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SEC Moves Forward on UK-, French-Substituted Compliance Determinations

The SEC moved forward on proposed substituted compliance determinations for UK- and French-regulated firms that register as security-based swap dealers ("SBSDs").

The SEC proposed order for UK firms comes in response to an application submitted by the UK Financial Conduct Authority ("FCA") pursuant to SEA Rule 3a71-6 ("Substituted compliance for security-based swap dealers and major security-based swap participants"). The SEC reopened the comment period for the proposed substituted compliance determination for the application submitted by the Autorité des Marchés Financiers (or "AMF") and the Autorité de Contrôle Prudentiel et de Résolution (or "ACPR").

FCA requested substituted compliance for requirements under Exchange Act Section 15F ("Registration and Regulation of Security-Based Swap Dealers and Major Security-Based Swap Participants") regarding (i) risk control, (ii) recordkeeping and reporting, (iii) internal supervision and compliance, and (iv) counterparty protection.

Under the proposed order, substituted compliance would be granted subject to a number of conditions, the following among them:

  • portfolio valuation disputes would be reported directly to the SEC, based on UK timing requirements;

  • a firm would need to (i) maintain assets allowable under SEA Rule 18a-1 ("Net Capital Requirements for Security-Based Swap Dealers for Which There Is Not a Prudential Regulator"), after applying "applicable haircuts" under the Basel capital standard, (ii) make a quarterly record listing, (iii) maintain $100 million of equity capital, as defined in the Basel capital standard, and (iv) include its most recent statement of financial condition;

  • suitability exceptions would be available to non-special entities that are "per se professional clients" under UK requirements;

  • various SEC recordkeeping and retention requirements (including format) would continue to apply;

  • SEC financial and operational reporting requirements would continue to apply; and

  • the SBSD would need to submit to the SEC certain regulatory notices required under local law.

Comments on the proposed orders must be submitted within 25 days following their publication in the Federal Register.

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