The SEC granted a substituted compliance determination for French-regulated security-based swap dealers ("SBSDs"). This is the SEC's second substituted compliance determination for SBSDs and its first that covers capital and margin requirements.
The SEC Order for French firms comes in response to an application submitted by the Autorité des Marchés Financiers ("AMF") and the Autorité de Contrôle Prudentiel et de Résolution ("ACPR") pursuant to SEA Rule 3a71-6 ("Substituted compliance for security-based swap dealers and major security-based swap participants"). See previous coverage. To address supervisory and enforcement matters resulting from the substituted compliance, the SEC, AMF and ACPR entered into a Memorandum of Understanding. (The Order also notes that the SEC and the European Central Bank are in the process of developing a separate memorandum of understanding.)
The substituted compliance Order applies only for specified firms that are, among other things, subject to provisions of MiFID and for whom relevant security-based swaps ("SBS") activities constitute "investment services" or "investment activities" under MiFID and within the relevant entity's authorization to provide such services in France. In addition, the Order imposes requirements on the status of counterparties under relevant European law (e.g., as "clients" under MiFID and "counterparties" under EMIR) and specifies that the relevant SBS be "financial instruments" for purposes of MiFID and an "OTC derivative" for purposes of EMIR.
The Order provides conditional substituted compliance as to the following requirements applicable to SBSDs, in each case subject to conditions enumerated in the Order:
Trade Acknowledgment and Verification under SEA Rule 15Fi-2.
Portfolio Reconciliation and Dispute Reporting under SEA Rule 15Fi-3, provided that dispute reports required under European law must be also provided to the SEC.
Portfolio Compression under SEA Rule 15Fi-4.
SBS Trading Relationship Documentation under SEA Rule 15Fi-5, other than OLA representations under clause (b)(5) for U.S. persons.
Capital under SEA Section 15F(e) and Rules 18a-1 and 18a-1a-1d. Firms would be required to (i) maintain liquid assets with an aggregate market value exceeding the firm's total liabilities by a minimum of $100 million prior to applying the deductions specified in the capital condition, and by a minimum of $20 million following the application of the deduction, (ii) create and maintain for three years a quarterly record proving compliance with the capital condition, (iii) send written notification to the SEC within 24 hours should the firm fail to meet the capital condition requirements and (iv) provide the most recent balance sheet to the SEC. Firms would also need to apply substituted compliance to certain recordkeeping, record preservation and notification requirements relating to capital.
Margin under SEA Section 15F(e) and Rule 18a-3. The determination requires a relevant SBSD to collect variation margin ("VM") and initial margin ("IM") unless the relevant counterparty would qualify for an exception under 18a-3(c)(1)(iii) or (c)(2)(iii) and would need to apply for substituted compliance for certain recordkeeping requirements.
Internal Supervision under SEA Sections 15F(j)(4)(A) and (j)(5) and Rule 15Fh-3(h).
Chief Compliance Officer under SEA Section 15F(k) and Rule 15Fk-1. Firms must provide, in English, the compliance reports they submit to their management bodies under French and EU law at the earlier of 15 days following (i) when the report is submitted to the management bodies or (ii) when the report must be submitted to the management bodies. The reports are required to cover relevant Exchange Act requirements and conditions of the Order.
External Business Conduct. The SEC provided substituted compliance determinations covering (1) disclosure requirements under SEA Rule 15Fh-3(b); (2) "know your counterparty" requirements under Rule 15Fh-3(e); (3) suitability requirements under Rule 15Fh-3(f), provided that the relevant counterparty is a "professional client" for MiFID purposes and is not a "special entity"; (4) fair and balanced communications under Rule 15Fh-3(g); and (5) daily mark disclosure under Rule 15Fh-3(c).
Recordkeeping. The SEC provided substituted compliance determinations covering some but not all aspects of the recordkeeping requirements under SEA Rules 18a-5 and 18a-6, subject to numerous conditions.
Financial Reporting and Notifications. The SEC granted substituted compliance as to aspects of SEA Rules 18a-7 and 18a-8, subject to numerous conditions, including that certain information be periodically reported to the SEC.
The SEC substituted compliance determinations still require firms to maintain books and records open to SEC inspection and to promptly provide the SEC with legible, true, complete and current copies of such records. In addition, firms are required to promptly provide upon request an English translation of any record, report or notification.
The SEC moved forward on proposed substituted compliance determination for UK- and French-regulated firms that register as security-based swap dealers.
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