51\ Additionally, consistent with the Swiss Application's
statement that under Swiss law ``there is no explicit requirement to
agree in writing to all terms governing the trading relationship,''
\52\ the commenter's letter notes that ``Swiss law does not
specifically require Covered Entities to agree with counterparties on
the process for valuing each SBS.'' \53\ Although the commenter
asserted that ``parties will in practice agree on how SBS are valued,''
\54\ the Commission has previously stated that voluntary market
practices do not establish the requisite supervisory framework or
enforcement authority to establish the specific regulatory requirements
of Exchange Act section 15Fi-5.\55\ Additionally, the commenter
asserted that the ``documentation requirement is intended to ensure
parties always have legal certainty regarding their contractual
obligations to each other,'' but proceeded to note that its current
practices under Swiss law do not always fulfill this requirement.\56\
Ultimately, the Commission is unconvinced by the commenter's arguments
that Swiss law imposes trading relationship documentation requirements
that are comparable to those under Exchange Act rule 15Fi-5. Therefore,
for the reasons discussed above and in the proposed Order, the
Commission is not making a positive substituted compliance
determination in relation to trading relationship documentation.
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\47\ See Swiss Firms' Letter at 1-4.
\48\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775.
\49\ See Swiss Firms' Letter at 2.
\50\ See Swiss Firms' Letter at 2.
\51\ 17 CFR 240.15Fi-5(a)(2), Exchange Act rule 15Fi-5(a)(2).
\52\ See Swiss Application section II.1.c at 24.
\53\ See Swiss Firms' Letter at 2.
\54\ Id.
\55\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775 n.53.
\56\ See Swiss Firms' Letter at 2 (stating that ``in very
limited instances, key terms may be documented in a confirmation
shortly after an oral agreement'').
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The commenter also requested that, as an alternative to a positive
substituted compliance determination for trading relationship
documentation generally, the Commission provide relief from the
requirements of Exchange Act rule 15Fi-5(b)(5) \57\ relating to
disclosures for insured depository institutions and financial companies
under the Dodd Frank Act.\58\ In support of its request the commenter
noted that such relief would be consistent with the rule's goal of
``enhancing transparency and legal certainty regarding each party's
rights and obligations under the transaction.'' \59\ However, the
commenter did not identify Swiss requirements that would require
comparable disclosure of those rights and obligations or governing law
under the transaction and, in fact, noted that because Swiss law
subjects banks to a depositor protection scheme, no documentation is
required.\60\ The commenter also posits that the Commission should
grant relief to be consistent with its approach taken in other
jurisdictions.\61\ However, in each of the jurisdictions cited by the
commenter, comparable requirements were identified by the applicants to
warrant a positive substituted compliance determination.\62\ A
comparable disclosure requirement under Swiss law has not been
identified in either the Swiss Application \63\ or the commenter's
letter.\64\
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\57\ 17 CFR 240.15Fi-5(b)(5), Exchange Act rule 15Fi-5(b)(5).
\58\ The trading relationship documentation provisions of rule
15Fi-5(b)(5), 17 CFR 240.15Fi-5(b)(5), require certain disclosures
regarding the status of the SBS Entity or its counterparty as an
insured depository institution or financial counterparty, and
regarding the possible application of the insolvency regime set
forth under Title II of the Dodd-Frank Act or the Federal Deposit
Insurance Act.
\59\ See Swiss Firms' Letter at 3 (quoting the Risk Mitigation
Adopting Release, 85 FR at 6361).
\60\ See Swiss Firms' Letter at 3.
\61\ See Swiss Firms' Letter at 3-4 (citing to the French
Substituted Compliance Order, 86 FR at 41623 n.136, German
Substituted Compliance Order, 85 FR at 85690 n.36, and Spanish
Substituted Compliance Notice and Proposed Order, 86 FR at 47674
n.66).
\62\ See French Substituted Compliance Order, 86 FR at 41623
n.136 (citing EMIR Margin RTS article 2); German Substituted
Compliance Order, 85 FR at 85690 n.36 (citing EMIR Margin article 2
and EMIR Margin RTS article 2); Spanish Substituted Compliance
Notice and Proposed Order, 86 FR at 47674 n.66 (citing EMIT Margin
RTS).
\63\ See Swiss Application section II.1.c at 28-29 (stating that
``because Swiss law subjects banks to a depositor protection scheme,
documentation of the bank's status as such is not required'').
\64\ See Swiss Firms' Letter at 3 (stating that ``Swiss laws do
not require the same disclosure [as Exchange Act rule 15Fi-
5(b)(5)]'').
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As previously stated, in lieu of requiring requirement-by-
requirement similarity, the Commission takes a holistic approach to
assessing comparability analysis, encompassing all Swiss requirements
that establish comparability with the applicable regulatory
outcome.\65\ However, as neither the Swiss Application, nor the
commenter, has identified an applicable regulation under Swiss law, the
Commission is unable to determine comparability. Therefore, the
Commission is not granting the commenter's requested relief and is not
making a positive substituted compliance determination specific to the
requirements of Exchange Act rule 15Fi-5(b)(5).
---------------------------------------------------------------------------
\65\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775.
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Dispute Reporting: The Commission did not receive comments on its
preliminary view with respect to dispute resolution. For the reasons
described in the proposed Order,\66\ the Commission continues to
believe that Swiss dispute reporting requirements are not comparable to
Exchange Act requirements and is not making a positive substituted
compliance determination for them.
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\66\ See id. at 45774-75.
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Other Risk Control Requirements: Having not received any comments
addressing them, the Commission continues to conclude that, taken as a
whole, the internal risk management, trade acknowledgment and
verification, portfolio reconciliation, and portfolio compression
requirements under Swiss law subject Covered Entities to risk
mitigation and documentation practices that are appropriate to the
risks associated with their security-based swap businesses, and thus
help to produce regulatory outcomes that are comparable to the outcomes
associated with the relevant risk control requirements under the
Exchange Act. Although the Commission recognizes that there are
differences between the approaches taken by the relevant risk control
requirements under the Exchange Act and relevant Swiss
[[Page 57461]]
requirements, the Commission continues to believe that those
differences on balance should not preclude substituted compliance for
these requirements, as the relevant Swiss requirements taken as a whole
help to produce comparable regulatory outcomes.
To help ensure the comparability of outcomes, substituted
compliance for the relevant risk control requirements is subject to
certain conditions. Substituted compliance for internal risk
management, trade acknowledgment and verification, portfolio
reconciliation, and portfolio compression requirements is conditioned
on the Covered Entity being subject to, and complying with, relevant
Swiss requirements.\67\ In connection with portfolio reconciliation
requirements, the Order requires that Covered Entities not apply FinMIA
article 108(b)'s exception for ``small non-financial counterparties''
as defined in FinMIA article 98. Requiring that Covered Entities not
apply this exception helps ensures that the Swiss requirements for
portfolio reconciliation are applied to Covered Entities in a manner
comparable to the applicable Exchange Act requirements. In connection
with portfolio compression requirements, the Order also requires that
Covered Entities not apply the portion of FinMIA article 108(d) that
excludes application of its requirements when there are fewer than 500
non-centrally cleared OTC derivatives transactions outstanding.\68\
Requiring that Covered Entities not apply this exclusion helps ensure
that the Swiss requirements for portfolio compression are applied to
Covered Entities in a manner comparable to the applicable Exchange Act
requirements. A Covered Entity that is unable to comply with an
applicable condition--and thus is not eligible to use substituted
compliance for the particular set of Exchange Act risk control
requirements related to that condition--nevertheless may use
substituted compliance for another set of Exchange Act requirements
addressed in the Order if it complies with the conditions to the
relevant parts of the Order.
---------------------------------------------------------------------------
\67\ See paras. (b)(1) through (4) of the Order.
\68\ See para. (b)(4)(ii) of the Order.
---------------------------------------------------------------------------
Under the Order, substituted compliance for the relevant risk
control requirements (relating to internal risk management, trade
acknowledgment and verification, portfolio reconciliation, and
portfolio compression) is not subject to a condition that the Covered
Entity apply substituted compliance for related recordkeeping
requirements in Exchange Act rules 18a-5 and 18a-6. A Covered Entity
that applies substituted compliance for one or more risk control
requirements, but does not apply substituted compliance for the related
recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6, will
remain subject to the relevant provisions of Exchange Act rules 18a-5
and 18a-6. Those rules require the Covered Entity to make and preserve
records of its compliance with Exchange Act risk control requirements
and of its security-based swap activities required or governed by those
requirements. A Covered Entity that applies substituted compliance for
a risk control requirement, but complies directly with related
recordkeeping requirements in rules 18a-5 and 18a-6, therefore must
make and preserve records of its compliance with the relevant
conditions of the Order and of its security-based swap activities
required or governed by those conditions and/or referenced in the
relevant parts of rules 18a-5 and 18a-6.
V. Substituted Compliance for Internal Supervision, Chief Compliance
Officer and Additional Exchange Act Section 15F(j) Requirements
A. Proposed Approach
The Swiss Application requested substituted compliance in
connection with requirements relating to:
<bullet> Internal supervision--Diligent supervision is required
pursuant to Exchange Act rule 15Fh-3(h),\69\ and Exchange Act section
15F(j)(5) requires conflict of interest systems and procedures. These
provisions generally require that SBSEs 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.\70\
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\69\ 17 CFR 240.15Fh-3(h).
\70\ The Swiss Application addresses Swiss provisions that
address firms' supervisory systems, responsible individuals and
qualification requirements for supervisors, supervisory system
policies and procedures; the chief compliance officer and the chief
compliance officer's reporting authority and job security, chief
compliance officer policies and procedures, and chief compliance
officer reports. See Swiss Application section II.3 at 67-109.
---------------------------------------------------------------------------
<bullet> Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and Exchange
Act rule 15Fk-1.\71\ These provisions in general require that SBSEs
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.\72\
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\71\ 17 CFR 240.15Fk-1.
\72\ The Swiss Application discusses Swiss requirements that
address compliance officers and their responsibilities, compliance
officer appointment, removal and compensation, related conflict of
interest provisions and compliance-related reports. See Swiss
Application section II.3.c at 90-109.
---------------------------------------------------------------------------
<bullet> Additional Exchange Act section 15F(j) requirements--
Additional requirements related to information-gathering pursuant to
Exchange Act section 15F(j)(4)(A), and certain antitrust prohibitions
specified by Exchange Act section 15F(j)(6).\73\
---------------------------------------------------------------------------
\73\ Section 15F(j)(4)(A) particularly requires firms to have
systems and procedures to obtain necessary information to perform
functions required under section 15F. The Swiss Application in turn
discusses Swiss provisions generally addressing information
gathering and disclosure. See Swiss Application Section II.2 at 33.
Section 15F(j)(6) prohibits firms from adopting any process or
taking any action that results in any unreasonable restraint of
trade, or to impose any material anticompetitive burden on trading
or clearing. The Swiss Application addresses Swiss antitrust
requirements. See Swiss Application section II.3.b at 78.
---------------------------------------------------------------------------
Taken as a whole, these internal supervision, chief compliance
officer and additional Exchange Act section 15F(j) requirements help to
promote SBSEs' use of structures, processes and responsible personnel
reasonably designed to promote compliance with applicable law, identify
and cure instances of non-compliance and manage conflicts of interest.
In proposing to provide conditional substituted compliance in
connection with this part of the Swiss Application, the Commission
preliminarily concluded that the relevant Swiss requirements in general
would produce comparable regulatory outcomes by providing that Swiss
SBSDs 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.
Substituted compliance under the proposed Order was to be conditioned
in part on SBSDs being subject to and complying with specified Swiss
provisions that in the aggregate produce regulatory outcomes that are
comparable to those associated with those internal supervision,
compliance and related requirements under the Exchange Act.\74\
---------------------------------------------------------------------------
\74\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775-76.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance was to be subject
to certain additional conditions to help ensure the comparability of
regulatory outcomes. First, substituted compliance in connection with
the
[[Page 57462]]
internal supervision requirements would be conditioned on the Covered
Entities complying with applicable Swiss supervisory and compliance
provisions as if those provisions also require the Covered Entities to
comply with applicable requirements under the Exchange Act and the
other conditions of the Order.\75\ This condition was intended to
reflect that, even with substituted compliance, Covered Entities would
still directly be subject to a number of requirements under the
Exchange Act and conditions of the Order that fall outside the ambit of
Swiss internal supervision and compliance requirements.\76\
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\75\ In other words, the proposed Order would require that the
Covered Entity's supervisory and compliance program cover the
applicable requirements under the Exchange Act and other conditions
of the Order.
\76\ See id. at 45776. These residual Exchange Act requirements
could, for example, relate to requirements for which substituted
compliance is not available, requirements for which the Order does
not make a positive substituted compliance determination, security-
based swap business for which the Covered Entity is unable to
satisfy the conditions of the Order, and/or requirements or
security-based swap business for which the Covered Entity decides
not to use substituted compliance. The condition was designed to
allow a Covered Entity to use their existing internal supervision
and compliance frameworks to comply with the relevant Exchange Act
requirements and Order conditions, rather than having to establish
separate special-purpose supervision and compliance frameworks.
---------------------------------------------------------------------------
For similar reasons, the proposed Order conditioned substituted
compliance in connection with the compliance report requirements under
Exchange Act section 15F(k)(3) and Exchange Act rule 15Fk-1(c) on the
Covered Entity annually providing the Commission with certain
compliance reports required pursuant to FINMA Circular 2017/1 margins
78-81. Those reports must: (1) Be provided to the Commission at least
annually and in the English language; (2) include a certification
signed by the chief compliance officer or senior officer \77\ 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; (3) address the Covered Entity's
compliance with applicable requirements under the Exchange Act and
other applicable conditions of the proposed Order in connection with
requirements for which the Covered Entity is relying on the proposed
Order; (4) 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; 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.\78\
---------------------------------------------------------------------------
\77\ See Exchange Act rule 15Fk-1(e)(2) (defining ``senior
officer'' as ``the chief executive officer or other equivalent
officer'').
\78\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45776-77. The condition was designed to allow a Covered
Entity to leverage the compliance reports that it must produce
pursuant to Swiss requirements, by extending those reports to
address compliance with the conditions to the proposed Order. In
practice, a Covered Entity may satisfy this condition by identifying
relevant Order conditions and reporting on the implementation and
effectiveness of its controls with regard to compliance with those
Order conditions.
---------------------------------------------------------------------------
The Commission preliminarily did not provide substituted compliance
for Exchange Act antitrust provisions, based on the preliminary
conclusion that allowing an alternative means of compliance would not
lead to comparable regulatory outcomes.\79\
---------------------------------------------------------------------------
\79\ See id. at 45777.
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B. Commenter Views and Final Provisions
The Commission received one comment addressing the internal
supervision, chief compliance officer and additional Exchange Act
section 15F(j) requirements section of the proposed Order \80\ and
other than modifying the order in response to the comment, is adopting
it as proposed.\81\
---------------------------------------------------------------------------
\80\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45775-77.
\81\ See para. (c) of the Order.
---------------------------------------------------------------------------
The commenter stated that two Swiss provisions included in
paragraph (c)(3) of the proposed Order, BO articles 14e and 14g, would
not apply to Covered Entities.\82\ The commenter also stated that the
other provisions cited in paragraph (c)(3), in particular BO article 12
and FINMA Circular 2017/1, were sufficient for a finding of
comparability.\83\ With respect to BO article 14e, the Commission
believes that the remaining provisions are duplicative and has
therefore deleted the reference to BO article 14e.\84\ With respect to
BO article 14g, however, the provisions cited do not clearly address
conflicts of interest of associated persons, although the Swiss
Application argues that those provisions do, in practice, lead to
comparable outcomes.\85\ The Swiss Application, however, identified
FinSA article 25,\86\ which addresses conflicts of interest to the same
extent as article 14g, and is applicable to the Covered Entities, but
only within Switzerland. The Commission believes it is therefore
necessary to make two changes to address the deletion of BO article
14g. First, the Commission has replaced BO article 14g with FinSA
article 25 in paragraph (c)(3), but compliance with FinSA article 25 is
only required when it is by its terms applicable (within
Switzerland).\87\ In addition, consistent with the Swiss
Application,\88\ the Commission has included a condition to BO article
12 requiring that article 12(2) be applied in a manner to address the
relevant conflicts of interest.\89\
---------------------------------------------------------------------------
\82\ See Letter from Colin Lloyd of Cleary Gottlieb Steen &
Hamilton LLP on behalf of UBS AG and Credit Suisse AG to Vanessa
Countryman, Secretary, Commission, dated October 6, 2021 (``Swiss
Firms' Letter II'').
\83\ Id.
\84\ See para. (c)(3) of the Order.
\85\ See Swiss Application section II.3.d at 96 and Swiss Firms'
Letter II.
\86\ See Swiss Application section II.3.d at 96.
\87\ See para. (c)(3) of the Order.
\88\ See Swiss Application section II.3.d at 97-98.
\89\ See para. (c)(3) of the Order.
---------------------------------------------------------------------------
Consistent with the proposed Order, substituted compliance in
connection with internal supervision further is conditioned on the
Covered Entity being subject to and complying with the applicable Swiss
supervisory and compliance provisions listed in paragraph (c)(3) of the
Order, as if those provisions also require SBSDs to comply with
applicable requirements under the Exchange Act and the other applicable
conditions to the Order.\90\ Substituted compliance in connection with
the chief compliance officer requirements further is conditioned on the
compliance reports provided to the Commission addressing the SBSD's
compliance with other applicable conditions of the Order.\91\ A Covered
Entity that is unable to comply with an applicable condition--and thus
is not eligible to use substituted compliance for the Exchange Act
internal supervision and/or chief compliance officer requirements
related to that condition--nevertheless may use substituted compliance
for another set of Exchange Act requirements addressed in the Order if
it complies with the conditions to the relevant parts of the Order.
---------------------------------------------------------------------------
\90\ See para. (c)(4) of the Order. In other words, a Covered
Entity's reliance on substituted compliance under para. (c)(4)
requires that the Covered Entity's supervisory and compliance
programs cover the applicable provisions under the Exchange Act and
other conditions of the Order.
\91\ See para. (c)(2)(ii) of the Order.
---------------------------------------------------------------------------
Under the Order, substituted compliance for internal supervision
and chief compliance officer requirements is not subject to a condition
that the Covered Entity apply substituted compliance for related
recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6. A
Covered Entity that
[[Page 57463]]
applies substituted compliance for internal supervision and/or chief
compliance officer requirements, but does not apply substituted
compliance for the related recordkeeping requirements in Exchange Act
rules 18a-5 and 18a-6, will remain subject to the relevant provisions
of Exchange Act rules 18a-5 and 18a-6. Those rules require the Covered
Entity to make and preserve records of its compliance with Exchange Act
internal supervision and chief compliance officer requirements and of
its security-based swap activities required or governed by those
requirements. A Covered Entity that applies substituted compliance for
internal supervision and/or chief compliance officer requirements, but
complies directly with related recordkeeping requirements in rules 18a-
5 and 18a-6, therefore must make and preserve records of its compliance
with the relevant conditions of the Order and of its security-based
swap activities required or governed by those conditions and/or
referenced in the relevant parts of rules 18a-5 and 18a-6.
Finally, the substituted compliance Order does not extend to
antitrust provisions under the Exchange Act, as the Commission
continues to believe that allowing an alternative means of compliance
would not lead to outcomes comparable to the Exchange Act.\92\
---------------------------------------------------------------------------
\92\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45777.
---------------------------------------------------------------------------
VI. Substituted Compliance for Recordkeeping, Reporting, and
Notification Requirements
A. Proposed Approach
The Swiss Application in part requested substituted compliance for
requirements applicable to SBS Entities under the Exchange Act relating
to:
<bullet> Record Making--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\93\
---------------------------------------------------------------------------
\93\ See 17 CFR 240.18a-5. The Swiss Application discusses Swiss
requirements that address firms' record creation obligations related
to matters such as financial condition, operations, transactions,
counterparties, and their property, personnel, and business conduct.
See Swiss Application section II.2.a at 33-47.
---------------------------------------------------------------------------
<bullet> Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\94\
---------------------------------------------------------------------------
\94\ See 17 CFR 240.18a-6. The Swiss Application discusses Swiss
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 Swiss
Application section II.2.b at 48-61.
---------------------------------------------------------------------------
<bullet> Reporting--Exchange Act rule 18a-7 requires certain
reports.\95\
---------------------------------------------------------------------------
\95\ See 17 CFR 240.18a-7. The Swiss Application discusses Swiss
requirements that address firms' obligations to make certain
reports. See Swiss Application section II.2.c at 62-64.
---------------------------------------------------------------------------
<bullet> Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\96\
---------------------------------------------------------------------------
\96\ See 17 CFR 240.18a-8. The Swiss Application discusses Swiss
requirements that address firms' obligations to make certain
notifications. See Swiss Application section II.2.c at 64-66.
---------------------------------------------------------------------------
<bullet> Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\97\
---------------------------------------------------------------------------
\97\ See 15 U.S.C. 78o-10(g). The Swiss Application discusses
Swiss 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
Swiss Application section II.2.b at 50-52.
---------------------------------------------------------------------------
Taken as a whole, the recordkeeping, reporting, and notification
requirements that apply to SBS Entities 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.\98\
---------------------------------------------------------------------------
\98\ Rule 3a71-6 sets forth additional analytic considerations
in connection with substituted compliance for the Commission's
recordkeeping, reporting, and notification requirements. In
particular, Exchange Act rule 3a71-6(d)(6) provides that the
Commission intends to consider (in addition to any conditions
imposed) ``whether the foreign financial regulatory system's
required records and reports, the timeframes for recording or
reporting information, the accounting standards governing the
records and reports, and the required format of the records and
reports'' are comparable to applicable provisions under the Exchange
Act, and whether the foreign provisions ``would permit the
Commission to examine and inspect regulated firms' compliance with
the applicable securities laws.''
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B. Commenter Views and Final Provisions
1. General Considerations
In proposing to provide conditional substituted compliance in
connection with this part of the Swiss Application, the Commission
preliminarily concluded that the relevant Swiss requirements, subject
to conditions and limitations, 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 prudentially regulated SBS Entities pursuant
to Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8 and Exchange Act
section 15F(g) (collectively, the ``recordkeeping, reporting, and
notification requirements'').\99\ Substituted compliance for the
recordkeeping, reporting, and notification requirements accordingly is
conditioned on Covered Entities being subject to and complying with the
Swiss provisions that in the aggregate establish a framework that
produces outcomes comparable to those associated with the analogous
recordkeeping, reporting, and notification requirements under the
Exchange Act.\100\
---------------------------------------------------------------------------
\99\ See Swiss Substituted Compliance Notice and Proposed Order,
86 FR at 45777.
\100\ See paras. (d)(1)(i)(A), (d)(1)(i)(B), (d)(1)(i)(C),
(d)(1)(i)(D), (d)(1)(i)(E), (d)(1)(i)(F)(1), (d)(1)(i)(G),
(d)(1)(i)(H), (d)(1)(i)(I)(1), (d)(1)(i)(J)(1), (d)(1)(i)(K)(1),
(d)(2)(i)(A), (d)(2)(i)(B), (d)(2)(i)(C), (d)(2)(i)(D),
(d)(2)(i)(E), (d)(2)(i)(F)(1), (d)(2)(i)(G)(1), (d)(2)(i)(H),
(d)(2)(i)(I), (d)(2)(i)(J), (d)(2)(i)(K)(1), (d)(2)(i)(L),
(d)(2)(i)(M), (d)(3)(i), (d)(3)(i)(B), (d)(4)(i)(A), (d)(4)(i)(B),
and (d)(5) of the Order.
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The proposed structure of the substituted compliance determinations
with respect to the recordkeeping, reporting, and notification
requirements would have provided Covered Entities with greater
flexibility to select distinct requirements within the broader rules
for which they want to apply substituted compliance.\101\ 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 more granular approach to the
recordkeeping, reporting, and notification rules was 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,
reporting, and notification requirements applicable to SBS Entities 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 was consistent with the approach taken by the
Commission in the French and UK Orders.\102\
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\101\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45777-78.
\102\ 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 resulted in preliminary substituted
compliance determinations with respect to the different categories of
records these
[[Page 57464]]
rules require SBS Entities to make, keep current, and/or preserve.\103\
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 (e.g., business
conduct requirements) as well as to promote the prudent operation of
these firms.\104\ The Commission stated a preliminary belief that the
comparable Swiss recordkeeping rules achieve these outcomes with
respect to compliance with substantive Swiss requirements for which
preliminary positive substituted compliance determinations were being
made (e.g., the preliminary positive substituted compliance
determinations with respect to the Exchange Act business conduct
requirements).\105\ 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)(2) of Exchange Act rule 18a-5 addressing
ledger accounts) can be viewed in isolation as a distinct recordkeeping
rule. Therefore, the Commission made preliminary substituted compliance
determinations at this level of Exchange Act rules 18a-5 and 18a-
6.\106\ The Commission did not receive comment on this granular
approach and is adopting it as proposed.\107\
---------------------------------------------------------------------------
\103\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45778.
\104\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
\105\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45778.
\106\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45778.
\107\ See paras. (d)(1)(i) and (d)(2)(ii) of the Order.
---------------------------------------------------------------------------
Second, the Commission did not make a preliminary positive
substituted compliance determination with respect to a discrete
provision of the recordkeeping, reporting, and notification
requirements if it was fully or partially linked to a substantive
Exchange Act requirement for which substituted compliance was not
available or for which a preliminary positive substituted compliance
determination was not being made.\108\ In particular, a preliminary
positive substituted compliance determination was not 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 was not 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; (8) Exchange Act rule 15Fh-2;
and (9) Exchange Act rule 15Fi-5. This proposed approach was consistent
with the approach taken by the Commission in the French and UK
Orders.\109\ The Commission did not receive comment on these
limitations and the Order includes them.\110\
---------------------------------------------------------------------------
\108\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45778 (discussing this limitation).
\109\ See French Substituted Compliance Order, 86 FR at 41650;
UK Substituted Compliance Order, 86 FR at 45778.
\110\ See para. (d) of the Order.
---------------------------------------------------------------------------
Third, the Commission conditioned substituted compliance with
discrete provisions of the recordkeeping, reporting, and notification
requirements that were fully or partially linked to a substantive
Exchange Act requirement for which substituted compliance was available
on the Covered Entity applying substituted compliance with respect to
the linked Exchange Act requirement.\111\ In particular, substituted
compliance for a provision of the recordkeeping, reporting, and
notification requirements that is linked to the following Exchange Act
rules was conditioned on the SBS Entity applying substituted compliance
to the linked substantive Exchange Act rule: (1) Exchange Act rule
15Fh-3(h); (2) Exchange Act rule 15Fi-2; (3) Exchange Act rule 15Fi-3;
(4) Exchange Act rule 15Fi-4; and (5) Exchange Act rule 15Fk-1. The
Commission did not receive comment on these conditions and the Order
includes them.\112\
---------------------------------------------------------------------------
\111\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 18395 (discussing this condition).
\112\ See para. (d)(3) of the Order.
---------------------------------------------------------------------------
Fourth, the Commission conditioned substituted compliance with
Exchange Act rule 18a-7 on Covered Entities filing periodic unaudited
financial and operational information with the Commission or its
designee in the manner and format required by Commission rule or
order.\113\ The Commission did not receive comment on this condition
and the Order includes it.\114\
---------------------------------------------------------------------------
\113\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45782 (discussing this condition).
\114\ See para. (d)(3) of the Order.
---------------------------------------------------------------------------
Fifth, the proposed Order conditioned substituted compliance with
Exchange Act rule 18a-8 on Covered entities simultaneously sending a
copy of any notice required to be sent by Swiss law to the Commission
in the manner specified on the Commission's website and including with
the transmission the contact information of an individual who can
provide further information about the matter that is the subject of the
notice.\115\ The Commission did not receive comment on these conditions
and the Order includes them.\116\
---------------------------------------------------------------------------
\115\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45782 (discussing this condition).
\116\ See para. (d)(4)(ii)(A) of the Order.
---------------------------------------------------------------------------
Sixth, the proposed Order included a condition that Covered
Entities must promptly 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 of this Order.\117\ The Commission did not receive a
comment on this condition and the Order includes it.\118\
---------------------------------------------------------------------------
\117\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45784 (discussing this condition).
\118\ See para. (d)(7) of the Order.
---------------------------------------------------------------------------
2. Citations to Swiss Law
The Commission received comment recommending changes to the
proposed Order to refine the scope of Swiss law provisions that would
operate as conditions to substituted compliance.\119\ The Commission
staff reviewed each of the Swiss law citations that the commenter
recommended adding or removing from the Order for relevance to the
comparable Exchange Act requirement while also keeping in mind that
each Swiss law citation was included in the Swiss Application
intentionally. The Commission's conclusion and reasoning with respect
to the commenter's recommendations are discussed in further detail
below.
---------------------------------------------------------------------------
\119\ See Swiss Firms' Letter at Annex.
---------------------------------------------------------------------------
First, the commenter recommended replacing references to FMIO
article 38 with FinMIA article 38 in paragraphs (d)(1)(i)(E) and
(d)(1)(i)(G) of the Order, because FinMIA article 38 covers
recordkeeping duties of Covered Entities while FMIO article 38 is a
provision that applies to organized trading facilities. The Commission
agrees with the commenter's reasoning and is therefore replacing
references to FMIO article 38 with FinMIA article 38 in paragraphs
(d)(1)(i)(E) and (d)(1)(i)(G) of the Order.\120\
---------------------------------------------------------------------------
\120\ Compare paras. (d)(1)(i)(E) and (d)(1)(i)(G) of the Swiss
Substituted Compliance Notice and Proposed Order, with paras.
(d)(1)(i)(E) and (d)(1)(i)(G) of the Order.
---------------------------------------------------------------------------
Second, the commenter recommended deleting from paragraphs
(d)(1)(i)(H) and (d)(2)(i)(H) of the Order references to CO article
330a, which provides for an employee's right to obtain a letter of
[[Page 57465]]
recommendation, reasoning that this Swiss law provision does not
directly apply to records, and that this provision only concerns rights
arising out of employment relationships under Swiss law and is not
applicable outside of Switzerland. Even though CO article 330a is not a
direct recordkeeping requirement, in practice it requires Swiss firms
to maintain employment records that are relevant to Exchange Act rules
18a-5(b)(8) and 18a-6(d)(1), so the Commission is not removing
references to this requirement from the Order's list of Swiss
requirements comparable to Exchange Act rules 18a-5(b)(8) and 18a-
6(d)(1).\121\
---------------------------------------------------------------------------
\121\ Compare paras. (d)(1)(i)(H) and (d)(2)(i)(H) of the Swiss
Substituted Compliance Notice and Proposed Order, with paras.
(d)(1)(i)(H) and (d)(2)(i)(H) of the Order.
---------------------------------------------------------------------------
Third, the commenter recommended deleting from paragraph
(d)(2)(i)(G)(1) of the Order references to CO article 686, which
requires firms to preserve a register of registered shares for ten
years, reasoning that this Swiss law provision only applies to shares
of companies incorporated in Switzerland. The Commission expects the
firms relying on the Order to be incorporated in Switzerland, so the
Commission is not removing references to this requirement from the
Order's list of Swiss requirements comparable to Exchange Act rules
18a-6(c).\122\
---------------------------------------------------------------------------
\122\ Compare para. (d)(2)(i)(G)(1) of the Swiss Substituted
Compliance Notice and Proposed Order, with para. (d)(2)(i)(G)(1) of
the Order.
---------------------------------------------------------------------------
Fourth, the commenter recommended replacing references to FINMA
Circular 2008/21 margin 131 with FINMA Circular 2008/21 margin 132 in
paragraph (d)(2)(i)(I) of the Order, because the Swiss Application
inadvertently cited to a repealed provision of Swiss law. The
Commission agrees with the commenter's reasoning and is therefore
replacing FINMA Circular 2008/21 margin 131 with FINMA Circular 2008/21
margin 132 in paragraph (d)(2)(i)(I) of the Order.\123\
---------------------------------------------------------------------------
\123\ Compare para. (d)(2)(i)(I) of the Swiss Substituted
Compliance Notice and Proposed Order, with para. (d)(2)(i)(I) of the
Order.
---------------------------------------------------------------------------
VII. Supervisory and Enforcement Considerations
A. Proposed Approach
Exchange Act rule 3a71-6(a)(2)(i) provides that the Commission's
assessments regarding the comparability of foreign requirements in part
should take into account ``the effectiveness of the supervisory program
administered, and the enforcement authority exercised'' by the foreign
financial regulatory authority. This provision is intended to help
ensure that substituted compliance is not predicated on rules that
appear high-quality on paper if market participants in practice are
allowed to fall short of their obligations, while also recognizing that
differences among supervisory and enforcement regimes should not be
assumed to reflect flaws in one regime or another. The Swiss
Application accordingly included information regarding the supervisory
and enforcement framework applicable to derivatives markets and market
participants in Switzerland.
In proposing to grant substituted compliance in connection with the
Swiss Application, the Commission preliminarily concluded that the
relevant supervisory and enforcement considerations were consistent
with substituted compliance. That preliminary conclusion took into
account information regarding FINMAs practices supervising Covered
Firms located in Switzerland, as well as their enforcement-related
authority and practices.\124\
---------------------------------------------------------------------------
\124\ See Swiss Substituted Compliance Notice and Proposed
Order, 86 FR at 45784-85.
---------------------------------------------------------------------------
B. Commenter Views and Final Provisions
Commenters did not address the Commission's preliminary conclusions
regarding supervisory and enforcement considerations, and the
Commission continues to conclude that the relevant supervisory and
enforcement considerations in Switzerland are consistent with
substituted compliance. In particular, based on the available
information regarding FINMA's authority and practices to oversee market
participants' compliance with applicable requirements and to take
action in the event of violations, the Commission remains of the view
that, consistent with rule 3a71-6, comparability determinations reflect
Swiss requirements as they apply in practice.
To be clear, the supervisory and enforcement considerations
addressed by rule 3a71-6 do not mandate that the Commission make
judgments regarding the comparative merits of U.S. and foreign
supervisory and enforcement frameworks, or to require specific findings
regarding the supervisory and enforcement effectiveness of a foreign
regime. The rule 3a71-6 considerations regarding supervisory and
enforcement effectiveness instead address whether comparability
analyses related to substituted compliance reflect requirements that
market participants must follow, and for which market participants are
subject to enforcement consequences in the event of violations. Those
considerations are satisfied here.
VIII. Conclusion
It is hereby determined and ordered, pursuant to rule 3a71-6 under
the Exchange Act, that a Covered Entity (as defined in paragraph (e)(1)
of this Order) may satisfy the requirements under the Exchange Act that
are addressed in paragraphs (b) through (d) of this Order so long as
the Covered Entity is subject to and complies with relevant
requirements of the Swiss Confederation and with the conditions to 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 (d):
(1) Security-based swaps and transactions as ``derivatives'' or
``derivative transactions.'' For each condition in paragraphs (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, provisions of FinMIA and FMIO, the
relevant security-based swaps and security-based swap transactions are
``derivatives'' and/or ``derivative transactions'' for purposes of
FinMIA article 2(c), or otherwise are described by the relevant
language of that provision.
(2) ``Counterparty'' status. For each condition in paragraph (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, the provisions of FinMIA and FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of whether the Covered Entity's counterparty is a
``counterparty'' for purposes of FinMIA article 93, or otherwise is
described by the relevant language of that provision.
(3) Counterparty's status as ``company.'' For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of whether a Covered Entity's counterparty is a ``company''
for purposes of FMIO article 77, or otherwise is described by the
relevant language of that provision.
(4) Covered Entity as ``bank.'' For each condition in paragraph (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, the provisions of the BA and BO and/
or other Swiss requirements adopted pursuant to those provisions, the
Covered Entity is a ``bank'' for
[[Page 57466]]
purposes of BA article 1a, or otherwise is described by the relevant
language of that provision.
(5) Covered Entity as ``systemically important.'' For each
condition in paragraph (b) through (d) of this Order that requires the
application of, and the Covered Entity's compliance with, the
provisions of the FINMA Circular 2017/1, the Covered Entity is
``systemically important'' for purposes of BA article 8(3) and article
9, or otherwise are described by the relevant language of that
provision.
(6) Covered Entity as ``category 1.'' For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FINMA
Circular 2017/1, the Covered Entity is supervised as ``category 1,'' as
defined in BO articles 2(2) and 2(3) and BO Annex 3, or otherwise is
described by the relevant language of those provisions.
(7) ``Institution-specific approach'' to operational risk
quantification. For each condition in paragraphs (b) through (d) of
this Order that requires the application of, and the Covered Entity's
compliance with, the provisions of FINMA Circular 2008/21 margins 45-
107, the Covered Entity applies the institution-specific approach, as
defined in CAO article 94, to quantifying capital requirements for
operational risk, as approved by FINMA.
(8) Memorandum of Understanding with FINMA. The Commission and
FINMA 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.
(9) Notice to Commission. A Covered Entity relying on this Order
must provide notice of its intent to rely on this Order by notifying
the Commission in writing. Such notice must be sent to an email address
provided on the Commission's website. The notice must include the
contact information of an individual who can provide further
information about the matter that is the subject of the notice. The
notice must identify each specific substituted compliance determination
within paragraphs (b) through (d) of the Order for which the Covered
Entity intends to apply substituted compliance. A Covered Entity must
promptly provide an amended notice if it modifies its reliance on the
substituted compliance determinations in this Order.
(10) Notification Requirements Related to Changes in Capital. A
Covered Entity that is prudentially regulated relying on this Order
must 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).
(b) Substituted Compliance in Connection With Risk Control Requirements
This Order extends to the following provisions related to risk
control:
(1) Internal risk management. The requirements of Exchange Act
section 15F(j)(2) and relevant aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that the Covered Entity is subject to and
complies with the requirements of: BO article 12; FINMA Circular 2017/1
margins 9-14, 31-49, 52-76, 82-97; and FINMA Circular 2008/21 margins
45, 54-63, 65-68, 117-138.
(2) Trade acknowledgement and verification. The requirements of
Exchange Act rule 15Fi-2, provided that the Covered Entity is subject
to and complies with the requirements of FinMIA articles 108(a) and
(c); and FMIO articles 95, 97, and 113(1).
(3) Portfolio reconciliation. The requirements of Exchange Act rule
15Fi-3, other than paragraph (c) to that rule, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of FINMASA article 29; FinMIA article 108(b) and (c); and
FMIO articles 96, 97 and 113(1)(d);
(ii) The Covered Entity does not apply FinMIA article 108(b)'s
exception for ``small non-financial counterparties'' as defined in
FinMIA article 98.
(4) Portfolio compression. The requirements of Exchange Act rule
15Fi-4, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of FinMIA article 108(d); and FMIO articles 98 and
113(1)(d); and
(ii) The Covered Entity does not apply the portion of FinMIA
article 108(d) that excludes application of the requirement when there
are fewer than 500 non-centrally cleared OTC derivatives transactions
outstanding.
(c) Substituted Compliance in Connection With Internal Supervision and
Compliance Requirements and Certain Exchange Act Section 15F(j)
Requirements
This Order extends to the following provisions related to internal
supervision and compliance and Exchange Act section 15F(j)
requirements:
(1) Internal supervision. The requirements of Exchange Act rule
15Fh-3(h) and Exchange Act sections 15F(j)(4)(A) and (j)(5), provided
that:
(i) The Covered Entity is subject to and complies with the
requirements identified in paragraph (c)(3) of this Order; and
(ii) This paragraph (c) does not extend to the requirements of
paragraph (h)(2)(iii)(I) to rule 15Fh-3 to the extent those
requirements pertain to compliance with Exchange Act sections
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to the general and
supporting provisions of paragraph (h) to rule 15Fh-3 in connection
with those Exchange Act sections.
(2) Chief compliance officers. The requirements of Exchange Act
section 15F(k) and Exchange Act rule 15Fk-1, provided that:
(i) The Covered Entity complies with the requirements identified in
paragraph (c)(3) of this Order;
(ii) All reports required pursuant to FINMA Circular 2017/1 margins
78-81 must also:
(A) Be provided to the Commission at least annually, and in the
English language;
(B) Include a certification signed by the chief compliance officer
or senior officer (as defined in Exchange Act rule 15Fk-1(e)(2)) 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;
(C) Address the firm's compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions to this Order in connection
with requirements for which the Covered Entity is relying on this
Order;
(D) Be provided to the Commission no later than 15 days following
the earlier of:
(i) The submission of the report to the Covered Entity's management
body; or
(ii) The time the report is required to be submitted to the
management body; and
(E) 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.
(3) Applicable supervisory and compliance requirements. Paragraphs
(c)(1) and (c)(2) are conditioned on the Covered Entity being subject
to and complying with the following requirements: BA articles 3(2)(c)
and 3f;
[[Page 57467]]
BO article 12 (provided that the application of BO article 12(2)
includes procedures reasonably designed to address conflicts of
interest that may be present with respect to associated persons being
supervised); FINMA Circular 2017/1 articles 9-97; FINMA Circular 2008/
21 margins 54-62, 65-68, 121-122, and 128-136.5; FINMA Circular 2013/8
margins 45-61, 64; FINMA Circular 2010/1 margins 16-74; FINMA Circular
2018/3 margins 14-35; and (where applicable) FinSA article 25.
(4) Additional condition to paragraph (c)(1). Paragraph (c)(1)
further is conditioned on the requirement that the Covered Entity
complies with the provisions specified in paragraph (c)(3) as if those
provisions also require compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions to this Order in connection
with requirements for which the Covered Entity is relying on this
Order.
(d) Substituted Compliance in Connection With Recordkeeping, Reporting,
and Notification Requirements
This Order extends to the following provisions that apply to a
Covered Entity related to recordkeeping, reporting, and notification:
(1)(i) Make and keep current certain records. The requirements of
the following provisions of Exchange Act rule 18a-5, provided that the
Covered Entity complies with the relevant conditions in this paragraph
(d)(1)(i) and with the applicable conditions in paragraph (d)(1)(ii):
(A) The requirements of Exchange Act rule 18a-5(b)(1), provided
that the Covered Entity is subject to and complies with the
requirements of FMIO-FINMA article 1; FinMIA articles 104 and 106; FMIO
annex 2; CO article 958f;
(B) The requirements of Exchange Act rule 18a-5(b)(2), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; AccO article 1; FinMIA article 106;
(C) The requirements of Exchange Act rule 18a-5(b)(3), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FinMIA articles 104 and 106; FMIO
annex 2;
(D) The requirements of Exchange Act rule 18a-5(b)(4), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 38; FMIO article 36; FinIA article 50;
FMIO-FINMA article 1; CO article 958f;
(E) The requirements of Exchange Act rule 18a-5(b)(5), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 38; FinIA article 50; FMIO-FINMA article
1; CO article 958f;
(F) The requirements of Exchange Act rules 18a-5(b)(6) and (b)(11),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 106 and 108(a); FMIO article 95; CO
article 958f; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 15Fi-2 pursuant to this Order;
(G) The requirements of Exchange Act rule 18a-5(b)(7), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 38; FinIA article 50; FMIO-FINMA article
1; FMIO annex 2; FinMIA articles 104 and 106; AMLA article 3; CO
article 958f;
(H) The requirements of Exchange Act rule 18a-5(b)(8), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12; CO
article 330a; FINMA Circular 2008/21, Annex 3, margins 30-33;
(I) The requirements of Exchange Act rule 18a-5(b)(13), regarding
one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1 for which
substituted compliance is available under this Order, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMA Circular 2017/1; BA article 3; CO article 958f,
in each case with respect to the relevant security-based swap or
activity;
(2) With respect to the portion of Exchange Act rule 18a-5(b)(13)
that relates to one or more provisions of Exchange Act rule 15Fh-3 for
which substituted compliance is available under this Order, the Covered
Entity applies substituted compliance for such business conduct
standard(s) of Exchange Act rule 15Fh-3 pursuant to this Order, as
applicable, with respect to the relevant security-based swap or
activity; and
(3) With respect to the portion of Exchange Act rule 18a-5(b)(13)
that relates to Exchange Act rule 15Fk-1, the Covered Entity applies
substituted compliance for Exchange Act section 15F(k) and Exchange Act
rule 15Fk-1 pursuant to this Order;
(J) The requirements of Exchange Act rule 18a-5(b)(14)(i) and (ii),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 104 and 106; CO article 958f; and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-3 pursuant to this Order; and
(K) The requirements of Exchange Act rule 18a-5(b)(14)(iii),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 104 and 106; CO article 958f; and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-4 pursuant to this Order.
(ii) Paragraph (d)(1)(i) is subject to the following further
conditions:
(A) Paragraphs (d)(1)(i)(A) through (C) and (G) are subject to the
condition that the Covered Entity preserves all of the data elements
necessary to create the records required by the applicable Exchange Act
rules cited in such paragraphs and upon request furnishes promptly to
representatives of the Commission the records required by those rules;
(B) A Covered Entity may apply the substituted compliance
determination in paragraph (d)(1)(i)(I) to records of compliance with
Exchange Act rule 15Fh-3(h) in respect of one or more security-based
swaps or activities related to security-based swaps; and
(C) This Order does not extend to the requirements of Exchange Act
rule 18a-5(b)(9), (b)(10), or (b)(12).
(2)(i) Preserve certain records. The requirements of the following
provisions of Exchange Act rule 18a-6, provided that the Covered Entity
complies with the relevant conditions in this paragraph (d)(2)(i) and
with the applicable conditions in paragraph (d)(2)(ii):
(A) The requirements of Exchange Act rule 18a-6(a)(2), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 106; CO article 958f; FMIO-FINMA article
1(4); AccO article 3; FINMA Circular 2008/4 Marg. 16;
(B) The requirements of Exchange Act rule 18a-6(b)(2)(i), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 106; CO article 958f; FMIO-FINMA article
1(4); AccO article 3; FINMA Circular 2008/4 Marg. 16;
(C) The requirements of Exchange Act rule 18a-6(b)(2)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FINMA Circular 2013/8 Marg. 60 and
Marg. 61;
(D) The requirements of Exchange Act rule 18a-6(b)(2)(iii),
provided that the Covered Entity is subject to and complies with the
requirements of CO
[[Page 57468]]
article 958f; AMLA article 7(3); AMLO-FINMA article 5(1);
(E) The requirements of Exchange Act rule 18a-6(b)(2)(iv), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FINMA Circular 2013/8 Marg. 60 and
Marg. 61;
(F) The requirements of Exchange Act rule 18a-6(b)(2)(vii),
regarding one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1
for which substituted compliance is available under this Order,
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMA Circular 2017/1; BA article 3; CO article 958f,
in each case with respect to the relevant security-based swap or
activity;
(2) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to one or more provisions of Exchange Act
rule 15Fh-3 for which substituted compliance is available under this
Order, the Covered Entity applies substituted compliance for such
business conduct standard(s) of Exchange Act rule 15Fh-3 pursuant to
this Order, as applicable, with respect to the relevant security-based
swap or activity; and
(3) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fk-1, the Covered
Entity applies substituted compliance for Exchange Act section 15F(k)
and Exchange Act rule 15Fk-1 pursuant to this Order;
(G) The requirements of Exchange Act rule 18a-6(c), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of BA article 3; BO article 12; CO articles 686 and 958f;
and
(2) This Order does not extend to the requirements of Exchange act
rule 18a-6(c) relating to Forms SBSE, SBSE-A, SBSE-C, SBSE-W, all
amendments to these forms, and all other licenses or other
documentation showing the registration of the Covered Entity with any
securities regulatory authority or the U.S. Commodity Futures Trading
Commission;
(H) The requirements of Exchange Act rule 18a-6(d)(1), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12; CO
article 330a; FINMA Circular 2008/21, Annex 3, margins 30-33;
(I) The requirements of Exchange Act rule 18a-6(d)(2)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of BA article 3; BO article 12; CO article 958f; FINMA
Circular 2008/21 margins 122, 128, 132, and Appendix 2;
(J) The requirements of Exchange Act rule 18a-6(d)(3)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12;
(K) The requirements of Exchange Act rule 18a-6(d)(4) and (d)(5),
regarding one or more provisions of Exchange Act rules 15Fi-3 or 15Fi-4
for which substituted compliance is available under this Order,
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of CO article 958f; FinMIA article 106;
(2) With respect to the portion of Exchange Act rule 18a-6(d)(4)
and (d)(5) that relates to Exchange Act rules 15Fi-3 or 15Fi-4, the
Covered Entity applies substituted compliance for Exchange Act rules
15Fi-3 and 15Fi-4 pursuant to this Order; and
(3) This Order does not extend to the requirements of Exchange Act
rule 18a-6(d)(4) and (d)(5) relating to Exchange Act rule 15Fi-5;
(L) The requirements of Exchange Act rule 18a-6(e), provided that
the Covered Entity is subject to and complies with the requirements of
AccO; and
(M) The requirements of Exchange Act rule 18a-6(f), provided that
the Covered Entity is subject to and complies with the requirements of
FINMA Circular 2018/3.
(ii) Paragraph (d)(2)(i) is subject to the following further
conditions:
(A) A Covered Entity may apply the substituted compliance
determination in paragraph (d)(2)(i)(F) to records related to Exchange
Act rule 15Fh-3(h) in respect of one or more security-based swaps or
activities related to security-based swaps; and
(B) This Order does not extend to the requirements of Exchange Act
rule 18a-6(b)(2)(v), (b)(2)(vi), or (b)(2)(viii).
(3) File Reports. The requirements of Exchange Act rule 18a-7(a)(2)
and the requirements of Exchange Act rule 18a-7(j) as applied to the
requirements of Exchange Act rule 18a-7(a)(2), provided that:
(i) The Covered Entity is subject to and complies with the
requirements of BA article 6a; BO article 32; CAO article 16; FINMA
Circular 2020/1; and FINMA Circular 2016/1; and
(ii) The Covered Entity files periodic unaudited financial and
operational information with the Commission or its designee in the
manner and format required by Commission rule or order and presents the
financial information in the filing in accordance with generally
accepted accounting principles that the Covered Entity uses to prepare
general purpose publicly available or available to be issued financial
statements in Switzerland.
(4)(i) Provide Notification. The requirements of the following
provisions of Exchange Act rule 18a-8, provided that the Covered Entity
complies with the relevant conditions in this paragraph (d)(4)(i) and
with the applicable conditions in paragraph (d)(4)(ii):
(A) The requirements of Exchange Act rule 18a-8(c) and the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of Exchange Act rule 18a-8(c), provided that the Covered
Entity is subject to and complies with the requirements of FINMASA
article 29(2); CAO articles 14, 42(3), 101, and 130(4); and Liquidity
Ordinance articles 17b, and 26(2).
(B) The requirements of Exchange Act rule 18a-8(d) and the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of Exchange Act rule 18a-8(d), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMASA article 29(2); CAO articles 14, 42(3), 101, and
130(4); and Liquidity Ordinance articles 17b, and 26(2); and
(2) This Order does not extend to the requirements of Exchange Act
rule 18a-8(d) to give notice with respect to books and records required
by Exchange Act rule 18a-5 for which the Covered Entity does not apply
substituted compliance pursuant to this Order;
(ii) Paragraph (d)(4)(i) is subject to the following further
conditions:
(A) The Covered Entity:
(1) Simultaneously sends a copy of any notice required to be sent
by Swiss law cited in this paragraph of the Order to the Commission in
the manner specified on the Commission's website; 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; and
(B) This Order does not extend to the requirements of paragraph (g)
of rule 18a-8 or to the requirements of Exchange Act rule 18a-8(h) as
applied to such requirements.
(5) Daily Trading Records. The requirements of Exchange Act section
15F(g), provided that the Covered Entity is subject to and complies
with the requirements of CO article 958f; FMIO article 36; FMIO-FINMA
article 1; FinMIA articles 38, 104, and 106; FINMA Circular 2013/8
marg. 60 and marg. 61.
(6) Examination and Production of Records. Notwithstanding the
forgoing provisions of paragraph (d) of this Order, this Order does not
extend to, and Covered Entities remain subject to, the requirement of
Exchange Act section
[[Page 57469]]
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.
(7) English Translations. Notwithstanding the forgoing provisions
of paragraph (d) of this Order, to the extent documents are not
prepared in the English language, Covered Entities must promptly
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 of this Order.
(e) Definitions
(1) ``Covered Entity'' means an entity that:
(i) Is a security-based swap dealer registered with the Commission;
(ii) Is not a ``U.S. person,'' as that term is defined in rule
3a71-3(a)(4) under the Exchange Act;
(iii) Is a systemically important bank authorized by FINMA to
conduct banking activities in the Swiss Confederation; and
(iv) Is supervised by FINMA under the intensive and continual
supervision model as a Category 1 firm as that term is defined in BO
Annex 3.
(2) ``AccO'' means the Ordinance on the Maintenance and Retention
of Accounts (Accounts Ordinance), CC 221.431, as amended from time to
time.
(3) ``AMLA'' means the Federal Act on Combating Money Laundering
and Terrorist Financing (Anti-Money Laundering Act), CC 955, as amended
from time to time.
(4) ``AMLO-FINMA'' means the Ordinance of the Swiss Financial
Market Supervisory Authority on the Prevention of Money Laundering and
the Financing of Terrorist Activities (FINMA Anti-Money Laundering
Ordinance), CC 955.033.0, as amended from time to time.
(5) ``BA'' means the Federal Act on Banks and Savings Banks
(Banking Act), CC 952, as amended from time to time.
(6) ``BO'' means the Ordinance on Banks and Savings Banks (Banking
Ordinance), CC 952.02, as amended from time to time.
(7) ``CAO'' means the Ordinance concerning Capital Adequacy and
Risk Diversification for Banks and Securities Dealers (Capital Adequacy
Ordinance), CC 952.03, as amended from time to time.
(8) ``CO'' means the Federal Act on the Amendment of the Swiss
Civil Code (Part Five: The Code of Obligations), CC 220, as amended
from time to time.
(9) ``FinIA'' means Federal Act on Financial Institutions
(Financial Institutions Act), CC 954.1, as amended from time to time.
(10) ``FINMA'' means the Swiss Financial Market Supervisory
Authority.
(11) ``FINMA Circular 2008/4'' means the FINMA Circular 2008/4,
Securities Journals.
(12) ``FINMA Circular 2008/21'' means the FINMA Circular 2008/21,
Operational Risk--Banks.
(13) ``FINMA Circular 2010/1'' means the FINMA Circular 2010/1,
Remuneration schemes.
(14) ``FINMA Circular 2013/8'' means the FINMA Circular 2013/8,
Market conduct rules, Supervisory rules on market conduct in securities
trading.
(15) ``FINMA Circular 2016/1'' means the FINMA Circular 2016/1,
Disclosure--Banks.
(16) ``FINMA Circular 2017/1'' means the FINMA Circular 2017/1,
Corporate Governance--Banks.
(17) ``FINMA Circular 2018/3'' means the FINMA Circular 2018/3,
Outsourcing--Banks and Insurers.
(18) ``FINMA Circular 2020/1'' means the FINMA Circular 2020/1,
Accounting--Banks.
(19) ``FINMASA'' means the Federal Act on the Swiss Financial
Market Supervisory Authority (Financial Market Supervision Act), CC
956.1, as amended from time to time.
(20) ``FinMIA'' means the Federal Act on Financial Market
Infrastructures and Market Conduct in Securities and Derivatives
Trading (Financial Market Infrastructure Act), CC 958.1, as amended
from time to time.
(21) ``FMIO'' means the Ordinance on Financial Market
Infrastructures and Market Conduct in Securities and Derivatives
Trading (Financial Market Infrastructure Ordinance), CC 958.11, as
amended from time to time.
(22) ``FMIO-FINMA'' means the Ordinance of the Swiss Financial
Market Supervisory Authority on Financial Market Infrastructures and
Market Conduct in Securities and Derivatives Trading (FINMA Financial
Market Infrastructure Ordinance), CC 958.111, as amended from time to
time.
(23) ``FinSA'' means the Federal Act on Financial Services
(Financial Services Act), CC 950.1, as amended from time to time.
(24) ``Liquidity Ordinance'' means the Ordinance on the Liquidity
of Banks.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22475 Filed 10-14-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on October 15, 2021.
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