On July 30, 2021, the SEC approved a conditional substituted compliance order (SEC final 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 United Kingdom (UK). The order allows certain UK firms registered with the SEC as an SBS Entity to conditionally satisfy certain Exchange Act requirements by complying with comparable UK and to the extent still applicable to UK SBS Entities, European Union (EU) requirements relating to:

The substituted compliance determination was originally requested on March 19, 2020 when the UK Financial Conduct Authority (FCA) submitted its substituted compliance application (FCA Application) requesting that the SEC determine, under the Exchange Act Rule 3a71-6, that SBS Entities subject to regulation in the UK conditionally may satisfy requirements under the Exchange Act by complying with comparable UK requirements. The SEC issued a request for public comment on the FCA Application along with an SEC proposed order on April 5, 2021 (see Legal Update, SEC Requests Public Comment on UK and French Security-Based Swap (SBS) Substituted Compliance Orders).

The approval of the SEC final 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). The SEC final order notes that substituted compliance may help SBS Entities leverage their existing systems and practices to comply with relevant Exchange Act requirements in conjunction with their compliance with relevant UK requirements. As stated in the SEC final order, market participants will begin to count security-based swap transactions toward the thresholds for registration with the SEC as an SBS Entity on the August 6, 2021 counting date and will be required to begin registering with the SEC on the November 1, 2021 registration date (see Practice Notes, US Derivatives Regulation: Swap Dealer and SBSD Registration Thresholds and US Derivatives Regulation: Requirements for Swap Dealers and MSPs Checklist: Requirements for Security-Based Swap Dealers and MSBSPs). The SEC final order observes that substituted compliance should assist relevant non-US security-based swap market participants in preparing for registration.

In addition, as required under Exchange Act Rule 3a71-6, the SEC has also entered into a memorandum of understanding dated July 30, 2021 (MOU) with the FCA and the Bank of England (BoE), with BoE acting in its capacity as the Prudential Regulation Authority (PRA), to address supervisory, enforcement cooperation, and other matters arising under substituted compliance regarding certain over-the-counter (OTC) derivatives entities that operate on a cross-border basis in the United States and the UK.

For more information on substituted compliance with SEC security-based swaps (SBS) rules, see Practice Note, US Derivatives Regulation: Cross-Border Application of Swaps Rules: SBS Substituted Compliance.