SEC Approves Substituted Compliance Order for Certain French Security-Based Swap Entities | Practical Law

SEC Approves Substituted Compliance Order for Certain French Security-Based Swap Entities | Practical Law

The SEC approved a substituted compliance order relating to certain non-US security-based swap (SBS) entities based in France.

SEC Approves Substituted Compliance Order for Certain French Security-Based Swap Entities

by Practical Law Finance
Published on 28 Jul 2021 • USA (National/Federal)
The SEC approved a substituted compliance order relating to certain non-US security-based swap (SBS) entities based in France.
On July 23, 2021, the SEC approved a substituted compliance order regarding certain non-US security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs, and together with SBSDs, SBS Entities) subject to regulation in the French Republic. The order allows certain French firms registered with the SEC as an SBS Entity to conditionally satisfy certain Exchange Act requirements by complying with comparable French and European Union (EU) requirements relating to:
  • Risk control.
  • Recordkeeping and reporting.
  • Internal supervision and compliance.
  • Counterparty protection.
To promote comparability of regulatory outcomes, the substituted compliance order incorporates certain conditions and other limits. In particular, the order includes two additional capital conditions. The first requires French firms to comply with certain Exchange Act recordkeeping and notification rules linked to capital requirements. Under the second capital condition, firms will be required to:
  • Maintain liquid assets, as defined in the condition, that have an aggregate market value that exceeds the amount of the firm's total liabilities by:
    • at least $100 million before applying the condition's specified deduction; and
    • at least $20 million after applying the deduction.
  • Make and preserve for three years a quarterly record demonstrating compliance with the capital condition.
  • Notify the SEC in writing within 24 hours if it fails to meet the requirements of the capital condition.
  • Include its most balance sheet filed with its local supervisor with its initial written notice to the SEC of its intent to rely on substituted compliance.
Further conditions and limits incorporated into the substituted compliance order require French firms to, among others things:
  • Comply with certain disclosure-related provisions for transactions with US counterparties.
  • Report counterparty valuation disputes directly to the SEC, based on French and EU timing requirements.
  • Collect variation margin (VM) and initial margin (IM) from a counterparty with respect to transactions in non-cleared security-based swaps (SBSs), unless the counterparty would qualify for an exception from the collateral collection requirements under the SEC's margin rule for non-cleared SBSs, and comply with certain recordkeeping requirements related to margin.
  • Maintain internal supervision frameworks to promote compliance with US requirements and conditions of the substituted compliance order.
  • Annually provide the SEC with certain compliance reports that are required under French and EU law. The reports must be in English and certified to cover compliance with Exchange Act requirements and the conditions of the substituted compliance order.
  • Treat counterparties as a "per se professional client" under French and EU requirements.
  • Reconcile the portfolio containing the relevant SBS each business day.
  • Report periodic unaudited financial and operational information and submit a copy of the annual audited financial reports filed with French authorities to the SEC, along with any applicable reports and schedules as specified in the order.
  • Provide the SEC with a copy of any notice required to be sent under comparable French laws.
  • Promptly provide an English translation of any record, report, or notification upon request.
The substituted compliance determination was originally requested by French financial authorities in December 2020, and the SEC twice sought public comment on the proposed order (see Legal Update, SEC Requests Public Comment on UK and French Security-Based Swap (SBS) Substituted Compliance Orders). The SEC's approval of the final substituted compliance order comes in anticipation of the October 6, 2021 registration compliance date for SBS Entities (see Legal Update, SEC Approves Registration of First Security-Based Swap Data Repository (SBSDR) Triggering Compliance Date for Regulation SBSR). This is the first SEC substituted compliance order that covers SBS margin and capital requirements.
In addition, as required under Exchange Act Rule 3a71-6, the SEC has also entered into a memorandum of understanding with the French financial authorities to address supervisory and enforcement cooperation and other matters arising under substituted compliance. The SEC still has the authority to inspect, examine, and supervise non-US firms and take any appropriate enforcement action.
For more information on substituted compliance with SEC SBS rules, see Practice Note, US Derivatives Regulation: Cross-Border Application of Swaps Rules: SBS Substituted Compliance.