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SEC Issues New and Amended Security-Based Swap (SBS) Substituted Compliance Orders
Practical Law Legal Update w-032-3256 (Approx. 6 pages)
SEC Issues New and Amended Security-Based Swap (SBS) Substituted Compliance Orders
by Practical Law Finance
| Published on 08 Nov 2021 • USA (National/Federal) |
The SEC issued an omnibus amended security-based swap (SBS) conditional substituted compliance order for Germany, France, and the UK, as well as new SBS conditional substituted compliance orders for Spain and Switzerland. The SEC also signed a memorandum of understanding (MoU) with the European Central Bank (ECB) regarding cooperation on oversight of SBS entities.
The SEC has issued the following new and amended security-based swap (SBS) conditional substituted compliance orders:
- On October 22, 2021, an omnibus order which includes an amended SBS conditional substituted compliance order for the Federal Republic of Germany (Germany) and amended SBS conditional substituted compliance orders for the French Republic (France) and the United Kingdom (UK) (see Omnibus Order Amending SBS Substituted Compliance for France, Germany, and the UK).
- On October 22, 2021, an SBS conditional substituted compliance order for non-US security-based swap dealers (SBSDs) subject to regulation in the Kingdom of Spain (Spain) (see Order for SBS Substituted Compliance in Spain).
- On October 8, 2021 an SBS conditional substituted compliance order for the Swiss Confederation (Switzerland) (see Order for SBS Substituted Compliance in Switzerland).
In advance of these conditional substituted compliance orders, on August 16, 2021, the SEC and the European Central Bank (ECB) signed a memorandum of understanding (ECB MoU) regarding cooperation on oversight of SBS entities, which include SBSDs and major security-based swap participants (MSBSPs). This is the first MoU between the SEC and ECB (see SEC-ECB Memorandum of Understanding (MoU)).
Note that the SEC provides jurisdiction-specific information on all outstanding substituted compliance orders granted to date, as well as conditional substituted compliance applications and MoUs on this webpage.
For detailed information on SBS substituted compliance and other SBS cross-border rules, see Practice Note, US Derivatives Regulation: Cross-Border Application of Swaps Rules: SEC Cross-Border Security-Based Swaps Rules.
Omnibus Order Amending SBS Substituted Compliance for France, Germany, and the UK
On October 22, 2021, the SEC issued an omnibus order (omnibus SBS substituted compliance order) related to prior grants of conditional substituted compliance to SBS entities in France, Germany, and the UK. The omnibus SBS substituted compliance order extends until January 1, 2022 the deadline for non-US SBS entities subject to regulation in Germany, France, and the UK to meet certain conditions relating to Exchange Act capital requirements under section 15F(e) and Exchange Act rules 18a-1 and 18a-1a through d and margin requirements under Exchange Act section 15F(e) and Exchange Act rule 18a-3.
Amended Germany SBS Substituted Compliance Order
The omnibus SBS substituted compliance order includes an amended and restated order granting conditional substituted compliance for certain requirements applicable to non-US SBSDs and MSBSPs subject to regulation in Germany (amended Germany SBS substituted compliance order). The amended Germany SBS substituted compliance order provides that:
- A December 2020 Germany SBS conditional substituted compliance order (December 2020 Germany SBS order) did not address substituted compliance for capital and margin requirements under the Exchange Act applicable to SBS entities without a prudential regulator.
- Changes were required to the December 2020 Germany SBS order to align the Germany SBS substituted compliance order with conditional substituted compliance orders for SBS entities subject to regulation in France and the UK, which the SEC finalized after issuing the December 2020 Germany SBS order.
- The amended Germany SBS substituted compliance order specifies that a party may avail itself of substituted compliance under the amended Germany SBS substituted compliance order if it is:
- a SBSD or MSBSP registered with the SEC;
- not a US person, as defined in Rule 3a71-3(a)(4) under the Exchange Act; and
- an investment firm, credit institution, or both that is supervised by the ECB (or has a licensing application pending with the ECB as of August 12, 2021) as a significant institution and is authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) to provide investment services or perform investment activities in Germany.
The amended Germany SBS substituted compliance order provides for substituted compliance in connection with the following SBS requirements under the Exchange Act:
- Risk-control requirements.
- Capital and margin requirements.
- Internal supervision and compliance requirements and certain Exchange Act requirements.
- Counterparty protection requirements.
- Recordkeeping, reporting, notification, and securities count requirements.
Amended French and UK SBS Substituted Compliance Orders
The omnibus SBS substituted compliance order also includes an amended order (amended French/UK SBS substituted compliance order), which makes certain reconciliations to the previously issued French and UK SBS substituted compliance orders for consistency with the Germany SBS substituted compliance order. The amended French/UK SBS substituted compliance order:
- Amends prior conditional SBS substituted compliance orders for non-US SBS entities subject to regulation in France and the UK.
- Notes that the prior French and UK SBS substituted compliance orders included an additional capital condition that is designed to ensure comparable regulatory outcomes between Exchange Act capital requirements and French and UK capital requirements, respectively.
- Amends the French and UK SBS substituted compliance orders to make the additional capital conditions in those orders consistent with the additional capital conditions required in the amended Germany SBS order. (For information on the prior French and UK substituted compliance orders, see Legal Updates, SEC Approves Substituted Compliance Order for Certain French Security-Based Swap Entities and SEC Approves Conditional Substituted Compliance Order for Certain UK Security-Based Swap Entities, respectively.)
Order for SBS Substituted Compliance in Spain
On October 22, 2021, the SEC issued a conditional substituted compliance order (Spain SBS substituted compliance order) for non-US SBSDs subject to regulation in Spain, which specifies that a party may avail itself of substituted compliance if it is:
- An SBSD or MSBSP registered with the CFTC.
- Not a US person, as defined in rule 3a71-3(a)(4) under the Exchange Act.
- An investment firm or a credit institution authorized by the Comisión Nacional del Mercado de Valores (CNMV) and the ECB to provide investment services and/or perform investment activities in Spain.
- A significant institution supervised by the CNMV and the ECB with the Banco de España (BoS).
The Spain SBS substituted compliance order provides for substituted compliance in connection with the following SBS requirements under the Exchange Act::
- Risk-control requirements.
- Internal supervision and compliance requirements.
- Counterparty protection requirements
- Recordkeeping, reporting, and notification requirements.
On October 22, 2021, the SEC also entered into a substituted compliance memorandum of understanding with the CNMV and the BoS to address substituted compliance cooperation in conjunction with the ECB MoU (see SEC-ECB Memorandum of Understanding (MoU)).
Order for SBS Substituted Compliance in Switzerland
On October 8, 2021, the SEC entered into a conditional substituted compliance memorandum of understanding with the Swiss Financial Market Supervisory Authority (FINMA) to address substituted compliance cooperation. On October 8, 2021, the SEC also issued a conditional substituted compliance order (Switzerland SBS substituted compliance order), for non-US SBSDs subject to regulation in Switzerland, which specifies that a party may avail itself of substituted compliance if it is:
- An SBSD registered with the SEC.
- Not a US person as defined in rule 3a71-3(a)(4) under the Exchange Act.
- A systemically important bank authorized by FINMA to conduct banking activities in Switzerland.
- Is supervised by FINMA under its intensive and continual supervision model
The Switzerland SBS substituted compliance order provides for substituted compliance in connection with the following SBS requirements under the Exchange Act:
- Risk-control requirements.
- Internal supervision and compliance requirements chief compliance officer and certain additional Exchange Act requirements.
- Recordkeeping, reporting, and notification requirements.
SEC-ECB Memorandum of Understanding (MoU)
The SEC and the ECB announced on August 16, 2021 the signing of a memorandum of understanding (ECB MoU) under which they have agreed to consult, cooperate, and exchange information in connection with the supervision, enforcement, and oversight of certain SBSDs and MSBSPs that are registered with the SEC and supervised by the ECB. The ECB MoU is designed to facilitate the SEC's oversight of all SEC-registered SBS entities in EU member states participating in the Single Supervisory Mechanism (SSM). The SSM refers to the system of banking supervision in the European Union. It is composed of the ECB and the relevant national competent authorities of participating EU member states. The ECB MoU also enhances the ability of the SEC and the ECB to consult, coordinate, and share information with each other regarding these entities, including in connection with cross-border inspections.
The ECB MoU also supports the SEC's oversight of the operation of substituted compliance orders that the SEC has issued for SBS entities in France and Germany, as well as any future substituted compliance orders for such firms in other EU member states that participate in the SSM, such as Spain. Substituted compliance allows an SBS entity to comply with particular US requirements under Title VII of the Dodd-Frank Act through compliance with comparable laws in the entity's home jurisdiction (see Practice Note, US Derivatives Regulation: Cross-Border Application of Swap Rules: SEC Cross-Border Security-Based Swaps Rules: SBS Substituted Compliance).