[Federal Register Volume 85, Number 220 (Friday, November 13, 2020)]
[Notices]
[Pages 72726-72746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25166]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90378; S7-16-20]


Notice of Substituted Compliance Application Submitted by the 
Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht in Connection With 
Certain Requirements Applicable to Security-Based Swap Entities Subject 
to Regulation in the Federal Republic of Germany; Proposed Order

AGENCY: Securities and Exchange Commission.

ACTION: Notice of application for substituted compliance determination; 
proposed order.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is soliciting public comment on an application by the 
Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht (``BaFin'') 
requesting that, pursuant to rule 3a71-6 under the Securities Exchange 
Act of 1934 (``Exchange Act''), the Commission determine that 
registered security-based swap dealers and registered major security-
based swap participants (``SBS Entities'') that are not U.S. persons 
and that are subject to certain regulation in the Federal Republic of 
Germany (``Germany'') may comply with certain requirements under the 
Exchange Act via compliance with corresponding requirements of Germany 
and the European Union. The Commission also is soliciting comment on a 
proposed Order providing for the conditional availability of 
substituted compliance in connection with the application.

DATES: Submit comments on or before December 8, 2020.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-16-20 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-16-20. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that the Commission 
does not redact or edit personal identifying information from comment 
submissions. You should submit only information

[[Page 72727]]

that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director or 
Laura Compton, Senior Special Counsel at 202-551-5870, Office of 
Derivatives Policy, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment 
on an application by BaFin requesting that the Commission determine 
that SBS Entities that are not U.S. persons and that are subject to 
certain regulation in Germany may satisfy certain requirements under 
the Exchange Act by complying with comparable requirements in Germany 
including relevant European Union (``EU'') requirements. The Commission 
also is soliciting comment on a proposed Order, set forth in Attachment 
A, providing for the conditional availability of substituted compliance 
in connection with that application.

I. Background

A. Substituted Compliance Under Exchange Act Rule 3a71-6

1. Potential Scope of Availability
    Exchange Act rule 3a71-6 conditionally provides that non-U.S. SBS 
Entities may satisfy certain requirements under Exchange Act section 
15F by complying with comparable regulatory requirements of a foreign 
jurisdiction.\1\ This substituted compliance framework does not 
constitute exemptive relief, but instead provides an alternative method 
by which non-U.S. SBS Entities may comply with applicable U.S. 
requirements.\2\ The non-U.S. SBS Entities accordingly would remain 
subject to the relevant requirements under section 15F, and the 
Commission would retain the authority to inspect, examine and supervise 
those SBS Entities' compliance and take enforcement action as 
appropriate.\3\
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    \1\ On August 6, 2021, market participants will begin to count 
security-based swap positions toward the thresholds for registration 
with the Commission as a security-based swap dealer or major 
security-based swap participant. See Capital, Margin, and 
Segregation Requirements for Security-Based Swap Dealers and Major 
Security-Based Swap Participants and Capital and Segregation 
Requirements for Broker-Dealers, 84 FR 43872, 53954 (Aug. 22, 2019); 
see also Rule Amendments and Guidance Addressing Cross-Border 
Application of Certain Security-Based Swap Requirements, 85 FR 6270, 
6345-49 (Feb. 4, 2020).
    \2\ ``[I]n the Commission's view, the potential for substituted 
compliance will help to promote the effective application of Title 
VII requirements, by making it less likely that certain market 
participants that are complying with comparable foreign requirements 
will determine that they need to choose between modifying their 
business conduct systems to reflect the requirements of U.S. rules, 
or else limiting or ceasing their participation in the U.S. 
market.'' Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 
29960, 30074 (May 13, 2016) (``Business Conduct Adopting Release'').
    \3\ The Commission has the authority to bring an enforcement 
action against a non-U.S. SBS Entity for failure to comply with 
applicable requirements under the Exchange Act if the firm has 
failed to comply with the corresponding foreign requirements. See 
also section VII.B.3. of this release.
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    Substituted compliance potentially is available in connection with 
section 15F requirements regarding: (1) Business conduct and 
supervision;\4\ (2) chief compliance officers; \5\ (3) trade 
acknowledgment and verification; \6\ (4) capital; \7\ (5) margin; \8\ 
(6) recordkeeping and reporting; \9\ and (7) portfolio reconciliation, 
portfolio compression and trading relationship documentation.\10\
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    \4\ See Exchange Act rule 3a71-6(d)(1) (providing that 
substituted compliance generally is available in connection with the 
business conduct and supervision requirements of Exchange Act 
sections 15F(h) and (j) and Exchange Act rules 15Fh-3 through 15Fh-
6). But see note 11, infra (addressing the fact that substituted 
compliance does not extend to section 15F antifraud prohibitions and 
information-related requirements).
    \5\ See Exchange Act rule 3a71-6(d)(2) (providing that 
substituted compliance is available in connection with the chief 
compliance officer requirements of Exchange Act section 15F(k) and 
Exchange Act rule 15Fk-1).
    \6\ See Exchange Act rule 3a71-6(d)(3) (providing that 
substituted compliance is available in connection with the trade 
acknowledgment and verification requirements of Exchange Act section 
15F(i) and Exchange Act rule 15Fi-2).
    \7\ See Exchange Act rule 3a71-6(d)(4)(i) (providing that 
substituted compliance is available in connection with the security-
based swap dealer capital requirements of Exchange Act section 
15F(e)).
    \8\ See Exchange Act rule 3a71-6(d)(5)(i) (providing that 
substituted compliance is available in connection with the security-
based swap dealer margin requirements of Exchange Act section 
15F(e)).
    \9\ See Exchange Act rule 3a71-6(d)(6) (providing that 
substituted compliance is available in connection with the 
recordkeeping and reporting requirements of Exchange Act section 15F 
and Exchange Act rules 18a-5 through 18a-9).
    \10\ See Exchange Act rule 3a71-6(d)(7) (providing that 
substituted compliance is available in connection with the portfolio 
reconciliation, portfolio compression, and trading relationship 
documentation requirements of Exchange Act section 15F(i) and 
Exchange Act rules 15Fi-3 through 15Fi-5).
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    Substituted compliance is not available for antifraud prohibitions 
and information-related requirements under section 15F.\11\ Substituted 
compliance under rule 3a71-6 also does not extend to certain other 
provisions of the Exchange Act that apply to security-based swap 
transactions. \12\ SBS Entities in Germany accordingly must comply 
directly with those requirements, as applicable, regardless of whether 
the Commission grants the present application.
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    \11\ See Exchange Act rule 3a71-6(d)(1) (specifying that 
substituted compliance is not available in connection with the 
antifraud provisions of Exchange Act section 15F(h)(4)(A) and 
Exchange Act rule 15Fh-4(a), and the information-related provisions 
of Exchange Act sections 15F(j)(3) and 15F(j)(4)(B)).
    Substituted compliance also is not available for security-based 
swap dealer registration requirements pursuant to Exchange Act 
sections 15F(a) and (b).
    \12\ Substituted compliance under rule 3a71-6 accordingly is not 
available in connection with security-based swap dealer requirements 
such as: (a) Additional antifraud prohibitions (see Exchange Act 
section 10(b), Exchange Act rule 10b-5, and Securities Act of 1933 
section 17(a)); (b) requirements related to transactions with 
counterparties that are not eligible contract participants 
(``ECPs'') (see Exchange Act section 6(l); Securities Act of 1933 
section 5(e)); (c) segregation of customer assets (see Exchange Act 
section 3E; Exchange Act rule 18a-4); (d) required clearing upon 
counterparty election (see Exchange Act section 3C(g)(5)); (e) 
regulatory reporting and public dissemination (see generally 
Regulation SBSR, 17 CFR 242.900 et seq.); and (f) registration of 
offerings (see Securities Act of 1933 section 5).
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2. Prerequisites to Substituted Compliance
a. Comparability of Regulatory Outcomes
    As a prerequisite to substituted compliance, rule 3a71-6 provides 
that the Commission must determine that the analogous foreign 
requirements are ``comparable'' to the applicable requirements under 
the Exchange Act, after accounting for factors that the Commission 
determines are appropriate, ``such as the scope and objectives of the 
relevant foreign regulatory requirements . . . , as well as the 
effectiveness of the supervisory compliance program administered, and 
the enforcement authority exercised'' by the foreign authority.\13\
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    \13\ Exchange Act rule 3a71-6(a)(2)(i).
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    In making those assessments, the Commission has explained that it 
will ``endeavor to take a holistic approach in considering whether 
regulatory requirements are comparable . . . and will focus on the 
comparability of regulatory outcomes rather than predicating 
substituted compliance on requirement-by-requirement similarity.'' \14\
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    \14\ See Business Conduct Adopting Release, 81 FR at 30078 
(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 added that its 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.'' Id. at 30079 (footnote 
omitted).

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[[Page 72728]]

b. Memorandum of Understanding
    Rule 3a71-6 also predicates substituted compliance on the 
Commission entering into a supervisory and enforcement memorandum of 
understanding and/or other arrangement with the relevant foreign 
financial regulatory authority ``addressing supervisory and enforcement 
cooperation and other matters arising under the substituted compliance 
determination.'' \15\ The Commission and BaFin are in the process of 
negotiating a memorandum of understanding to address cooperation 
matters related to substituted compliance.\16\
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    \15\ Exchange Act rule 3a71-6(a)(2)(ii). The Commission has 
explained that this prerequisite ``should help ensure that both 
regulators will cooperate with each other within the substituted 
compliance framework, such that both regulators have information 
that will assist them in fulfilling their respective regulatory 
mandates.'' Business Conduct Adopting Release, 81 FR at 30074-75.
    \16\ The Commission and BaFin will need to have in place a 
current memorandum of understanding or other arrangement addressing 
matters related to substituted compliance before the Commission may 
issue a final order allowing Covered Entities to use substituted 
compliance to satisfy obligations under the Exchange Act. The 
Commission expects to publish any such memorandum of understanding 
or other arrangement on its website at www.sec.gov under the 
``Substituted Compliance'' tab located on the ``Security-Based Swap 
Markets'' page.
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c. ``Adequate Assurances''
    Finally, rule 3a71-6 states that a foreign regulatory authority may 
submit a substituted compliance application only if the authority 
provides ``adequate assurances'' that no law or policy would impede the 
ability of any entity that is directly supervised by the authority and 
that may register with the Commission ``to provide prompt access to the 
Commission to such entity's books and records or to submit to onsite 
inspection or examination by the Commission.'' \17\ In the Commission's 
preliminary view, BaFin has satisfied this prerequisite as of the date 
of the application.\18\
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    \17\ Exchange Act rule 3a71-6(c)(3) (also stating that for 
applications by market participants--rather than by foreign 
regulatory authorities--each applicant must provide the 
certification and opinion of counsel related to Commission access 
that is described in the registration application provisions of 
Exchange Act rule 15Fb2-4(c)). The Commission has explained that 
this prerequisite (and its analogue for applications submitted by 
market participants) should promote efficiency by focusing 
substituted compliance assessments on those jurisdictions that are 
capable of allowing the Commission to have the requisite access to 
registered entities. ``In other words, if a jurisdiction has 
blocking statutes or other laws or policies that would preclude the 
registration of such dealers and major participants with the 
Commission, there would be no purpose to the Commission considering 
a substituted compliance application in connection with that 
jurisdiction.'' Business Conduct Adopting Release, 81 FR at 30081.
    \18\ This took into account information and representations that 
BaFin provided regarding certain German and EU requirements that are 
relevant to the Commission's ability to inspect, and access the 
books and records of, security-based swap dealers in Germany.
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B. Commission rule 0-13 and publication of notice for comment

    Commission rule 0-13 addresses procedures for filing substituted 
compliance applications, and provides that the Commission will publish 
notice when a completed application has been submitted. The rule 
further provides that any person may submit to the Commission ``any 
information that relates to the Commission action requested in the 
application.'' \19\
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    \19\ See Commission rule 0-13(h). That paragraph adds that the 
Commission may take final action on a substituted compliance 
application no earlier than 25 days following publication of the 
notice in the Federal Register.
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II. Germany's Substituted Compliance Request

    BaFin has submitted a completed substituted compliance application 
to the Commission.\20\ Pursuant to rule 0-13, the Commission is 
publishing notice of the application together with a proposed Order to 
conditionally grant substituted compliance to certain German SBS 
Entities in connection with certain requirements under the Exchange 
Act. The Commission will consider public comments on BaFin's 
application and the proposed Order.
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    \20\ See Letter from Elisabeth Roegele, Chief Executive Director 
of Securities Supervision and Deputy President, BaFin, to Vanessa 
Countryman, Secretary, Commission, dated Nov. 6, 2020 (``BaFin 
Application''). The application is available on the Commission's 
website at: https://www.sec.gov/files/germany-BaFin-complete-application-substituted-compliance-11062020.pdf.
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    BaFin's application seeks substituted compliance for German market 
participants in connection with a number of requirements under Exchange 
Act section 15F.

A. Relevant Market Participants

    The Commission will consider whether to make substituted compliance 
available to any entity that: (i) Is registered with the Commission as 
a security-based swap dealer or major security-based swap participant; 
(ii) is not a U.S. person; (iii) has been authorized by BaFin as an 
investment firm or credit institution; and (iv) is subject to relevant 
German and EU financial regulatory requirements and to supervision and 
enforcement by BaFin in connection with its security-based swap 
activity.

B. Relevant Section 15F Requirements

    BaFin requests that the Commission issue an order determining 
that--for substituted compliance purposes--applicable requirements in 
Germany are comparable with the following requirements under Exchange 
Act section 15F:
    Risk control requirements--Requirements related to internal risk 
management systems, trade acknowledgment and verification, portfolio 
reconciliation and dispute resolution, portfolio compression and 
trading relationship documentation.\21\
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    \21\ See part IV, infra.
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    Internal supervision, chief compliance officer and additional 
section 15F(j) requirements--Requirements related to diligent 
supervision and chief compliance officers, as well as requirements 
related to conflicts of interest and information gathering under 
Exchange Act section 15F(j).\22\
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    \22\ See part V, infra.
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    Counterparty protection requirements--Requirements related to 
disclosure of material risks and characteristics and material 
incentives or conflicts of interest, disclosure of daily marks, fair 
and balanced communications, disclosure of clearing rights, ``know your 
counterparty'' and suitability of recommendations.\23\
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    \23\ See part VI, infra. BaFin is not requesting substituted 
compliance in connection with: Eligible contract participant 
(``ECP'') verification requirements (Exchange Act section 
15F(h)(3)(A) and Exchange Act rule 15Fh-3(a)(1)); ``special entity'' 
provisions (Exchange Act sections 15F(h)(4)-(5) and Exchange Act 
rules 15Fh-3(a)(2)-(3), 15Fh-4(b) and 15Fh-5); and political 
contribution provisions (Exchange Act rule 15Fh-6).
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    Recordkeeping, reporting, and notification requirements--
Requirements related to making and keeping current certain prescribed 
records, the preservation of records, reporting, and notification.\24\
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    \24\ See part VII, infra. The application does not seek 
substituted compliance with respect to capital or margin 
requirements. The Commission does not administer or oversee capital 
and margin requirements for prudentially regulated SBS Entities. The 
Commission has preliminarily determined to focus its analysis on the 
recordkeeping, reporting, and notification requirements that apply 
to prudentially regulated SBS entities and is deferring 
consideration of requirements that apply to non-prudentially 
regulated SBS Entities until it receives an application seeking 
substituted compliance for capital and margin requirements. The 
Commission is seeking commenters' views on this issue below.
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C. Comparability Considerations and Proposed Order

    Because Germany is a member of the European Union, market 
participants in

[[Page 72729]]

Germany are subject to German regulations implemented pursuant to EU 
directives, and to applicable EU regulations. Those include 
requirements related to: Organization, compliance and conduct; \25\ 
risk-mitigation; \26\ prudential matters; \27\ and certain other 
matters relevant to the application.\28\
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    \25\ Relevant elements of the EU's Markets in Financial 
Instruments Directive (``MiFID''), Directive 2014/65/EU, have been 
implemented in Germany via amendments to the Securities Trading 
Act--Wertpapierhandelsgesetz (``WpHG''). MiFID and WgHG address, 
inter alia, organizational, compliance and conduct requirements 
applicable to nonbank ``investment firms.'' In significant part, 
those requirements also apply to credit institutions that provide 
investment services or perform investment activities. See MiFID art. 
1(3); WpHG sec. 2(10) (WpHG definition of ``investment services 
enterprises''). Commission Delegated Regulation (EU) 2017/565 
(``MiFID Org Reg'') in part supplements MiFID with respect to 
organizational requirements for firms. The Markets in Financial 
Instruments Regulation (``MiFIR''), Regulation (EU) 648/2012, 
generally addresses trading venues and transparency. Commission 
Delegated Directive (EU) 2017/593 (``MiFID Delegated Directive'') in 
part supplements MiFID with regard to safeguarding client property, 
and in Germany is implemented in relevant part by the WpHG. 
Directive (EU) 2015/849 (``MLD'') addresses requirements on the 
prevention of the use of the financial system for the purposes of 
money laundering or terrorist financing, and in Germany has been 
implemented by the Money Laundering Act--Geldw[auml]schegesetz 
(``GwG'').
    \26\ The European Market Infrastructure Regulation (``EMIR''), 
Regulation (EU) 648/2012, in part imposes certain risk-mitigation 
requirements on counterparties in connection with uncleared OTC 
transactions. Delegated Regulation (EU) 149/2013 (``EMIR RTS'') 
supplements EMIR with various regulatory technical standards, 
including standards addressing confirmations, portfolio 
reconciliation, portfolio compression and dispute resolution. 
Delegated Regulation (EU) 2016/2251 (``EMIR Margin RTS'') further 
supplements EMIR with regulatory technical standards related to risk 
mitigation techniques.
    \27\ The EU's Capital Requirements Directive IV (``CRD''), 
Directive 2013/36/EU has been adopted in Germany via amendments to 
the Banking Act--Gesetz [uuml]ber das Kreditwesen (``KWG''). CRD and 
KWG set forth prudential requirements and certain related 
requirements applicable to credit institutions and certain nonbank 
investment firms. Certain CRD requirements regarding reporting 
obligations have been incorporated into German law by the 
Finanzdienstleistungsaufsichtsgesetz (``FinDAG''). The Capital 
Requirements Regulation (``CRR''), Regulation (EU) 575/2013 further 
addresses prudential requirements and related recordkeeping 
requirements for credit institutions and certain investment firms. 
Commission Implementing Regulation (EU) 680/2014 (``CRR Reporting 
ITS'') sets forth implementing technical standard regarding 
supervisory reporting. Pursuant to amendments that will become 
effective in June 2021, the requirements of CRD and the CRR will 
apply to credit institutions and to certain nonbank undertakings 
(that carry on activities involving dealing, portfolio management, 
investment advice and underwriting/placing) that meet specified 
thresholds (e.g., consolidated assets of [euro]30 billion or more). 
See generally Investment Firms Regulation (``IFR''), Regulation (EU) 
2019/2033, art. 62 (amending certain definitions in the CRR).
    \28\ The Market Abuse Regulation (``MAR''), Regulation (EU) 596/
2014, sets forth requirements to enhance market integrity and 
investor protection. The MAR Investment Recommendations Regulation, 
Commission Delegated Regulation (EU) 2016/958, supplements MAR with 
respect to regulatory technical standards regarding investment 
recommendations.
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    In the view of BaFin, German and EU requirements taken as a whole 
produce regulatory outcomes that are comparable to those of the 
relevant requirements under the Exchange Act. In support, the 
application incorporates and relies on a series of European Commission 
analyses that compare EU requirements with applicable requirements 
under the Exchange Act, in addition to analyses specific to German law 
and practices.\29\
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    \29\ BaFin's application incorporates and builds upon European 
Commission analyses related to: Risk control (see BaFin application 
Annex A category 1), books and records (see BaFin application Annex 
A category 2), internal supervision and compliance (see BaFin 
application Annex A category 3), and counterparty protection (see 
BaFin application Annex A category 4). These analyses are available 
on the Commission's website along with the remainder of BaFin's 
application. See note 20, supra.
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    In the Commission's preliminary view, requirements under the 
Exchange Act and German/EU requirements maintain similar approaches 
with respect to achieving regulatory goals in several respects, but 
follow differing approaches or incorporate disparate elements in 
certain other respects. The Commission has considered those 
similarities and differences when analyzing comparability and 
developing preliminary views in light of the Commission's holistic, 
outcomes-oriented framework for assessing comparability.
    In this context, the Commission recognizes that other regulatory 
regimes will have exclusions, exceptions and exemptions that may not 
align perfectly with the corresponding requirements under the Exchange 
Act. Where the Commission preliminarily has found that the German 
regime produces comparable outcomes notwithstanding those particular 
differences, the Commission proposes to make a positive determination 
on substituted compliance. Where the Commission preliminarily has found 
that those exclusions, exemptions and exceptions lead to outcomes that 
are not comparable, however, the proposal would not provide for 
substituted compliance.
    Accordingly, based on the Commission's analysis of the application 
and review of relevant German and EU requirements, the Commission is 
proposing an Order, located at Attachment A, granting substituted 
compliance subject to specific conditions and limitations. When SBS 
Entities seek to rely on substituted compliance to satisfy particular 
requirements under the Exchange Act, non-compliance with the applicable 
German and EU requirements would lead to a violation of those 
requirements under the Exchange Act and potential enforcement action by 
the Commission (as opposed to automatic revocation of the substituted 
compliance order).

III. Applicable Entities and General Conditions

A. Entities for Which Conditional Substituted Compliance Is Available

    Under the proposed Order, substituted compliance would be available 
to ``Covered Entities''--a term that limits the availability of 
substituted compliance to SBS Entities that are subject to applicable 
German and EU requirements and oversight. Consistent with the 
parameters of substituted compliance under Exchange Act rule 3a71-6, 
the proposed ``Covered Entity'' definition provides that the relevant 
entities must be security-based swap dealers or major security-based 
swap participants registered with the Commission, and that those 
entities cannot be U.S. persons.\30\
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    \30\ See para. (f)(1)(i)-(ii) to the proposed Order.
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    The proposed ``Covered Entity'' definition further would provide 
that the entities must be investment firms or credit institutions that 
BaFin has authorized to provide investment services or perform 
investment activities in Germany.\31\ This is intended to help ensure 
that those entities are subject to relevant German and EU requirements 
and oversight.
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    \31\ See para. (f)(1)(iii) to the proposed Order.
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B. General Conditions and Prerequisites

    Substituted compliance under the proposed Order would be subject to 
a number of conditions and other prerequisites, in part to help ensure 
that the relevant German and EU requirements that form the basis for 
substituted compliance in practice will apply to the SBS Entity's 
security-based swap business and activities.
1. ``Subject to and Complies With'' Applicability Provisions
    Each relevant section of the proposed Order would be subject to the 
condition that the Covered Entity ``is subject to and complies with'' 
the applicable German and EU requirements that are needed to establish 
comparability.\32\ Accordingly, the proposed Order would not provide 
substituted compliance

[[Page 72730]]

when an SBS Entity is excused from compliance with relevant foreign 
provisions, such as, for example, would be the case if the German or EU 
requirements that the Commission has deemed comparable for purposes of 
the proposed Order do not apply to the security-based swap activities 
of a third-country branch of a German SBS Entity. In that event, the 
Covered Entity would not be ``subject to'' those requirements, and the 
Covered Entity could not rely on substituted compliance in connection 
with those activities.\33\
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    \32\ E.g., para. (d)(1) to the proposed Order (providing for 
conditional substituted compliance in connection with certain 
disclosure provisions provided that the Covered Entity ``is subject 
to and complies'' with specified German and EU requirements related 
to disclosure).
    \33\ A SBS Entity's ``voluntary'' compliance with the relevant 
German and EU requirements would not suffice for these purposes. 
Substituted compliance reflects an alternative means by which an SBS 
Entity may comply with applicable requirements under the Exchange 
Act, and thus mandates that the SBS Entity be subject to the 
requirements needed to establish comparability and face consequences 
arising from any failure to comply with those requirements. 
Moreover, the comparability assessment takes into account the 
effectiveness of the supervisory compliance program administered and 
the enforcement authority exercised by BaFin, which would not be 
expected to promote comparable outcomes when compliance merely is 
``voluntary.''
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2. Additional General Conditions
    Substituted compliance under the proposed Order further would be 
subject to general conditions intended to help ensure the applicability 
of relevant German and EU requirements. In particular:
     MiFID ``investment services or activities''--The SBS 
Entity's security-based swap activities must constitute ``investment 
services or activities'' for purposes of applicable provisions under 
MiFID, WpHG and/or other EU and German requirements adopted pursuant to 
those provisions, and must fall within the scope of the firm's 
authorization from BaFin.\34\
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    \34\ See paragraph (a)(1) to the proposed Order (requiring that 
relevant activities constitute ``investment services'' or 
``investment activities'' as defined in MiFID art. 4(1)(2) and WpHG 
sec. 2(8) in connection with applicable provisions).
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     MiFID ``clients''--The SBS Entity's counterparties (or 
potential counterparties) must be ``clients'' (or potential 
``clients'') for purposes of applicable provisions under MiFID, WpHG 
and/or other EU and German requirements adopted pursuant to those 
provisions.\35\
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    \35\ See paragraph (a)(2) to the proposed Order (requirement 
that relevant counterparties or potential counterparties be 
``clients'' or potential ``clients'' as defined in MiFID art. 
4(1)(9) and WpHG sec. 67(1) in connection with applicable 
provisions).
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     MiFID ``financial instruments''--The relevant security-
based swaps must be ``financial instruments'' for purposes of MiFID, 
the WpHG and/or other EU and German requirements adopted pursuant to 
those provisions.\36\
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    \36\ See paragraph (a)(3) to the proposed Order (requirement 
that relevant security-based swaps be ``financial instruments'' as 
defined in MiFID art. 4(1)(15) and WpHG sec. 2(4) in connection with 
applicable provisions).
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     CRD ``institutions''--The Covered Entity must be an 
``institution'' for purposes of applicable provisions under CRD, KWG 
and CRR and/or other EU and German requirements adopted pursuant to 
those provisions.\37\
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    \37\ See para. (a)(4) to the proposed Order (requirement that 
relevant Covered Entities must be ``institutions'' as defined in CRD 
art. 3(1)(3), CRR art. 4(1)(3) and KWG sec. 1(1b)).
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     Memorandum of Understanding--The Commission and BaFin have 
an applicable memorandum of understanding or other arrangement 
addressing cooperation with respect to the substituted compliance Order 
at the time the Covered Entity makes use of substituted compliance.\38\
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    \38\ See para. (a)(5) to the proposed Order; see also part 
I.A.2.b, supra.
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     Notice of reliance on substituted compliance--An SBS 
Entity relying on the substituted compliance order must provide notice 
of its intent to rely on the order by notifying the Commission in 
writing.\39\
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    \39\ See para. (a)(6) to the proposed Order.
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3. European Union Cross-Border Matters
    For some EU requirements under MiFID (and other EU and German 
requirements adopted pursuant to MiFID), EU law allocates the 
responsibility for supervising and enforcing those requirements to 
authorities of the Member State in whose territory a Covered Entity 
provides certain services.\40\ To help ensure that the prerequisites to 
substituted compliance with respect to supervision and enforcement are 
satisfied in fact, the proposed Order would provide substituted 
compliance only if BaFin is the authority responsible for supervision 
and enforcement of those EU requirements under MiFID (and other EU and 
German requirements adopted pursuant to MiFID) in relation to the 
particular service for which substituted compliance is used.
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    \40\ See MiFID art. 35(8).
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    Similarly, for some of the EU requirements under MAR (and other EU 
requirements adopted pursuant to MAR), EU law allocates the 
responsibility for supervising and enforcing those requirements to 
authorities of potentially multiple Member States. For those EU 
requirements under MAR (and other EU requirements adopted pursuant to 
MAR), to help ensure that the prerequisites to substituted compliance 
with respect to supervision and enforcement are satisfied in fact, the 
proposed Order would provide substituted compliance only if one of 
those authorities is BaFin.\41\
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    \41\ See para. (a) to the proposed Order.
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IV. Substituted Compliance for Risk Control Requirements

A. BaFin Request and Associated Analytic Considerations

    BaFin's application in part requests substituted compliance in 
connection with risk control requirements under the Exchange Act 
relating to:
     Risk management systems--An internal risk management 
system is required pursuant to Exchange Act section 15F(j)(2) and 
relevant aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I).\42\ These 
provisions address the obligation of registered entities to follow 
policies and procedures reasonably designed to help manage the risks 
associated with their business activities.\43\
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    \42\ BaFin is not requesting substituted compliance in 
connection with Exchange Act rules 18a-1(f) and 18a-2(c), which set 
forth additional internal risk management system requirements for 
nonbank security-based swap dealers and nonbank major security-based 
swap participants.
    \43\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 
70214, 70250 (Nov. 23, 2012) (proposing capital and margin 
requirements for security-based swap dealers and major security-
based swap participants). BaFin's application discusses German and 
EU requirements that address SBS Entities' obligations related to 
risk management. See BaFin application Annex A category 1 at 9-21.
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     Trade acknowledgment and verification--Trade 
acknowledgment and verification is required pursuant to Exchange Act 
section 15F(i) and Exchange Act rule 15Fi-2. These provisions help 
avoid legal and operational risks by requiring definitive written 
records of transactions and for procedures to avoid disagreements 
regarding the meaning of transaction terms.\44\
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    \44\ Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR 39808, 
39809 & 39820 (Jun. 17, 2019) (``Trade Acknowledgment and 
Verification Adopting Release''). BaFin's application discusses 
German and EU requirements that address SBS Entities' obligations 
related to confirmations and to information to be provided to 
clients regarding executed orders. See BaFin application Annex A 
category 1 at 22-39.
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     Portfolio reconciliation and dispute reporting--Portfolio 
reconciliation and dispute reporting is required pursuant to Exchange 
Act section 15F(i) and Exchange Act rule 15Fi-3. These provisions 
require that counterparties engage in portfolio reconciliation and 
resolve discrepancies in connection with uncleared security-based 
swaps. These also require prompt notification of the Commission and 
applicable

[[Page 72731]]

prudential regulators regarding certain valuation disputes.\45\
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    \45\ See Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR 
6359, 6360-61 (Feb. 4, 2020) (``Risk Mitigation Adopting Release''). 
BaFin's application discusses German and EU requirements that 
address portfolio reconciliation and dispute resolution and 
reporting. See BaFin application Annex A category 1 at 40-53.
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     Portfolio compression--Portfolio compression is required 
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-4. 
These provisions require that SBS Entities have procedures addressing 
bilateral offset, bilateral compression and multilateral compression in 
connection with uncleared security-based swaps.\46\
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    \46\ See Risk Mitigation Adopting Release, 85 FR at 6361. 
BaFin's application discusses EU portfolio compression requirements. 
See BaFin application Annex A category 1 at 54-56.
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     Trading relationship documentation--Trading relationship 
documentation is required pursuant to Exchange Act section 15F(i) and 
Exchange Act rule 15Fi-5. These provisions require that SBS Entities 
have procedures to execute written security-based swap trading 
relationship documentation with their counterparties prior to, or 
contemporaneously with, executing certain security-based swaps.\47\
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    \47\ See Risk Mitigation Adopting Release, 85 FR at 6361. 
BaFin's application discusses German and EU requirements regarding 
records of rights, obligations and terms of investment firm 
services. See BaFin application Annex A category 1 at 56-62.
---------------------------------------------------------------------------

    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. 
The Commission's comparability assessment accordingly focuses on 
whether the analogous foreign requirements--taken as a whole--produce 
comparable outcomes with regard to providing that registered entities 
follow financial responsibility, risk mitigation and documentation 
practices that are appropriate to the risks associated with their 
security-based swap businesses.

B. Preliminary Views and Proposed Order

1. General Considerations
    In the Commission's preliminary view based on BaFin's application 
and the Commission's review of applicable provisions, relevant German 
and EU requirements in general would produce regulatory outcomes that 
are comparable to those associated with the above risk control 
requirements, by subjecting German SBS Entities to financial 
responsibility, risk mitigation and documentation practices that are 
appropriate to the risks associated with their security-based swap 
businesses. Substituted compliance accordingly would be conditioned on 
SBS Entities being subject to the German and EU provisions that in the 
aggregate establish a framework that produces outcomes comparable to 
those associated with the risk control requirements under the Exchange 
Act.\48\
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    \48\ In connection with risk management system requirements, 
Covered Entities particularly must comply with: MiFID art. 16(4)-(5) 
and WpHG sec. 80 (addressing administrative and accounting 
procedures, internal control mechanisms, risk assessment procedures 
and information processing system safeguards); MiFID Org Reg art. 
21-24 (addressing risk management and internal audit); CRD art. 74, 
76 and 79-87 and KWG sections 25a, 25b, 25c (other than 25c(2)), 25d 
(other than 25d(3) and 25d(11)) (addressing internal governance and 
the treatment of various categories of risk); and EMIR Margin RTS 
art. 2 (addressing required risk management procedures for the 
exchange of collateral for non-centrally cleared over-the-counter 
derivatives contracts); CRR art. 286-88 and 293 (addressing 
counterparty credit risk management and risk management systems); 
EMIR Margin RTS art. 2 (addressing general provisions for risk 
management procedures).  para. (b)(1) to the proposed Order. In 
connection with trade acknowledgement and verification requirements, 
firms must comply with MiFID art. 25(6) and WpHG sec. 63(12) 
(addressing reports on services), MiFID Org Reg art. 59-61 
(addressing essential information regarding executed orders and 
portfolio management), EMIR art. 11(1)(a) (addressing required 
bilateral confirmations for uncleared over-the-counter derivatives) 
and EMIR RTS art. 12 (addressing timeliness of confirmations). See 
para. (b)(2) to the proposed Order. In connection with portfolio 
reconciliation and dispute reporting requirements, firms must comply 
with EMIR art. 11(1)(b) (addressing required portfolio 
reconciliation and dispute resolution for uncleared over-the-counter 
derivatives) and EMIR RTS art. 13 and 15 (addressing further 
requirements related to portfolio reconciliation and dispute 
resolution). See para. (b)(3) to the proposed Order. In connection 
with portfolio compression requirements, firms must comply with EMIR 
RTS art. 14 (also addressing portfolio protection). See para. (b)(4) 
to the proposed Order. In connection with trading relationship 
documentation requirements, firms must comply with: MiFID art. 25(5) 
and WpHG sec. 83(2) (addressing required records of documents 
regarding parties' rights and obligations and other terms on which 
the investment firm will provide services); MiFID Org Reg art. 24, 
56, 58, 73 and applicable parts of Annex I (addressing audit 
requirements, records related to appropriateness assessments, client 
agreements and parties' rights and obligations); and EMIR Margin RTS 
art. 2 (addressing general provisions for risk management 
procedures, including procedures providing for or specifying the 
terms of agreements). See para. (b)(5) to the proposed Order. The 
above EMIR requirements apply only to ``OTC derivatives contracts,'' 
which are defined as derivatives contracts not executed on certain 
``regulated markets'' or equivalent ``third-country markets.'' See 
EMIR art. 2(7). The EMIR-related conditions accordingly will not 
impede substituted compliance in connection with exchange-traded or 
market-traded security-based swaps that do not constitute ``OTC 
derivatives contracts.''
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    In reaching these preliminary views, the Commission recognizes that 
there are certain differences between those German and EU requirements 
and the applicable risk control requirements under the Exchange Act. In 
the Commission's preliminary view, on balance, those differences would 
not be inconsistent with substituted compliance for these requirements. 
As noted, requirement-by-requirement similarity is not needed for 
substituted compliance.\49\
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    \49\ See note 14, supra, and accompanying text.
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2. Additional Conditions
    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes:
a. Trading Relationship Documentation--MiFID ``Eligible Counterparty'' 
Exception Not Applicable
    Under the proposed Order, substituted compliance in connection with 
the trading relationship documentation provisions of Exchange Act rule 
15Fi-5 would be conditioned on the requirement that the non-U.S. firm 
not treat its counterparties as ``eligible counterparties'' for 
purposes of the relevant MiFID provisions needed to establish 
comparability.\50\
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    \50\ See para. (b)(5)(ii) to the proposed Order (incorporating 
condition that the Covered Entity cannot treat applicable 
counterparties as ``eligible counterparties'' for purpose of MiFID 
art. 30 or WpHG sec. 68). Because trading relationship documentation 
is an entity-level requirement, this condition generally would 
disapply the ``eligible counterparty'' exception in connection with 
all of the entity's applicable counterparties, including non-U.S. 
counterparties. Rule 15Fi-5, however, does not apply to existing 
security-based swaps, or to cleared and certain security-based swaps 
executed anonymously on a national security exchange or a security-
based swap execution facility. See rule 15Fi-5(a)(1).
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    Certain of the relevant German and EU requirements that provide for 
this type of documentation \51\ do not apply to investment firms' 
transactions with ``eligible counterparties.'' \52\ The Commission is 
concerned that a foreign framework which completely excludes

[[Page 72732]]

compliance in connection with a particular category of security-based 
swap counterparties may not promote the risk control purpose of the 
trading relationship documentation requirement sufficiently to produce 
a comparable regulatory outcome.
---------------------------------------------------------------------------

    \51\ E.g., MiFID art. 25(5) (requiring that investment firms 
establish a record that includes documents ``that set out the rights 
and obligations of the parties, and the other terms on which the 
investment firm will provide services to the client''); WpHG sec. 
83(2); MiFID Org Reg art. 58.
    \52\ See MiFID art. 30(1); WpHG sec. 68. On the other hand, 
certain relevant EU provisions are not subject to this ``eligible 
counterparty'' exclusion. See EMIR Margin RTS art. 2 (requiring risk 
management procedures associated with the exchange of collateral, 
including procedures providing for or specifying ``the terms of all 
necessary agreements to be entered into by counterparties'' in 
connection with non-cleared OTC derivatives including terms of 
netting and collateral exchange agreements); MiFID art. 25(6) and 
MiFID Org Reg art. 59 (addressing required reports of services, 
including confirmations).
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    The Commission is mindful that compliance with this condition may 
require German SBS Entities that wish to rely on substituted compliance 
to supplement their existing practices, and incur additional time and 
cost burdens, to follow relevant German and EU documentation 
requirements in connection with their security-based swap business 
involving ``eligible counterparties.'' On balance, however, in the 
Commission's preliminary view, this prerequisite to substituted 
compliance is necessary to promote comparability in light of the risk 
control purposes of the trading relationship documentation requirement, 
and the requirement's lack of a comparable carveout based on 
counterparty categories.
b. Trading Relationship Documentation--Disclosure Regarding Legal and 
Bankruptcy Status
    Under the proposed Order, substituted compliance in connection with 
trading relationship documentation would not extend to disclosures 
required by rule 15F(b)(5) regarding the status of the SBS Entity or 
its counterparty as an insured depository institution or financial 
counterparty, and regarding the possibility that in certain 
circumstances the SBS Entity or its counterparty may be subject to the 
insolvency regime set forth under Title II of the Dodd-Frank Act or the 
Federal Deposit Insurance Act, which may affect rights to terminate, 
liquidate or net security-based swaps.\53\ Documentation requirements 
under applicable German and EU law would not be expected to address the 
disclosure of information related to insolvency procedures under U.S. 
law.
---------------------------------------------------------------------------

    \53\ See Risk Mitigation Adopting Release, 85 FR at 6374 
(discussing potential application of alternatives to the liquidation 
schemes established under the Securities Investor Protection Act of 
1970 or the U.S. Bankruptcy Code).
---------------------------------------------------------------------------

c. Dispute Reporting--Provision of Dispute Reports Consistent With EU 
Law
    Under the proposed Order, substituted compliance also would be 
conditioned on SBS Entities having to provide the Commission with 
reports regarding disputes between counterparties, on the same basis as 
the SBS Entities provide those reports to competent authorities 
pursuant to EU law.\54\ This condition promotes comparability with the 
Exchange Act requirement, which requires reporting to the Commission 
regarding significant valuation disputes,\55\ while efficiently 
leveraging EU reporting provisions to avoid the need for SBS Entities 
to create additional de novo reporting frameworks.\56\
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    \54\ See para. (b)(3)(ii) to the proposed Order (requiring that 
the Covered Entity provide the Commission with reports regarding 
counterparty disputes on the same basis that it provides those 
reports to competent authorities pursuant to EMIR RTS art. 15(2)).
    \55\ In proposing the notice provision, the Commission 
recognized that valuation inaccuracies may lead to uncollaterialized 
credit exposure and the potential for loss in the event of default. 
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621 
(Feb. 15, 2019). It thus is important that the Commission be 
informed regarding valuation disputes affecting registered entities.
    \56\ The principal difference between the two sets of 
requirements concerns the timing of notices. Under Exchange Act rule 
15Fi-3, SBS Entities must promptly report, to the Commission, 
valuation disputes in excess of $20 million that have been 
outstanding for three or five business days (depending on 
counterparty types). Under EMIR RTS art. 15(2), firms must report at 
least monthly, to competent authorities, disputes between 
counterparties in excess of [euro]15 million and outstanding for at 
least 15 business days. BaFin states that these reports regarding 
outstanding disputes must be provided on a monthly basis within 14 
days of the end of the reporting period. See BaFin, ``EMIR--
Requirements for financial counterparties'' (https://www.bafin.de/EN/Aufsicht/BoersenMaerkte/Derivate/EMIR/FinanzielleGegenparteien/finanzielle_gegenparteien_artikel_en.html) The Commission is mindful 
that the EU provision does not provide for notice as quickly as rule 
15Fi-3(c), but in the Commission's preliminary view, on balance this 
difference would not be inconsistent with the conclusion that the 
two sets of risk control requirements--taken as a whole--produce 
comparable regulatory outcomes.
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V. Substituted Compliance for Internal Supervision, Chief Compliance 
Officers and Additional Exchange Act Section 15F(j) Requirements

A. BaFin Request and Associated Analytic Considerations

    BaFin also requests substituted compliance in connection with 
requirements under the Exchange Act relating to:
     Internal supervision--Diligent supervision is required 
pursuant to Exchange Act section 15F(h)(1)(B) and Exchange Act rule 
15Fh-3(h), and additional conflict of interest provisions under 
Exchange Act section 15F(j)(5). These provisions generally require that 
SBS Entities establish, maintain and enforce supervisory policies and 
procedures that reasonably are designed to prevent violations of 
applicable law, and implement certain systems and procedures related to 
conflicts of interest.\57\
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    \57\ BaFin's application addresses German and EU provisions that 
address firms' supervisory frameworks, persons with supervisory 
authority, supervisory policies and procedures, general compliance 
and internal recordkeeping, investigation of personnel, conflicts of 
interest, personal trading and remuneration. See BaFin application 
Annex A category 3 at 4-24, 27-64.
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     Chief compliance officers--Chief compliance officer 
requirements are set out in Exchange Act section 15F(k) and Exchange 
Act rule 15Fk-1. These provisions in general require that SBS Entities 
designate individuals with the responsibility and authority to 
establish, administer and review compliance policies and procedures, to 
resolve conflicts of interest, and to prepare and certify an annual 
compliance report to the Commission.\58\
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    \58\ BaFin's application discusses German and EU requirements 
that address compliance officers and their responsibilities, 
compliance officer appointment, removal and compensation, related 
conflict of interest provisions, and compliance-related reports. See 
BaFin application Annex A category 3 at 65-98.
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     Additional Exchange Act section 15F(j) requirements--There 
are certain 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).\59\
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    \59\ Section 15F(j)(4)(A) particularly requires firms to have 
systems and procedures to obtain necessary information to perform 
functions required under section 15F. BaFin's application in turn 
discusses German and EU provisions generally addressing information 
gathering and disclosure. See BaFin application Annex A category 3 
at 24-27. 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. BaFin's application addresses EU antitrust 
requirements. See BaFin application Annex A category 3 at 28.
---------------------------------------------------------------------------

    Taken as a whole, these internal supervision, chief compliance 
officer and additional Exchange Act section 15F(j) requirements help to 
promote SBS Entities' use of structures, processes and responsible 
personnel reasonably designed to promote compliance with applicable 
law, to identify and cure instances of non-compliance, and to manage 
conflicts of interest. The comparability assessment accordingly may 
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that registered 
entities have structures and processes reasonably designed to promote 
compliance with applicable law, identify and cure instances of non-
compliance, and to manage conflicts of interest, in part through the 
designation of an individual with responsibility and authority over 
compliance matters.

[[Page 72733]]

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on BaFin's application and the Commission's review of 
applicable provisions, in the Commission's preliminary view, the 
relevant German and EU requirements in general would produce regulatory 
outcomes that are comparable to those associated with the above-
described internal supervision, chief compliance officer, conflict of 
interest and information-related requirements by providing that German 
SBS Entities have structures and processes that reasonably are designed 
to promote compliance with applicable law and to identify and cure 
instances of non-compliance and manage conflicts of interest.
    This portion of the proposed Order would extend generally to the 
internal supervision provisions of Exchange Act rule 15Fh-3(h), the 
information gathering provisions of Exchange Act section 15F(j)(4)(A), 
and the conflict of interest provisions of Exchange Act section 
15F(j)(5),\60\ and to the chief compliance officer provisions of 
Exchange Act section 15F(k) and Exchange Act rule 15Fk-1.\61\
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    \60\ See proposed para. (c)(1) to the Order. This portion of the 
proposed Order does not extend to applicable portions of rule 15Fh-
3(h) as that rule mandates supervisory policies and procedures in 
connection with: The risk management system provisions of Exchange 
Act section 15F(j)(2) (which are addressed by proposed paragraph 
(b)(1) to the Order in connection with internal risk management); 
the information-related provisions of Exchange Act sections 
15F(j)(3) and (j)(4)(B) (for which substituted compliance is not 
available); and the antitrust provisions of Exchange Act section 
15F(j)(6) (for which the Commission is not proposing to provide 
substituted compliance). See proposed para. (c)(1)(iii) to the 
Order.
    \61\ See proposed para. (c)(2) to the Order.
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    In taking this proposed approach, the Commission recognizes that 
certain differences are present between those German and EU 
requirements and the applicable requirements under the Exchange Act. In 
the Commission's preliminary view, on balance, however, those 
differences would not be inconsistent with substituted compliance 
within the relevant outcomes-oriented context. As elsewhere, this part 
of the proposed Order conditions substituted compliance on SBS Entities 
complying with specified German and EU requirements that are necessary 
to establish comparability.\62\
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    \62\ In connection with these internal supervision, chief 
compliance officer and conflict of interest and information 
gathering provisions, SBS Entities particularly must comply with: 
MiFID art. 16 and 23 and WpHG sec. 63, 80 and 83-84 (addressing 
organizational requirements and conflicts of interest); MiFID Org 
Reg art. 21-37 (addressing organizational requirements, compliance, 
risk management, internal audit, senior management responsibility, 
complaints handling, remuneration policies and practices, personal 
transaction restrictions, outsourcing, conflicts of interest and 
investment research and marketing); MiFID Org Reg 72-76 and Annex IV 
(addressing recordkeeping, including records of orders, transactions 
and communications); and CRD articles 74, 76, 79-87, 88(1) and 
91(1)-(2), 91(7)-(9), 92-95 and KWG sections 25a, 25b, 25c (other 
than 25c(2)), 25d (other than 25d(3) and 25d(11)), 25e and 25f 
(addressing internalgovernance, recovery and resolution plans, risk 
management policies, and management body and remuneration policies).
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2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes:
a. Application of German and EU Supervisory and Compliance Requirements 
to Residual U.S. Requirements and Order Conditions
    Under the proposed Order, substituted compliance with the relevant 
internal supervision requirements would be conditioned with relevant 
German SBS Entities complying with applicable German and EU supervisory 
and compliance provisions as if those provisions also require SBS 
Entities to comply with applicable requirements under the Exchange Act 
and the other conditions to the Order.\63\
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    \63\ See para. (c)(4) to the proposed Order.
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    This condition addresses the fact that, even with substituted 
compliance, SBS Entities still would be subject directly to a number of 
requirements under the Exchange Act and to the conditions to the final 
Order. In some cases, particular requirements under the Exchange Act 
are outside the ambit of substituted compliance.\64\ In other cases, 
certain requirements under the Exchange Act may not have comparable 
German or EU requirements, or may be outside the scope of BaFin's 
request.\65\ While the German and EU regulatory frameworks in general 
reasonably appear to promote SBS Entities' compliance with applicable 
German and EU laws, those requirements do not--and would not be 
expected to--appear to promote SBS Entities' compliance with 
requirements under the Exchange Act that are not subject to substituted 
compliance, or promote SBS Entities' compliance with the conditions to 
substituted compliance.
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    \64\ As discussed above, see notes 11 and 12, supra, substituted 
compliance does not extend to certain Exchange Act antifraud 
prohibitions and other requirements under the Exchange Act (e.g., 
requirements related to transactions with non-ECPs, and segregation 
requirements). Substituted compliance also does not extend to 
requirements under the Exchange Act that are outside of the scope of 
BaFin's request (e.g., ECP verification and special entity 
requirements), or to requirements under the Exchange Act for which 
the Commission has not found comparability.
    \65\ For example, BaFin is not requesting substituted compliance 
in connection with ECP verification requirements, ``special entity'' 
provisions and political contribution provisions. See note 23, 
supra.
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    This condition would allow SBS Entities 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. In practice, compliance with this condition likely would 
require SBS Entities to comprehensively identify all applicable 
requirements under the Exchange Act with which they must comply 
directly even with substituted compliance (as well as the other 
conditions to the Order), and augment their existing internal 
supervision and compliance frameworks to the extent necessary to 
incorporate reasonable policies and processes to help ensure that they 
follow those requirements.\66\
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    \66\ For example, MiFID Org Reg art. 22 addresses several 
aspects of firms' compliance with requirements under MiFID, and 
includes provisions that the compliance function: Monitor the 
adequacy and effectiveness of compliance measures, policies and 
procedures; advise and assist relevant persons in compliance with 
MiFID; and report on implementation and effectiveness. Under the 
proposed condition, SBS Entities would have to apply those article 
provisions in a manner that also promotes compliance with the 
applicable requirements under the Exchange Act and the conditions to 
the Order.
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b. Compliance Reports
    Under the proposed Order, substituted compliance in connection with 
the compliance report requirements under Exchange Act section 15F(k)(3) 
and Exchange Act rule 15Fk-1(c) also would be conditioned on the 
requirement that the compliance reports required pursuant to MiFID Org 
Reg article 22(2)(c) must: (a) Be provided to the Commission annually 
and in the English language, (b) include a certification under penalty 
of law that the report is accurate and complete, and (c) address the 
SBS Entity's compliance with other conditions to this Order.\67\
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    \67\ See para. (c)(2)(ii) to the proposed Order. MiFID Org Reg 
art. 22(2)(c) particularly requires that a firm's compliance 
function ``report to the management body, on at least an annual 
basis, on the implementation and effectiveness of the overall 
control environment for investment services and activities, on the 
risks that have been identified and on the complaints-handling 
reporting as well as remedies undertaken or to be undertaken[.]'' 
Under the proposed condition, those reports, as submitted to the 
Commission and the firm's management body, also would address SBS 
Entities' compliance with the other conditions to the Order (in 
addition to addressing those firms' compliance with applicable 
German and EU provisions).

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[[Page 72734]]

    Although certain German and EU requirements address firms' use of 
internal compliance reports, the requirements do not--and would not be 
expected to--require those entities to submit compliance reports to the 
Commission.\68\ Under this condition, SBS Entities could leverage the 
compliance reports that they otherwise are required to produce, by 
extending those reports to address compliance with the conditions to 
the Order.\69\
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    \68\ The application also indicates that there is no EU 
requirement to submit compliance reports to a regulator. See EU 
supervision and compliance analysis at 75.
    \69\ In practice, SBS Entities may satisfy this condition by 
identifying relevant Order conditions, and reporting on the 
implementation and effectiveness of their controls with regard to 
compliance with those Order conditions.
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c. Antitrust Considerations
    Under the proposed Order, substituted compliance would not extend 
to Exchange Act section 15F(j)(6) (and related internal supervision 
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Section 
15F(j)(6) prohibits SBS Entities 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.\70\ 
In the Commission's preliminary view, allowing an alternative means of 
compliance would not lead to outcomes comparable to that statutory 
prohibition.\71\
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    \70\ See para. (c)(1)(ii) to the proposed Order.
    \71\ The Commission is not taking any position regarding the 
applicability of the section 15F(j)(6) antitrust prohibitions in the 
cross-border context. Non-U.S. SBS Entities should assess the 
applicability of those prohibitions to their security-based swap 
businesses.
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VI. Substituted Compliance for Counterparty Protection Requirements

A. BaFin Request and Associated Analytic Considerations

    BaFin further requests substituted compliance in connection with 
provisions under the Exchange Act relating to:
     Disclosure of material risks and characteristics and 
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) requires that SBS Entities disclose to certain counterparties to a 
security-based swap certain information about the material risks and 
characteristics of the security-based swap, as well as material 
incentives or conflicts of interest that the SBS Entity may have in 
connection with the security-based swap. These provisions address the 
need for security-based swap market participants to have information 
that is sufficient to make informed decisions regarding potential 
transactions involving particular counterparties and particular 
financial instruments.\72\
---------------------------------------------------------------------------

    \72\ See Business Conduct Adopting Release, 81 FR at 29983-86. 
BaFin's application discusses German and EU requirements that 
address disclosure of product information and firm information. See 
BaFin application Annex A category 4 at 27-47.
---------------------------------------------------------------------------

     Daily mark disclosure--Exchange Act rule 15Fh-3(c) 
requires that SBS Entities provide daily mark information to certain 
counterparties. These provisions address the need for market 
participants to have effective access to daily mark information 
necessary to manage their security-based swap positions.\73\
---------------------------------------------------------------------------

    \73\ See Business Conduct Adopting Release, 81 FR at 29986-91. 
BaFin's application discusses German and EU requirements that 
address valuation, portfolio reconciliation and trade reporting. See 
BaFin application Annex A category 4 at 48-60.
---------------------------------------------------------------------------

     Fair and balanced communications--Exchange Act rule 15Fh-
3(g) requires that SBS Entities communicate with counterparties in a 
fair and balanced manner based on principles of fair dealing and good 
faith. These provisions promote complete and honest communications as 
part of SBS Entities' security-based swap businesses.\74\
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    \74\ See Business Conduct Adopting Release, 81 FR at 30000-02. 
BaFin's application discusses German and EU requirements that 
address communications standards. See BaFin application Annex A 
category 4 at 3-26.
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     Clearing rights disclosure--Exchange Act rule 15Fh-3(d) 
requires that SBS Entities provide certain counterparties with 
information regarding clearing rights under the Exchange Act.\75\
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    \75\ Exchange Act section 3C(g)(5) [15 U.S.C. 78c-3(g)(5)] 
provides certain rights for counterparties to select the clearing 
agency at which a security-based swap is cleared. For all security-
based swaps that an SBS Entity enters into with certain 
counterparties, the counterparty has the sole right to select the 
clearing agency at which the security-based swap is cleared. For 
security-based swaps that are not subject to mandatory clearing 
(pursuant to Exchange Act sections 3C(a)-(b)) and that an SBS Entity 
enters into with certain counterparties, the counterparty also may 
elect to require clearing of the security-based swap. Substituted 
compliance is not available in connection with this provision. 
BaFin's application discusses German and EU provisions that address 
clearing rights. See BaFin application Annex A category 4 at 85-92.
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     ``Know your counterparty''--Exchange Act rule 15Fh-3(e) 
requires that SBS Entities establish, maintain and enforce written 
policies and procedures to obtain and retain certain information 
regarding a counterparty that is necessary for conducting business with 
that counterparty. This provision accounts for the need that SBS 
Entities obtain essential counterparty information necessary to promote 
effective compliance and risk management.\76\
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    \76\ See Business Conduct Adopting Release, 81 FR at 29993-94. 
BaFin's application discusses German and EU suitability requirements 
regarding information that firms must obtain regarding 
counterparties. See BaFin application Annex A category 4 at 71-84.
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     Suitability--Exchange Act rule 15Fh-3(f)requires a 
security-based swap dealer that recommends to certain counterparties a 
security-based swap or trading strategy involving a security-based 
swap, to undertake reasonable diligence to understand the potential 
risks and rewards associated with the recommendation and to have a 
reasonable basis to believe that the recommendation is suitable for the 
counterparty.\77\ This provision accounts for the need to guard against 
security-based swap dealers making unsuitable recommendations.\78\
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    \77\ See Business Conduct Adopting Release, 81 FR at 29994-
30000. A security-based swap dealer may satisfy its counterparty-
specific suitability obligation with respect to an ``institutional 
counterparty,'' as defined in Exchange Act rule 15Fh-3(f)(4), if the 
security-based swap dealer reasonably determines that the 
counterparty or its agent is capable of independently evaluating 
relevant investment risks, the counterparty or its agent represents 
in writing that it is exercising independent judgment in evaluating 
the recommendation, and the security-based swap dealer discloses 
that it is acting as counterparty and is not undertaking to assess 
the suitability of the recommendation for the counterparty. See 
Exchange Act rule 15Fh-3(f)(2)-(3).
    \78\ See Business Conduct Adopting Release, 81 FR at 29997. 
BaFin's application discusses German and EU suitability requirements 
that are more targeted for transactions with ``professional 
clients.'' See BaFin application Annex A category 4 at 71-84.
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    Taken as a whole, the counterparty protection requirements under 
section 15F of the Exchange Act help to ``bring professional standards 
of conduct to, and increase transparency in, the security-based swap 
market and to require registered [entities] to treat parties to these 
transactions fairly.'' \79\ The comparability assessment accordingly 
may focus on whether the analogous foreign requirements--taken as a 
whole--produce similar outcomes

[[Page 72735]]

with regard to promoting professional standards of conduct, increasing 
transparency and requiring SBS Entities to treat parties fairly.
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    \79\ See Business Conduct Adopting Release, 81 FR at 30065. 
These transaction-level requirements generally apply only to a non-
U.S. SBS Entity's activities involving U.S. counterparties (unless 
the transaction is arranged, negotiated or executed in the United 
States). In particular, for non-U.S. SBS Entities, the counterparty 
protection requirements under Exchange Act section 15F(h) apply only 
to the SBS Entity's transactions with U.S. counterparties (apart 
from certain transactions conducted through a foreign branch of the 
U.S. counterparty), or to transactions arranged, negotiated or 
executed in the United States. See Exchange Act rule 3a71-3(c) [17 
CFR 240.3a71-3(c)] (exception from business conduct requirements for 
a security-based swap dealer's ``foreign business''); see also 
Exchange Act rules 3a71-3(a)(3), (8) and (9) [17 CFR 240.3a71-
3(a)(3), (8) and (9)] (definitions of ``transaction conducted 
through a foreign branch,'' ``U.S. business'' and ``foreign 
business'').
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B. Preliminary Views and Proposed Order

1. General Considerations
    Based on BaFin's application and the Commission's review of 
applicable provisions, in the Commission's preliminary view, the 
relevant German and EU requirements produce regulatory outcomes that 
are comparable to counterparty protection requirements under Exchange 
Act section 15F(h) related to fair and balanced communications; 
disclosure of material risks and characteristics; disclosure of 
material incentives or conflicts of interest; ``know your 
counterparty''; suitability; and daily mark disclosure, by subjecting 
German SBS Entities to obligations that promote standards of 
professional conduct, transparency and the fair treatment of parties.
    The proposed Order accordingly would provide conditional 
substituted compliance in connection with those requirements.\80\ The 
proposed Order preliminarily does not provide substituted compliance in 
connection with requirements related to clearing rights disclosure, 
however, for reasons addressed below.
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    \80\ See generally para. (d) to the proposed Order.
---------------------------------------------------------------------------

    In taking this proposed approach, the Commission recognizes that 
there are certain differences between relevant German and EU 
requirements, on the one hand, and the relevant communications, 
disclosure, ``know your counterparty'' and suitability requirements 
under the Exchange Act, on the other hand. On balance, however, in the 
Commission's preliminary view, those differences, when coupled with the 
conditions in the proposed Order, are not so material as to be 
inconsistent with substituted compliance within the requisite outcomes-
oriented context. As elsewhere, the counterparty protection provisions 
of the proposed Order in part condition substituted compliance on SBS 
Entities being subject to, and complying with, specified German and EU 
requirements that are necessary to establish comparability.\81\ 
Substituted compliance in connection with these counterparty protection 
requirements also would be subject to specific conditions and 
limitations necessary to promote consistency in regulatory outcomes.
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    \81\ In connection with requirements related to disclosure of 
information regarding material risks and characteristics, Covered 
Entities must be subject to and comply with: MiFID art. 24(4); WpHG 
sections 63(7) and 64(1); and MiFID Org Reg art. 48-50, in each case 
in relation to the security-based swap for which substituted 
compliance is applied. See para. (d)(1) to the proposed Order. In 
connection with requirements related to disclosure of information 
regarding material incentives or conflicts of interest, Covered 
Entities must be subject to and comply with either: (i) MiFID art. 
23(2)-(3); WpHG section 63(2); and MiFID Org Reg art. 33-35; (ii) 
MiFID art. 24(9); WpHG section 70; and MiFID Delegated Directive 
art. 11(5); or (iii) Market Abuse Regulation art. 20(1), in each 
case in relation to the security-based swap for which substituted 
compliance is applied. See para. (d)(2) to the proposed Order. In 
connection with ``know your counterparty'' requirements, Covered 
Entities must be subject to and comply with: MiFID art. 16(2); WpHG 
section 80(1); MiFID Org Reg art. 21-22, 25-26 and applicable parts 
of Annex I; CRD art. 74(1) and 85(1); KWG section 25a; MLD art. 11 
and 13; GwG sections 10-11; MLD art. 8(3) and 8(4)(a) as applied to 
internal policies, controls and procedures regarding recordkeeping 
of customer due diligence activities; GwG section 6(1)-(2) as 
applied to principles, procedures and controls regarding 
recordkeeping of customer due diligence activities, in each case in 
relation to the security-based swap for which substituted compliance 
is applied. See para. (d)(3) to the proposed Order. In connection 
with suitability requirements, Covered Entities must be subject to 
and comply with: MiFID art. 24(2)-(3) and 25(1)-(2); WpHG sections 
63(5)-(6), 80(9)-(13) and 87(1)-(2); and MiFID Org Reg art. 21(1)(b) 
and (d), 54 and 55, in each case in relation to the recommendation 
for which substituted compliance is applied. See para. (d)(4)(i) to 
the proposed Order. In connection with fair and balanced 
communications requirements, Covered Entities must be subject to and 
comply with: (i) either MiFID art. 24(1), (3) and WpHG sections 
63(1), (6) or MiFID art. 30(1) and WpHG section 68(1); and (ii) 
MiFID art. 24(4)-(5); WpHG sections 63(7) and 64(1); MiFID Org Reg 
art. 46-48; Market Abuse Regulation art. 12(1)(c) and 15; and MAR 
Investment Recommendations Regulation art. 5, in each case in 
relation to the communication for which substituted compliance is 
applied. See para. (d)(5) to the Proposed Order. In connection with 
daily mark disclosure requirements, Covered Entities must be 
required to reconcile, and in fact reconcile, the portfolio 
containing the security-based swap for which substituted compliance 
is applied, on each business day pursuant to EMIR articles 11(1)(b) 
and 11(2) and EMIR RTS article 13. See para. (d)(6) to the Proposed 
Order.
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2. Additional Conditions and Scope Issues
a. Daily Mark Disclosure
    The proposed Order would provide substituted compliance in 
connection with daily mark disclosure requirements pursuant to Exchange 
Act rule 15Fh-3(c) to the extent that the Covered Entity participates 
in daily portfolio reconciliation exercises that include the relevant 
security-based swap pursuant to German and EU requirements. BaFin's 
application takes the view that EU requirements directing certain types 
of derivatives counterparties to mark-to-market (or mark-to-model) 
uncleared transactions each day are comparable to Exchange Act 
requirements. In the Commission's preliminary view, however, these EU 
mark-to-market (or mark-to-model) requirements are not comparable to 
Exchange Act requirements because the EU requirements do not require 
disclosure to counterparties. In the alternative, BaFin's application 
notes that certain derivatives counterparties must report to an EU 
trade repository updated daily valuations for each OTC derivative 
contract and that all counterparties have the right to access these 
valuations at the relevant EU trade repository. In the Commission's 
preliminary view, in practice U.S. counterparties may encounter 
challenges when attempting to access daily marks for different 
security-based swaps reported to multiple EU trade repositories with 
which they may not otherwise have business relationships. In addition, 
the information may be less current, given the time necessary for 
reporting and for the trade repository to make the information 
available. For these reasons, in the Commission's preliminary view, 
these EU reporting requirements also are not comparable to Exchange Act 
requirements. Finally, BaFin's application describes the EU's portfolio 
reconciliation requirements for uncleared OTC derivative contracts, 
which include a requirement to exchange valuations of those contracts 
directly between counterparties. The required frequency of portfolio 
reconciliations varies depending on the types of counterparties and the 
size of the portfolio of OTC derivatives between them, with daily 
reconciliation required only for the largest portfolios. For security-
based swaps to which the EU's daily portfolio reconciliation 
requirements apply (i.e., security-based swaps of a financial 
counterparty or non-financial counterparty subject to the clearing 
obligation in EMIR, if the counterparties have 500 or more OTC 
derivatives contracts outstanding with each other),\82\ the Commission 
preliminarily views these requirements as comparable to Exchange Act 
requirements. For all other security-based swaps in portfolios that are 
not required to be reconciled on each business day, the Commission 
preliminarily views the EU's portfolio reconciliation requirements as 
not comparable to Exchange Act requirements.
---------------------------------------------------------------------------

    \82\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
---------------------------------------------------------------------------

b. No Substituted Compliance in Connection With Clearing Rights 
Disclosure
    The proposed Order would not provide substituted compliance in 
connection with clearing rights disclosure requirements pursuant to 
Exchange Act rule 15Fh-3(d). For those

[[Page 72736]]

requirements, BaFin's application cites certain provisions related to 
clearing rights in the EU that are unrelated to the clearing rights 
provided by Exchange Act section 3C(g)(5).\83\ The section 3C(g)(5) 
clearing rights are not eligible for substituted compliance, and the EU 
provisions do not require disclosure of these section 3C(g)(5) clearing 
rights. In the Commission's preliminary view, substituted compliance 
based on EU clearing provisions would not lead to comparable disclosure 
of a counterparty's clearing rights under the Exchange Act.
---------------------------------------------------------------------------

    \83\ See note 75, supra.
---------------------------------------------------------------------------

c. Suitability
    Under the proposed Order, substituted compliance in connection with 
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would 
be conditioned on the requirement that the counterparty be a per se 
``professional client'' as defined in MiFID and not be a ``special 
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange 
Act rule 15Fh-2(d).\84\ Accordingly, the proposed Order would not 
provide substituted compliance for Exchange Act suitability 
requirements for a recommendation made to a counterparty that is a 
``retail client'' or an elective ``professional client,'' as such terms 
are defined in MiFID,\85\ or for a ``special entity'' as defined in the 
Exchange Act. In the Commission's preliminary view, absent such a 
condition the MiFID suitability requirement would not be expected to 
produce a counterparty protection outcome that is comparable with the 
outcome produced by the suitability requirements under the Exchange 
Act.\86\
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    \84\ See para. (d)(4)(ii) to the proposed Order.
    \85\ Annex II of MiFID describes which clients are 
``professional clients.'' Section I of Annex II describes the types 
of clients considered to be professional clients unless the client 
elects non-professional treatment; these clients are per se 
professional clients. Section II of Annex II describes the types of 
clients who may be treated as professional clients on request; these 
clients are elective professional clients. See MiFID Annex II.
    \86\ The Commission recognizes that Exchange Act rules permit 
security-based swap dealers, when making a recommendation to an 
``institutional counterparty,'' to satisfy some elements of the 
suitability requirement if the security-based swap dealer reasonably 
determines that the counterparty or its agent is capable of 
independently evaluating relevant investment risks, the counterparty 
or its agent represents in writing that it is exercising independent 
judgment in evaluating recommendations, and the security-based swap 
dealer discloses to the counterparty that it is acting as 
counterparty and is not undertaking to assess the suitability of the 
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this 
alternative applies are only a subset of the ``professional 
clients'' to whom more narrowly tailored suitability requirements 
apply under MiFID. The Commission notes that the institutional 
counterparty alternative under the Exchange Act would remain 
available, in accordance with its terms, for recommendations that 
are not eligible for, or for which a Covered Entity does not rely 
on, substituted compliance.
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VII. Substituted Compliance for Recordkeeping, Reporting, and 
Notification Requirements

A. BaFin Request and Associated Analytic Considerations

    BaFin's application in part requests substituted compliance for 
requirements applicable to SBS Entities under the Exchange Act relating 
to:
     Recordmaking--Exchange Act rule 18a-5 requires prescribed 
records to be made and kept current.\87\
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    \87\ BaFin's application discusses German and EU requirements 
that address firms' record creation obligations related to matters 
such as transactions, counterparties and their property, personnel 
and business conduct. See BaFin application Annex A category 2 at 4-
34.
---------------------------------------------------------------------------

     Record Preservation--Exchange Act rule 18a-6 requires 
preservation of records.\88\
---------------------------------------------------------------------------

    \88\ BaFin's application discusses German and EU requirements 
that address firms' record preservation obligations related to 
records that firms are required to create, as well as additional 
records such as records of communications. See BaFin application 
Annex A category 2 at 35-79.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain 
reports.\89\
---------------------------------------------------------------------------

    \89\ BaFin's application discusses German and EU requirements 
that address firms' obligations to make certain reports. See BaFin 
application Annex A category 2 at 80-91 and 96-102.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires 
notification of the Commission when certain financial or operational 
problems occur.\90\
---------------------------------------------------------------------------

    \90\ BaFin's application discusses German and EU requirements 
that address firms' obligations to make certain notifications. See 
BaFin application Annex A category 2 at 92-96 and 102.
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    The Commission does not administer or oversee capital and margin 
requirements for prudentially regulated SBS Entities.\91\ Taken as a 
whole, the recordkeeping, reporting, and notification requirements that 
apply to prudentially regulated 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. The 
comparability assessment accordingly may focus on whether the analogous 
foreign requirements--taken as a whole--produce comparable outcomes 
with regard to recordkeeping, reporting, and notification and related 
practices that support the Commission's oversight of these registrants. 
A foreign jurisdiction need not have analogues to every requirement 
under Commission rules.\92\
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    \91\ Because of the close relationship between many of the 
recordkeeping, reporting, and notification requirements and the 
administration and oversight of capital and margin requirements, the 
Commission preliminarily believes that it would be appropriate to 
consider substituted compliance for recordkeeping, reporting and 
notification requirements applicable to nonbank SBS Entities in 
connection with a potential substituted compliance request for 
capital and margin requirements. The Commission is seeking 
commenters' views on this issue below.
    \92\ 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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    For certain of the recordkeeping and notification requirements, the 
comparability assessment also appropriately may consider the extent to 
which those requirements are linked to separate requirements in the 
Exchange Act that may be subject to a substituted compliance 
application. In particular, a number of recordkeeping requirements 
serve a primary purpose of promoting and/or documenting SBS Entities' 
compliance with associated Exchange Act requirements.\93\ When 
substituted compliance is permitted for the associated Exchange Act 
requirements, substituted compliance also may be appropriate for the 
linked recordkeeping and notification requirements. Conversely, when 
substituted compliance is not available or requested for Exchange Act 
requirements, substituted compliance may not be appropriate for linked 
recordkeeping or notification requirements.
---------------------------------------------------------------------------

    \93\ Recordkeeping and notification rules that are linked to 
other Exchange Act rules include provisions that address: (1) 
Unverified security-based swap transactions (Exchange Act rules 18a-
5(b)(11) and 18a-6(b)(2)(i)); (2) compliance with business conduct 
requirements (Exchange Act rules 18a-5(b)(12) and (13), 18a-
6(b)(2)(i), and 18a-6(b)(2)(vii)); (3) preservation of records 
relating to certain risk mitigation requirements (Exchange Act rules 
18a-6(d)(4) and (5); and (4) segregation requirements (Exchange Act 
Rules 18a-5(b)(9) and (10), 18a-6(b)(2)(v), and 18a-8(g)).
---------------------------------------------------------------------------

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on BaFin's application and Commission's review of applicable 
provisions, in the Commission's preliminary view, the relevant German 
and EU requirements, subject to the

[[Page 72737]]

conditions and limitations of the proposed Order, would produce 
regulatory outcomes that are comparable to the outcomes associated with 
the recordkeeping 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.
    In reaching this preliminary conclusion, the Commission recognizes 
that there are certain differences between those German and EU 
requirements and the applicable recordkeeping and notification 
requirements under the Exchange Act. In the Commission's preliminary 
view, on balance, those differences generally would not be inconsistent 
with substituted compliance for these requirements. As noted, 
``requirement-by-requirement similarity'' is not needed for substituted 
compliance.
    As discussed below, in select areas, substituted compliance in 
connection with these requirements is subject to specific conditions 
necessary to promote consistency in regulatory outcomes, or to reflect 
the scope of substituted compliance that would be available in 
connection with associated Exchange Act rules.
2. Additional Conditions
i. Additional Conditions Applicable to Exchange Act Rule 18a-5
    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the SBS Entity: (1) Preserves all of the data 
elements necessary to create the records required by Exchange Act rules 
18a-5(b)(1), (2), (3), and (7); and (2) upon request furnishes promptly 
to representatives of the Commission the records required by those 
rules. This condition is modeled on the alternative compliance 
mechanism in paragraph (c) of Exchange Act rule 18a-5. In effect, a 
firm will not be required to create a record formatted pursuant to the 
Commission's rules each day, but instead only when requested to do so 
by Commission staff. The objective is to require--on a very limited 
basis--the production of a record that consolidates the information 
required by Exchange Act rule 18a-5(b)(1), (2), (3), or (7) in a single 
record and, as applicable, in a blotter or ledger format. This will 
assist the Commission staff in reviewing the information on the record.
    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the prudentially regulated SBS Entity make and keep 
current the records required by rules 18a-5(b)(9) and (10) if the firm 
is not exempt from the requirements of Exchange Act rule 18a-4.\94\ 
These rules require the SBS Entity to make a record of compliance with 
the possession or control requirements of Exchange Act rule 18a-4 and a 
record of the reserve computation required by Exchange Act rule 18a-4, 
respectively. Substituted compliance is not available with respect to 
Exchange Act rule 18a-4. Instead, provisions of the rule address cross-
border transactions and provide exemptions from its requirements 
depending on the nature of the transaction.\95\ For example, a 
security-based swap dealer that is a foreign bank is subject to the 
possession or control and reserve account requirements of Exchange Act 
rule 18a-4 with respect to a security-based swap customer that is a 
U.S. person or, in the case of a non-U.S. person, if the security-based 
swap dealer holds funds or other property arising out of a transaction 
had by such non-U.S. person with a branch or agency in the United 
States of the foreign security-based swap dealer. Further, Exchange Act 
rule 18a-4 contains a complete exemption from its requirements if the 
security-based swap dealer limits its business activities and meets 
certain conditions.\96\ Prudentially regulated security-based swap 
dealers that are not subject to the requirements of Exchange Act rule 
18a-4 will not need to make the records required by Exchange Act rules 
18a-5(b)(9) and (10) under this condition in the proposed Order. 
However, if a firm is subject to Exchange Act rule 18a-4, it will need 
to make these records under this condition of the Order.
---------------------------------------------------------------------------

    \94\ 17 CFR 240.18a-4.
    \95\ See 17 CFR 240.18a-4(e).
    \96\ See 17 CFR 240.18a-4(f).
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the prudentially regulated SBS Entity makes and 
keeps current the records required by Exchange Act rule 18a-5(b)(12). 
This rule requires the firm to document compliance with Exchange Act 
rule 15Fh-6, which imposes restrictions related to political 
contributions to municipal entities. BaFin has not requested 
substituted compliance with respect to Exchange Act rule 15Fh-6.
    Finally, under the proposed Order, substituted compliance in 
connection with the recordmaking requirements of Exchange Act rule 18a-
5 is subject to the condition that the SBS Entity makes and keeps 
current records documenting compliance with requirements referenced in 
Exchange Act rule 18a-5(b)(13) for which substituted compliance is not 
available. Exchange Act rule 18a-5(b)(13) requires the firm to document 
compliance with Exchange Act rules 15Fh-1 through 15Fh-5 and Exchange 
Act rule 15Fk-1--which, as discussed more fully in sections V and VI of 
this notice, establish certain obligations with respect to diligent 
supervision, compliance, and counterparty protection. Under the 
proposed Order, when substituted compliance is available with respect 
to such an obligation, substituted compliance also would be available 
with respect to the corresponding recordmaking requirement of Exchange 
Act rule 18a-5(b)(13). In circumstances where substituted compliance is 
not permitted,\97\ has not been requested,\98\ or is otherwise not 
available under the proposed Order, direct compliance with the relevant 
Exchange Act obligation would be required, and so, too, would direct 
compliance with the corresponding recordmaking requirement of Exchange 
Act rule 18a-5(b)(13).
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    \97\ See Exchange Act rule 3a71-6(d)(1) (specifying that 
substituted compliance is not available in connection with the 
antifraud provisions of Exchange Act rule 15Fh-4(a)).
    \98\ BaFin has not requested substituted compliance in 
connection with the ECP verification requirements of Exchange Act 
rule 15Fh-3(a)(1)) or the ``special entity'' provisions of Exchange 
Act rules 15Fh-3(a)(2)-(3), 15Fh-4(b) and 15Fh-5.
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ii. Additional Conditions Applicable to Exchange Act Rule 18a-6
    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the security-based swap dealer or major 
security-based swap participant, with respect to a security-based swap 
transaction, preserves the information required by Exchange Act rule 
18a-6(b)(2)(vi) if the transaction is required to be reported to a 
registered security-based swap data repository pursuant to Regulation 
SBSR (or pursuant to any substituted compliance order addressing 
Regulation SBSR).\99\ This condition is designed to ensure that the 
firm preserves information it reports to a security-based swap data 
repository registered under the Exchange Act pursuant to Regulation 
SBSR (or pursuant to any substituted compliance order addressing 
Regulation SBSR) in addition to preserving information it

[[Page 72738]]

reports to a data repository pursuant to German and EU laws.
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    \99\ 17 CFR 242.900-909.
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    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the prudentially regulated SBS Entity 
preserves the records required by Exchange Act rule 18a-6(b)(2)(v) if 
the firm is not exempt from the requirements of Exchange Act rule 18a-
4. Exchange Act rule 18a-6(b)(2)(v) requires the preservation of detail 
relating to information for the possession or control requirements of 
Exchange Act rule 18a-4. As discussed above, substituted compliance is 
not available for Exchange Act rule 18a-4. Consequently, under this 
condition, a prudentially regulated SBS Entity will need to preserve 
the records required by Exchange Act rule 18a-6(b)(2)(v), but only if 
the firm is not exempt from Exchange Act rule 18a-4.
    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the prudentially regulated SBS Entity 
preserves records with respect to requirements referenced in Exchange 
Act rule 18a-6(b)(2)(vii) for which substituted compliance is not 
available. Under Exchange Act rule 18a-6(b)(2)(vii), the firm must 
preserve copies of documents, communications, disclosures, and notices 
required pursuant to Exchange Act rules 15Fh-1 through 15Fh-6 and 
Exchange Act rule 15Fk-1--which establish certain obligations with 
respect to diligent supervision, compliance, and counterparty 
protection. Under the proposed Order, when substituted compliance is 
available with respect to such an obligation, substituted compliance 
also would be available with respect to the corresponding record 
preservation requirement of Exchange Act rule 18a-6(b)(2)(vii). In 
circumstances where substituted compliance is not permitted, has not 
been requested, or is otherwise not available under the proposed Order, 
direct compliance with the relevant Exchange Act obligation would be 
required, and so, too, would direct compliance with the corresponding 
record preservation requirement of Exchange Act rule 18a-6(b)(2)(vii).
    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the SBS Entity preserves the records 
required by Exchange Act rule 18a-6(b)(2)(viii). This rule requires the 
preservation of documents used to make a reasonable determination with 
respect to special entities, including information relating to the 
financial status, the tax status, and the investment or financing 
objectives of the special entity as required under Exchange Act 
sections 15F(h)(4)(C) and (5)(A). BaFin is not seeking substituted 
compliance with respect to these Exchange Act requirements.
iii. Additional Conditions Applicable to Exchange Act Rule 18a-7
    Under the proposed Order, substituted compliance with respect to 
Exchange Act rule 18a-7 is subject to the condition that the SBS Entity 
file with the Commission financial and operational information in the 
manner and format specified by the Commission by order or rule.\100\ 
Rule 18a-7 requires SBS Entities, on a quarterly basis, to file an 
unaudited financial and operational report known as FOCUS Report Part 
IIC. The Commission will use the FOCUS Report Part IIC to both monitor 
the financial and operational condition of individual SBS Entities and 
to perform comparisons across SBS Entities. The FOCUS Report Part IIC 
is a standardized form that elicits specific information through 
numbered line items. This facilitates cross-firm analysis and 
comprehensive monitoring of all SBS Entities registered with the 
Commission. Further, the Commission has designated the Financial 
Industry Regulatory Authority, Inc. (``FINRA'') to receive the FOCUS 
reports from SBS Entities.\101\ Broker-dealers registered with the 
Commission currently file their FOCUS reports with FINRA through the 
eFOCUS system it administers. FINRA's eFOCUS system will enable broker-
dealers, security-based swap dealers, and major security-based swap 
participants to file FOCUS reports on the same platform using the same 
preexisting templates, software, and procedures.
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    \100\ For example, the Commission could specify the manner and 
format of the filing of the financial and operational information in 
a final substituted compliance order.
    \101\ See Order Designating Financial Industry Regulatory 
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, Exchange Release No. 34-88866 (May 14, 2020).
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    The Commission preliminarily believes that it would be appropriate 
to condition substituted compliance with respect to rule 18a-7 on the 
SBS Entity filing financial and operational information in a manner and 
format that facilitates cross-firm analysis and comprehensive 
monitoring of all SBS Entities registered with the Commission. For 
example, the Commission could by order or rule require SBS Entities to 
file the financial and operational information with FINRA using the 
FOCUS Report Part IIC but permit the information input into the form to 
be the same information the SBS Entity reports to BaFin or other 
European supervisors.\102\ Further, the Commission could specify that 
as a condition to the substituted compliance, an SBS Entity may present 
the information reported in the FOCUS Report Part IIC in accordance 
with generally accepted accounting principles (``GAAP'') that the SBS 
Entity uses to prepare general purpose financial statements in its home 
jurisdiction instead of U.S. GAAP if other GAAP, such as International 
Financial Reporting Standards (IFRS) as issued by the International 
Accounting Standards Board (IASB), is used by the SBS Entity in 
preparing general purpose financial statements.
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    \102\ The Commission anticipates that it would be appropriate to 
tailor the line items required to be reported pursuant to this 
condition and is requesting comment on which, if any, line items in 
FOCUS Report Part IIC the SBS Entity does not otherwise report or 
record pursuant to applicable laws or regulations. Further, the 
Commission is requesting comment on whether it would be appropriate 
as a condition to substituted compliance for SBS Entities to file a 
FOCUS Report Part IIC with a limited number of the required line 
items filled out for two years. During this time, the Commission 
could further evaluate the scope of information SBS Entities should 
file.
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iv. Additional Conditions Applicable to Exchange Act Rule 18a-8
    Under the proposed Order, substituted compliance in connection with 
the notification requirements of Exchange Act rule 18a-8 is subject to 
the condition that the prudentially regulated SBS Entity: (1) 
Simultaneously transmits to the principal office of the Commission or 
to an email address provided on the Commission's website a copy of any 
notice required to be sent by the German notification laws; 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. The purpose of this condition is to alert the 
Commission to financial or operational problems that could adversely 
affect the firm--the objective of Exchange Act rule 18a-8.
    In addition, under the proposed Order, substituted compliance in 
connection with the notification requirements of Exchange Act rule 18a-
8 is subject to the condition that the prudentially regulated SBS 
Entity comply with the notification

[[Page 72739]]

requirement of Exchange Act rule 18a-8(g) if the firm is not exempt 
from Exchange Act rule 18a-4. This rule requires notification if the 
firm fails to make in its special reserve account for the exclusive 
benefit of security-based swap customers a deposit, as required by 
Exchange Act rule 18a-4(c). As discussed above, substituted compliance 
is not available for Exchange Act rule 18a-4.
3. Examination and Production of Records
    Every SBS Entity registered with the Commission, whether complying 
directly with Exchange Act requirements or relying on substituted 
compliance as a means of complying with the Exchange Act, is required 
to satisfy the inspection and production requirements imposed on such 
entities under the Exchange Act.\103\ Covered entities may make, keep, 
and preserve records, subject to the conditions described above, in a 
manner prescribed by applicable European and German requirements. The 
Commission notes that as an element of its substituted compliance 
application, BaFin has provided the Commission with adequate assurances 
that no law or policy would impede the ability of any entity that is 
directly supervised by the authority and that may register with the 
Commission ``to provide prompt access to the Commission to such 
entity's books and records or to submit to onsite inspection or 
examination by the Commission.'' Consistent with those assurances and 
the requirements that apply to all registered SBS Entities under the 
Exchange Act, prudentially regulated SBS Entities will need to keep 
books and records open to inspection by any representative of the 
Commission and to furnish promptly to a representative of the 
Commission legible, true, complete, and current copies of those records 
of the firm that these entities are required to preserve under Exchange 
Act rule 18a-6 (which would include records for which a positive 
substituted compliance determination is being made with respect to 
Exchange Act rule 18a-6 under this order), or any other records of the 
firm that are subject to examination or required to be made or 
maintained pursuant to Exchange Act section 15F that are requested by a 
representative of the Commission.
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    \103\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g).
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VIII. Additional Considerations Regarding Supervisory and Enforcement 
Effectiveness in Germany

A. General Considerations

    As noted above, Exchange Act rule 3a71-6 provides that the 
Commission's assessment of the comparability of the requirements of the 
foreign financial regulatory system take into account ``the 
effectiveness of the supervisory program administered, and the 
enforcement authority exercised'' by the foreign financial regulatory 
authority. This prerequisite accounts for the understanding that 
substituted compliance determinations should reflect the reality of the 
foreign regulatory framework, in that rules that appear high-quality on 
paper nonetheless should not form the basis for substituted compliance 
if--in practice--market participants are permitted to fall short of 
their regulatory obligations. This prerequisite, however, also 
recognizes that differences among the supervisory and enforcement 
regimes should not be assumed to reflect flaws in one regime or 
another.\104\
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    \104\ See generally Business Conduct Adopting Release, 81 FR at 
30079.
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    In connection with these considerations, BaFin's application 
includes information regarding the German supervisory and enforcement 
framework applicable to derivatives markets and market participants. 
This includes information regarding the supervisory and enforcement 
authority afforded to BaFin to promote compliance with applicable 
requirements, applicable supervisory and enforcement tools and 
capabilities, consequences of non-compliance, and the application of 
BaFin's supervisory and enforcement practices in the cross-border 
context.
    In preliminarily concluding that the relevant supervisory and 
enforcement considerations are consistent with substituted compliance, 
the Commission particularly has considered the following factors:

B. Supervisory Framework in Germany

    Supervision of credit institutions located in Germany is conducted 
by both BaFin and the European Central Bank (``ECB''). BaFin supervises 
credit institutions for compliance with the WpHG (the German Securities 
Trading Act), MiFID, and EMIR. The ECB, through joint supervisory teams 
(``JSTs'') comprising ECB staff, BaFin staff, and staff from other 
countries in the EU where the institution has a subsidiary or branch, 
supervises credit institutions that are classified as significant 
institutions for compliance with the CRD and CRR.\105\ Both BaFin and 
the ECB are able to request records needed for supervision from credit 
institutions through the supervisory process. In addition, both BaFin 
and the ECB set annual priorities and conduct thematic reviews that are 
used to deepen supervision in specific regulatory areas. The results of 
these thematic reviews are made public and are used to provide 
transparency to the industry.
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    \105\ All credit institutions supervised under the ECB's single 
supervision mechanism are classified as significant institutions or 
less significant institutions. Additional information on how credit 
institutions are classified is available at: https://www.bankingsupervision.europa.eu/press/publications/newsletter/2018/html/ssm.nl181114_3.en.html.
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1. BaFin Supervisory Considerations
    BaFin's supervision over credit institutions is conducted by 
multiple supervisors who are in frequent contact with the firms. The 
supervisors review various reports submitted to BaFin to ensure they 
are complete, accurate and timely, including the independent auditor 
reports that are required by statute in Germany.\106\ Supervisors 
review each report against other information they have about the firm 
to look for inconsistencies. Depending on the issue, BaFin's 
supervisors follow up with the firm in a variety of ways to ensure that 
the auditor's findings have been remedied, including document and data 
requests, meetings with compliance staff, formal meetings with senior 
management, onsite inspections, requiring a special audit, or 
accompanying the auditors on the annual audit or a special audit. BaFin 
requires special audits when it suspects a violation of a regulatory 
provision. During a special audit, BaFin will provide the independent 
auditor with comprehensive and detailed information on the scope of the 
audit and the issues and questions that need to be addressed. BaFin 
staff is in close contact with the auditor and discusses preliminary 
findings and the progress of the audit. The auditor issues a final 
report to BaFin on the audit, which serves as a basis for further 
regulatory measures.
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    \106\ Although the credit institution can choose its auditor, 
the auditor must be approved by BaFin. BaFin also has the authority 
to require a firm to change its auditor, to direct the areas that 
the auditor must review, or to take over the audit.
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    BaFin's specialized divisions engage in daily supervision of the 
markets. Should they detect misconduct, they have the authority to 
initiate administrative procedures in order to

[[Page 72740]]

halt it. The specialized divisions also may refer the misconduct to the 
Division for Administrative Offence Proceedings for enforcement, or, in 
the case of a criminal offense, must refer the case to the state 
prosecutor for criminal consideration.
2. ECB and JST Supervisory Considerations
    Supervision of credit institutions' compliance with the CRD and CRR 
is conducted through the ECB's single supervisory mechanism and 
executed by JSTs. The head of the JST is from the ECB and generally is 
not from the country where the significant institution is located. As 
part of its day-to-day supervision, the JST analyzes the supervisory 
reporting, financial statements, and internal documentation of 
supervised entities. The JSTs hold regular and ad hoc meetings with the 
supervised entities at various levels of staff seniority. They conduct 
ongoing risk analyses of approved risk models, and analyze and assess 
the recovery plans of supervised entities. The various supervisory 
activities typically result in supervisory measures addressed to the 
supervised institution. Supervisory activities and decisions result in 
a number of routine steps such as the monitoring of compliance by the 
JST and, if necessary, enforcement measures and sanctions. In addition 
to ongoing supervision, the JST may conduct in-depth reviews on certain 
topics by organizing a dedicated onsite mission (e.g., an inspection or 
an internal model investigation). The onsite inspections are carried 
out by an independent inspection team, which works in close cooperation 
with the respective JST.

C. Enforcement Authority in Germany

    The Securities Trading Act empowers BaFin Securities Supervision to 
compel in an investigation, via formal request, information from any 
person, including responses to questions, documents, or other data. In 
addition, its Division for Administrative Offence Proceedings has the 
authority to compel unsworn testimony from witnesses and subjects of an 
investigation, but under German law, the subject of the investigation 
is not required to answer questions about the accusation.
    When a matter has been referred for enforcement proceedings, BaFin 
Securities Supervision is authorized to impose a range of sanctions. 
The main sanctioning tool is imposition of financial penalties. Other 
sanctions include publishing warnings on BaFin's website, prohibiting 
certain trading, requiring cessations of the misconduct, and 
prohibiting an individual from exercising professional activity. 
Because BaFin's general focus is to ensure compliance with the 
applicable regulatory framework, investigations do not always result in 
a sanction process.
    Misconduct detected by the JSTs is addressed primarily by the ECB. 
The ECB has the power to enforce violations and to impose fines on 
supervised entities for breaches of directly applicable European Union 
law. The ECB can also ask national competent authorities (such as 
BaFin) to open proceedings that may lead to the imposition of certain 
pecuniary and non-pecuniary penalties.

IX. Request for Comment

    Commenters are invited to address all aspects of the application, 
the Commission's preliminary views and the proposed Order.

A. General Aspects of the Comparability Assessments and Proposed Order

    The Commission requests comment regarding the preliminary views and 
proposed Order in connection with each of the general ``regulatory 
outcome'' categories addressed above. Commenters particularly are 
invited to address, among other issues:
     Whether the relevant German and EU provisions generally 
are sufficient to produce regulatory outcomes that are comparable to 
the outcomes associated with requirements under the Exchange Act;
     Whether the conditions and limitations of the proposed 
Order would adequately address potential gaps in the relevant 
regulatory outcomes;
     Whether additional or fewer conditions or limitations 
would be appropriate for enhancing regulatory efficiency while 
promoting regulatory outcomes that are comparable to those arising 
under the Exchange Act;
     Whether the proposed conditions and limitations 
sufficiently guard against comparability gaps arising from the cross-
border application of German or EU requirements (including when SBS 
Entities conduct security-based swap business through branches located 
in the United States or in third countries);
     Whether the proposed conditions and limitations 
sufficiently guard against comparability gaps arising from the cross-
border application of German or EU requirements, including when SBS 
Entities conduct security-based swap business through branches located 
in other EU jurisdictions, and when SBS Entities conduct that business 
through branches located in the United States or in third countries; 
and
     Any implementation or other practical issues that may 
arise due to the proposed conditions and limitations.
    Commenters also are invited to address the references to EU 
directives (e.g., MiFID and CRD) that are incorporated into the 
conditions to the proposed Order. EU directives by themselves do not 
apply to market participants, but instead require implementation by 
member states (see notes 25 and 27, supra). As drafted, the conditions 
to the proposed Order not only would require Covered Entities to comply 
with EU regulations (which directly are applicable to market 
participants) and with German laws implementing EU directives, but also 
incorporate references to relevant EU directives. Commenters are 
invited to address the implication of those references to EU 
directives, including whether their inclusion may raise questions 
regarding the availability of substituted compliance.

B. Risk Control Requirements

    The Commission further requests comment regarding the proposed 
conditions in connection with the risk control requirements.
    Trading relationship documentation and MiFID ``eligible 
counterparty'' exclusion--Commenters in part are requested to address 
the potential impact of the condition that would disapply application 
of the MiFID ``eligible counterparty'' exclusion in connection with 
substituted compliance for the trading relationship documentation 
requirements. What potential disruption may arise as a result of that 
condition? Is that condition necessary given the related EU 
requirements that are not subject to the MiFID ``eligible 
counterparty'' exclusion--i.e., EMIR Margin RTS article 2 (regarding 
procedures providing for or specifying the terms of agreements), EMIR 
article 11(1)(a) (regarding bilateral confirmations), and MiFID article 
25(6) and MiFID Org Reg article 59 (regarding required reports on 
services)? Are there more targeted conditions that would effectively 
promote the relevant regulatory outcomes?
    Trading relationship documentation disclosure provisions--In 
addition, commenters are requested to address whether the proposal 
appropriately excludes the provisions of paragraph (b)(5) of rule 15Fi-
5 from the scope of substituted compliance in connection with trading 
relationship documentation, on the basis that the German and EU 
documentation requirements would not be expected to subsume those 
disclosures. Also, should

[[Page 72741]]

the proposal be modified to further exclude the clearing disclosure 
provisions of paragraph (b)(6) of rule 15Fi-5 from the scope of 
substituted compliance, for similar reasons? \107\
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    \107\ Paragraph (b)(6) to rule 15Fi-5 requires that trading 
relationship documentation include a notice containing information 
regarding certain consequences of a security-based swap being 
accepted by a clearing agency.
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    Risk management systems--Commenters further are requested to 
address the set of German and EU requirements that Covered Entities 
must satisfy as conditions to substituted compliance in connection with 
risk management system requirements (as well as in connection with the 
internal supervision and compliance requirements addressed below), 
including whether any additions to or subtractions from those 
conditions are warranted. In this respect the Commission notes that 
although the proposed conditions in connection with those requirements 
generally incorporate CRD requirements related to internal governance 
(CRD article 74), treatment of risk (CRD article 76), additional risk-
related practices (CRD articles 79-87), governance arrangements (CRD 
article 88), management body responsibilities (CRD article 91) and 
remuneration (CRD articles 92-95),\108\ the proposed conditions do not 
incorporate certain CRD requirements related to management body 
activities and recruitment.\109\ While the Commission is mindful that 
the holistic approach toward substituted compliance generally 
necessitates a focus on the U.S. and foreign regulatory regimes as a 
whole, those foreign requirements related to management body activities 
and recruitment appear significantly different from the U.S. internal 
supervision and compliance requirements at issue. The Commission 
accordingly believes that, on balance, the conditions to substituted 
compliance should not subsume those particular CRD requirements. The 
Commission invites comment regarding whether this aspect of the 
proposal strikes the correct balance.
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    \108\ See paragraphs (b)(1) and (c)(3) to the proposed Order.
    \109\ The proposed conditions in connection with the risk 
control requirements and internal supervision and compliance 
requirements particularly do not incorporate CRD articles 88(2), 
91(3)-(6) and 91(10) and KWG sections 25c(2), 25d(3) and 25d(11), 
which address nomination committees, outside directorships, and 
management body qualities and diversity.
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    Delivery of trade acknowledgements--Commenters are invited to 
address whether substituted compliance in connection with trade 
acknowledgment and verification requirements should be conditioned on 
Covered Entities having to use electronic means to provide relevant 
information to clients pursuant to applicable EU requirements. In this 
regard, the Commission notes that Exchange Act rule 15Fi-2(c) requires 
that trade acknowledgments be provided via ``electronic means,'' while 
MiFID Org Reg article 59 instead states that applicable disclosures 
must be in a ``durable medium'' but does not appear to explicitly 
mandate electronic disclosure.
    Timing of dispute reporting--Commenters also are requested to 
address whether substituted compliance in connection with dispute 
reporting appropriately may be satisfied by disclosing information to 
the Commission based on the 15 business day standard of EMIR RTS art. 
15(2), in lieu of the three to five business day standard prescribed by 
rule 15Fi-3(c).
    Applicability of relevant requirements under EMIR--Substituted 
compliance for Exchange Act rules 15Fi-2 through 15Fi-4, related to 
trade acknowledgments and verifications, portfolio reconciliation and 
dispute reporting, and portfolio compression, in part are conditioned 
on EMIR article 11 requirements that are linked to the presence of an 
``OTC derivative contract not cleared by a CCP.'' \110\ Those Exchange 
Act rules similarly do not apply to cleared security-based swaps. 
Commenters are invited to address whether there are any differences 
between the scope of the EMIR requirements and the scope of those 
Exchange Act rules that may lead to uncertainty or otherwise complicate 
the implementation of substituted compliance in connection with those 
requirements.
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    \110\ EMIR article 2(3) defines ``OTC derivative contract'' by 
reference to derivatives not executed on a ``regulated market'' 
within the meaning of article 4(1)(14) of MiFID I (Directive 2004/
39/EC the predecessor to the current version of MiFID) or on a third 
country market considered as equivalent to a regulated market in 
accordance with article 19(6) of MiFID I.
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C. Internal Supervision, Chief Compliance Officer and Additional 
Exchange Act Section 15F(j) Requirements

    The Commission also requests comment regarding the proposed 
conditions in connection with the internal supervision, chief 
compliance officer and additional Exchange Act section 15F(j) 
requirements.
    ``As if'' compliance condition--Commenters particularly are invited 
to address the proposed condition that SBS Entities apply relevant 
German and EU supervisory and compliance provisions ``as if'' those 
provisions also promoted the SBS Entities' compliance with applicable 
requirements under the Exchange Act (i.e., requirements that are not 
satisfied via substituted compliance) and the other conditions to the 
Order. To what extent would this condition lead to implementation 
issues, including but not limited to issues regarding how SBS 
Entities--in practice--would leverage existing supervisory and 
compliance frameworks to comply with this condition? Would alternative 
approaches, more targeted conditions or further guidance promote 
regulatory outcomes that are comparable to outcomes under the Exchange 
Act, while reducing implementation issues?
    Annual reports pursuant to EU rules--Commenters also are invited to 
address the proposed condition that SBS Entities provide to the 
Commission, at least annually, certified English-language versions of 
the annual compliance reports required under MiFID Org Reg article 
22(2)(c) that also address compliance with other conditions to the 
Order. Are those compliance reports sufficient to provide the 
Commission with compliance-related information that is comparable to 
the information required by Exchange Act section 15F(k)(3) and Exchange 
Act rule 15Fk-1(c)? If not, how may the condition appropriately be 
modified? Could the proposed condition impose implementation issues? 
Would alternative approaches or more targeted conditions promote 
regulatory outcomes that are comparable to those under the Exchange Act 
while reducing implementation issues? Should the condition also require 
SBS Entities to provide the Commission with ad hoc compliance reports 
required pursuant to MiFID Org Reg article 22(3)(c)?

D. Counterparty Protection Requirements

    The Commission also requests comment regarding the proposed 
conditions in connection with counterparty protection requirements. 
Commenters particularly are invited to address the Commission's 
preliminary view that German and EU requirements are not comparable to 
clearing rights disclosure requirements under the Exchange Act. Do any 
German or EU requirements compare in scope and objective to the 
clearing rights disclosure requirements under the Exchange Act?
    Commenters also are invited to address the Commission's preliminary 
view that German and EU portfolio reconciliation requirements are 
comparable to Exchange Act daily mark

[[Page 72742]]

disclosure requirements only for transactions required to be reconciled 
each business day. Should the Commission instead allow substituted 
compliance for daily mark disclosure requirements for any uncleared OTC 
derivative contract that is subject to German and EU portfolio 
reconciliation requirements, even if reconciliation is required on less 
than a daily basis? Should the Commission allow substituted compliance 
for daily mark disclosure requirements for any OTC derivative contract 
for which margin is exchanged, even if German and EU portfolio 
reconciliation requirements do not require that contract to be 
reconciled? Similarly, are the scope and objectives of German and EU 
trade reporting requirements comparable to the scope and objectives of 
Exchange Act daily mark disclosure requirements? Do the scope and/or 
objectives of those German and EU requirements differ in important ways 
from the scope and/or objectives of daily mark disclosure requirements 
under the Exchange Act?
    Commenters also are invited to address the proposed condition that 
would require an SBS Entity's counterparty to be a per se 
``professional client'' that is not a ``special entity,'' for 
substituted compliance to be available for Exchange Act suitability 
requirements. Would that condition appropriately limit substituted 
compliance to recommendations that are subject to German and EU 
suitability requirements comparable to those under the Exchange Act? 
Would the absence of that condition permit SBS Entities to comply with 
materially narrower German and EU suitability requirements in lieu of 
broader Exchange Act suitability requirements? Would that condition 
cause any market disruption or be difficult to implement? Would 
alternative approaches or more targeted conditions effectively promote 
the counterparty protection objectives of the Exchange Act suitability 
requirement while reducing implementation issues?
    Commenters also are invited to address whether the Commission 
should allow SBS Entities to use substituted compliance for Exchange 
Act material incentives or conflicts of interest disclosure 
requirements if the SBS Entity is subject to and complies with German 
and EU laws that require the SBS Entity to have organizational 
arrangements to prevent conflicts of interest from adversely affecting 
the interest of the SBS Entity's client and, when those arrangements 
are not sufficient to ensure with reasonable confidence that risks of 
damage to client interests will be prevented, to disclose a conflict of 
interest and the steps taken to mitigate those risks. Would permitting 
substituted compliance in the latter scenario achieve comparable 
regulatory outcomes as the relevant Exchange Act disclosure 
requirements? Should the Commission limit substituted compliance for 
Exchange Act material incentives or conflicts of interest disclosure 
requirements only to conflicts of interest for which German and EU laws 
require disclosure because the organizational arrangements are not 
sufficient as described above? Would limiting substituted compliance in 
this way cause any market disruption or be difficult to implement? 
Would alternative approaches effectively promote the counterparty 
protection objectives of the Exchange Act disclosure requirements while 
reducing implementation issues?

E. Recordkeeping, Reporting, and Notification

    The Commission also requests comment regarding the proposed 
conditions with respect to the recordkeeping, reporting, and 
notification requirements. Commenters particularly are invited to 
address the proposed condition with respect to Exchange Act rule 18a-5 
that the prudentially regulated SBS Entity: (a) Preserve all of the 
data elements necessary to create the records required by Exchange Act 
rules 18a-5(b)(1), (2), (3), and (7); and (b) upon request furnish 
promptly to representatives of the Commission the records required by 
those rules. Do the relevant German and EU laws require prudentially 
regulated SBS Entities to retain the data elements necessary to create 
the records required by these rules? If not, please identify which data 
elements are not preserved pursuant to the relevant German and EU laws. 
Further, how burdensome would it be for a prudentially regulated SBS 
Entity to format the data elements into the records required by these 
rules (e.g., a blotter, ledger, or securities record, as applicable) if 
the firm was requested to do so? In what formats do prudentially 
regulated SBS Entities in Germany produce this information to BaFin or 
other European authorities? How do those formats differ from the 
formats required by Exchange Act rules 18a-5(b)(1), (2), (3), and (7)?
    Commenters also are invited to address the proposal that a positive 
substituted compliance determination with respect to Exchange Act rule 
18a-7 would be conditioned on the SBS Entity filing financial and 
operational information with the Commission in the manner and format 
specified by the Commission by order or rule. Because the Commission 
does not have responsibility to administer capital and margin 
requirements for prudentially regulated SBS Entities, the FOCUS Report 
Part IIC elicits much less information than the FOCUS Report Part II or 
the financial reports SBS Entities file with BaFin and/or other 
European authorities. Should the Commission require SBS Entities to 
file the financial and operational information using the FOCUS Report 
Part IIC? Are there line items on the FOCUS Report Part IIC that elicit 
information that is not included in the reports SBS Entities file with 
BaFin and/or other European authorities? If so, do SBS Entities record 
that information in their required books and records? Please identify 
any information that is elicited in the FOCUS Report Part IIC that is 
not: (1) Included in the financial reports filed by SBS Entities with 
BaFin and/or other European authorities; or (2) recorded in the books 
and records required of SBS Entities. Would the answer to these 
questions change if references to FFIEC Form 031 were not included in 
the FOCUS Report Part IIC? If so, how? As a preliminary matter, as a 
condition of substituted compliance should SBS Entities file a limited 
amount of financial and operational information on the FOCUS Report 
Part IIC for a period of two years to further evaluate the burden of 
requiring all applicable line items to be filled out? If so, which line 
items should be required? To the extent that SBS Entities otherwise 
report or record information that is responsive to the FOCUS Report 
Part IIC, how could the information on these reports be integrated into 
a database of filings the Commission or its designee will maintain for 
filers of the FOCUS Report Parts II and IIC (e.g., the eFOCUS system) 
to achieve the objective of being able to perform cross-form analysis 
of information entered into the uniquely numbered line items on the 
forms?
    In addition, commenters are invited to address the Commission's 
preliminary view that a substituted compliance determination with 
respect to the recordkeeping, reporting, and notification requirements 
applicable to nonbank SBS Entities be made in connection with an 
application for substituted compliance with respect to the capital and 
margin requirements applicable to nonbank SBS Entities. For example, 
are there recordkeeping, reporting, and notification requirements 
applicable to nonbank SBS Entities that the Commission should consider 
for substituted compliance in the context of this application? If so, 
please identify the requirements and explain why the Commission should 
consider them.

[[Page 72743]]

    Further, if the Commission makes a positive substituted compliance 
determination with respect to the underlying requirements and the 
related record making and record preservation requirements applicable 
to prudentially regulated SBS Entities, should the Commission also make 
a positive substituted compliance determination with respect to 
parallel record making and record preservation requirements for SBS 
Entities that do not have a prudential regulator? In particular, in 
this circumstance, should the Commission make a positive substituted 
compliance determination with respect to the following record making 
and record preservation requirements applicable to SBS Entities that do 
not have a prudential regulator: Exchange Act rule 18a-5(a)(18) 
(regarding making portfolio reconciliation records), Exchange Act rule 
18a-6(d)(4)-(5) (regarding portfolio reconciliation retention), 
Exchange Act rule 18a-5(a)(16)-(17) with respect to requirements of 
Exchange Act rules 15Fh-3 and 15Fk-1 to which the proposed order 
extends (regarding making records evidencing compliance with business 
conduct standards), Exchange Act rule 18a-6(b)(1)(xii) with respect to 
requirements of Exchange Act rules 15Fh-3 and 15Fk-1 to which the 
proposed order extends (regarding business conduct record retention), 
and Exchange Act rule 18a-5(a)(15) (regarding making non-verified 
security-based swap records)? If so, explain why.
    Finally, if the Commission makes a positive substituted compliance 
determination with respect to other record making and record 
preservation requirements applicable to prudentially regulated SBS 
Entities where there is a parallel requirement applicable to SBS 
Entities without a prudential regulator, should the Commission make a 
substituted compliance determination with respect to the parallel 
requirements? If so, identify the parallel requirements and explain why 
the Commission should make a positive substituted compliance 
determination.

F. Supervisory and Enforcement Issues

    The Commission further requests comment regarding how to weigh 
considerations regarding supervisory and enforcement effectiveness in 
Germany as part of the comparability assessments. Commenters 
particularly are invited to address relevant issues regarding the 
effectiveness of German supervision and enforcement over firms that may 
register with the Commission as SBS Entities, including but not limited 
to issues regarding:
     BaFin and ECB supervisory and enforcement authority, 
supervisory inspection practices and the use of alternative supervisory 
tools, and enforcement tools and practices;
     BaFin and ECB supervisory and enforcement effectiveness 
with respect to derivatives such as security-based swaps;
     BaFin and ECB supervision and enforcement in the cross-
border context (e.g., any differences between the oversight of firms' 
businesses within Germany and the oversight of activities and branches 
outside of Germany, including within the United States); and
     BaFin supervision and enforcement effectiveness with 
respect to investment firms as compared to BaFin and ECB supervision 
and enforcement effectiveness with respect to credit institutions.

    By the Commission.
Vanessa A. Countryman,
Secretary.

Attachment A

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34- )
[DATE]

Order Providing for Conditional Substituted Compliance to Certain 
German Security-Based Swap Dealers and Major Security-Based Swap 
Participants

    IT IS HEREBY ORDERED, pursuant to rule 3a71-6 under the Exchange 
Act, that a Covered Entity (as defined in paragraph (f)(1) of this 
Order) may satisfy the requirements under the Exchange Act that are 
addressed in paragraphs (b) through (e) of this Order so long as the 
Covered Entity is subject to and complies with relevant requirements of 
the Federal Republic of Germany and the European Union and with the 
conditions to this Order.

(a) General conditions.

    This Order is subject to the following general conditions, in 
addition to the conditions specified in paragraphs (b) through (e):
    (1) Activities as ``investment services or activities.'' For each 
condition in paragraphs (b) through (e) of this Order that requires the 
application of, and the Covered Entity's compliance with, provisions of 
MiFID, WpHG, and/or other EU and German requirements adopted pursuant 
to those provisions, the Covered Entity's relevant security-based swap 
activities constitute ``investment services'' or ``investment 
activities,'' as defined in MiFID article 4(1)(2) and in WpHG section 
2(8), and fall within the scope of the Covered Entity's authorization 
from BaFin to provide investment services and/or perform investment 
activities in the Federal Republic of Germany.
    (2) Counterparties as ``clients.'' For each condition in paragraphs 
(b) through (e) of this Order that requires the application of, and the 
Covered Entity's compliance with, provisions of MiFID, WpHG and/or 
other EU and German requirements adopted pursuant to those provisions, 
the relevant counterparty (or potential counterparty) to the Covered 
Entity is a ``client'' (or potential ``client''), as defined in MiFID 
article 4(1)(9) and in WpHG section 67(1).
    (3) Security-based swaps as ``financial instruments.'' For each 
condition in paragraphs (b) through (e) of this Order that requires the 
application of, and the Covered Entity's compliance with, provisions of 
MiFID, WpHG and/or other EU and German requirements adopted pursuant to 
those provisions, the relevant security-based swap is a ``financial 
instrument,'' as defined in MiFID article 4(1)(15) and in WpHG section 
2(4).
    (4) Covered Entity as ``institution.'' For each condition in 
paragraph (b) through (e) of this Order that requires the application 
of, and the Covered Entity's compliance with, the provisions of the 
CRD, KWG, CRR and/or other EU and German requirements adopted pursuant 
to those provisions, the Covered Entity is an ``institution,'' as 
defined in CRD article 3(1)(3), in CRR article 4(1)(3) and in KWG 
section 1(1b).
    (5) Memorandum of Understanding. The Commission and BaFin 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.
    (6) 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.
    (7) European Union Cross-Border Matters. If, in relation to a 
particular service provided by a Covered Entity, responsibility for 
ensuring compliance with any provision of MiFID or any other EU or 
German requirement adopted pursuant to MiFID listed in

[[Page 72744]]

paragraphs (b) through (e) of this Order is allocated to an authority 
of the Member State of the European Union in whose territory a Covered 
Entity provides the service, BaFin must be the authority responsible 
for supervision and enforcement of that provision or requirement in 
relation to the particular service. If responsibility for ensuring 
compliance with any provision of MAR or any other EU requirement 
adopted pursuant to MAR listed in paragraphs (b) through (e) of this 
Order is allocated to one or more authorities of a Member State of the 
European Union, one of such authorities must be BaFin.

(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 related 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: MiFID articles 16(4) and 16(5); WpHG 
section 80; MiFID Org Reg articles 21-24; CRD articles 74, 76 and 79-
87; KWG sections 25a, 25b, 25c (other than 25c(2)), 25d (other than 
25d(3) and 25d(11)), 25(e) and 25(f); CRR articles 286-88 and 293; and 
EMIR Margin RTS article 2.
    (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 MiFID article 25(6), WpHG 
section 63(12), MiFID Org Reg articles 59-61, EMIR article 11(1)(a) and 
EMIR RTS article 12.
    (3) Portfolio reconciliation and dispute reporting. The 
requirements of Exchange Act rule 15Fi-3, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of EMIR article 11(1)(b) and EMIR RTS article 13 and 15;
    (ii) The Covered Entity provides the Commission with reports 
regarding disputes between counterparties on the same basis as it 
provides those reports to competent authorities pursuant to EMIR RTS 
article 15(2).
    (4) Portfolio compression. The requirements of Exchange Act rule 
15Fi-4, provided that the Covered Entity is subject to and complies 
with the requirements of EMIR RTS article 14.
    (5) Trading relationship documentation. The requirements of 
Exchange Act rule 15Fi-5, other than paragraph (b)(5) to that rule, 
provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of MiFID article 25(5), WpHG section 83(2), MiFID Org Reg 
articles 24, 56, 58, 73 and applicable parts of Annex I, and EMIR 
Margin RTS article 2; and
    (ii) The Covered Entity does not treat the applicable counterparty 
as an ``eligible counterparty'' for purposes of MiFID article 30 and 
WpHG section 68.

(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);
    (ii) The Covered Entity complies with paragraph (c)(4) to this 
Order; and
    (iii) 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) to this Order;
    (ii) All reports required pursuant to MiFID Org Reg article 
22(2)(c) must also:
    (A) Be provided to the Commission at least annually, and in the 
English language;
    (B) Include a certification that, under penalty of law, the report 
is accurate and complete; and
    (C) Address the firm's compliance with the other conditions to this 
Order.
    (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: MiFID articles 16 and 
23; WpHG sections 63, 80, 83 and 84; MiFID Org Reg articles 21-37, 72-
76 and Annex IV; CRD articles 74, 76, 79-87, 88(1), 91(1)-(2), 91(7)-
(9) and 92-95; and KWG sections 25a, 25b, 25c (other than 25c(2)), 25d 
(other than 25d(3) and 25d(11)), 25e and 25f.
    (4) Additional condition to paragraph (c)(1). Paragraph (c)(1) 
further is conditioned on the requirement that Covered Entities comply 
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 conditions to this Order.

(d) Substituted compliance in connection with counterparty protection 
requirements.

    This Order extends to the following provisions related to 
counterparty protection:
    (1) Disclosure of information regarding material risks and 
characteristics. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material risks and characteristics of a 
security-based swap, provided that the Covered Entity is subject to and 
complies with the requirements of MiFID article 24(4), WpHG sections 
63(7) and 64(1) and MiFID Org Reg articles 48-50, in each case in 
relation to that security-based swap.
    (2) Disclosure of information regarding material incentives or 
conflicts of interest. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material incentives or conflicts of interest 
that a Covered Entity may have in connection with a security-based 
swap, provided that the Covered Entity, in relation to that security-
based swap, is subject to and complies with the requirements of either:
    (i) MiFID article 23(2)-(3); WpHG section 63(2); and MiFID Org Reg 
articles 33-35;
    (ii) MiFID article 24(9); WpHG section 70; and MiFID Delegated 
Directive article 11(5); or
    (iii) Market Abuse Regulation article 20(1).
    (3) ``Know your counterparty.'' The requirements of Exchange Act 
rule 15Fh-3(e), provided that the Covered Entity is subject to and 
complies with the requirements of MiFID article 16(2); WpHG section 
80(1); MiFID Org Reg articles 21-22, 25-26 and applicable parts of 
Annex I; CRD articles 74(1) and 85(1); KWG section 25a; MLD articles 11 
and 13; GwG sections 10-11; MLD articles 8(3) and 8(4)(a) as applied to 
internal policies, controls and procedures regarding recordkeeping of 
customer due diligence activities; and GwG section 6(1)-(2) as applied 
to principles, procedures and controls regarding recordkeeping of 
customer

[[Page 72745]]

diligence activities, in each case in relation to that security-based 
swap.
    (4) Suitability. The requirements of Exchange Act rule 15Fh-3(f), 
provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of MiFID articles 24(2)-(3) and 25(1)-(2); WpHG sections 
63(5)-(6), 80(9)-(13) and 87(1)-(2); and MiFID Org Reg articles 
21(1)(b) and (d), 54 and 55, in each case in relation to the 
recommendation that is provided by or on behalf of the Covered Entity; 
and
    (ii) The counterparty to which the Covered Entity makes the 
recommendation is a ``professional client'' mentioned in MiFID Annex II 
section I and WpHG section 67(2) and is not a ``special entity'' as 
defined in Exchange Act section 15F(h)(2)(C) and Exchange Act rule 
15Fh-2(d).
    (5) Fair and balanced communications. The requirements of Exchange 
Act rule 15Fh-3(g), provided that the Covered Entity, in relation to 
the relevant communication, is subject to and complies with the 
requirements of:
    (i) Either MiFID articles 24(1), (3) and WpHG sections 63(1), (6) 
or MiFID article 30(1) and WpHG section 68(1); and
    (ii) MiFID articles 24(4)-(5); WpHG sections 63(7) and 64(1); MiFID 
Org Reg articles 46-48; Market Abuse Regulation articles 12(1)(c) and 
15; and MAR Investment Recommendations Regulation article 5.
    (6) Daily mark disclosure. The requirements of Exchange Act rule 
15Fh-3(c), provided that the Covered Entity is required to reconcile, 
and does reconcile, the portfolio containing the relevant security-
based swap on each business day pursuant to EMIR articles 11(1)(b) and 
11(2) and EMIR RTS article 13.

(e) Substituted compliance in connection with recordkeeping, reporting, 
and notification requirements.

    This Order extends to the following provisions related to 
Commission requirements to:
    (1) Make and keep current certain records. The requirements to make 
and keep current records of Exchange Act rule 18a-5 applicable to 
prudentially regulated security-based swap dealers and major security-
based swap participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRR articles 103 and 103(b)(ii); EMIR articles 
9(2), 11(1)(a), and 39(4); EMIR RTS 148/2013; MiFID articles 9(1), 
16(3), 16(6)-16(9), 25(1), 25(5), and 25(6); MiFID Delegated Directive 
article 2; MiFID Org Reg. articles 16(7), 21(1)(a), 35, 59, 72, 73, 74, 
75, 76, and applicable parts of Annex I; MiFID Org Reg. Annex IV; MiFIR 
article 25; MLD4 articles 11 and 13; EBA/ESMA Guidelines on Management 
Suitability guidelines 74, 75, and 172, and Annex III; CRD articles 88, 
91(1), and 91(8); KWG sections 25c(1) and 25d(1)-(3); WpHG section 63, 
section 64, section 81 paragraph 1, section 83 paragraphs 1 through 8, 
and section 84; and GwG section 10, paragraph 1, points 1 through 3;
    (ii)(A) The Covered Entity preserves all of the data elements 
necessary to create the records required by Exchange Act rules 18a-
5(b)(1), (2), (3), and (7); and
    (B) The Covered Entity upon request furnishes promptly to 
representatives of the Commission the records required by those rules;
    (iii) The Covered Entity makes and keeps current the records 
required by Exchange Act rules 18a-5(b)(9) and (10) if the Covered 
Entity is not exempt from the requirements of Exchange Act rule 18a-4;
    (iv) The Covered Entity makes and keeps current the records 
required by Exchange Act rule 18a-5(b)(12); and
    (v) Except with respect to requirements of Exchange Act rules 15Fh-
3 and 15Fk-1 to which this Order extends pursuant paragraphs (c)(2) and 
(d), the Covered Entity makes and keeps current the records required by 
Exchange Act rule 18a-5(b)(13).
    (2) Preserve records. The record preservation requirements of 
Exchange Act rule 18a-6 applicable to prudentially regulated security-
based swap dealers and major security-based swap participants; provided 
that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRD articles 88, 91(1), and 91(8); CRR articles 
99, 104(1)(j), 294, 394, 415-428, and 430; CRR Reporting ITS Article 14 
and Annexes I-V, VIII-XIII; EMIR articles 9(1) and 9(2); MiFID articles 
9(1), 16(3), and 69(2); MiFID Org Reg. articles 21(1)(a), 21(2), 35, 
58, 72(1), 72(3), 73, and 76; MiFIR articles 16(2), 16(5), 16(6), 
16(7), 25(1), 25(5), 31(1) and 72; MLD4 articles 11 and 13; EBA/ESMA 
Guidelines on Management Suitability guidelines 74, 75, and 172, and 
Annex III; EBA Guidelines on Outsourcing section 13.3; KWG 25c(1) and 
25d(1)-(3); WpHG sections 6, 7, 63, 64, and 80 and section 83 
paragraphs 1, 2, 3, and 8; and GwG sections 10 and 11;
    (ii) The Covered Entity preserves the records required by Exchange 
Act rule 18a-6(b)(2)(v) if the Covered Entity is not exempt from the 
requirements of Exchange Act rule 18a-4;
    (iii) Except with respect to requirements of Exchange Act rules 
15Fh-3 and 15Fk-1 to which this Order extends pursuant to paragraphs 
(c)(2) and (d), the Covered Entity preserves the records required by 
Exchange Act rule 18a-6(b)(2)(vii); and
    (iv) The Covered Entity preserves the records required by Exchange 
Act rule 18a-6(b)(2)(vi) and (b)(2)(viii).
    (3) File Financial and Operational Information. The reporting 
requirements of Exchange Act rule 18a-7 applicable to prudentially 
regulated security-based swap dealers and major security-based swap 
participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRR articles 99, 104(1)(j), 394, 415-428, and 
430; CRR Reporting ITS chapter 2 and Annexes I-V and VII-XIII; and 
Commission Delegated Regulation (EU) 2017/1443, as amended from time to 
time; and
    (ii) The Covered Entity files financial and operational information 
with the Commission or its designee in the manner and format required 
by Commission rule or order.
    (4) Provide Notification. The notification requirements of Exchange 
Act rule 18a-8 applicable to prudentially regulated security-based swap 
dealers and major security-based swap participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRD article 71; MiFID article 73; KWG section 
24 paragraph 1; and FinDAG section 4d; and
    (ii) The Covered Entity:
    (A) Simultaneously transmits to the principal office of the 
Commission or to an email address provided on the Commission's website 
a copy of any notice required to be sent by the German and EU laws 
referenced in paragraph (e)(3)(i) of this order; and
    (B) 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;
    (iii) The Covered Entity complies with notification requirements of 
Exchange Act rule 18a-8(g) if the Covered Entity is not exempt from 
Exchange Act rule 18a-4.
    (4) Examination and Production of Records. Notwithstanding the 
forgoing provisions of paragraph (e) of this Order, prudentially 
regulated security-based swap dealers and major security-based swap 
participants remains subject to the requirement of Exchange Act section 
15F(f) to keep books and records open to inspection by any 
representative

[[Page 72746]]

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.

(f) Definitions.

    (1) ``Covered Entity'' means an entity that:
    (i) Is a security-based swap dealer or major security-based swap 
participant 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; and
    (iii) Is an investment firm or credit institution authorized by 
BaFin to provide investment services or perform investment activities 
in the Federal Republic of Germany.
    (2) ``MiFID'' means the ``Markets in Financial Instruments 
Directive,'' Directive 2014/65/EU, as amended from time to time.
    (3) ``WpHG'' means Germany's ``Wertpapierhandelsgesetz'', as 
amended from time to time.
    (4) ``MiFID Org Reg'' means Commission Delegated Regulation (EU) 
2017/565, as amended from time to time.
    (5) ``MiFID Delegated Directive'' means Commission Delegated 
Directive (EU) 2017/593, as amended from time to time.
    (6) ``MLD'' means Directive (EU) 2015/849, as amended from time to 
time.
    (7) ``GwG'' means Germany's ``Geldw[auml]schegesetz,'' as amended 
from time to time.
    (8) ``MiFIR'' means Regulation (EU) 600/2014, as amended from time 
to time.
    (9) ``EMIR'' means the ``European Market Infrastructure 
Regulation,'' Regulation (EU) No 648/2012, as amended from time to 
time.
    (10) ``EMIR RTS'' means Commission Delegated Regulation (EU) No 
149/2013, as amended from time to time.
    (11) ``CRR Reporting ITS'' means Commission Implementing Regulation 
(EU) 680/2014, as amended from time to time.
    (12) ``CRD'' means Directive 2013/36/EU, as amended from time to 
time.
    (13) ``KWG'' means Germany's ``Kreditwesengesetz,'' as amended from 
time to time.
    (14) ``CRR'' means Regulation (EU) No 575/2013, as amended from 
time to time.
    (15) ``Market Abuse Regulation'' means Regulation (EU) 596/2014, as 
amended from time to time.
    (16) ``MAR Investment Recommendations Regulation'' means Commission 
Delegated Regulation (EU) 2016/958, as amended from time to time.
    (17) ``FinDAG'' means Germany's 
``Finanzdienstleistungsaufsichtsgesetz,'' as amended from time to time.
    (18) ``BaFin'' means the Bundesanstalt f[uuml]r 
Finanzdienstleistungsaufsicht.

[FR Doc. 2020-25166 Filed 11-10-20; 8:45 am]
BILLING CODE 8011-01-P


