[Federal Register Volume 86, Number 163 (Thursday, August 26, 2021)]
[Notices]
[Pages 47668-47696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18335]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92716; S7-09-21]


Notice of Substituted Compliance Application Submitted by the 
Spanish Financial Conduct Authority in Connection With Certain 
Requirements Applicable to Security-Based Swap Dealers and Major 
Security-Based Swap Participants Subject to Regulation in the Kingdom 
of Spain; Proposed Order

August 20, 2021.
AGENCY: Securities and Exchange Commission.

ACTION: Notice of application for substituted compliance determination; 
proposed order.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is soliciting public comment on an application by the Spanish 
Comisi[oacute]n Nacional del Mercado de Valores (``CNMV'') requesting 
that, pursuant to rule 3a71-6 under the Securities Exchange Act of 1934 
(``Exchange Act''), the Commission determine that registered security-
based swap dealers and registered major security-based swap 
participants (together, ``SBS Entities'') that are not U.S. persons and 
that are subject to certain regulation in the Kingdom of Spain 
(``Spain'') may comply with certain requirements under the Exchange Act 
via compliance with corresponding requirements of Spain and the 
European Union (``EU''). The Commission also is soliciting comment on a 
proposed Order providing for conditional substituted compliance in 
connection with the application.

DATES: Submit comments on or before September 20, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-09-21 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-09-21. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Typically, comments are also available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10 a.m. and 3 p.m. Due to pandemic conditions, however, access 
to the Commission's public reference room is not permitted at this 
time. All comments received will be posted without change. Persons 
submitting comments are cautioned that the Commission does not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director, 
Laura Compton, Senior Special Counsel, or James Curley, Special 
Counsel, at 202-551-5870, Office of Derivatives Policy, Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment 
on an application by the CNMV requesting that the Commission determine 
that SBS Entities that are not U.S. persons and that are subject to 
certain regulation in Spain may satisfy certain requirements under the 
Exchange Act by complying with comparable requirements in Spain, 
including relevant EU requirements. The Commission also is soliciting 
comment on a proposed Order, set forth in Attachment A, providing for 
conditional substituted compliance in connection with the CNMV 
application.

I. Background

    On August 6, 2021, market participants began to count security-
based swap positions toward the thresholds for registration with the 
Commission as an SBS Entity.\1\ Exchange Act rule 3a71-6 \2\ 
conditionally provides that non-U.S. SBS Entities may satisfy certain 
requirements under Exchange Act section 15F \3\ by complying with 
comparable regulatory requirements of a

[[Page 47669]]

foreign jurisdiction.\4\ Substituted compliance potentially is 
available in connection with requirements regarding business conduct 
and supervision; \5\ chief compliance officers; \6\ trade 
acknowledgment and verification; \7\ non-prudentially regulated capital 
and margin; \8\ recordkeeping and reporting; \9\ portfolio 
reconciliation and dispute reporting, portfolio compression and trading 
relationship documentation.\10\
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    \1\ See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 
43872, 53954 (Aug. 22, 2019) (``Capital and Margin Adopting 
Release''); see also Exchange Act Release No. 87780 (Dec. 18, 2019), 
85 FR 6270, 6345-49 (Feb. 4, 2020).
    \2\ 17 CFR 240.3a71-6.
    \3\ 15 U.S.C. 78o-10.
    \4\ The Commission also has discussed the parameters of 
substituted compliance in connection with substituted compliance 
requests for other jurisdictions. See, e.g. , Exchange Act Release 
No. 90378 (Nov. 9, 2020), 85 FR 72726 (Nov. 13, 2020) (``German 
Substituted Compliance Notice and Proposed Order''); Exchange Act 
Release No. 90765 (Dec. 22, 2020), 85 FR 85686 (Dec. 29, 2020) 
(``German Substituted Compliance Order''); Exchange Act Release No. 
92647 (Aug. 12, 2021), 86 FR 46500 (Aug. 18, 2021) (``German 
Substituted Compliance Notice and Proposed Amended Order''); 
Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 
29, 2020) (``French Substituted Compliance Notice and Proposed 
Order''); Exchange Act Release No. 91477 (Apr. 5, 2021), 86 FR 18341 
(Apr. 8, 2021) (``French Substituted Compliance Re-Opening 
Release''); Exchange Act Release No. 92494 (July 23, 2021), 86 FR 
41612 (Aug. 2, 2021) (``French Substituted Compliance Order''); 
Exchange Act Release No. 91476 (Apr. 5, 2021), 86 FR 18378 (Apr. 8, 
2021) (``UK Substituted Compliance Notice and Proposed Order''); 
Exchange Act Release No. 92529 (July 30, 2021), 86 FR 43318 (August 
6, 2021) (``UK Substituted Compliance Order''); Exchange Act Release 
No. 92632 (Aug. 10, 2021), 86 FR 45770 (Aug. 16, 2021) (``Swiss 
Substituted Compliance Notice and Proposed Order'').
    \5\ See Exchange Act rule 3a71-6(d)(1) (requirements regarding 
business conduct and supervision, including internal risk 
management, internal supervision, antitrust considerations, 
disclosure of material risks and characteristics, disclosure of 
material incentives or conflicts of interest, ``know your 
counterparty,'' suitability, fair and balanced communications, daily 
mark disclosure, disclosure of clearing rights, eligible contract 
participant verification, special entities, and political 
contributions).
    \6\ See Exchange Act rule 3a71-6(d)(2).
    \7\ See Exchange Act rule 3a71-6(d)(3).
    \8\ See Exchange Act rule 3a71-6(d)(4)-(5).
    \9\ See Exchange Act rule 3a71-6(d)(6) (requirements regarding 
record creation, record maintenance, reporting, notification, and 
securities counts).
    \10\ See Exchange Act rule 3a71-6(d)(7). Substituted compliance 
is not available for antifraud prohibitions and information-related 
requirements under section 15F. See Exchange Act rule 3a71-6(d)(1) 
(specifying that substituted compliance is not available in 
connection with the antifraud provisions of Exchange Act section 
15F(h)(4)(A) and Exchange Act rule 15Fh-4(a), 17 CFR 240.15Fh-4(a), 
and the information-related provisions of Exchange Act sections 
15F(j)(3) and 15F(j)(4)(B)). Substituted compliance under rule 3a71-
6 also does not extend to certain other provisions of the federal 
securities laws that apply to security-based swaps, such as: (1) 
Additional antifraud prohibitions (see Exchange Act section 10(b), 
15 U.S.C. 78j(b), Exchange Act rule 10b-5, 17 CFR 240.10b-5, and 
Securities Act of 1933 section 17(a), 15 U.S.C. 77q(a)); (2) 
requirements related to transactions with counterparties that are 
not eligible contract participants (``ECPs'') (see Exchange Act 
section 6(l), 15 U.S.C. 78f(l); Securities Act of 1933 section 5(e), 
15 U.S.C. 77e(e)); (3) segregation of customer assets (see Exchange 
Act section 3E, 15 U.S.C. 78c-5; Exchange Act rule 18a-4, 17 CFR 
240.18a-4); (4) required clearing upon counterparty election (see 
Exchange Act section 3C(g)(5), 15 U.S.C. 78c-3(g)(5)); (5) 
regulatory reporting and public dissemination (see generally 
Regulation SBSR, 17 CFR 242.900 et seq. ); (6) SBS Entity 
registration (see Exchange Act section 15F(a) and (b)); and (7) 
registration of offerings (see Securities Act of 1933 section 5, 15 
U.S.C. 77e).
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    Substituted compliance in part is predicated on the Commission 
determining the analogous foreign requirements are ``comparable'' to 
the applicable requirements under the Exchange Act, after accounting 
for factors such as the ``scope and objectives'' of the relevant 
foreign regulatory requirements and the effectiveness of the relevant 
foreign authority's or authorities' supervisory and enforcement 
frameworks.\11\ Substituted compliance further requires that the 
Commission and the relevant foreign financial regulatory authorities 
have entered into an effective supervisory and enforcement memorandum 
of understanding and/or other arrangement addressing cooperation and 
other matters related to substituted compliance.\12\ A foreign 
financial regulatory authority may submit a substituted compliance 
application only if the authority provides ``adequate assurances'' that 
no law or policy would impede the ability of any entity that is 
directly supervised by the authority and that may register with the 
Commission ``to provide prompt access to the Commission to such 
entity's books and records or to submit to onsite inspection or 
examination by the Commission.'' \13\
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    \11\ See Exchange Act rule 3a71-6(a)(2)(i).
    \12\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission, the 
CNMV and the Bank of Spain are in the process of negotiating a 
memorandum of understanding to address cooperation matters related 
to substituted compliance. Because the CNMV, Bank of Spain and 
European Central Bank (``ECB'') share responsibility for supervising 
compliance with certain provisions of EU and Spanish law, the 
Commission and the ECB have entered into a memorandum of 
understanding to address cooperation matters related to substituted 
compliance. These memoranda of understanding or other arrangements 
will need to be in place before the Commission may allow Covered 
Entities to use substituted compliance to satisfy obligations under 
the Exchange Act. The memorandum of understanding with the ECB can 
be found on its website at www.sec.gov under the ``Substituted 
Compliance'' tab, which is located on the ``Security-Based Swap 
Markets'' page in the Division of Trading and Markets section of the 
site. The Commission expects to publish any memorandum of 
understanding with the CNMV and the Bank of Spain at the same 
location on the Commission's website.
    \13\ See Exchange Act rule 3a71-6(a)(3). The CNMV has satisfied 
this prerequisite in the Commission's preliminary view, taking into 
account information and representations that the CNMV provided 
regarding certain Spanish and EU requirements that are relevant to 
the Commission's ability to inspect, and access the books and 
records of, Covered Entities (as defined in the proposed Order).
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    Commission rule 0-13 \14\ addresses procedures for filing 
substituted compliance applications. The rule provides that the 
Commission will publish a notice when a completed application has been 
submitted and that any person may submit to the Commission ``any 
information that relates to the Commission action requested in the 
application.'' \15\
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    \14\ 17 CFR 240.0-13.
    \15\ See Commission rule 0-13(h). The Commission may take final 
action on a substituted compliance application no earlier than 25 
days following publication of the notice in the Federal Register.
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II. The CNMV's Substituted Compliance Request

    The CNMV has submitted a complete substituted compliance 
application to the Commission (``CNMV Application'').\16\ Pursuant to 
rule 0-13, the Commission is publishing notice of the CNMV Application 
together with a proposed Order to conditionally grant substituted 
compliance to an entity that (1) is a security-based swap dealer or 
major security-based swap participant registered with the Commission; 
(2) is not a ``U.S. person,'' as that term is defined in rule 3a71-
3(a)(4) under the Exchange Act; \17\ (3) is an investment firm 
authorized by the CNMV or a credit institution authorized by the ECB to 
provide investment services or perform investment activities in Spain; 
and (4) is a significant institution supervised by the CNMV and the ECB 
(with the participation of the Bank of Spain) (each, a ``Covered 
Entity'').\18\ In making its substituted compliance determination, the 
Commission will consider public comments on the CNMV Application and 
the proposed Order.
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    \16\ See Letter from Rodrigo Buenaventura, Chair, CNMV, dated 
August 20, 2021 (``CNMV Application''). The CNMV Application is 
available on the Commission's website at: https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap.
    \17\ CFR 240.3a71-3(a)(4).
    \18\ See para. (f)(1) of the proposed Order.
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    The CNMV seeks substituted compliance for Covered Entities in 
connection with a number of requirements under Exchange Act section 
15F.

A. Relevant Market Participants and General Conditions

    The Commission will consider whether to allow substituted 
compliance to be used by any Covered Entity.

B. Relevant Section 15F Requirements

    The CNMV requests that the Commission issue an order determining

[[Page 47670]]

that--for substituted compliance purposes--applicable requirements in 
Spain are comparable with the following requirements under Exchange Act 
section 15F:
     Risk control requirements--Requirements related to 
internal risk management, trade acknowledgment and verification, 
portfolio reconciliation and dispute resolution, portfolio compression, 
and trading relationship documentation.\19\
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    \19\ See part IV, infra. The CNMV is not requesting substituted 
compliance in connection with capital and margin requirements 
applicable to non-prudentially regulated SBS Entities (Exchange Act 
section 15F(e) and Exchange Act rules 18a-1 through 18a-1d, 18a-2, 
and 18a-3, 17 CFR 240.18a-1 through 18a-1d, 240.18a-2, and 240.18a-
3).
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     Internal supervision, chief compliance officer and 
antitrust requirements--Requirements related to diligent supervision, 
conflicts of interest, information gathering, chief compliance 
officers, and antitrust considerations.\20\
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    \20\ See part V, infra.
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     Counterparty protection requirements--Requirements related 
to disclosure of material risks and characteristics, disclosure of 
material incentives or conflicts of interest, ``know your 
counterparty,'' suitability of recommendations, fair and balanced 
communications, disclosure of daily marks, and disclosure of clearing 
rights.\21\
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    \21\ See part VI, infra. The CNMV is not requesting substituted 
compliance in connection with: eligible counterparty verification 
requirements (Exchange Act section 15F(h)(3)(A) and Exchange Act 
rule 15Fh-3(a)(1), 17 CFR 240.15Fh-3(a)(1)); ``special entity'' 
provisions (Exchange Act sections 15F(h)(4) and (5); Exchange Act 
rule 15Fh-3(a)(2) and (3); and Exchange Act rules 15Fh-4(b) and 
15Fh-5, 17 CFR 240.15Fh-4(b) and 240.15Fh-5); and political 
contribution provisions (Exchange Act rule 15Fh-6, 17 CFR 240.15Fh-
6).
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     Recordkeeping, reporting, and notification requirements--
Requirements related to making and keeping current certain prescribed 
records, preservation of records, reporting, and notification.\22\
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    \22\ See part VII, infra.
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C. Comparability Considerations and Proposed Order

    Because Spain is a member of the European Union, market 
participants in Spain are subject to Spanish requirements implemented 
pursuant to EU directives and to applicable EU regulations. Those 
include requirements related to: Organization, compliance, and conduct; 
\23\ risk mitigation; \24\ prudential matters; \25\ and certain other 
matters relevant to the application.\26\ In the view of the Spanish 
Authorities, Spanish and EU requirements taken as a whole produce 
regulatory outcomes that are comparable to those of the relevant 
requirements under the Exchange Act.\27\
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    \23\ See Markets in Financial Instruments Directive, Directive 
2014/65/EU (``MiFID'') (implemented in Spain by the Spanish 
Securities Market Act, Royal Legislative Decree 4/2015, of October 
23 (``SSMA''), and Royal Decree 217/2008, of February 15 (``RD 217/
2008'')); see also Commission Delegated Regulation (EU) 2017/565 
(``MiFID Org Reg''); Markets in Financial Instruments Regulation, 
Regulation (EU) 648/2012 (``MiFIR''); Commission Delegated Directive 
(EU) 2017/593 (``MiFID Delegated Directive'') (implemented in Spain 
in relevant part by the SSMA and RD 217/2008).
    \24\ See European Market Infrastructure Regulation, Regulation 
(EU) 648/2012 (``EMIR''); see also Regulation (EU) 149/2013 (``EMIR 
RTS''); Delegated Regulation (EU) 2016/2251 (``EMIR Margin RTS'').
    \25\ See Capital Requirements Directive, Directive 2013/36/EU 
(``CRD'') (implemented in Spain by the Act on Regulation, 
Supervision, and Solvency of Credit Institutions, Law 10/2014, of 
June 26 (``LOSSEC''), Royal Decree 84/2015, of February 13 (``RD 84/
2015''), and Circular 2/2016, of February 2, of the Bank of Spain 
(``BoS Circular 2/2016''), as well as in some portions of the SSMA 
and RD 217/2008); see also Capital Requirements Regulation, 
Regulation (EU) 575/2013 (``CRR''); Commission Implementing 
Regulation (EU) 680/2014 (``CRR Reporting ITS'').
    \26\ See Market Abuse Regulation, Regulation (EU) 596/2014 
(``MAR''); Commission Delegated Regulation (EU) 2016/958 (``MAR 
Investment Recommendations Regulation''); Anti-Money Laundering 
Directive, Directive (EU) 2015/849 (``MLD'') (implemented in Spain 
by the Spanish Anti-Money Laundering Act, Law 10/2010, of April 28 
(``SMLA'')).
    \27\ In support, the CNMV Application incorporates and relies on 
a series of European Commission analyses that compare EU 
requirements with applicable requirements under the Exchange Act, in 
addition to analyses specific to Spanish law and practices, in the 
areas of: risk control (see CNMV Application Appendix B category 1); 
recordkeeping, reporting, and notification (see the CNMV Application 
Appendix B category 2), internal supervision, chief compliance 
officer, and antitrust (see CNMV Application Appendix B category 3); 
and counterparty protection (see CNMV Application Appendix B 
category 4).
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    In the Commission's preliminary view, requirements under the 
Exchange Act and requirements under Spanish and EU law maintain similar 
approaches with respect to achieving regulatory goals in several 
respects, but follow differing approaches or incorporate disparate 
elements in certain other respects. The Commission has considered those 
similarities and differences when analyzing comparability and 
developing preliminary views, while recognizing that differences in 
approach do not necessarily preclude substituted compliance in light of 
the Commission's holistic, outcomes-oriented framework for assessing 
comparability.\28\
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    \28\ In this context, the Commission recognizes that other 
regulatory regimes will have exclusions, exceptions and exemptions 
that may not align perfectly with the corresponding requirements 
under the Exchange Act. Where the Commission preliminarily has found 
that the Spanish regime produces comparable outcomes notwithstanding 
those particular differences, the Commission proposes to make a 
positive determination on substituted compliance. Where the 
Commission preliminarily has found that those exclusions, 
exemptions, and exceptions lead to outcomes that are not comparable, 
however, the Commission does not propose to provide for substituted 
compliance.
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    Based on the Commission's analysis of the application and review of 
relevant Spanish and EU requirements, the proposed Order, located at 
Attachment A, would grant substituted compliance subject to specific 
conditions and limitations. When Covered Entities seek to rely on 
substituted compliance to satisfy particular requirements under the 
Exchange Act, non-compliance with the applicable Spanish requirements 
would lead to a violation of those Exchange Act requirements and 
potential enforcement action by the Commission (as opposed to automatic 
revocation of the substituted compliance order).

III. Scope of and Conditions to Substituted Compliance

A. Covered Entities for Which the Commission Is Proposing a Positive 
Conditional Substituted Compliance Determination

    Under the proposed Order, substituted compliance could be applied 
by ``Covered Entities''--a term that would limit the scope of the 
substituted compliance determination to SBS Entities that are subject 
to applicable Spanish requirements and oversight. Consistent with the 
parameters of substituted compliance under Exchange Act rule 3a71-6, 
the proposed ``Covered Entity'' definition provides that the relevant 
entity must be a security-based swap dealer or major security-based 
swap participant registered with the Commission, and that the entity 
cannot be a U.S. person.\29\ The proposed ``Covered Entity'' definition 
further would provide that the entity must be an investment firm or a 
credit institution authorized by the CNMV and the ECB to provide 
investment services or perform investment activities in the Kingdom of 
Spain and also must be a significant institution supervised by the CNMV 
and the ECB (with the participation of the Bank of Spain).\30\ These 
prongs of the definition are intended to help ensure that Covered 
Entities are subject to

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relevant Spanish and EU requirements and oversight.
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    \29\ See paras. (f)(1)(i) and (ii) of the proposed Order.
    \30\ See paras. (f)(1)(iii) and (iv) of the proposed Order.
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B. Conditions to Substituted Compliance

    Substituted compliance under the proposed Order would be subject to 
a number of conditions and other prerequisites, to help ensure that the 
relevant Spanish requirements that form the basis for substituted 
compliance in practice will apply to the Covered Entity's security-
based swap business and activities, and to promote the Commission's 
oversight over entities that avail themselves of substituted 
compliance.
1. ``Subject to and Complies With'' Relevant Spanish and EU 
Requirements
    Each relevant section of the proposed Order would be subject to the 
condition that the Covered Entity ``is subject to and complies with'' 
the Spanish and EU requirements that are needed to establish 
comparability. Accordingly, the proposed Order would not provide 
substituted compliance when a Covered Entity is excused from compliance 
with relevant foreign provisions, such as, for example, if relevant 
Spanish or EU requirements do not apply to the security-based swap 
activities of a third-country branch of a Spanish SBS Entity. In that 
event, the Covered Entity would not be ``subject to'' those 
requirements, and the Covered Entity could not rely on substituted 
compliance in connection with those activities.\31\
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    \31\ An SBS Entity's ``voluntary'' compliance with the relevant 
Spanish requirements would not suffice for these purposes. 
Substituted compliance reflects an alternative means by which an SBS 
Entity may comply with applicable requirements under the Exchange 
Act, and thus mandates that the SBS Entity be subject to the 
requirements needed to establish comparability and face consequences 
arising from any failure to comply with those requirements. 
Moreover, the comparability assessment takes into account the 
effectiveness of the supervisory compliance program administered and 
the enforcement authority exercised by the CNMV, the Bank of Spain 
and the ECB, which would not be expected to promote comparable 
outcomes when compliance merely is ``voluntary.''
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2. Additional General Conditions To Help Ensure Applicability of 
Relevant Spanish and EU Requirements
    Substituted compliance under the proposed Order further would be 
subject to general conditions intended to help ensure the applicability 
of relevant Spanish and EU requirements, and to facilitate the 
Commission's oversight of firms that avail themselves of substituted 
compliance. In particular:
     Activities as MiFID ``investment services or 
activities''--The Covered Entity's security-based swap activities must 
constitute ``investment services or activities'' for purposes of 
applicable provisions under MiFID; Spanish requirements that implement 
MiFID; and/or other EU and/or Spanish requirements adopted pursuant to 
those provisions, and must fall within the scope of the firm's 
authorization from the CNMV and the ECB.\32\
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    \32\ See para. (a)(1) of the proposed Order. Under this 
condition, a Covered Entity's relevant security-based swap 
activities must constitute investment services or activities only to 
the extent that the relevant part of the proposed Order would 
require the Covered Entity to be subject to and comply with 
provisions of MiFID, SSMA, RD 217/2008 or related EU and Spanish 
requirements. The security-based swap activities need not be 
``investment services or activities'' when the relevant part of the 
proposed Order would not require compliance with one of those 
provisions (e.g., paragraph (d)(6) of the proposed Order addressing 
substituted compliance for daily mark disclosure requirements).
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     Counterparties as MiFID ``clients''--The Covered Entity's 
counterparty (or potential counterparty) must be a ``client'' (or 
potential ``client'') for purposes of applicable provisions under 
MiFID; provisions of SSMA and/or RD 217/2008 that implement MiFID; and/
or other EU and Spanish requirements adopted pursuant to those 
provisions.\33\
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    \33\ See para. (a)(2) of the proposed Order.
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     Security-based swaps as MiFID ``financial instruments''--
The relevant security-based swap must be a ``financial instrument'' for 
purposes of applicable provisions under MiFID; provisions of SSMA and/
or RD 217/2008 that implement MiFID; and/or other EU and Spanish 
requirements adopted pursuant to those provisions.\34\
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    \34\ See para. (a)(3) of the proposed Order.
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     Covered Entity as CRD ``institutions''--The Covered Entity 
must be an ``institution'' for purposes of applicable provisions under 
CRD; provisions of LOSSEC, RD 84/2015, BoS Circular 2/2016, SSMA, and/
or RD 217/2008 that implement CRD; CRR; and/or other EU and Spanish 
requirements adopted pursuant to those provisions.\35\
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    \35\ See para. (a)(4) of the proposed Order.
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     Counterparties as EMIR ``counterparties''--If an 
applicable provision under EMIR, EMIR RTS, EMIR Margin RTS, and/or 
other EU requirements adopted pursuant to those provisions applies only 
to the Covered Entity's activities with specified types of 
counterparties, and if the counterparty to the Covered Entity is not 
any of the specified types of counterparty, the Covered Entity must 
comply with the applicable provision as if the counterparty were the 
specified type of counterparty.\36\ In addition, the proposed Order 
would provide that a Covered Entity could not satisfy a condition 
requiring compliance with those EMIR-based provisions by complying with 
third country requirements that EU authorities may determine to be 
equivalent to EMIR.\37\
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    \36\ See para. (a)(5)(i) of the proposed Order. In this regard, 
if the Covered Entity reasonably determines that the counterparty 
would be a financial counterparty if it were established in the EU 
and authorized by an appropriate EU authority (including Member 
State authorities), it must treat the counterparty as if the 
counterparty were a financial counterparty.
    \37\ See para. (a)(5)(ii) of the proposed Order.
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     Security-based swap status under EMIR--The relevant 
security-based swap must be, for purposes of applicable provisions 
under EMIR, EMIR RTS, EMIR Margin RTS, and/or other EU requirements 
adopted pursuant to those provisions, either (i) an ``OTC derivative'' 
or ``OTC derivative contract,'' as defined in EMIR article 2(7), that 
has not been cleared by a central counterparty and otherwise is subject 
to the provisions of EMIR article 11, EMIR RTS articles 11 through 15, 
and EMIR Margin RTS article 2; or (ii) cleared by a central 
counterparty that is authorized or recognized to clear derivatives 
contracts by a relevant authority in the EU.\38\
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    \38\ See para. (a)(6) of the proposed Order.
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     Memoranda of Understanding--The Commission and the CNMV 
and the Bank of Spain must have an applicable memorandum of 
understanding or other arrangement addressing cooperation with respect 
to the Order at the time the Covered Entity makes use of substituted 
compliance.\39\ The CNMV, Bank of Spain, and ECB share responsibility 
for supervising compliance with some of the provisions of EU and 
Spanish law addressed by the proposed Order.\40\ To ensure the 
Commission's ability to receive information about these Covered 
Entities that may belong to the ECB, the proposed Order would require 
that, at the time such a Covered Entity makes use of substituted 
compliance with respect to those requirements, the Commission and the 
ECB also must have a memorandum of understanding and/or other 
arrangement addressing cooperation with respect to the Order as it 
pertains to this ECB-owned information.\41\
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    \39\ See para. (a)(7) of the proposed Order.
    \40\ For example, the proposed Order would make substituted 
compliance for Exchange Act internal risk management, internal 
supervision, chief compliance officer, and ``know your 
counterparty'' requirements available to Covered Entities that are 
subject to and comply with, among other requirements, certain 
provisions of CRD, provisions of Spanish law that implement CRD, and 
related EU requirements. The CNMV, Bank of Spain, and ECB share 
responsibility for supervising compliance with each of these 
requirements. See paras. (b)(1), (c)(3), (d)(3) of the proposed 
Order.
    \41\ See para. (a)(8) of the proposed Order. In accordance with 
the terms of the proposed Order, this arrangement will need to be in 
place at the time a Covered Entity makes use of substituted 
compliance by complying with any EU or Spanish requirements for 
which the CNMV, Bank of Spain, and ECB share supervisory 
responsibility. The Commission and the ECB have entered into a 
memorandum of understanding to address substituted compliance 
cooperation, a copy of which is on the Commission's website at 
www.sec.gov under the ``Substituted Compliance'' tab, which is 
located on the ``Security-Based Swap Markets'' page in the Division 
of Trading and Markets section of the site.

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[[Page 47672]]

     Notice of reliance on substituted compliance--A Covered 
Entity must notify the Commission of its intent to use substituted 
compliance.\42\ In the notice, the Covered Entity would need to 
identify each specific substituted compliance determination for which 
the Covered Entity intends to apply substituted compliance.\43\ If a 
Covered Entity elects not to apply substituted compliance with respect 
to a specific substituted compliance determination in the proposed 
Order, it must comply with the Exchange Act requirements subject to 
that determination. Further, except in the case of the counterparty 
protection requirements and linked recordkeeping requirements discussed 
below, the Commission has determined that the Exchange Act requirements 
subject to substituted compliance determinations in the proposed Order 
are entity-level requirements. Therefore, if a Covered Entity elects to 
apply substituted compliance to these entity-level requirements, the 
Commission is proposing that it must do so at the entity level.\44\ 
Finally, a Covered Entity must promptly update the notice if it intends 
to modify its reliance on the positive substituted compliance 
determinations in the proposed Order.\45\
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    \42\ See para. (a)(9) of the proposed Order.
    \43\ If the Covered Entity intends to rely on all the 
substituted compliance determinations in a given paragraph of the 
Order, it can cite that paragraph in the notice. For example, if the 
Covered Entity intends to rely on the substituted compliance 
determinations for Exchange Act risk control requirements in 
paragraph (b) of the proposed Order, it would indicate in the notice 
that it is relying on the determinations in paragraph (b). However, 
if the Covered Entity intends to rely on the internal risk 
management, trade acknowledgement and verification, and portfolio 
reconciliation and dispute resolution determinations, but not the 
portfolio compression and trading relationship documentation 
determinations, it would need to indicate in the notice that it is 
relying on paragraphs (b)(1) through (3) of the proposed Order. In 
this case, paragraphs (b)(4) and (b)(5) of the proposed Order (the 
portfolio compression and trading relationship documentation 
determinations, respectively) would be excluded from the notice and 
the Covered Entity would need to comply with Exchange Act portfolio 
compression and trading relationship documentation requirements. 
Further, as discussed below in part VII.B, the recordkeeping, 
reporting, notification, and securities count determinations in the 
proposed Order have been structured to provide Covered Entities with 
a high level of flexibility in selecting specific requirements 
within those requirements for which they want to rely on substituted 
compliance. For example, paragraph (e)(1)(i) of the proposed Order 
sets forth the Commission's preliminary substituted compliance 
determinations with respect to the requirements of Exchange Act rule 
18a-5, 17 CFR 240.18a-5. These proposed determinations are set forth 
in paragraphs (e)(1)(i)(A) through (O). If a Covered Entity intends 
to rely on some but not all of the determinations, it would need to 
identify in the notice the specific determinations in this paragraph 
it intends to rely on (e.g., paragraphs (d)(1)(i)(A), (B), (C), (D), 
(G), (H), (I), and (O)). For any determinations excluded from the 
notice, the Covered Entity would need to comply with the Exchange 
Act rule 18a-5 requirement.
    \44\ See part III.C, infra.
    \45\ A Covered Entity would modify its reliance on the positive 
substituted compliance determinations in the proposed Order, and 
thereby trigger the requirement to update its notice, if it adds or 
subtracts determinations for which it is applying substituted 
compliance or completely discontinues its reliance on the proposed 
Order.
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     Notification related to changes in capital category--
Covered Entities with a prudential regulator would need to apply 
substituted compliance with respect to the requirements of Exchange Act 
rule 18a-8(c) and the requirements of Exchange Act rule 18a-8(h) as 
applied to Exchange Act rule 18a-8(c). Exchange Act rule 18a-8(c) 
generally requires every security-based swap dealer with a prudential 
regulator that files a notice of adjustment of its reported capital 
category with the Federal Reserve Board, the Office of the Comptroller 
of the Currency, or the Federal Deposit Insurance Corporation to give 
notice of this fact to the that same day by transmitting a copy to the 
Commission of the notice of adjustment of reported capital category in 
accordance with Exchange Act rule 18a-8(h).\46\ Exchange Act rule 18a-
8(h) sets forth the manner in which every notice or report required to 
be given or transmitted pursuant to Exchange Act rule 18a-8 must be 
made. While Exchange Act rule 18a-8(c) is not linked to an Exchange Act 
capital requirement, it is linked to capital requirements in the U.S. 
promulgated by the prudential regulators. In its application, the CNMV 
cited various Spanish provisions as providing similar outcomes to the 
notifications requirements of Exchange Act Rule 18a-8.\47\ This general 
condition would be designed to clarify that a prudentially regulated 
Covered Entity must provide the Commission with copies of any 
notifications regarding changes in the Covered Entity's capital 
situation required by Spanish law. The intent is to align the 
notification requirement with the EU and Spanish capital requirements 
applicable to the Covered Entity.
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    \46\ 17 CFR 240.18a-8(c).
    \47\ See LOSSEC articles 116, 119, 121, and 122; and SSMA 
articles 276bis, 276ter, 276qu[aacute]ter, and 276quinquies.
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3. European Union Cross-Border Matters
    The cross-border application of MiFID, MiFIR, MAR and EU and Member 
State requirements adopted pursuant to MiFID, MiFIR, or MAR raises 
special issues. For some provisions of MiFID and MiFIR (and other EU 
and Spanish requirements adopted pursuant to those provisions of MiFID 
and MiFIR), EU law allocates the responsibility for supervising and 
enforcing those requirements to authorities of the Member State in 
whose territory a Covered Entity provides certain services.\48\ To help 
ensure that the prerequisites to substituted compliance with respect to 
supervision and enforcement are satisfied in fact, when the proposed 
Order requires a Covered Entity to be subject to or comply with one of 
those MiFID or MiFIR provisions (or other EU or Spanish requirements 
adopted pursuant to those provisions of MiFID or MiFIR), the CNMV must 
be the authority responsible for supervision and enforcement of those 
requirements in relation to the particular service for which 
substituted compliance is used.\49\ Similarly, for some of the EU 
requirements under MAR (and other EU requirements adopted pursuant to 
MAR), EU law allocates the responsibility for supervising and enforcing 
those requirements to authorities of potentially multiple Member 
States. To help ensure that the prerequisites to substituted compliance 
with respect to supervision and enforcement are satisfied in fact, when 
the proposed Order requires a Covered Entity to be subject to or comply 
with one of those MAR requirements (or other EU requirements adopted 
pursuant to MAR), the Covered Entity may use substituted compliance 
only if one of the authorities responsible for supervision and 
enforcement of those requirements is the CNMV.\50\
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    \48\ See MiFID article 35(8).
    \49\ See para. (a)(10)(i) of the proposed Order.
    \50\ See para. (a)(10)(ii) of the proposed Order.
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C. Substituted Compliance for Entity-Level and Transaction-Level 
Requirements
    The proposed Order would permit a Covered Entity to use substituted 
compliance for one or more sets of entity-level Exchange Act 
requirements.\51\ For example, a Covered

[[Page 47673]]

Entity could use substituted compliance for internal risk management 
requirements but comply directly with Exchange Act trade acknowledgment 
and verification; portfolio reconciliation and dispute reporting; 
portfolio compression; trading relationship documentation; internal 
supervision; chief compliance officer; and recordkeeping, reporting, 
and notification requirements. For any one set of entity-level 
requirements for which a Covered Entity uses substituted compliance, 
however, a Covered Entity must choose either to apply substituted 
compliance pursuant to the proposed Order with respect to all security-
based swap business subject to the relevant Spanish and EU requirements 
or to comply directly with the Exchange Act with respect to all such 
business; a Covered Entity may not choose to apply substituted 
compliance for some of the business subject to the relevant Spanish or 
EU requirements and comply directly with the Exchange Act for another 
part of the business that is subject to the relevant Spanish and EU 
requirements.\52\ Additionally, for entity-level Exchange Act 
requirements, if the Covered Entity also has security-based swap 
business that is not subject to the relevant Spanish requirements, the 
Covered Entity must either comply directly with the Exchange Act for 
that business or comply with the terms of another applicable 
substituted compliance order.\53\ For transaction-level Exchange Act 
requirements,\54\ a Covered Entity may decide to apply substituted 
compliance for some of its security-based swap business and to comply 
directly with the Exchange Act (or comply with another applicable 
substituted compliance order) for other parts of its security-based 
swap business.
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    \51\ The entity-level requirements for which the Commission is 
proposing to make a positive substituted compliance determination 
are: Risk control requirements related to internal risk management, 
trade acknowledgement and verification, portfolio reconciliation and 
dispute resolution, portfolio compression, and trading relationship 
documentation; internal supervision and chief compliance officer 
requirements; and recordkeeping, reporting, notification, and 
securities count requirements (other than those linked to the 
counterparty protection rules). See Exchange Act Release No. 87005 
(June 19, 2019) 84 FR 68550, 68596 (Dec. 16, 2019) (``Recordkeeping 
Adopting Release''); Exchange Act Release No. 78011 (June 8, 2016) 
81 FR 39808, 39827 (June 17, 2016) (``Trade Acknowledgment and 
Verification Adopting Release''); Exchange Act Adopting Release No. 
87782 (Dec. 18, 2019) 85 FR 6359, 6378 (Feb. 4, 2020) (``Risk 
Mitigation Adopting Release''); Business Conduct Adopting Release, 
81 FR 30064.
    \52\ For example, the proposed Order would require a Covered 
Entity applying substituted compliance for internal risk management 
requirements to comply with the comparable Spanish requirements with 
respect to all of its internal risk management systems.
    \53\ In the context of the EMIR counterparties condition in 
paragraph (a)(5), a Covered Entity must choose: (1) To apply 
substituted compliance pursuant to the Order--including compliance 
with paragraph (a)(5) as applicable--for a particular set of entity-
level requirements with respect to all of its business that would be 
subject to the relevant EMIR-based requirement if the counterparty 
were the relevant type of counterparty; or (2) to comply directly 
with the Exchange Act with respect to such business.
    \54\ The transaction-level requirements for which the Commission 
is proposing to make a positive substituted compliance determination 
are: Counterparty protection requirements related to disclosure of 
material risks and characteristics, disclosure of material 
incentives or conflicts of interest, ``know your counterparty,'' 
suitability of recommendations, fair and balanced communications, 
and disclosure of daily marks; and the recordkeeping requirements 
related to those counterparty protection requirements. See Business 
Conduct Adopting Release, 81 FR 30065.
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    The Commission preliminarily believes that this scope of 
substituted compliance strikes the right balance between providing 
Covered Entities flexibility to tailor the application of substituted 
compliance to their business needs and ensuring that substituted 
compliance is consistent with the Commission's classification of the 
relevant Exchange Act requirements as either entity-level or 
transaction-level requirements.

IV. Substituted Compliance for Risk Control Requirements

A. CNMV Request and Associated Analytic Considerations

    The CNMV Application in part requests substituted compliance in 
connection with risk control requirements under the Exchange Act 
relating to:
     Internal risk management--Internal risk management system 
requirements pursuant to Exchange Act section 15F(j)(2) and relevant 
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I).\55\ Those provisions 
address the obligation of SBS Entities to follow policies and 
procedures reasonably designed to help manage the risks associated with 
their business activities.\56\
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    \55\ The CNMV is not requesting substituted compliance in 
connection with Exchange Act rule 18a-1(f) or Exchange Act rule 18a-
2(c), which include additional internal risk management system 
requirements for non-prudentially regulated SBS Entities subject to 
the Commission's capital and margin requirements.
    \56\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 
70214, 70250 (Nov. 23, 2012) (proposing capital and margin 
requirements for SBS Entities and discussing certain risk management 
requirements). The CNMV Application discusses Spanish and EU 
internal risk management requirements. See CNMV Application Appendix 
B category 1 at 2-20.
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     Trade acknowledgment and verification--Trade 
acknowledgment and verification requirements pursuant to Exchange Act 
section 15F(i) and Exchange Act rule 15Fi-2.\57\ Those provisions help 
avoid legal and operational risks by requiring definitive written 
records of transactions and for procedures to avoid disagreements 
regarding the meaning of transaction terms.\58\
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    \57\ 17 CFR 240.15Fi-2.
    \58\ See Trade Acknowledgment and Verification Adopting Release, 
81 FR 39808, 39809, 39820. The CNMV Application discusses Spanish 
and EU trade acknowledgment and verification requirements. See CNMV 
Application Appendix B category 1 at 21-34.
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     Portfolio reconciliation and dispute reporting--Portfolio 
reconciliation and dispute reporting requirements pursuant to Exchange 
Act section 15F(i) and Exchange Act rule 15Fi-3.\59\ Those provisions 
require that counterparties engage in portfolio reconciliation and 
resolve discrepancies in connection with uncleared security-based swaps 
and promptly notify the Commission and applicable prudential regulators 
regarding certain valuation disputes.\60\
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    \59\ 17 CFR 240.15Fi-3.
    \60\ See Risk Mitigation Adopting Release, 85 FR 6359, 6360-61. 
The CNMV Application discusses Spanish and EU portfolio 
reconciliation and dispute resolution requirements. See CNMV 
Application Appendix B category 1 at 35-44.
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     Portfolio compression--Portfolio compression requirements 
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-
4.\61\ Those provisions require that SBS Entities have procedures 
addressing bilateral offset, bilateral compression and multilateral 
compression in connection with uncleared security-based swaps.\62\
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    \61\ 17 CFR 240.15Fi-4.
    \62\ See Risk Mitigation Adopting Release, 85 FR 6361. The CNMV 
Application discusses Spanish and EU portfolio compression 
requirements. See CNMV Application Appendix B category 1 at 44-46.
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     Trading relationship documentation--Trading relationship 
documentation requirements pursuant to Exchange Act section 15F(i) and 
Exchange Act rule 15Fi-5.\63\ Those provisions require that SBS 
Entities have procedures to execute written security-based swap trading 
relationship documentation with their counterparties prior to, or 
contemporaneously with, executing certain security-based swaps.\64\
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    \63\ 17 CFR 240.15Fi-5.
    \64\ See Risk Mitigation Adopting Release, 85 FR 6361. The CNMV 
Application discusses Spanish and EU trading relationship 
documentation requirements. See CNMV Application Appendix B category 
1 at 46-51.
---------------------------------------------------------------------------

    Taken as a whole, these risk control requirements help to promote 
market stability by mandating that SBS Entities follow practices that 
are appropriate to manage the market, credit, counterparty, 
operational, and legal risks associated with their security-based swap 
businesses. The Commission's comparability assessment accordingly 
focuses on whether the analogous foreign requirements--taken as a 
whole--produce comparable outcomes

[[Page 47674]]

with regard to providing that Covered Entities follow risk mitigation 
and documentation practices that are appropriate to the risks 
associated with their security-based swap businesses.

B. Preliminary Views and Proposed Order

1. General Considerations
    In the Commission's preliminary view based on the CNMV Application 
and the Commission's review of applicable provisions, relevant Spanish 
and EU requirements would produce regulatory outcomes that are 
comparable to those associated with the above risk control 
requirements, by subjecting Covered Entities to risk mitigation and 
documentation practices that are appropriate to the risks associated 
with their security-based swap businesses. Substituted compliance 
accordingly would be conditioned on Covered Entities being subject to 
the Spanish and EU provisions that in the aggregate establish a 
framework that produces outcomes comparable to those associated with 
these risk control requirements under the Exchange Act.\65\
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    \65\ See para. (b)(1) of the proposed Order.
---------------------------------------------------------------------------

    While the Commission recognizes these and certain other differences 
between Spanish and EU requirements and the applicable risk control 
requirements under the Exchange Act, in the Commission's preliminary 
view those differences on balance would not preclude substituted 
compliance for these requirements, particularly as requirement-by-
requirement similarity is not needed for substituted compliance.
2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes:
a. Trading Relationship Documentation--Disclosure Regarding Legal and 
Bankruptcy Status
    Under the proposed Order, substituted compliance in connection with 
trading relationship documentation requirements would not extend to 
disclosures regarding legal and bankruptcy status that are required by 
Exchange Act rule 15Fi-5(b)(5) when the counterparty is a U.S. 
person.\66\ Documentation requirements under applicable Spanish and EU 
law do not address the disclosure of information related to insolvency 
procedures under U.S. law. However, the absence of such disclosure 
would not appear to preclude a comparable regulatory outcome when the 
counterparty is not a U.S. person, because the insolvency-related 
consequences that are the subject of the disclosure would not be 
applicable to non-U.S. counterparties in most cases.\67\
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    \66\ Those disclosures address information regarding the status 
of the SBS Entity or its counterparty as an insured depository 
institution or financial counterparty, and regarding the possibility 
that in certain circumstances the SBS Entity or its counterparty may 
be subject to the insolvency regime set forth under Title II of the 
Dodd-Frank Act or the Federal Deposit Insurance Act, which may 
affect rights to terminate, liquidate, or net security-based swaps. 
See Risk Mitigation Adopting Release, 85 FR 6374 (discussing 
potential application of alternatives to the liquidation schemes 
established under the Securities Investor Protection Act of 1970 or 
the U.S. Bankruptcy Code). The absence of such disclosure would not 
appear to preclude a comparable regulatory outcome when the 
counterparty is not a U.S. person, as the insolvency-related 
consequences that are the subject of the disclosure would not be 
applicable to non-U.S. counterparties in most cases. See also EMIR 
Margin RTS (in part addressing procedures providing for or 
specifying the terms of agreements entered into by counterparties, 
including applicable governing law for non-cleared derivatives, and 
further providing that counterparties entering into a netting or 
collateral exchange agreement must perform an independent legal 
review regarding enforceability).
    \67\ See also UK EMIR Margin RTS (in part addressing procedures 
providing for or specifying the terms of agreements entered into by 
counterparties, including applicable governing law for non-centrally 
cleared derivatives, and further providing that counterparties which 
enter into a netting or collateral exchange agreement must perform 
an independent legal review regarding enforceability).
---------------------------------------------------------------------------

b. Portfolio Reconciliation and Dispute Reporting--EU Law-Required 
Dispute Reports to the Commission
    Under the proposed Order, substituted compliance further would be 
conditioned on the Covered Entity providing the Commission with reports 
regarding disputes between counterparties, on the same basis as the 
Covered Entity provides those reports to competent authorities pursuant 
to EU law.\68\ This condition promotes comparability with the Exchange 
Act requirements to report significant valuation disputes to the 
Commission,\69\ while leveraging EU reporting provisions to avoid the 
need for Covered Entities to create additional de novo reporting 
frameworks.\70\
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    \68\ See para. (b)(3)(ii) of the proposed Order.
    \69\ In proposing this dispute reporting requirement, the 
Commission recognized that valuation inaccuracies may lead to 
uncollaterialized credit exposure and the potential for loss in the 
event of default. See Exchange Act Release No. 84861 (Dec. 19, 
2018), 84 FR 4614, 4621 (Feb. 15, 2019). It is important that the 
Commission be informed regarding valuation disputes affecting SBS 
Entities.
    \70\ The principal difference between the two sets of 
requirements concerns the timing of notices. Under Exchange Act rule 
15Fi-3, SBS Entities must promptly report to the Commission 
valuation disputes in excess of $20 million that have been 
outstanding for three or five business days (depending on the 
counterparty type). Under EMIR RTS article 15(2), firms must report 
at least monthly, to competent authorities, disputes between 
counterparties in excess of [euro]15 million and outstanding for at 
least 15 business days. The Commission is mindful that the EU 
provision does not provide for notice as quickly as rule 15Fi-3(c), 
but in the Commission's preliminary view, on balance this difference 
would not be inconsistent with the conclusion that the two sets of 
risk control requirements--taken as a whole--produce comparable 
regulatory outcomes.
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V. Substituted Compliance for Internal Supervision, Chief Compliance 
Officers and Antitrust Requirements

A. CNMV Request and Associated Analytic Considerations

    The CNMV also requests substituted compliance in connection with 
requirements under the Exchange Act relating to:
     Internal supervision--Diligent supervision is required 
pursuant to Exchange Act rule 15Fh-3(h) and Exchange Act section 
15F(j)(5) requires conflict of interest systems and procedures. These 
provisions generally require that SBS Entities establish, maintain, and 
enforce supervisory policies and procedures that reasonably are 
designed to prevent violations of applicable law, and implement certain 
systems and procedures related to conflicts of interest. Exchange Act 
section 15F(j)(4)(A) additionally requires systems and procedures to 
obtain necessary information to perform functions required under 
section 15F.\71\
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    \71\ The CNMV Application addresses Spanish and EU requirements 
that address Covered Entities'' obligations related to internal 
supervision. See CNMV Application Appendix B category 3 at 1-59.
---------------------------------------------------------------------------

     Chief compliance officers--Chief compliance officer 
requirements are set out in Exchange Act section 15F(k) and Exchange 
Act rule 15Fk-1.\72\ These provisions in general require that SBS 
Entities designate individuals with the responsibility and authority to 
establish, administer, and review compliance policies and procedures; 
to resolve conflicts of interest; and to prepare and certify an annual 
compliance report to the Commission.\73\
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    \72\ 17 CFR 240.15Fk-1.
    \73\ The CNMV Application discusses Spanish and EU chief 
compliance officer requirements. See CNMV Application Appendix B 
category 3 at 60-89.
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     Antitrust requirements--Additional requirements related to 
antitrust prohibitions specified by Exchange Act section 15F(j)(6).\74\
---------------------------------------------------------------------------

    \74\ Section 15F(j)(6) prohibits firms from adopting any process 
or taking any action that results in any unreasonable restraint of 
trade or imposing any material anticompetitive burden on trading or 
clearing. The CNMV Application addresses EU antitrust requirements. 
See CNMV Application Appendix B category 3 at 26.

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[[Page 47675]]

    Taken as a whole, these internal supervision, chief compliance 
officer, and additional Exchange Act section 15F(j) requirements help 
to promote SBS Entities' use of structures, processes, and responsible 
personnel reasonably designed to promote compliance with applicable 
law; to identify and cure instances of non-compliance; and to manage 
conflicts of interest. The comparability assessment accordingly may 
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that Covered 
Entities have structures and processes reasonably designed to promote 
compliance with applicable law; identify and cure instances of non-
compliance; and to manage conflicts of interest, in part through the 
designation of an individual with responsibility and authority over 
compliance matters.

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the CNMV Application and the Commission's review of 
applicable provisions, in the Commission's preliminary view the 
relevant Spanish and EU requirements would produce regulatory outcomes 
that are comparable to those associated with the above-described 
internal supervision, chief compliance officer, conflict of interest, 
and information-related requirements by providing that Covered Entities 
have structures and processes that reasonably are designed to promote 
compliance with applicable law and to identify and cure instances of 
non-compliance and manage conflicts of interest.\75\ As elsewhere, this 
part of the proposed Order conditions substituted compliance on Covered 
Entities being subject to and complying with specified Spanish and EU 
requirements that are necessary to establish comparability.\76\
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    \75\ This portion of the proposed Order accordingly would extend 
generally to the internal supervision provisions of Exchange Act 
rule 15Fh-3(h), the requirement in Exchange Act section 15F(j)(4)(A) 
to have systems and procedures to obtain necessary information to 
perform functions required under Exchange Act section 15F; and the 
conflict of interest provisions of Exchange Act section 15F(j)(5). 
See para. (c)(1) of the proposed Order. This portion of the proposed 
Order does not extend to the portions of rule 15Fh-3(h) that mandate 
supervisory policies and procedures in connection with: The internal 
risk management provisions of Exchange Act section 15F(j)(2) (which 
are addressed by paragraph (b)(1) of the proposed Order in 
connection with internal risk management); the information-related 
provisions of Exchange Act sections 15F(j)(3) and (j)(4)(B) (for 
which substituted compliance is not available); or the antitrust 
provisions of Exchange Act section 15F(j)(6) (for which the 
Commission is not proposing to provide substituted compliance). See 
para. (c)(1)(iii) of the proposed Order.
    \76\ See paras. (c)(1)(i), (c)(2)(i), and (c)(3) of the proposed 
Order.
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    The Commission recognizes that certain differences are present 
between those Spanish requirements and the applicable requirements 
under the Exchange Act. In the Commission's preliminary view, on 
balance, however, those differences would not preclude substituted 
compliance within the relevant outcomes-oriented context.

2. Additional Conditions and Scope Issues

    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes:
a. Internal Supervision--Application of Spanish and EU Supervisory and 
Compliance Requirements to Residual U.S. Requirements and Order 
Conditions
    Under the proposed Order, substituted compliance for internal 
supervision requirements would be conditioned on Covered Entities 
complying with applicable Spanish and EU internal supervision 
requirements as if those provisions also require the Covered Entity to 
comply with applicable requirements under the Exchange Act and the 
other applicable conditions of the proposed Order.\77\
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    \77\ See paras. (c)(1)(ii) and (c)(4) of the proposed Order.
---------------------------------------------------------------------------

    Even with substituted compliance, Covered Entities still would be 
subject directly to a number of requirements under the Exchange Act and 
to the conditions of the proposed Order. In some cases, particular 
requirements under the Exchange Act are outside the ambit of 
substituted compliance.\78\ In other cases, certain requirements under 
the Exchange Act may not have comparable Spanish and EU requirements or 
may be outside the scope of the CNMV Application,\79\ or the Covered 
Entity may decide not to use substituted compliance for certain 
requirements under the Exchange Act. While the Spanish and EU 
regulatory framework in general reasonably appears to promote Covered 
Entities' compliance with applicable Spanish and EU laws, those 
requirements do not appear to promote Covered Entities' compliance with 
requirements under the Exchange Act that are not subject to substituted 
compliance, or to promote Covered Entities' compliance with the 
applicable conditions to the proposed Order. This condition would 
address this issue, while still allowing Covered Entities to use their 
existing internal supervision and compliance frameworks to comply with 
the relevant Exchange Act requirements and proposed Order conditions, 
rather than having to establish separate special-purpose supervision 
and compliance frameworks.
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    \78\ As noted, substituted compliance does not extend to 
antifraud prohibitions or to certain other requirements under the 
Exchange Act (e.g., requirements related to transactions with 
counterparties that are not ECPs and segregation requirements). See 
note 10, supra.
    \79\ For example, the CNMV is not requesting substituted 
compliance in connection with eligible counterparty verification 
requirements, ``special entity'' provisions, and political 
contribution provisions. See note 21, supra.
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b. Chief Compliance Officers--Compliance Reports
    Under the proposed Order, substituted compliance in connection with 
the compliance report requirements under Exchange Act section 15F(k)(3) 
and Exchange Act rule 15Fk-1(c) also would be subject to the conditions 
that the compliance reports required pursuant to MiFID Org Reg article 
22(2)(c) must: (1) Be provided to the Commission at least annually and 
in the English language; \80\ (2) include a certification signed by the 
chief compliance officer or senior officer of the Covered Entity that, 
to the best of the certifier's knowledge and reasonable belief and 
under penalty of law, the report is accurate and complete in all 
material respects; \81\ (3) address the Covered Entity's compliance 
with applicable requirements under the Exchange Act and other 
applicable conditions of the proposed Order; \82\ (4)

[[Page 47676]]

be provided to the Commission no later than 15 days following the 
earlier of the submission of the report to the Covered Entity's 
management body or the time the report is required to be submitted to 
the management body; \83\ and (5) together cover the entire period that 
the Covered Entity's annual compliance report referenced in Exchange 
Act section 15F(k)(3) and Exchange Act rule 15Fk-1(c) would be required 
to cover.\84\ Although certain Spanish and EU requirements address a 
Covered Entity's use of internal compliance reports, those provisions 
do not require it to submit compliance reports to the Commission. Under 
this condition, a Covered Entity could leverage the compliance reports 
that it otherwise must produce, by extending those reports to address 
compliance with the conditions of the proposed Order.\85\
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    \80\ See para. (c)(2)(ii)(A) of the proposed Order.
    \81\ See para. (c)(2)(ii)(B) of the proposed Order.
    \82\ See para. (d)(2)(ii)(C) of the proposed Order. MiFID Org 
Reg article 22(2)(c) particularly requires that a Covered Entity's 
compliance function ``report to the management body, on at least an 
annual basis, on the implementation and effectiveness of the overall 
control environment for investment services and activities, on the 
risks that have been identified and on the complaints-handling 
reporting as well as remedies undertaken or to be undertaken[.]'' 
Under the proposed condition, those reports, as submitted to the 
Commission and the Covered Entity's management body, also would 
address the Covered Entity's compliance with applicable Exchange Act 
requirements and other applicable conditions of the proposed Order 
(in addition to addressing the Covered Entity's compliance with 
applicable Spanish and EU provisions). The Commission believes that 
this condition is necessary to promote comparable regulatory 
outcomes, particularly in light of the granular approach to 
substituted compliance, to ensure that the compliance report covers 
applicable Exchange Act requirements and proposed Order conditions 
if the Covered Entity uses substituted compliance for chief 
compliance officer requirements, whether or not the Covered Entity 
relies on substituted compliance for internal supervision.
    \83\ See para. (c)(2)(ii)(D) of the proposed Order. The 
Commission believes that it is appropriate for the Commission to 
receive compliance reports shortly after their submission to the 
management body. Providing these reports to the Commission near the 
times that the Covered Entity submits them to the management body 
also will better align with the Spanish and EU regulatory framework, 
which permits a Covered Entity to prepare and submit to the 
management body multiple compliance reports throughout the year. The 
Commission views 15 days as providing a reasonable time to translate 
reports, if needed, and convey them to the Commission. This deadline 
is intended to promote timely notice of compliance matters in a 
manner comparable to Exchange Act requirements, while also 
accounting for the annual deadline required under MiFID Org Reg 
article 22(2)(c) as well as the possibility that the Covered Entity 
may submit reports ahead of this annual deadline.
    \84\ See para. (c)(2)(ii)(E) of the proposed Order. This 
requirement prevents a Covered Entity from notifying the Commission 
just prior to the due date of its annual Exchange Act compliance 
report that it will use substituted compliance for chief compliance 
officer requirements and then providing the Commission a Spanish 
compliance report that covers only a part of the year that would 
have been covered in the Exchange Act report.
    \85\ In practice, a Covered Entity may satisfy this condition by 
identifying relevant Exchange Act requirements and proposed Order 
conditions and reporting on the implementation and effectiveness of 
its controls with regard to compliance with those requirements and 
conditions.
---------------------------------------------------------------------------

    The Commission recognizes that Covered Entities preparing multiple 
Spanish compliance reports each year may find it difficult to submit to 
those reports to the Commission throughout the year, each with a chief 
compliance officer or senior officer certification and a section 
addressing the Covered Entity's compliance with U.S. requirements. 
However, on balance the Commission believes that these elements are 
necessary to achieve a regulatory outcome comparable to the Exchange 
Act.
c. No Substituted Compliance in Connection With Antitrust Requirements
    Under the proposed Order, substituted compliance would not extend 
to Exchange Act section 15F(j)(6) (and related internal supervision 
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an 
alternative means of compliance would not lead to outcomes comparable 
to that statutory prohibition.\86\
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    \86\ See also German Substituted Compliance Order, 85 FR 85691-
92; French Substituted Compliance Order, 86 FR 41642-43. The 
Commission is not taking any position regarding the applicability of 
the section 15F(j)(6) antitrust prohibitions in the cross-border 
context. Non-U.S. SBS Entities should assess the applicability of 
those prohibitions to their security-based swap businesses.
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VI. Substituted Compliance for Counterparty Protection Requirements

A. CNMV Request and Associated Analytic Considerations

    The CNMV further requests substituted compliance in connection with 
provisions under the Exchange Act relating to:
     Disclosure of material risks and characteristics and 
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) requires that SBS Entities disclose to certain counterparties to a 
security-based swap certain information about the material risks and 
characteristics of the security-based swap, as well as material 
incentives or conflicts of interest that the SBS Entity may have in 
connection with the security-based swap. These provisions address the 
need for security-based swap market participants to have information 
that is sufficient to make informed decisions regarding potential 
transactions involving particular counterparties and particular 
financial instruments.\87\
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    \87\ See Business Conduct Adopting Release, 81 FR 29983-86. The 
CNMV Application discusses Spanish and EU requirements that address 
disclosure of material risks and characteristics and material 
incentives or conflicts of interest. See CNMV Application Appendix B 
category 4 at 16-33.
---------------------------------------------------------------------------

     ``Know your counterparty''--Exchange Act rule 15Fh-3(e) 
requires that SBS Entities establish, maintain, and enforce written 
policies and procedures to obtain and retain certain information 
regarding a counterparty that is necessary for conducting business with 
that counterparty. This provision accounts for the need that SBS 
Entities obtain essential counterparty information necessary to promote 
effective compliance and risk management.\88\
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    \88\ See Business Conduct Adopting Release, 81 FR 29993-94. The 
CNMV Application discusses Spanish and EU ``know your counterparty'' 
requirements. See CNMV Application Appendix B category 4 at 41-48.
---------------------------------------------------------------------------

     Suitability--Exchange Act rule 15Fh-3(f) requires a 
security-based swap dealer that recommends to certain counterparties a 
security-based swap or trading strategy involving a security-based 
swap, to undertake reasonable diligence to understand the potential 
risks and rewards associated with the recommendation and to have a 
reasonable basis to believe that the recommendation is suitable for the 
counterparty.\89\ This provision accounts for the need to guard against 
security-based swap dealers making unsuitable recommendations.\90\
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    \89\ See Business Conduct Adopting Release, 81 FR 29994-30000.
    \90\ See Business Conduct Adopting Release, 81 FR 29994-30000. 
The CNMV Application discusses Spanish and EU suitability 
requirements. See CNMV Application Appendix B category 4 at 49-60.
---------------------------------------------------------------------------

     Fair and balanced communications--Exchange Act rule 15Fh-
3(g) requires that SBS Entities communicate with counterparties in a 
fair and balanced manner based on principles of fair dealing and good 
faith. These provisions promote complete and honest communications as 
part of SBS Entities' security-based swap businesses.\91\
---------------------------------------------------------------------------

    \91\ See Business Conduct Adopting Release, 81 FR 30000-02. The 
CNMV Application discusses Spanish and EU fair and balanced 
communications requirements. See CNMV Application Appendix B 
category 4 at 1-15.
---------------------------------------------------------------------------

     Daily mark disclosure--Exchange Act rule 15Fh-3(c) 
requires that SBS Entities provide daily mark information to certain 
counterparties. These provisions address t he need for market 
participants to have effective access to daily mark information 
necessary to manage their security-based swap positions.\92\
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    \92\ See Business Conduct Adopting Release, 81 FR 29986-91. The 
CNMV Application discusses Spanish and EU daily mark disclosure 
requirements. See CNMV Application Appendix B category 4 at 34-40.
---------------------------------------------------------------------------

     Clearing rights disclosure--Exchange Act rule 15Fh-3(d) 
requires that SBS Entities provide certain counterparties with 
information regarding clearing rights under the Exchange Act.\93\
---------------------------------------------------------------------------

    \93\ See Business Conduct Adopting Release, 81 FR 29991-93. 
Exchange Act section 3C(g)(5) provides certain rights for 
counterparties to select the clearing agency at which a security-
based swap is cleared. For all security-based swaps that an SBS 
Entity enters into with certain counterparties, the counterparty has 
the sole right to select the clearing agency at which the security-
based swap is cleared. For security-based swaps that are not subject 
to mandatory clearing (pursuant to Exchange Act sections 3C(a) and 
(b)) and that an SBS Entity enters into with certain counterparties, 
the counterparty also may elect to require clearing of the security-
based swap. Substituted compliance is not available in connection 
with these provisions. The CNMV Application discusses Spanish and EU 
clearing rights. See CNMV Application Appendix B category 4 at 61-
69.

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[[Page 47677]]

    Taken as a whole, the counterparty protection requirements under 
section 15F of the Exchange Act help to ``bring professional standards 
of conduct to, and increase transparency in, the security-based swap 
market and to require [SBS Entities] to treat parties to these 
transactions fairly.'' \94\ The comparability assessment accordingly 
may focus on whether the analogous foreign requirements--taken as a 
whole--produce similar outcomes with regard to promoting professional 
standards of conduct, increasing transparency, and requiring Covered 
Entities to treat parties fairly.
---------------------------------------------------------------------------

    \94\ See Business Conduct Adopting Release, 81 FR 30065. For 
non-U.S. SBS Entities, the counterparty protection requirements 
under Exchange Act section 15F(h) apply only to the SBS Entity's 
transactions with U.S. counterparties (apart from certain 
transactions conducted through a foreign branch of the U.S. 
counterparty), or to transactions arranged, negotiated, or executed 
by personnel located in a U.S. branch or office. See Exchange Act 
rule 3a71-3(c), 17 CFR 240.3a71-3(c) (exception from business 
conduct requirements for a security-based swap dealer's ``foreign 
business''); see also Exchange Act rule 3a71-3(a)(3), (8) and (9) 
(definitions of ``transaction conducted through a foreign branch,'' 
``U.S. business'' and ``foreign business'').
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B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the CNMV Application and the Commission's review of 
applicable provisions, in the Commission's preliminary view, the 
relevant Spanish and EU requirements produce regulatory outcomes that 
are comparable to counterparty protection requirements under Exchange 
Act section 15F(h) related to disclosure of material risks and 
characteristics, disclosure of material incentives or conflicts of 
interest, ``know your counterparty,'' suitability, fair and balanced 
communications, and daily mark disclosure, by subjecting Covered 
Entities to obligations that promote standards of professional conduct, 
transparency, and the fair treatment of parties. The proposed Order 
accordingly would provide conditional substituted compliance in 
connection with those requirements.\95\ The proposed Order 
preliminarily does not provide substituted compliance in connection 
with requirements related to clearing rights disclosure, however, for 
reasons addressed below.
---------------------------------------------------------------------------

    \95\ See para. (d) of the proposed Order.
---------------------------------------------------------------------------

    In taking this proposed approach, the Commission recognizes that 
there are certain differences between relevant Spanish and EU 
requirements, on the one hand, and the relevant disclosure, ``know your 
counterparty,'' suitability, and communications requirements under the 
Exchange Act, on the other hand. On balance, however, in the 
Commission's preliminary view, those differences, when coupled with the 
conditions in the proposed Order, are not so material as to be 
inconsistent with substituted compliance within the requisite outcomes-
oriented framework. As elsewhere, the counterparty protection 
provisions of the proposed Order in part condition substituted 
compliance on Covered Entities being subject to, and complying with, 
specified Spanish and EU requirements that are necessary to establish 
comparability.\96\ Substituted compliance in connection with these 
counterparty protection requirements also would be subject to specific 
conditions and limitations necessary to promote consistency in 
regulatory outcomes.
---------------------------------------------------------------------------

    \96\ See paras. (d)(1) through (3), (d)(4)(i), and (d)(5) of the 
proposed Order (requirement to be subject to and comply with 
relevant Spanish and EU requirements in connection with substituted 
compliance for Exchange Act disclosure of material risks and 
characteristics, disclosures of material incentives or conflicts of 
interest, ``know your counterparty,'' suitability, and fair and 
balanced communications requirements); para. (d)(6) of the proposed 
Order (requirement to be required under Spanish and EU requirements 
to reconcile, and in fact reconcile, the portfolio containing the 
security-based swap for which substituted compliance is applied, on 
each business day in connection with substituted compliance for 
daily mark disclosure requirements).
---------------------------------------------------------------------------

2. Additional Conditions and Scope Issues
a. Suitability--Limitation to per se Professional Clients
    Under the proposed Order, substituted compliance in connection with 
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would 
be conditioned on the requirement that the counterparty be a per se 
``professional client'' as defined in MiFID and not be a ``special 
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange 
Act rule 15Fh-2(d).\97\ Accordingly, the proposed Order would not 
provide substituted compliance for Exchange Act suitability 
requirements for a recommendation made to a counterparty that is a 
``retail client'' or an elective ``professional client,'' as such terms 
are defined in MiFID,\98\ or for a ``special entity'' as defined in the 
Exchange Act. In the Commission's preliminary view, absent such a 
condition the MiFID suitability requirements would not be expected to 
produce a counterparty protection outcome that is comparable with the 
outcome produced by the suitability requirements under the Exchange 
Act.\99\
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    \97\ 17 CFR 240.15Fh-2(d). See para. (d)(4)(ii) of the proposed 
Order.
    \98\ Annex II of MiFID describes which clients are 
``professional clients.'' Section I of Annex II describes the types 
of clients considered to be professional clients unless the client 
elects non-professional treatment; these clients are per se 
professional clients. Section II of Annex II describes the types of 
clients who may be treated as professional clients on request; these 
clients are elective professional clients. See MiFID Annex II. A 
retail client is a client who is not a professional client. See 
MiFID article 4(1)(11).
    \99\ The Commission recognizes that Exchange Act rules permit 
security-based swap dealers, when making a recommendation to an 
``institutional counterparty,'' to satisfy some elements of the 
suitability requirement if the security-based swap dealer reasonably 
determines that the counterparty or its agent is capable of 
independently evaluating relevant investment risks, the counterparty 
or its agent represents in writing that it is exercising independent 
judgment in evaluating recommendations, and the security-based swap 
dealer discloses to the counterparty that it is acting as 
counterparty and is not undertaking to assess the suitability of the 
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this 
alternative applies are only a subset of the ``professional 
clients'' to whom more narrowly tailored suitability requirements 
apply under MiFID. The institutional counterparty alternative under 
the Exchange Act would remain available, in accordance with its 
terms, for recommendations that are not eligible for, or for which a 
Covered Entity does not rely on, substituted compliance.
---------------------------------------------------------------------------

b. Daily Mark Disclosure--Limitation to Security-Based Swaps in 
Portfolios Required To Be Reconciled and in Fact Reconciled Each 
Business day
    The proposed Order would provide substituted compliance in 
connection with daily mark disclosure requirements pursuant to Exchange 
Act rule 15Fh-3(c) to the extent that the Covered Entity participates 
in daily portfolio reconciliation exercises that include the relevant 
security-based swap pursuant to Spanish and EU requirements.\100\

[[Page 47678]]

Spanish and EU portfolio reconciliation requirements for uncleared OTC 
derivative contracts include a requirement to exchange valuations of 
those contracts directly between counterparties. The required frequency 
of portfolio reconciliations varies depending on the types of 
counterparties and the size of the portfolio of OTC derivatives between 
them, with daily reconciliation required only for the largest 
portfolios. For security-based swaps to which the EU's daily portfolio 
reconciliation requirements apply (i.e., security-based swaps of a 
financial counterparty or non-financial counterparty subject to the 
clearing obligation in EMIR, if the counterparties have 500 or more OTC 
derivatives contracts outstanding with each other \101\), the 
Commission preliminarily views these requirements as comparable to 
Exchange Act requirements. For all other security-based swaps in 
portfolios that are not required to be reconciled on each business day, 
the Commission preliminarily views the EU's portfolio reconciliation 
requirements as not comparable to Exchange Act requirements and is 
proposing not to make a positive substituted compliance determination.
---------------------------------------------------------------------------

    \100\ See para. (d)(6) of the proposed Order. This approach 
would provide substituted compliance for daily mark requirements 
based on comparability of outcomes without the need to distinguish 
between U.S. person counterparties and other counterparties, and 
would avoid reliance on Spanish and EU trade reporting or mark-to-
market (or mark-to-model) requirements. The Spanish and EU mark-to-
market (or mark-to-model) requirements direct certain types of 
derivatives counterparties to mark-to-market (or mark-to-model) 
uncleared transactions each day but do not require disclosure of 
those marks to counterparties. Moreover, though Spanish and EU trade 
reporting requirements direct certain derivatives counterparties to 
report to a EU trade repository updated daily valuations for each 
OTC derivative contract, in practice U.S. counterparties may 
encounter challenges when attempting to access daily marks reported 
to multiple EU trade repositories with which they may not otherwise 
have business relationships. In addition, the information may be 
less current, given the time necessary for reporting and for the 
trade repository to make the information available.
    \101\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
---------------------------------------------------------------------------

c. No Substituted Compliance in Connection With Clearing Rights 
Disclosure Requirements
    The proposed Order would not provide substituted compliance in 
connection with clearing rights disclosure requirements pursuant to 
Exchange Act rule 15Fh-3(d). The CNMV Application cites certain 
provisions related to clearing rights in the EU that are unrelated to, 
and do not require disclosure of, the clearing rights provided by 
Exchange Act section 3C(g)(5).\102\ Moreover, unlike the rule 15Fh-3(d) 
disclosure requirements, the section 3C(g)(5) clearing rights 
themselves are not eligible for substituted compliance. Accordingly, in 
the Commission's preliminary view, substituted compliance based on EU 
clearing provisions would not lead to comparable disclosure of a 
counterparty's Exchange Act clearing rights and is not proposing to 
make a positive substituted compliance determination for clearing 
rights disclosure requirements.
---------------------------------------------------------------------------

    \102\ See note 93, supra.
---------------------------------------------------------------------------

VII. Substituted Compliance for Recordkeeping, Reporting, and 
Notification Requirements

A. CNMV Request and Associated Analytic Considerations

    The CNMV Application in part requests substituted compliance for 
requirements applicable to SBS Entities with a prudential regulator 
under the Exchange Act relating to:
     Record Making--Exchange Act rule 18a-5 requires prescribed 
records to be made and kept current.\103\
---------------------------------------------------------------------------

    \103\ 17 CFR 240.18a-5. The CNMV Application discusses Spanish 
and EU recordmaking requirements. See CNMV Application Appendix B 
category 2 at 3-27, 55-57.
---------------------------------------------------------------------------

     Record Preservation--Exchange Act rule 18a-6 requires 
preservation of records.\104\
---------------------------------------------------------------------------

    \104\ 17 CFR 240.18a-6. The CNMV Application discusses Spanish 
and EU record preservation requirements. See CNMV Application 
Appendix B category 2 at 28-54, 57-58.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain 
reports.\105\
---------------------------------------------------------------------------

    \105\ 17 CFR 240.18a-7. The CNMV Application discusses Spanish 
and EU requirements that address firms'' obligations to make certain 
reports. See CNMV Application Appendix B category 2 at 59-62.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires 
notification to the Commission when certain financial or operational 
problems occur.\106\
---------------------------------------------------------------------------

    \106\ 17 CFR 240.18a-8. The CNMV Application discusses Spanish 
and EU requirements that address firms'' obligations to make certain 
notifications. See CNMV Application Appendix B category 2 at 62-64.
---------------------------------------------------------------------------

     Daily Trading Records--Exchange Act section 15F(g) 
requires SBS Entities to maintain daily trading records.\107\
---------------------------------------------------------------------------

    \107\ The CNMV Application discusses Spanish and EU requirements 
that address firms' record preservation obligations related to 
records that firms are required to create, as well as additional 
records such as records of communications. See CNMV Application 
Appendix B category 2 at 2-3.
---------------------------------------------------------------------------

    Taken as a whole, the recordkeeping, reporting, and notification 
requirements that apply to SBS Entities with a prudential regulator are 
designed to promote the prudent operation of the firm's security-based 
swap activities, assist the Commission in conducting compliance 
examinations of those activities, and alert the Commission to potential 
financial or operational problems that could impact the firm and its 
customers. The comparability assessment accordingly may focus on 
whether the analogous foreign requirements--taken as a whole--produce 
comparable outcomes with regard to recordkeeping, reporting, 
notification, and related practices that support the Commission's 
oversight of these registrants. A foreign jurisdiction need not have 
analogues to every requirement under Commission rules to receive a 
positive substituted compliance determination.

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the CNMV Application and the Commission's review of 
applicable provisions, in the Commission's preliminary view, the 
relevant EU and Spanish requirements, subject to the conditions and 
limitations of the proposed Order, would produce regulatory outcomes 
that are comparable to the outcomes associated with the vast majority 
of the recordkeeping, reporting, and notification requirements under 
the Exchange Act applicable to SBS Entities with a prudential regulator 
pursuant to Exchange Act section 15F(g) and Exchange Act rules 18a-5, 
18a-6, 18a-7, and 18a-8.
    In reaching this preliminary conclusion, the Commission recognizes 
that there are certain differences between the EU and Spanish 
requirements and the Exchange Act requirements. In the Commission's 
preliminary view, on balance, those differences generally would not be 
inconsistent with substituted compliance for these requirements. 
Requirement-by-requirement similarity is not needed for substituted 
compliance.
    However, the Commission is structuring its preliminary substituted 
compliance determinations in the proposed Order to provide Covered 
Entities with greater flexibility to select which distinct requirements 
within the broader rule for which they would apply substituted 
compliance. This would not preclude a Covered Entity from applying 
substituted compliance for the entire rule (subject to conditions and 
limitations). However, it would permit the Covered Entity to apply 
substituted compliance with respect to certain requirements of a given 
rule and to comply directly with the remaining requirements. This 
granular approach to making substituted compliance determinations with 
respect to discrete requirements within Exchange Act rules 18a-5, 18a-
6, 18a-7, and 18a-8 (collectively, the ``recordkeeping, reporting, and 
notification rules'') is intended to permit Covered Entities to 
leverage existing recordkeeping and reporting systems that are designed 
to comply with the broker-dealer recordkeeping and reporting 
requirements on which the recordkeeping and reporting requirements 
applicable to SBS Entities

[[Page 47679]]

are based. For example, it may be more efficient for a Covered Entity 
to comply with certain Exchange Act requirements within a given 
recordkeeping, reporting, or notification rule (rather than apply 
substituted compliance) because it can utilize systems that its 
affiliated broker-dealer has implemented to comply with them. This 
proposed approach is consistent with the approach taken by the 
Commission in the French and UK Substituted Compliance Orders.\108\
---------------------------------------------------------------------------

    \108\ See French Substituted Compliance Order, 86 FR at 41649; 
UK Substituted Compliance Order, 86 FR at 43360.
---------------------------------------------------------------------------

    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of 
providing greater flexibility results in preliminary substituted 
compliance determinations with respect to the different categories of 
records these rules require SBS Entities with a prudential regulator to 
make, keep current, and/or preserve. The objective of these rules--
taken as a whole--is to assist the Commission in monitoring and 
examining for compliance with substantive Exchange Act requirements 
applicable to SBS Entities with a prudential regulator (e.g., business 
conduct requirements) as well as to promote the prudent operation of 
these firms.\109\ The Commission preliminarily believes the comparable 
EU and Spanish recordkeeping rules achieve these outcomes with respect 
to compliance with substantive EU and Spanish requirements for which 
preliminary positive substituted compliance determinations are being 
made in this proposed Order (e.g., the preliminary positive substituted 
compliance determinations with respect to the majority of the Exchange 
Act business conduct requirements). At the same time, the recordkeeping 
rules address different categories of records through distinct 
requirements within the rules. Each requirement with respect to a 
specific category of records (e.g., paragraph (b)(1) of Exchange Act 
rule 18a-5 addressing trade blotters) can be viewed in isolation as a 
distinct recordkeeping rule. Therefore, it may be appropriate to make 
substituted compliance determinations at this level of Exchange Act 
rules 18a-5 and 18a-6.
---------------------------------------------------------------------------

    \109\ See, e.g. , Exchange Act Release No. 71958 (Apr. 17, 
2014), 79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------

    As discussed in more detail below, the Commission's preliminary 
view is that substituted compliance is appropriate for most of the 
requirements applicable to SBS Entities with a prudential regulator 
within the recordkeeping, reporting, and notification rules. However, 
certain of the discrete requirements in these rules are fully or 
partially linked to substantive Exchange Act requirements for which 
substituted compliance is not available or for which a positive 
substituted compliance determination would not be made under the 
proposed Order. In these cases, a preliminary positive substituted 
compliance determination is not be made for the requirement that is 
fully linked to the substantive requirement or to the part of the 
requirement that is linked to the substantive requirement. In 
particular, a preliminary positive substituted compliance determination 
is not being made, in full or in part, for recordkeeping, reporting, or 
notification requirements linked to the following Exchange Act rules 
for which substituted compliance is not available or a preliminary 
positive substituted compliance determination is not being made: (1) 
Exchange Act rule 15Fh-4 (``Rule 15Fh-4 Exclusion''); (2) Exchange Act 
rule 15Fh-5 (``Rule 15Fh-5 Exclusion''); (3) Exchange Act rule 15Fh-6 
(``Rule 15Fh-6 Exclusion''); (4) Exchange Act rule 18a-4 (``Rule 18a-4 
Exclusion''); (5) Regulation SBSR (``Regulation SBSR Exclusion''); (6) 
Form SBSE and its variations (``Form SBSE Exclusion''); (7) Exchange 
Act rule 15Fh-1 Exclusion (``Rule 15Fh-1 Exclusion''), and (8) Exchange 
Act rule 15Fh-2 (``Rule 15Fh-2 Exclusion''). This proposed approach is 
consistent with the approach taken by the Commission in the French and 
UK Substituted Compliance Orders.\110\
---------------------------------------------------------------------------

    \110\ See French Substituted Compliance Order, French 
Substituted Compliance Order, 86 FR at 41650; UK Substituted 
Compliance Order, 86 FR at 43361.
---------------------------------------------------------------------------

    In addition, certain of the requirements in the recordkeeping, 
reporting, and notification rules are expressly linked to substantive 
Exchange Act requirements where a preliminary positive substituted 
compliance determination is being made under the proposed Order. In 
these cases, substituted compliance with the linked requirement in the 
recordkeeping, reporting, or notification rule is conditioned on the 
Covered Entity applying substituted compliance to the linked 
substantive Exchange Act requirement. This is the case regardless of 
whether the requirement is fully or partially linked to the substantive 
Exchange Act requirement. The recordkeeping, reporting, and 
notification requirements that are linked to a substantive Exchange Act 
requirement are designed and tailored to assist the Commission in 
monitoring and examining an SBS Entity's compliance with the 
substantive Exchange Act requirement. EU and Spanish recordkeeping, 
reporting, and notification requirements are designed to perform a 
similar role with respect to the substantive EU and Spanish 
requirements to which they are linked. Consequently, this condition is 
designed to ensure that the records, reports, and notifications of a 
Covered Entity align with the substantive Exchange Act or EU or Spanish 
requirement to which they are linked. For these reasons, under the 
proposed Order, substituted compliance for recordkeeping, reporting, 
and notification requirements linked to the following Exchange Act 
rules would be conditioned on the Covered Entity applying substituted 
compliance to the linked substantive Exchange Act rule: (1) Exchange 
Act rule 15Fh-3, except paragraphs (a) and (d) for which substituted 
compliance was not requested (``Rule 15Fh-3 Condition''); (2) Exchange 
Act rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act rule 
15Fi-3 (``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4 
(``Rule 15Fi-4 Condition''); (5) Exchange Act rule 15Fi-5 (``Rule 15Fi-
5 Condition''); and (6) Exchange Act rule 15Fk-1 (``Rule 15Fk-1 
Condition''). This proposed approach is consistent with the approach 
taken by the Commission in the French and UK Substituted Compliance 
Orders.\111\
---------------------------------------------------------------------------

    \111\ See French Substituted Compliance Order, 86 FR at 41650; 
UK Substituted Compliance Order, 86 FR at 43361.
---------------------------------------------------------------------------

2. Exchange Act Rule 18a-5
    Exchange Act rule 18a-5 requires SBS Entities to make and keep 
current various types of records. The requirements for SBS Entities 
without a prudential regulator are set forth in paragraph (a) of the 
rule.\112\ The requirements for SBS Entities with a prudential 
regulator are set forth in paragraph (b) of the rule.\113\ The 
Commission is making a preliminary positive substituted compliance 
determination for many of the requirements of paragraph (b) of Exchange 
Act rule 18a-5 in the granular manner discussed above.\114\
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    \112\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
    \113\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
    \114\ See para. (e)(1) of the proposed Order.
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    However, certain of the requirements in these paragraphs are linked 
to substantive Exchange Act requirements for which substituted 
compliance is not available or a preliminary positive substituted 
compliance determination would not be made under the proposed

[[Page 47680]]

Order. In these cases, a positive substituted compliance determination 
would not be made for the linked requirement in Exchange Act rule 18a-5 
or the portion of the requirement in Exchange Act rule 18a-5 that is 
linked to the substantive Exchange Act requirement.\115\
---------------------------------------------------------------------------

    \115\ A positive preliminary substituted compliance 
determination would not be made for the following requirements of 
Exchange Act rule 18a-5 because they are linked to a substantive 
Exchange Act requirement for which the proposed Order would not 
provide substituted compliance: (1) Exchange Act rules 18a-5(b)(9) 
and (10) are fully linked to Exchange Act rule 18a-4 and, therefore, 
would be subject to the Rule 18a-4 Exclusion; (2) Exchange Act rule 
18a-5(b)(12) is fully linked to Exchange Act rule 15Fh-6 and, 
therefore, would be subject to the Rule 15F-6 Exclusion; (3) the 
portions of Exchange Act rule 18a-5(b)(13) that relates to Exchange 
Act rule 15Fh-4 would be subject to the Rule 15Fh-4 Exclusion; (4) 
the portion of Exchange Act rule 18a-5(b)(13) that relates to 
Exchange Act rule 15Fh-5 would be subject to the 15Fh-5 Exclusion; 
(5) the portion of Exchange Act rule 18a-5(b)(13) that relates to 
Exchange Act rule 15Fh-1 would be subject to the 15Fh-1 Exclusion; 
and (6) the portion of Exchange Act rule 18a-5(b)(13) that relates 
to Exchange Act rule 15Fh-2 would be subject to the 15Fh-2 
Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-5 
are fully or partially linked to substantive Exchange Act requirements 
where a preliminary positive substituted compliance determination would 
be made under the proposed Order. In these cases, substituted 
compliance with the requirement in Exchange Act rule 18a-5 would be 
conditioned on the Covered Entity applying substituted compliance to 
the linked substantive Exchange Act requirement.\116\
---------------------------------------------------------------------------

    \116\ Substituted compliance with the following requirements of 
Exchange Act rule 18a-5 would be conditioned on the Covered Entity 
applying substituted compliance to the linked substantive Exchange 
Act requirement: (1) Exchange Act rules 18a-5(b)(6) and (b)(11) are 
linked to Exchange Act rule 15Fi-2 and, therefore, would be subject 
to the Rule 15Fi-2 Condition; (2) Exchange Act rule 18a-5(b)(13) is 
linked to Exchange Act rule 15Fh-3 and, therefore, would be subject 
to the Rule 15Fh-3 Condition; (3) Exchange Act rule 18a-5(b)(13) is 
linked to Exchange Act rule 15Fk-1, and therefore, would be subject 
to the Rule 15Fk-1 Condition; (4) Exchange Act rules 18a-5(b)(14)(i) 
and (ii) are linked to Exchange Act rule 15Fi-3 and, therefore, 
would be subject to the Rule 15Fi-3 Condition; and (5) Exchange Act 
rule 18a-5(b)(14)(iii) is linked to Exchange Act rule 15Fi-4 and, 
therefore, would be subject to the Rule 15Fi-4 Condition.
---------------------------------------------------------------------------

    In addition, the proposed Order would allow a Covered Entity to 
apply substituted compliance on a transaction-by-transaction basis for 
the Commission's recordkeeping requirements that are linked with the 
counterparty protection requirements in Exchange Act rule 15Fh-3.\117\ 
This approach is intended to be consistent with the Commission 
preliminarily allowing Covered Entities to apply substituted compliance 
on a transaction-by-transaction basis for the Commission's counterparty 
protection requirements.
---------------------------------------------------------------------------

    \117\ See para. (e)(1)(ii)(B) of the proposed Order.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the record making requirements of Exchange Act rule 18a-5 would be 
subject to the condition that the Covered Entity: (1) Preserves all of 
the data elements necessary to create the records required by Exchange 
Act rules 18a-5(b)(1), (2), (3), and (7); and (2) upon request 
furnishes promptly to representatives of the Commission the records 
required by those rules (``SEC Format Condition'').\118\ This proposed 
condition is modeled on the alternative compliance mechanism in 
paragraph (c) of Exchange Act rule 18a-5. In effect, a Covered Entity 
applying substituted compliance with respect to these requirements of 
Exchange Act rule 18a-5 would need to comply with the comparable EU and 
Spanish requirements. However, under the SEC Format Condition, the 
Covered Entity would need to produce a record that is formatted in 
accordance with the requirements of Exchange Act rule 18a-5 at the 
request of Commission staff. The objective is to require--on a very 
limited basis--the production of a record that consolidates the 
information required by Exchange Act rules 18a-5(b)(1), (2), (3), and 
(7) in a single record and, as applicable, in a blotter or ledger 
format. This will assist the Commission staff in reviewing the 
information on the record.
---------------------------------------------------------------------------

    \118\ See para. (e)(1)(ii)(A) of the proposed Order.
---------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary 
positive substituted compliance determinations with respect to 
requirements of Exchange Act rule 18a-5 by listing in each row: (1) The 
paragraph of the proposed Order that sets forth the preliminary 
determination; (2) the paragraph(s) of Exchange Act rule 18a-5 to which 
the preliminary determination applies; (3) a brief description of the 
records required by the paragraph(s); and (4) a brief description of 
any additional conditions to applying substituted compliance to the 
requirements, including any partial exclusions because portions of the 
requirements are linked to substantive Exchange Act requirements for 
which the proposed Order would not provide substituted compliance.\119\
---------------------------------------------------------------------------

    \119\ The chart below does not include the proposed conditions 
for applying substituted compliance to Exchange Act rule 18a-5; 
namely that the Covered Entity: (1) Must be subject to and comply 
with specified requirements of foreign law; and (2) as discussed 
below, must promptly furnish to a representative of the Commission 
upon request an English translation of a record. See para. (e)(7) of 
the proposed Order (setting forth the English translation 
requirement).

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------
                                                                                          Additional conditions
           Order paragraph                  Rule paragraph          Rule description      and partial exclusions
----------------------------------------------------------------------------------------------------------------
(e)(1)(i)(A).........................  (b)(1).................  Trade blotters.........  SEC Format Condition.
(e)(1)(i)(B).........................  (b)(2).................  Account ledgers........  SEC Format Condition.
(e)(1)(i)(C).........................  (b)(3).................  Stock record...........  SEC Format Condition.
(e)(1)(i)(D).........................  (b)(4).................  Memoranda of brokerage   N/A.
                                                                 orders.
(e)(1)(i)(E).........................  (b)(5).................  Memoranda of             N/A.
                                                                 proprietary orders.
(e)(1)(i)(F).........................  (b)(6).................  Confirmations, trade     Rule 15Fi-2 Condition.
                                       (b)(11)................   verification.
(e)(1)(i)(G).........................  (b)(7).................  Accountholder            SEC Format Condition.
                                                                 information.
(e)(1)(i)(H).........................  (b)(8).................  Associated person's      N/A.
                                                                 employment application.
(e)(1)(i)(I).........................  (b)(13)................  Compliance with          (1) Rule 15Fh-3
                                                                 business conduct         Condition.
                                                                 requirements.           (2) Rule 15Fk-1
                                                                                          Condition.
                                                                                         (3) Rule 15Fh-1
                                                                                          Exclusion.
                                                                                         (4) Rule 15Fh-2
                                                                                          Exclusion.
                                                                                         (5) Rule 15Fh-4
                                                                                          Exclusion.
                                                                                         (6) Rule 15Fh-5
                                                                                          Exclusion.

[[Page 47681]]

 
(e)(1)(i)(J).........................  (b)(14)(i).............  Portfolio                Rule 15Fi-3 Condition.
                                       (b)(14)(ii)............   reconciliation.
(e)(1)(i)(K).........................  (b)(14)(iii)...........  Portfolio compression..  Rule 15Fi-4 Condition.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary 
determinations with respect to requirements of Exchange Act rule 18a-5 
for which a positive substituted compliance determination would not be 
made because they are fully linked to substantive Exchange Act 
requirements for which the proposed Order would not provide substituted 
compliance by listing in each row: (1) The paragraph of the proposed 
Order that sets forth the determination; (2) the paragraph of Exchange 
Act rule 18a-5 to which the determination applies; (3) a brief 
description of the records required by the paragraph; and (4) a brief 
description of why the requirement is excluded from substituted 
compliance.

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------
           Order paragraph                  Rule paragraph          Rule description            Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(1)(ii)(C)........................  (b)(9).................  Possession or control    Rule 18a-4 Exclusion.
                                                                 records.
(e)(1)(ii)(C)........................  (b)(10)................  Reserve computations...  Rule 18a-4 Exclusion.
(e)(1)(ii)(C)........................  (b)(12)................  Political contribution   Rule 15Fh-6 Exclusion.
                                                                 records.
----------------------------------------------------------------------------------------------------------------

3. Exchange Act Rule 18a-6
    Exchange Act rule 18a-6 requires an SBS Entity to preserve certain 
types of records if it makes or receives them (in addition to the 
records the SBS Entity is required to make and keep current pursuant to 
Exchange Act rule 18a-5).\120\ Exchange Act rule 18a-6 also prescribes 
the time period that these additional records and the records required 
to be made and kept current pursuant to Exchange Act rule 18a-5 must be 
preserved and the manner in which they must be preserved.
---------------------------------------------------------------------------

    \120\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------

    Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the 
records that an SBS Entity must retain if it makes or receives them and 
prescribes the retention periods for these records as well as for the 
records that must be made and kept current pursuant to Exchange Act 
rule 18a-5. Certain of these paragraphs prescribe requirements 
separately for SBS Entities without a prudential regulator and SBS 
Entities with a prudential regulator.\121\ The proposed Order would 
make substituted compliance available for the requirements of these 
paragraphs applicable to SBS Entities with a prudential regulator. As 
discussed below, the Commission is making a preliminary positive 
substituted compliance determination for many of the requirements of 
these paragraphs applicable to SBS Entities with a prudential 
regulator.
---------------------------------------------------------------------------

    \121\ Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of 
Exchange Act rule 18a-6 apply to SBS Entities without a prudential 
regulator. Paras. (a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of 
Exchange Act rule 18a-6 apply to SBS Entities with a prudential 
regulator. Paras. (c), (d)(1), (d)(4), and (d)(5) of Exchange Act 
rule 18a-6 apply to SBS Entities irrespective of whether they have a 
prudential regulator.
---------------------------------------------------------------------------

    However, certain of these requirements are fully or partially 
linked to substantive Exchange Act requirements for which a preliminary 
positive substituted compliance determination would not be made under 
the proposed Order. In these cases, a positive substituted compliance 
determination would not be made for the linked requirement in Exchange 
Act rule 18a-6.\122\
---------------------------------------------------------------------------

    \122\ A positive substituted compliance determination would not 
be made for the following requirements of Exchange Act rule 18a-6 
because they are linked to a substantive Exchange Act requirement 
for which the proposed Order would not provide substituted 
compliance: (1) Exchange Act rule 18a-6(b)(2)(vi) is fully linked to 
Regulation SBSR and, therefore, would be subject to the Regulation 
SBSR Exclusion; (2) Exchange Act rule 18a-6(b)(2)(viii) is fully 
linked to Exchange Act rule 15Fh-4 and, therefore, would be subject 
to the Rule 15Fh-4 Exclusion; (3) Exchange Act rule 18a-
6(b)(2)(viii) is fully linked to Exchange Act rule 15Fh-5 and, 
therefore, would be subject to the Rule 15Fh-5 Exclusion; (4) 
Exchange Act rule 18a-6(b)(2)(v) is fully linked to Exchange Act 
rule 18a-4 and, therefore, would be subject to the Rule 18a-4 
Exclusion; (5) the portion of Exchange Act rule 18a-6(c) relating to 
Form SBSE and its variations would be subject to the Form SBSE 
Exclusion; (6) the portion of Exchange Act rule 18a-6(b)(2)(vii) 
that relates to Exchange Act rule 15Fh-1 would be subject to the 
15Fh-1 Exclusion; (7) the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fh-2 would be 
subject to the 15Fh-2 Exclusion; (8) the portion of Exchange Act 
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-4 would 
be subject to the 15Fh-4 Exclusion; (9) the portion of Exchange Act 
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-5 would 
be subject to the 15Fh-5 Exclusion; and (10) the portion of Exchange 
Act rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-6 
would be subject to the 15Fh-6 Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-6 
are fully or partially linked to substantive Exchange Act requirements 
where a positive substituted compliance determination would be made 
under the proposed Order. In these cases, substituted compliance with 
the requirement in Exchange Act rule 18a-6 would be conditioned on the 
Covered Entity applying substituted compliance to the linked 
substantive Exchange Act requirement.\123\
---------------------------------------------------------------------------

    \123\ Substituted compliance with the following requirements of 
Exchange Act rule 18a-6 would be conditioned on the Covered Entity 
applying substituted compliance to the linked substantive Exchange 
Act requirement: (1) Exchange Act rule 18a-6(b)(2)(vii) is linked to 
Exchange Act rule 15Fh-3 and, therefore, would be subject to the 
Rule 15Fh-3 Condition; (2) Exchange Act rule 18a-6(b)(2)(vii) is 
linked to Exchange Act rule 15Fk-1 and, therefore, would be subject 
to the Rule 15Fk-1 Condition; (3) Exchange Act rules 18a-6(d)(4) and 
(d)(5) are linked to Exchange Act rule 15Fi-3 and, therefore, would 
be subject to the Rule 15Fi-3 Condition; (4) Exchange Act rules 18a-
6(d)(4) and (d)(5) are linked to Exchange Act rule 15Fi-4 and, 
therefore, would be subject to the Rule 15Fi-4 Condition; and (5) 
Exchange Act rules 18a-6(d)(4) and (d)(5) are linked to Exchange Act 
rule 15Fi-5 and, therefore, would be subject to the Rule 15Fi-5 
Condition.
---------------------------------------------------------------------------

    Paragraph (e) of Exchange Act rule 18a-6 sets forth the 
requirements for preserving records electronically. Paragraph (f) sets 
forth requirements for

[[Page 47682]]

when records are prepared or maintained by a third party. The Order 
would make substituted compliance available for the requirements of 
paragraphs (e) and (f) of Exchange Act rule 18a-6 with respect to 
Covered Entities with a prudential regulator.\124\
---------------------------------------------------------------------------

    \124\ See paras. (e)(2)(i)(L) and (M) of the proposed Order.
---------------------------------------------------------------------------

    Paragraph (g) of Exchange Act rule 18a-6 requires an SBS Entity to 
furnish promptly to a representative of the Commission legible, true, 
complete, and current copies of those records of the SBS Entity that 
are required to be preserved under Exchange Act rule 18a-6, or any 
other records of the SBS Entity that are subject to examination or 
required to be made or maintained pursuant to section 15F of the 
Exchange Act that are requested by a representative of the Commission. 
The proposed Order would not make substituted compliance available for 
the requirements of paragraph (g) of Exchange Act rule 18a-6 because 
there is no comparable requirement in the EU or Spain to produce these 
records to a representative of the Commission.
    The following table summarizes the Commission's preliminary 
positive substituted compliance determinations with respect to 
requirements of Exchange Act rule 18a-6 by listing in each row: (1) The 
paragraph of the proposed Order that sets forth the determination; (2) 
the paragraph(s) of Exchange Act rule 18a-6 to which the determination 
applies; (3) a brief description of the records required by the 
paragraph(s); and (4) a brief description of any additional conditions 
to applying substituted compliance to the requirements, including any 
partial exclusions because portions of the requirements are linked to 
substantive Exchange Act requirements for which the proposed Order 
would not provide substituted compliance.\125\
---------------------------------------------------------------------------

    \125\ The chart below does not include the proposed conditions 
for applying substituted compliance to Exchange Act rule 18a-6; 
namely that the Covered Entity: (1) Must be subject to and complies 
with the requirements of foreign law; and (2) must promptly furnish 
to a representative of the Commission upon request an English 
translation of a record. See para. (e)(7) of the proposed Order 
(setting forth the English translation requirement).

                                             Exchange Act Rule 18a-6
                                              [Record preservation]
----------------------------------------------------------------------------------------------------------------
                                                                                          Conditions and partial
           Order paragraph                  Rule paragraph          Rule description            exclusions
----------------------------------------------------------------------------------------------------------------
(e)(2)(i)(A).........................  (a)(2).................  6 year record            N/A.
                                                                 preservation.
(e)(2)(i)(B).........................  (b)(2)(i)..............  3 year record            N/A.
                                                                 preservation.
(e)(2)(i)(C).........................  (b)(2)(ii).............  Communications.........  N/A.
(e)(2)(i)(D).........................  (b)(2)(iii)............  Account documents......  N/A.
(e)(2)(i)(E).........................  (b)(2)(iv).............  Written agreements.....  N/A.
(e)(2)(i)(F).........................  (b)(2)(vii)............  Business conduct         (1) Rule 15Fh-3
                                                                 standard records.        Condition.
                                                                                         (2) Rule 15Fk-1
                                                                                          Condition.
                                                                                         (3) Rule 15Fh-1
                                                                                          Exclusion.
                                                                                         (4) Rule 15Fh-2
                                                                                          Exclusion.
                                                                                         (5) Rule 15Fh-4
                                                                                          Exclusion.
                                                                                         (6) Rule 15Fh-5
                                                                                          Exclusion.
                                                                                         (7) Rule 15Fh-6
                                                                                          Exclusion.
(e)(2)(i)(G).........................  (c)....................  Corporate documents....  Form SBSE Exclusion.
(e)(2)(i)(H).........................  (d)(1).................  Associated person's      N/A.
                                                                 employment application.
(e)(2)(i)(I).........................  (d)(2)(ii).............  Regulatory authority     N/A.
                                                                 reports.
(e)(2)(i)(J).........................  (d)(3)(ii).............  Compliance,              N/A.
                                                                 supervisory, and
                                                                 procedures manuals.
(e)(2)(i)(K).........................  (d)(4), (d)(5).........  Portfolio                (1) Rule 15Fi-3
                                                                 reconciliation.          Condition.
                                                                                         (2) Rule 15Fi-4
                                                                                          Condition.
                                                                                         (3) Rule 15Fi-5
                                                                                          Condition.
(e)(2)(i)(L).........................  (e)....................  Electronic storage       N/A.
                                                                 system.
(e)(2)(i)(M).........................  (f)....................  Third-party              N/A.
                                                                 recordkeeper.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary 
determinations with respect to requirements of Exchange Act rule 18a-6 
for which a positive substituted compliance determination would not be 
made because they are fully linked to substantive Exchange Act 
requirements for which the proposed Order would not provide substituted 
compliance by listing in each row: (1) The paragraph of the proposed 
Order that sets forth the determination; (2) the paragraph of Exchange 
Act rule 18a-6 to which the determination applies; (3) a brief 
description of the records required by those paragraph; and (4) a brief 
description of why the requirement is excluded from substituted 
compliance.

                                             Exchange Act Rule 18a-6
                                                 [Preservation]
----------------------------------------------------------------------------------------------------------------
           Order paragraph                  Rule paragraph          Rule description            Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(2)(ii)...........................  (b)(2)(v)..............  Information supporting   Rule 18a-4 Exclusion.
                                                                 financial reports.
(e)(2)(ii)...........................  (b)(2)(vi).............  Regulation SBSR          Regulation SBSR
                                                                 information.             Exclusion.
(e)(2)(ii)...........................  (b)(2)(viii)...........  Special entity           (1) Rule 15Fh-4
                                                                 documents.               Exclusion.
                                                                                         (2) Rule 15Fh-5
                                                                                          Exclusion.
----------------------------------------------------------------------------------------------------------------


[[Page 47683]]

4. Exchange Act Rule 18a-7
    Exchange Act rule 18a-7 requires SBS Entities, on a monthly basis 
(if not prudentially regulated) or on a quarterly basis (if 
prudentially regulated), to file an unaudited financial and operational 
report on the FOCUS Report Part II (if not prudentially regulated) or 
Part IIC (if prudentially regulated). The Commission will use the FOCUS 
Reports filed by the SBS Entities to both monitor the financial and 
operational condition of individual SBS Entities and to perform 
comparisons across SBS Entities. The FOCUS Report Part IIC elicits less 
information than the FOCUS Report Part II because the Commission does 
not have responsibility for overseeing the capital and margin 
requirements applicable to these entities.
    The FOCUS Report Parts II and IIC are standardized forms that 
elicit specific information through numbered line items. This 
facilitates cross-firm analysis and comprehensive monitoring of all SBS 
Entities registered with the Commission. Further, the Commission has 
designated the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') to receive the FOCUS Reports from SBS Entities.\126\ 
Broker-dealers registered with the Commission currently file their 
FOCUS Reports with FINRA through the eFOCUS system it administers. 
Using FINRA's eFOCUS system will enable broker-dealers, security-based 
swap dealers, and major security-based swap participants to file FOCUS 
Reports on the same platform using the same preexisting templates, 
software, and procedures.
---------------------------------------------------------------------------

    \126\ See Order Designating Financial Industry Regulatory 
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, Exchange Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------

    Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS Entities 
with a prudential regulator to file the FOCUS Report Part IIC on a 
quarterly basis. The proposed Order would provide substituted 
compliance for this requirement subject to the condition that the 
Covered Entity file with the Commission periodic unaudited financial 
and operational information in the manner and format specified by the 
Commission by order or rule (``Manner and Format Condition'') and 
present the financial information in accordance with generally accepted 
accounting principles (``GAAP'') that the firm uses to prepare general 
purpose publicly available or available to be issued financial 
statements in Spain (``Spanish GAAP Condition'').\127\ The Commission 
believes that it would be appropriate to condition substituted 
compliance with respect to Exchange Act rule 18a-7 on the Covered 
Entity filing unaudited financial and operational information in a 
manner and format that facilitates cross-firm analysis and 
comprehensive monitoring of all SBS Entities registered with the 
Commission.\128\ For example, the Commission could by order or rule 
require Covered Entities with a prudential regulator to file the 
financial and operational information with FINRA using the FOCUS Report 
Part IIC but permit the information input into the form to be the same 
information the SBS Entity reports to the CNMV.
---------------------------------------------------------------------------

    \127\ Under the proposed Order, Covered Entities with a 
prudential regulator would need to present the information reported 
in the FOCUS Report in accordance with GAAP that the firm uses to 
prepare publicly available or available to be issued general purpose 
financial statements in its home jurisdiction instead of U.S. GAAP 
if other GAAP, such as International Financial Reporting Standards 
(IFRS) as issued by the International Accounting Standards Board 
(IASB), is used by the Covered Entity in preparing publicly 
available or available to be issued general purpose financial 
statements in Spain.
    \128\ The Manner and Format condition is included in the French 
and UK Substituted Compliance Orders. See French Substituted 
Compliance Order, 86 FR at 41651; UK Substituted Compliance Order, 
83 FR at 43361-62.
---------------------------------------------------------------------------

    The following table summarizes the Commission's proposed 
preliminary positive substituted compliance determinations with respect 
to requirements of Exchange Act rule 18a-7 by listing in each row: (1) 
The paragraph of the proposed Order that sets forth the determination; 
(2) the paragraph of Exchange Act rule 18a-7 to which the determination 
applies; (3) a brief description of the report required by the 
paragraph; and (4) a brief description of any additional conditions to 
applying substituted compliance to the requirements.\129\
---------------------------------------------------------------------------

    \129\ The chart below does not include the proposed conditions 
for applying substituted compliance to Exchange Act rule 18a-7; 
namely that the Covered Entity: (1) Must be subject to and comply 
with specified requirements of foreign law; and (2) must promptly 
furnish to a representative of the Commission upon request an 
English translation of a report. See para. (e)(7) of the proposed 
Order (setting forth the English translation requirement).

                                             Exchange Act Rule 18a-7
                                                   [Reporting]
----------------------------------------------------------------------------------------------------------------
           Order paragraph                  Rule paragraph          Rule description            Conditions
----------------------------------------------------------------------------------------------------------------
(e)(3)(i)............................  (a)(2).................  File FOCUS Reports.....  (1) Manner and Format
                                                                                          Condition.
                                                                                         (2) Spanish GAAP
                                                                                          Condition.
----------------------------------------------------------------------------------------------------------------

5. Exchange Act Rule 18a-8
    Exchange Act rule 18a-8 requires SBS Entities to send notifications 
to the Commission if certain adverse events occur.\130\ The proposed 
Order would provide substituted compliance for the requirements of 
Exchange Act rule 18a-8 applicable to SBS Entities with a prudential 
regulator (subject to conditions and limitations). In particular, the 
requirements of: (1) Paragraph (c) of Exchange Act Rule 18a-8 that an 
SBS Entity that is a security-based swap dealer and that files a notice 
of adjustment to its reported capital category with a U.S. prudential 
regulator must transmit a copy of the notice to the Commission; (2) 
paragraph (d) of the rule that an SBS Entity provide notification to 
the Commission if it fails to make and keep current books and records 
under Exchange Act rule 18a-5 and to transmit a subsequent report on 
steps being taken to correct the situation; and (3) paragraph (h) of 
the rule setting forth how to make the notifications required by 
Exchange Act 18a-8.
---------------------------------------------------------------------------

    \130\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the notification requirements of Exchange Act rule 18a-8 would be 
subject to the condition that the Covered Entity: (1) Simultaneously 
sends a copy of any notice required to be sent by EU or Spanish 
notification laws to the Commission in the manner specified on the 
Commission's website (i.e., the ``SEC Filing Condition''); and (2) 
includes with the transmission the contact information of an individual 
who can provide further information about the matter that is the 
subject of the notice (i.e., the ``Contact Information Condition''). 
The purpose of this condition is to alert the Commission to financial 
or operational problems that

[[Page 47684]]

could adversely affect the firm--the objective of Exchange Act rule 
18a-8.
    In addition, the Order does not provide substituted compliance for 
paragraph (g) of Exchange Act rule 18a-8 that an SBS Entity that is a 
security-based swap dealer provide notification if it fails to make a 
required deposit into its special reserve account for the exclusive 
benefit of security-based swap customers under Exchange Act rule 18a-4. 
Substituted compliance is not available for Exchange Act rule 18a-4.
    In addition, the proposed Order would not provide substituted 
compliance for paragraph (g) of Exchange Act rule 18a-8 that an SBS 
Entity that is a security-based swap dealer provide notification if it 
fails to make a required deposit into its special reserve account for 
the exclusive benefit of security-based swap customers under Exchange 
Act rule 18a-4. Substituted compliance is not available for Exchange 
Act rule 18a-4.
    The following table summarizes the Commission's proposed 
preliminary positive substituted compliance determinations with respect 
to requirements of Exchange Act rule 18a-8 by listing in each row: (1) 
The paragraph of the proposed Order that sets forth the determination; 
(2) the paragraph of Exchange Act rule 18a-8 to which the determination 
applies; (3) a brief description of the notification required by the 
paragraph; and (4) a brief description of any additional conditions to 
applying substituted compliance to the requirements.\131\
---------------------------------------------------------------------------

    \131\ The chart below does not include the proposed conditions 
for applying substituted compliance to Exchange Act rule 18a-8; 
namely that the Covered Entity: (1) Must be subject to and comply 
with specified requirements of foreign law; and (2) must promptly 
furnish to a representative of the Commission upon request an 
English translation of a notification. See para. (e)(7) of the 
proposed Order (setting forth the English translation requirement).

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------
           Order paragraph                  Rule paragraph          Rule description            Conditions
----------------------------------------------------------------------------------------------------------------
(e)(4)(i)(B).........................  (c)....................  Prudential regulator     (1) SEC Filing
                                                                 capital category         Condition.
                                                                 adjustment notices.     (2) Contact Information
                                                                                          Condition.
(e)(4)(i)(C).........................  (d)....................  Books and records        (1) SEC Filing
                                                                 notices.                 Condition.
                                                                                         (2) Contact Information
                                                                                          Condition.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary 
determinations with respect to requirements of Exchange Act rule 18a-8 
for which a positive substituted compliance determination would not be 
made because they are fully linked to substantive Exchange Act 
requirements for which the proposed Order would not provide substituted 
compliance by listing in each row: (1) The paragraph of the proposed 
Order that sets forth the determination; (2) the paragraph of Exchange 
Act rule 18a-8 to which the determination applies; (3) a brief 
description of the notification required by the paragraph; and (4) the 
exclusion from substituted compliance.

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------
           Order paragraph                  Rule paragraph          Rule description            Exclusion
----------------------------------------------------------------------------------------------------------------
(e)(4)(ii)(C)........................  (g)....................  Reserve account notices  Rule 18a-4 Exclusion.
----------------------------------------------------------------------------------------------------------------

6. Exchange Act Section 15F(g)
    Exchange Act Section 15F(g) requires SBS Entities, including SBS 
Entities with a prudential regulator, to maintain daily trading 
records.\132\ The Commission preliminarily believes EU and Spanish laws 
produce a comparable result in terms of its daily trading recordkeeping 
requirements.\133\ Accordingly, the Commission preliminarily is making 
a positive substituted compliance determination for the self-executing 
requirements in this paragraph.\134\
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78o-10(g).
    \133\ See SSMA Article 194(1); and RD 217/2008 Article 32(1).
    \134\ See para. (e)(5) to the proposed Order.
---------------------------------------------------------------------------

7. Examination and Production of Records
    The proposed Order would not extend to, and Covered Entities would 
remain subject to, the requirement of Exchange Act section 15F(f) to 
keep books and records open to inspection by any representative of the 
Commission and the requirement of Exchange Act rule 18a-6(g) to furnish 
promptly to a representative of the Commission legible, true, complete, 
and current copies of those records of the Covered Entity that are 
required to be preserved under Exchange Act rule 18a-6, or any other 
records of the Covered Entity that are subject to examination or 
required to be made or maintained pursuant to Exchange Act section 15F 
that are requested by a representative of the Commission.\135\
---------------------------------------------------------------------------

    \135\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g). French and UK Substituted Compliance Orders do not extend 
substituted compliance to these requirements. See French Substituted 
Compliance Order, 86 FR at 41650; UK Substituted Compliance Order, 
86 FR at 43361.
---------------------------------------------------------------------------

    Consequently, every Covered Entity registered with the Commission, 
whether complying directly with Exchange Act requirements or relying on 
substituted compliance as a means of complying with the Exchange Act, 
would be required to satisfy the inspection and production requirements 
imposed on such entities under the Exchange Act. Covered Entities would 
be able to make, keep, and preserve records, subject to the proposed 
conditions described above, in a manner prescribed by applicable EU and 
Spanish requirements. As an element of its substituted compliance 
application, the CNMV has provided the Commission with adequate 
assurances that no law or policy would impede the ability of any entity 
that is directly supervised by the authority and that

[[Page 47685]]

may register with the Commission to provide prompt access to the 
Commission to such entity's books and records or to submit to onsite 
inspection or examination by the Commission. Consistent with those 
assurances and the requirements that apply to all Covered Entities 
under the Exchange Act, Covered Entities operating under the proposed 
Order would need to keep books and records open to inspection by any 
representative of the Commission and to furnish promptly to a 
representative of the Commission legible, true, complete, and current 
copies of those records of the firm that these entities are required to 
preserve under Exchange Act rule 18a-6 (which would include records for 
which a positive substituted compliance determination is being made 
with respect to Exchange Act rule 18a-6 under the Order), or any other 
records of the firm that are subject to examination or required to be 
made or maintained pursuant to Exchange Act section 15F that are 
requested by a representative of the Commission.
8. English Translations
    The proposed Order provides that to the extent documents are not 
prepared in the English language, Covered Entities would need to 
furnish to a representative of the Commission upon request an English 
translation of any record, report, or notification of the Covered 
Entity that is required to be made, preserved, filed, or subject to 
examination pursuant to Exchange Act section 15F or the proposed 
Order.\136\ This condition would be designed to addresses difficulties 
that Commission examinations staff would have examining Covered 
Entities that furnish documents in a foreign language. The English 
translations would need to be provided promptly. This condition is 
included in the French and UK Substituted Compliance Orders.\137\
---------------------------------------------------------------------------

    \136\ See para. (e)(7) to the proposed Order.
    \137\ See French Order, 86 FR at 41651; UK Order, 86 FR at 
43361.
---------------------------------------------------------------------------

VIII. Additional Considerations Regarding Supervisory and Enforcement 
Effectiveness in Spain

A. General Considerations

    As noted above, Exchange Act rule 3a71-6 provides that the 
Commission's assessment of the comparability of the requirements of the 
foreign financial regulatory system must account for ``the 
effectiveness of the supervisory program administered, and the 
enforcement authority exercised'' by the foreign financial regulatory 
authority. This prerequisite accounts for the understanding that 
substituted compliance determinations should reflect the reality of the 
foreign regulatory framework, in that rules that appear high-quality on 
paper nonetheless should not form the basis for substituted compliance 
if--in practice--market participants are permitted to fall short of 
their regulatory obligations. This prerequisite, however, also 
recognizes that differences among the supervisory and enforcement 
regimes should not be assumed to reflect flaws in one regime or 
another.\138\
---------------------------------------------------------------------------

    \138\ See generally Business Conduct Adopting Release, 81 FR 
30079.
---------------------------------------------------------------------------

    In connection with these considerations, the CNMV Application 
includes information regarding the Spanish supervisory and enforcement 
framework applicable to derivatives markets and market participants. 
This includes information regarding the supervisory and enforcement 
authority afforded to authorities in Spain to promote compliance with 
applicable requirements, applicable supervisory and enforcement tools 
and capabilities, consequences of non-compliance, and the application 
of supervisory and enforcement practices in the cross-border context. 
After review of this information, the Commission preliminarily believes 
that the framework is reasonably designed to promote compliance with 
the laws where substituted compliance has been requested.
    In preliminarily concluding that the relevant supervisory and 
enforcement considerations are consistent with substituted compliance, 
the Commission particularly has considered the following factors:

B. Supervisory Framework in Spain

    Supervision of Covered Entities located in Spain is conducted by 
the CNMV and the ECB. The Bank of Spain informed the staff that it does 
not have supervisory authority over significant credit institutions in 
the areas where substituted compliance has been requested, although, as 
explained below, it does play a role in the supervision of anti-money 
laundering laws. In addition, the CNMV and the Bank of Spain cooperate 
closely and have frequent communications regarding the supervision of 
firms to accomplish their respective missions. The ECB, through joint 
supervisory teams (``JSTs''), supervises firms for compliance with the 
CRD and CRR, including all capital requirements. The CNMV and the ECB 
have the ability to request records needed for supervision from firms 
through the supervisory process. In addition, the CNMV and the ECB set 
annual priorities and conduct thematic reviews, which are used to 
enhance supervision in specific regulatory areas. The results of these 
thematic reviews are made public to provide transparency to the 
industry.
    The CNMV uses a risk-based approach to supervision to determine 
which firms will receive the most supervisory attention. Under the 
CNMV's risk framework, the largest banks providing investment services 
are included in the top tier. The CNMV is in daily contact with the 
largest firms through phone calls and emails and also conducts meetings 
with senior management. The CNMV uses a number of tools to supervise 
Covered Entities. For the largest firms, the CNMV conducts periodic 
monitoring of the confidential reports submitted by the firms to the 
CNMV regarding the conduct of business rules. This information is 
analyzed against existing information at the CNMV and, if red flags are 
spotted, different actions can be taken. For example, the information 
in the reports may be used to determine whether the firm should undergo 
an onsite inspection or a limited review. If red flags are spotted at 
several firms, a thematic review may be launched to obtain more 
information from these entities.
    The CNMV creates an annual supervision plan based on the 
information available on each one of the entities under the CNMV's 
supervision (e.g., systemic and financial risk, complaints received, 
previous supervisory experience with the firm, etc.) and the time that 
has passed since the last visit. This plan is based on an analysis of 
the potential risks in the sector and is shared with the Bank of Spain 
but is not otherwise made public. The CNMV uses a risk-based process to 
determine when it will conduct an onsite examination looking at factors 
such as systemic risks, types of services provided, types of products 
distributed, complaints, and the time since the last on-site 
inspection. The CNMV plans its onsite examinations as part of the 
annual supervision plan but can also decide to conduct a limited review 
of certain areas if issues or concerns arise during the year. At the 
end of the onsite portion of the examination, a report is issued and a 
formal Letter of Findings (``LoF'') is communicated to the firm. The 
LoF is addressed to the Compliance Officer who must inform the firm's 
Board of Directors. A copy of the LoF is also sent to the Bank of 
Spain.
    Firms are required to give a formal response to the LoF containing 
their

[[Page 47686]]

observations, a commitment that the firm will change its procedures and 
resolve any deficiencies observed, and confirmation that the entity's 
Board of Directors has been informed of the CNMV LoF and of the 
response given. Within six months, the firm must provide a compliance 
report describing how the firm has corrected deficiencies observed 
during the inspection. The CNMV verifies that changes have been made 
through desk reviews or in a subsequent onsite visit. If follow-up 
measures are deemed necessary, the CNMV will launch a supervisory 
activity to assess the new procedures in place at the firm. If 
appropriate changes have not been made or the conduct is severe, the 
CNMV may refer the matter to CNMV's enforcement program.
    The coordination of compliance with the anti-money laundering laws 
is done by the Commission for the Prevention of Money Laundering and 
Monetary Offenses (``COPBLAC''), through cooperation arrangements with 
the Bank of Spain and the CNMV. The Executive Service of the Commission 
for the Prevention of Money Laundering and Monetary Offences 
(``SEPBLAC'') works with the Bank of Spain and the CNMV to supervise 
Covered Entities for compliance with the anti-money laundering laws. 
The Bank of Spain and CNMV follow a risk-based approach to perform 
supervisory activities, with their main supervisory task to determine 
the AML/CFT risk profile of the firm. The Bank of Spain and CNMV also 
conduct onsite inspections based on an annual supervisory plan, which 
is approved by COPBLAC. After an inspection, the Bank of Spain and CNMV 
share a summary of conclusions and, where appropriate, recommendations, 
with the firm. The firm addresses the recommendations through a 
remediation plan that is monitored by the Bank of Spain or CNMV. The 
inspection report is shared with COPBLAC, who ultimately decides on 
what binding supervisory measures or sanctions to impose.
    Supervision of the CRD and CRR is conducted through the ECB's 
single supervisory mechanism and executed by JSTs comprising of ECB 
staff, Bank of Spain staff, and staff from other countries in the EU 
where the significant institution has a subsidiary or branch. The Bank 
of Spain assigns multiple supervisors to the JST for a significant 
institution headquartered in Spain. The head of the JST is from the ECB 
and generally is not from the country where the significant institution 
is located. As part of its day-to-day supervision, the JST analyzes the 
supervisory reporting, financial statements, and internal documentation 
of supervised entities. The JSTs hold regular and ad hoc meetings with 
the supervised entities at various levels of staff seniority. They 
conduct ongoing risk analyses of approved risk models, and analyze and 
assess the recovery plans of supervised entities. The various 
supervisory activities typically result in supervisory measures 
addressed to the supervised institution. Supervisory activities and 
decisions result in a number of routine steps such as the monitoring of 
compliance by the JST and, if necessary, enforcement measures and 
sanctions. In addition to ongoing supervision, the JST may conduct in-
depth reviews on certain topics by organizing a dedicated onsite 
mission (e.g., an inspection or an internal model investigation). The 
onsite inspections are carried out by an independent inspection team, 
which works in close cooperation with the respective JST.

C. Enforcement Authority in Spain

    CNMV is empowered to investigate and sanction very serious, 
serious, and minor infringements of law. The most common source of 
information regarding infringements is the supervisory activity of the 
Supervision Department and the Secondary Markets Department. In 
addition, CNMV may initiate investigations based on whistleblower 
complaints. According to CNMV, when a breach is committed by a credit 
institution, a report from the Bank of Spain is a prerequisite for 
imposing sanctions for serious or very serious infringements. The Bank 
of Spain has informed the staff that it does not have enforcement 
authority over significant credit institutions in the areas where 
substituted compliance has been requested. As described below, 
enforcement of the CRD and CRR for violations detected by the joint 
supervisory teams is conducted by the ECB. In addition, violations 
related to anti-money laundering are investigated and sanctioned by 
SEPBLAC, which has sole enforcement decision-making power with regard 
to the Spanish Money Laundering Act.
    CNMV has an array of investigative capacities that enable it to 
detect and enforce against breaches of relevant laws. It is empowered 
to perform its enforcement functions with respect to both legal and 
natural persons, including those persons holding directorships or 
executive positions in Covered Firms. Among the investigative tools 
available to CNMV are: The power to inspect on premises of a Covered 
Firm, the power to compel documents, information, and statements, and 
the power to obtain electronic communications for third parties with 
the subject's consent, or pursuant to judicial authorization. Upon 
receiving and considering a supervisory report containing sound 
evidence of a possible infringement, CNMV's enforcement unit prepares a 
legal assessment regarding the findings contained the report, and 
provides the assessment and the report to CNMV's Executive Committee. 
The Executive Committee then determines whether to initiate a 
sanctioning procedure. At the conclusion of such procedures, a wide 
range of possible sanctions may be imposed including, among others: 
Public reprimand, pecuniary sanctions up to 30M[euro], suspension or 
restriction of the type or volume of transactions the sanctioned party 
may carry out in the securities markets, disqualification from holding 
a directorship or executive post a financial institution for up to ten 
years, or disgorgement of profits made or losses avoided as a result of 
the infringement. CNMV is not empowered to enter into settlement 
agreements, but may impose a penalty discounted by 40% where the 
sanctioned party undertakes early payment, recognizes liabilities and 
waives the right to appeal within the administrative bodies. In the 
event the procedure continues, a 20% discount may be granted upon early 
payment (and waiver of the right to appeal the decision before the 
administrative body) at any time prior to the adoption of final 
decision. CNMV publicizes all serious and very serious infringements 
without undue delay provided publication is proportionate and would not 
jeopardize financial stability.
    Misconduct detected by the JSTs is addressed primarily by the ECB. 
Under the SSM Regulations, the ECB is empowered to address issues of 
noncompliance with applicable European Union law by directly imposing 
enforcement measures on supervised entities or requiring the CNMV to 
use its national enforcement powers. It also may choose to impose 
administrative penalties or request that the CNMV open sanctioning 
proceedings. In particular, the ECB may impose administrative pecuniary 
penalties, and may impose fines and periodic penalty payments per day 
of infringement. Where appropriate, the ECB may exercise its 
enforcement authority in parallel with supervisory measures.
    Where infringements of the SMLA occur, the SEPBLAC is empowered to 
conduct necessary inspections to verify compliance with the obligations 
relating to the functions assigned to it. In this regard, the obliged 
persons and their

[[Page 47687]]

employees, directors and agents are required to cooperate to the 
fullest extent possible with the staff of the SEPBLAC, providing 
unrestricted access to as much information or documentation as is 
required, including books, accounts, records, software, magnetic files, 
internal reports, minutes, official statements and any other related 
matters subject to inspection. However, the SEPBLAC is not competent to 
accede to obtain third party records (such as internet service 
providers or telephone records). Various sanctions are available to the 
SEPBLAC when infringements are determined to have occurred. Among the 
sanctions that the SEPBLAC may impose are: Public reprimand, a fine of 
no less than 150,000[euro] imposed against the Covered Entity, plus 
additional fines against those individuals in administrative or 
management positions who were responsible for the Covered Entity's 
violation, and withdrawal of administrative authorization for the 
Covered Entity.

IX. Request for Comment

    Commenters are invited to address all aspects of the application, 
the Commission's preliminary views and the proposed Order.

A. General Aspects of the Comparability Assessments and Proposed Order

    The Commission requests comment regarding the preliminary views and 
proposed Order in connection with each of the general ``regulatory 
outcome'' categories addressed above. Commenters particularly are 
invited to address, among other issues, whether the relevant Spanish 
and EU provisions generally are sufficient to produce regulatory 
outcomes that are comparable to the outcomes associated with 
requirements under the Exchange Act, and whether the conditions and 
limitations of the proposed Order would adequately address potential 
gaps in the relevant regulatory outcomes or would otherwise result in 
any implementation or other practical issues. Further, the Commission 
requests comment regarding whether the proposed conditions and 
limitations guard against comparability gaps arising from the cross-
border application of Spanish and EU requirements (including when SBS 
Entities conduct security-based swap business through branches located 
in the United States or in third countries). Should the Commission 
require Covered Entities to be subject to and comply with additional or 
alternative limitations and/or conditions to achieve a comparable 
regulatory outcome, or are any of the proposed limitations or 
conditions unnecessary to achieve a comparable regulatory outcome? 
Explain why or why not.
    With respect to the proposed conditions and limitations, commenters 
also are invited to address any differences between Spanish regulatory 
requirements and frameworks and the German, French, or UK requirements 
and frameworks that formed the basis for the Commission's conditional 
grant of substituted compliance for Germany, France, and the UK and/or 
for the Commission's proposal to amend its conditional grant of 
substituted compliance for Germany.\139\ Would the responses to any of 
the questions that the Commission asked in connection with the German, 
French, and/or UK notices and proposed orders differ if those questions 
applied to Spanish regulatory requirements and frameworks? \140\
---------------------------------------------------------------------------

    \139\ See German Substituted Compliance Order, 85 FR 85688-89; 
French Substituted Compliance Order, 86 FR 41616-22; UK Substituted 
Compliance Order, 86 FR 43321-31; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46501-03.
    \140\ See German Substituted Compliance Notice and Proposed 
Order, 85 FR 72740-43; French Substituted Compliance Notice and 
Proposed Order, 85 FR 85736-39; French Substituted Compliance Re-
Opening Release, 86 FR 18341-49; UK Substituted Compliance Notice 
and Proposed Order, 86 FR 18406-11; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46523-27.
---------------------------------------------------------------------------

B. Risk Control Requirements

    The Commission further requests comment regarding the proposed 
grant of substituted compliance in connection with requirements under 
the Exchange Act related to internal risk management, trade 
acknowledgement and verification, portfolio reconciliation and dispute 
reporting, portfolio reconciliation, and trading relationship 
documentation. Commenters particularly are invited to address the basis 
for substituted compliance in connection with those risk control 
requirements, and the proposed conditions and limitations connected to 
substituted compliance for those requirements. Do Spanish and EU laws 
taken as a whole produce regulatory outcomes that are comparable to 
Exchange Act requirements? In this regard, commenters are invited to 
address the Spanish and EU laws that a Covered Entity would have to be 
subject to and comply with in connection with each substituted 
compliance determination for a particular set of risk control 
requirements. With respect to each substituted compliance 
determination, the Commission seeks comment on the following matters: 
(1) Will the Covered Entity's status being subject to, and its 
compliance with, the Spanish and EU laws listed in the determination 
result in a comparable regulatory outcome; (2) are there additional or 
alternative Spanish and/or EU laws that Covered Entities should be 
required to be subject to and comply with to achieve a comparable 
regulatory outcome; and (3) are any of the Spanish and/or EU laws 
listed in the determination unnecessary to achieve a comparable 
regulatory outcome? Explain why or why not.
    With respect to trading relationship documentation requirements, 
the Commission invites commenters to address the proposed exclusion of 
certain legal and bankruptcy status disclosures from the proposed 
substituted compliance for trading relationship documentation 
requirements when the counterparty is a U.S. person. Do any additional 
or alternative Spanish and/or EU requirements require Covered Entities 
to make the legal and bankruptcy disclosures described in Exchange Act 
rule 15Fi-5(b)(5)?
    With respect to portfolio reconciliation and dispute reporting 
requirements, the Commission also invites commenters to address the 
condition requiring a Covered Entity to provide the Commission with 
reports regarding disputes between counterparties on the same basis as 
the Covered Entity provides those reports to competent authorities 
pursuant to Spanish and EU law. Would differences in the timing of 
dispute reports made pursuant to Exchange Act requirements as compared 
to reports made pursuant to Spanish and EU law make Spanish and EU 
portfolio reconciliation and dispute reporting requirements not 
comparable to Exchange Act requirements?
    Commenters further are invited to address any differences between 
Spanish regulatory requirements and frameworks and the German, French, 
and UK requirements and frameworks that formed the basis for the 
Commission's conditional grants of substituted compliance for certain 
risk control requirements in those countries and/or for the 
Commission's proposal to amend its conditional grant of substituted 
compliance for Germany.\141\ Would the responses to any of the 
questions that the Commission asked in connection with the German, 
French and/or UK notices and proposed orders

[[Page 47688]]

differ if those questions applied to Spanish regulatory requirements 
and frameworks? \142\
---------------------------------------------------------------------------

    \141\ See German Substituted Compliance Order, 85 FR 85689-91; 
French Substituted Compliance Order, 86 FR 41622-29; UK Substituted 
Compliance Order, 86 FR at 43331-37; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46503-04.
    \142\ See note 140, supra.
---------------------------------------------------------------------------

C. Internal Supervision, Chief Compliance Officer and Antitrust 
Requirements

    The Commission requests comment regarding the proposed grant of 
substituted compliance in connection with requirements under the 
Exchange Act related to internal supervision and chief compliance 
officer requirements. Commenters particularly are invited to address 
the basis for substituted compliance in connection with internal 
supervision and chief compliance officer requirements, and the proposed 
conditions and limitations connected to substituted compliance for 
those requirements. Do Spanish and EU laws taken as a whole produce 
regulatory outcomes that are comparable to Exchange Act requirements? 
In this regard, commenters are invited to address the Spanish and EU 
laws that a Covered Entity would have to be subject to and comply with 
in connection with the substituted compliance determinations for 
internal supervision and chief compliance officer requirements. With 
respect to each substituted compliance determination, the Commission 
seeks comment on the following matters: (1) Will the Covered Entity's 
status being subject to, and its compliance with, the Spanish and EU 
laws listed in the determination result in a comparable regulatory 
outcome; (2) are there additional or alternative Spanish and/or EU laws 
that Covered Entities should be required to be subject to and comply 
with to achieve a comparable regulatory outcome; and (3) are any of the 
Spanish and/or EU laws listed in the determination unnecessary to 
achieve a comparable regulatory outcome? Explain why or why not.
    With respect to internal supervision requirements, the Commission 
invites commenters to address the proposed condition that would require 
a Covered Entity to comply with applicable Spanish and EU internal 
supervision requirements as if those provisions also require the 
Covered Entity to comply with applicable requirements under the 
Exchange Act and the other applicable conditions of the proposed Order. 
Should the Commission require additional or alternative conditions 
relating to internal supervision of the Covered Entity's compliance 
with the Exchange Act and the applicable conditions of the proposed 
Order? Explain why or why not.
    With respect to chief compliance officer requirements, the 
Commission also invites commenters to address the proposed conditions 
requiring the Covered Entity to provide the Commission with each of its 
MiFID Org Reg compliance reports. The Commission seeks comment on the 
following matters: (1) Would an additional or alternative certification 
and/or scope of each compliance report produce a more comparable 
outcome; (2) are the proposed certification and/or scope requirements 
unnecessary to achieve a comparable regulatory outcome; (3) would an 
alternative deadline for the Covered Entity to provide these reports to 
the Commission produce a more comparable regulatory outcome? Explain 
why or why not.
    Commenters further are invited to address the Commission's 
preliminary determination not to grant substituted compliance for 
Exchange Act antitrust requirements. The Commission seeks comment on 
the following matters: (1) Will the Covered Entity's status being 
subject to, and its compliance with, the Spanish and EU laws listed in 
the CNMV Application result in a comparable regulatory outcome; and (2) 
are there additional or alternative Spanish and/or EU laws that Covered 
Entities could be required to be subject to and comply with to achieve 
a comparable regulatory outcome? Explain why or why not.
    Commenters further are invited to address any differences between 
Spanish regulatory requirements and frameworks and the German, French, 
and/or UK requirements and frameworks that formed the basis for the 
Commission's conditional grants of substituted compliance for certain 
internal supervision and chief compliance officer requirements in those 
countries and/or for the Commission's proposal to amend its conditional 
grant of substituted compliance for Germany.\143\ Explain why or why 
not. Would the responses to any of the questions about internal 
supervision, chief compliance officer, and antitrust requirements that 
the Commission asked in connection with the German, French, and/or UK 
notices and proposed orders differ if those questions applied to 
Spanish regulatory requirements and frameworks? \144\ Explain why or 
why not.
---------------------------------------------------------------------------

    \143\ See German Substituted Compliance Order, 85 FR 85691-92; 
French Substituted Compliance Order, 86 FR 41639-43; UK Substituted 
Compliance Order, 86 FR 43347-53; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46503-04, 46511.
    \144\ See note 140, supra.
---------------------------------------------------------------------------

D. Counterparty Protection Requirements

    The Commission requests comment regarding the proposed grant of 
substituted compliance in connection with certain counterparty 
protection requirements under the Exchange Act. Commenters particularly 
are invited to address the basis for substituted compliance in 
connection with counterparty protection requirements, and the proposed 
conditions and limitations connected to substituted compliance for 
those requirements. Do Spanish and EU laws taken as a whole produce 
regulatory outcomes that are comparable to Exchange Act requirements? 
In this regard, commenters are invited to address the Spanish and EU 
laws that a Covered Entity would have to be subject to and comply with 
in connection with each substituted compliance determination for a 
particular set of counterparty protection requirements. With respect to 
each substituted compliance determination, the Commission seeks comment 
on the following matters: (1) Will the Covered Entity's status being 
subject to, and its compliance with, the Spanish and EU laws listed in 
the determination result in a comparable regulatory outcome; (2) are 
there additional or alternative Spanish and/or EU laws that Covered 
Entities should be required to be subject to and comply with to achieve 
a comparable regulatory outcome; and (3) are any of the Spanish and/or 
EU laws listed in the determination unnecessary to achieve a comparable 
regulatory outcome? Explain why or why not.
    With respect to suitability requirements, the Commission also 
invites commenters to address the proposed limitation of substituted 
compliance to recommendations to counterparties that are per se 
professional clients as defined in MiFID and that are not special 
entities for purposes of the Exchange Act. Would Spanish and EU 
suitability requirements for elective professional clients, retail 
clients and/or special entities produce regulatory outcomes comparable 
to Exchange Act suitability requirements? Explain why or why not.
    With respect to daily mark disclosure requirements, the Commission 
also invites commenters to address the proposed limitation of 
substituted compliance to security-based swaps in portfolios that the 
Covered Entity is required to reconcile, and in fact does reconcile, on 
each business day. Are there additional or alternative Spanish and/or 
EU laws that apply to a broader

[[Page 47689]]

range of security-based swaps? Explain why or why not.
    Commenters further are invited to address the Commission's 
preliminary determination not to grant substituted compliance for 
Exchange Act clearing rights disclosure requirements. The Commission 
seeks comment on the following matters: (1) Will the Covered Entity's 
status being subject to, and its compliance with, the Spanish and EU 
laws listed in the CNMV Application result in a comparable regulatory 
outcome; and (2) are there additional or alternative Spanish and/or EU 
laws that Covered Entities could be required to be subject to and 
comply with to achieve a comparable regulatory outcome? Explain why or 
why not.
    Commenters further are invited to address any differences between 
Spanish regulatory requirements and frameworks and the German, French, 
and/or UK requirements and frameworks that formed the basis for the 
Commission's conditional grants of substituted compliance for certain 
of those counterparty protection requirements in those countries and/or 
for the Commission's proposal to amend its conditional grant of 
substituted compliance for Germany.\145\ Explain why or why not. Would 
the responses to any of the questions about counterparty protection 
requirements that the Commission asked in connection with the German, 
French, and/or UK notices and proposed orders differ if those questions 
applied to Spanish regulatory requirements and frameworks? \146\ 
Explain why or why not.
---------------------------------------------------------------------------

    \145\ See German Substituted Compliance Order, 85 FR 85692-95; 
French Substituted Compliance Order, 86 FR 41643-48; UK Substituted 
Compliance Order, 86 FR 43353-59; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46511-12.
    \146\ See note 140, supra.
---------------------------------------------------------------------------

E. Recordkeeping, Reporting, and Notification

    The Commission requests comment regarding the proposed grants of 
substituted compliance in connection with requirements under the 
Exchange Act related to recordkeeping, reporting, and notification, as 
well as the requirement of Exchange Act section 15F(g). Commenters 
particularly are invited to address the basis for substituted 
compliance in connection with those requirements, and the proposed 
conditions and limitations connected to substituted compliance for 
those requirements. Do EU and Spanish law taken as a whole produce 
regulatory outcomes that are comparable to those of Exchange Act 
section 15F(g) and Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8? 
In this regard, commenters are invited to address the EU and Spanish 
laws cited for each substituted compliance determination with respect 
to the distinct requirements within the recordkeeping, reporting, and 
notification rules (i.e., the rules for which a more granular approach 
to substituted compliance is being taken). With respect to each 
substituted compliance determination, the Commission seeks comment on 
the following matters: (1) Will the EU and Spanish laws cited for the 
determination result in a comparable regulatory outcome; (2) are there 
additional or alternative EU or Spanish laws that should be cited to 
achieve a comparable regulatory outcome; and (3) are any of the EU or 
Spanish laws cited for the determination unnecessary to achieve a 
comparable regulatory outcome?
    Commenters particularly are invited to address the proposed 
condition with respect to Exchange Act rule 18a-5 that the Covered 
Entity: (1) Preserve all of the data elements necessary to create the 
records required by Exchange Act rules 18a-5(b)(1), (2), (3), and (7); 
and (2) upon request furnish promptly to representatives of the 
Commission the records required by those rules. Do the relevant EU and 
Spanish laws require Covered Entities to retain the data elements 
necessary to create the records required by these rules? If not, please 
identify which data elements are not preserved pursuant to the relevant 
EU and Spanish laws. Further, how burdensome would it be for a Covered 
Entity to format the data elements into the records required by these 
rules (e.g., a blotter, ledger, or securities record, as applicable) if 
the firm was requested to do so? In what formats do Covered Entities in 
Spain produce this information to the CNMV or other EU or Spanish 
authorities? How do those formats differ from the formats required by 
Exchange Act rules 18a-5(b)(1), (2), (3), and (7)?
    Is it appropriate to structure the Commission's substituted 
compliance determinations in the proposed Order to provide Covered 
Entities with greater flexibility to select which distinct requirements 
within the broader recordkeeping, reporting, and notification rules for 
which they want to apply substituted compliance? Explain why or why 
not. For example, would it be more efficient for a Covered Entity to 
comply with certain Exchange Act requirements within a given rule 
(rather than apply substituted compliance) because it can utilize 
systems that its affiliated broker-dealer has implemented to comply 
with them? If so, explain why. If not, explain why not. Is it 
appropriate to permit Covered Entities to take a more granular approach 
to the requirements within the recordkeeping rules? For example, would 
this approach make it more difficult for the Commission to get a 
comprehensive understanding of the Covered Entity's security-based swap 
activities and financial condition? Explain why or why not. Would it be 
overly complex for the Covered Entity to administer a firm-wide 
recordkeeping system under this approach? Explain why or why not.
    Certain of the Commission's recordkeeping and notification 
requirements are fully or partially linked to substantive Exchange Act 
requirements for which a positive substituted compliance determination 
preliminarily would not be made under the proposed Order. In these 
cases, should the Commission not make a positive substituted compliance 
determination for the fully linked requirement in the recordkeeping or 
notification rules or to the portion of the requirement that is linked 
to a substantive Exchange Act requirement? In particular, should the 
Commission not make a positive substituted compliance determination for 
recordkeeping or notification requirements linked to the following 
Exchange Act rules for which a positive substituted compliance 
determination is preliminarily not being made: (1) Exchange Act rule 
15Fh-4; (2) Exchange Act rule 15Fh-5; (3) Exchange Act rule 15Fh-6; (4) 
Exchange Act rule 18a-4; (5) Regulation SBSR; (6) Form SBSE and its 
variations; (7) Exchange Act rule 15Fh-1; and (8) Exchange Act rule 
15Fh-2? If not, explain why.
    Certain of the requirements in the Commission's recordkeeping rules 
are linked to substantive Exchange Act requirements where a positive 
substituted compliance determination is being made under the proposed 
Order. In these cases, should a positive substituted compliance 
determination for the linked requirement in the recordkeeping rule be 
conditioned on the Covered Entity applying substituted compliance to 
the linked substantive Exchange Act requirement? If not, explain why. 
Should this be the case regardless of whether the requirement is fully 
or partially linked to the substantive Exchange Act requirement? If 
not, explain why. In particular, should substituted compliance for 
recordkeeping, reporting, and notification requirements linked to the 
following Exchange Act rules be conditioned on the Covered Entity

[[Page 47690]]

applying substituted compliance to the linked substantive Exchange Act 
rule: (1) Exchange Act rule 15Fh-3; (2) Exchange Act rule 15Fi-2; (3) 
Exchange Act rule 15Fi-3; (4) Exchange Act rule 15Fi-4; (5) Exchange 
Act rule 15Fi-5; and (6) Exchange Act rule 15Fk-1? If not, explain why.
    Commenters also are invited to address the preliminary positive 
substituted compliance determination with respect to Exchange Act rule 
18a-7, which would be conditioned on the Covered Entity filing 
financial and operational information with the Commission in the manner 
and format specified by the Commission by order or rule. Should the 
Commission require Covered Entities to file the financial and 
operational information using the FOCUS Report Part IIC? Are there line 
items on the FOCUS Report Part IIC that elicit information that is not 
included in the reports Covered Entities with a prudential regulator 
file with the CNMV or other EU or Spanish authorities? If so, do 
Covered Entities with a prudential regulator record that information in 
their required books and records? Please identify any information that 
is elicited in the FOCUS Report Part IIC that is not: (1) Included in 
the financial reports filed by Covered Entities with the CNMV; or (2) 
recorded in the books and records required of Covered Entities. Would 
the answer to these questions change if references to FFIEC Form 031 
were not included in the FOCUS Report Part IIC? If so, how? As a 
preliminary matter, as a condition of substituted compliance should 
Covered Entities file a limited amount of financial and operational 
information on the FOCUS Report Part IIC for a period of two years to 
further evaluate the burden of requiring all applicable line items to 
be filled out? If so, which line items should be required? To the 
extent that Covered Entities otherwise report or record information 
that is responsive to the FOCUS Report Part IIC, how could the 
information on this report be integrated into a database of filings the 
Commission or its designee will maintain for filers of the FOCUS Report 
Parts IIC (e.g., the eFOCUS system) to achieve the objective of being 
able to perform cross-form analysis of information entered into the 
uniquely numbered line items on the forms?
    Commenters further are invited to address any differences between 
Spanish regulatory requirements and frameworks and the German, French, 
and/or UK requirements and frameworks that formed the basis for the 
Commission's conditional grants of substituted compliance for 
recordkeeping, reporting, and notification requirements in those 
countries and/or for the Commission's proposal to amend its conditional 
grant of substituted compliance for Germany.\147\ Would the responses 
to any of the questions about those requirements that the Commission 
asked in connection with the German, French, and/or UK notices and 
proposed orders differ if those questions applied to Spanish regulatory 
requirements and frameworks?
---------------------------------------------------------------------------

    \147\ See German Substituted Compliance Order, 85 FR 85695-97; 
French Substituted Compliance Order, 86 FR 41648-57; UK Substituted 
Compliance Order, 86 FR 43359-69; German Substituted Compliance 
Notice and Proposed Amended Order, 86 FR 46512-22.
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F. Supervisory and Enforcement Issues

    The Commission further requests comment regarding how to weigh 
considerations regarding supervisory and enforcement effectiveness in 
Spain as part of the comparability assessments. Commenters particularly 
are invited to address relevant issues regarding the effectiveness of 
Spanish supervision and enforcement over firms that may register with 
the Commission as SBS Entities, including but not limited to issues 
regarding:
     The relevant Spanish authorities for the supervision and 
enforcement of the areas of law where substituted compliance has been 
requested and the supervision and enforcement role played by each 
authority;
     Spanish supervisory and enforcement authority, supervisory 
inspection practices, and the use of alternative supervisory and/or 
enforcement tools and practices;
     Spanish supervisory and enforcement effectiveness with 
respect to derivatives such as security-based swaps; and
     Spanish supervision and enforcement in the cross-border 
context (e.g., any differences between the oversight of firms' 
businesses within Spain and the oversight of activities and branches 
outside of Spain, including within the United States).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\148\
---------------------------------------------------------------------------

    \148\ 17 CFR 200.30-3(a)(89).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.

Attachment A

    It is hereby determined and ordered, pursuant to rule 3a71-6 under 
the Exchange Act, that a Covered Entity (as defined in paragraph (g)(1) 
of this Order) may satisfy the requirements under the Exchange Act that 
are addressed in paragraphs (b) through (e) of this Order so long as 
the Covered Entity is subject to and complies with relevant 
requirements of the Kingdom of Spain and the European Union and with 
the conditions of this Order, as amended or superseded from time to 
time.

(a) General Conditions

    This Order is subject to the following general conditions, in 
addition to the conditions specified in paragraphs (b) through (e):
    (1) Activities as MiFID ``investment services or activities.'' For 
each condition in paragraphs (b) through (e) of this Order that 
requires the application of, and the Covered Entity's compliance with, 
provisions of MiFID; provisions of SSMA and/or RD 217/2008 that 
implement MiFID; and/or other EU and Spanish requirements adopted 
pursuant to those provisions, the Covered Entity's relevant security-
based swap activities constitute ``investment services'' or 
``investment activities,'' as defined in MiFID article 4(1)(2) and in 
SSMA article 140, and fall within the scope of the Covered Entity's 
authorization from the CNMV and the ECB to provide investment services 
and/or perform investment activities in the Kingdom of Spain.
    (2) Counterparties as MiFID ``clients.'' For each condition in 
paragraphs (b) through (e) of this Order that requires the application 
of, and the Covered Entity's compliance with, provisions of MiFID; 
provisions of SSMA and/or RD 217/2008 that implement MiFID; and/or 
other EU and Spanish requirements adopted pursuant to those provisions, 
the relevant counterparty (or potential counterparty) to the Covered 
Entity is a ``client'' (or potential ``client''), as defined in MiFID 
article 4(1)(9) and in the First Additional Provision of Royal Decree 
Law 14/2018, of 28 September.
    (3) Security-based swaps as MiFID ``financial instruments.'' For 
each condition in paragraphs (b) through (e) of this Order that 
requires the application of, and the Covered Entity's compliance with, 
provisions of MiFID; provisions of SSMA and/or RD 217/2008 that 
implement MiFID; and/or other EU and Spanish requirements adopted 
pursuant to those provisions, the relevant security-based swap is a 
``financial instrument,'' as defined in MiFID article 4(1)(15) and in 
the Annex to SSMA.
    (4) Covered Entity as CRD/CRR ``institution.'' For each condition 
in paragraph (b) through (e) of this Order that requires the 
application of, and the Covered Entity's compliance with, the 
provisions of CRD; provisions of LOSSEC, RD 84/2015, BoS Circular 2/

[[Page 47691]]

2016, SSMA, and/or RD 217/2008 that implement CRD; CRR; and/or other EU 
and Spanish requirements adopted pursuant to those provisions, the 
Covered Entity is an ``institution,'' as defined in CRD article 3(1)(3) 
and CRR article 4(1)(3), and either a credit institution, as defined in 
LOSSEC article 1 (in the case of a provision of LOSSEC, RD 84/2015, 
and/or BoS Circular 2/2016), or an investment firm, as defined in SSMA 
article 138 (in the case of a provision of SSMA and/or RD 217/2008 that 
implements CRD).
    (5) Counterparties as EMIR ``counterparties.'' For each condition 
in paragraphs (b) through (e) of this Order that requires the 
application of, and the Covered Entity's compliance with, provisions of 
EMIR, EMIR RTS, EMIR Margin RTS, and/or other EU requirements adopted 
pursuant to those provisions, if the relevant provision applies only to 
the Covered Entity's activities with specified types of counterparties, 
and if the counterparty to the Covered Entity is not any of the 
specified types of counterparty, the Covered Entity complies with the 
applicable condition of this Order:
    (i) As if the counterparty were the specified type of counterparty; 
in this regard, if the Covered Entity reasonably determines that the 
counterparty would be a financial counterparty if it were established 
in the EU and authorized by an appropriate EU authority, it must treat 
the counterparty as if the counterparty were a financial counterparty; 
and
    (ii) Without regard to the application of EMIR article 13.
    (6) Security-based swap status under EMIR. For each condition in 
paragraphs (b) through (e) of this Order that requires the application 
of, and the Covered Entity's compliance with, provisions of EMIR, EMIR 
RTS, EMIR Margin RTS, and/or other EU requirements adopted pursuant to 
those provisions, either:
    (i) The relevant security-based swap is an ``OTC derivative'' or 
``OTC derivative contract,'' as defined in EMIR article 2(7), that has 
not been cleared by a central counterparty and otherwise is subject to 
the provisions of EMIR article 11, EMIR RTS articles 11 through 15, and 
EMIR Margin RTS article 2; or
    (ii) The relevant security-based swap has been cleared by a central 
counterparty that is authorized or recognized to clear derivatives 
contracts by a relevant authority in the EU.
    (7) Memorandum of Understanding with the Spanish Authorities. The 
Commission and the CNMV and the Bank of Spain have a supervisory and 
enforcement memorandum of understanding and/or other arrangement 
addressing cooperation with respect to this Order at the time the 
Covered Entity complies with the relevant requirements under the 
Exchange Act via compliance with one or more provisions of this Order.
    (8) Memorandum of Understanding Regarding ECB-Owned Information. 
The Commission and the ECB have a supervisory and enforcement 
memorandum of understanding and/or other arrangement addressing 
cooperation with respect to this Order as it pertains to information 
owned by the ECB at the time the Covered Entity complies with the 
relevant requirements under the Exchange Act via compliance with one or 
more provisions of this Order.
    (9) Notice to Commission. A Covered Entity relying on this Order 
must provide notice of its intent to rely on this Order by notifying 
the Commission in writing. Such notice must be sent to the Commission 
in the manner specified on the Commission's website. The notice must 
include the contact information of an individual who can provide 
further information about the matter that is the subject of the notice. 
The notice must also identify each specific substituted compliance 
determination within paragraphs (b) through (e) of this Order for which 
the Covered Entity intends to apply substituted compliance. A Covered 
Entity must promptly provide an amended notice if it modifies its 
reliance on the substituted compliance determinations in this Order.
    (10) European Union Cross-Border Matters.
    (i) If, in relation to a particular service provided by a Covered 
Entity, responsibility for ensuring compliance with any provision of 
MiFID or MiFIR or any other EU or Spanish requirement adopted pursuant 
to MiFID or MiFIR listed in paragraphs (b) through (e) of this Order is 
allocated to an authority of the Member State of the European Union in 
whose territory a Covered Entity provides the service, the CNMV must be 
the authority responsible for supervision and enforcement of that 
provision or requirement in relation to the particular service.
    (ii) If responsibility for ensuring compliance with any provision 
of MAR or any other EU requirement adopted pursuant to MAR listed in 
paragraphs (b) through (e) of this Order is allocated to one or more 
authorities of a Member State of the European Union, one of such 
authorities must be the CNMV.
    (11) Notification Requirements Related to Changes in Capital. A 
Covered Entity that is prudentially regulated relying on this Order 
must apply substituted compliance with respect to the requirements of 
Exchange Act rule 18a-8(c) and the requirements of Exchange Act rule 
18a-8(h) as applied to Exchange Act rule 18a-8(c).

(b) Substituted Compliance in Connection With Risk Control Requirements

    This Order extends to the following provisions related to risk 
control:
    (1) Internal risk management. The requirements of Exchange Act 
section 15F(j)(2) and related aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that
    (i) The Covered Entity is subject to and complies with the 
requirements of:
    (A) MiFID articles 16 and 23; SSMA articles 193, 194, 208bis, 
220bis, 221, 222, 223, and 224; and RD 217/2008 articles 30, 30bis, 
30ter, 30qu[aacute]ter, 30quinqies, 30sexies, 32, 41, 42, 43, 44, 45, 
46, 47, 48, 61, 66, 67, 68, 69, 70, 71, 72, 72bis, 72ter, 73, 74, 
74bis, 74ter, 75, 75bis, 76, 76bis, and 79; and, if the Covered Entity 
is a credit institution, also BoS Circular 2/2016 article 43 and RD 84/
2015 article 22;
    (B) MiFID Org Reg articles 21 through 37, 72 through 76 and Annex 
IV;
    (C) CRD articles 74, 76, 79 through 87, 88(1), 91(1) and (2), 91(7) 
through (9), 92, 94, and 95; SSMA articles 182(1) and (2) and 183(1) 
and (2); and RD 217/2008 article 35; and, if the Covered Entity is a 
credit institution, also LOSSEC articles 24, 25, 26, 27, 28, 29, 32, 
33, 34, 36, 37, and 38; RD 84/2015 articles 29, 30, 31, 32, 33, 34, 35, 
36, 37, 39, 41, 42, 43, 44, 46, 47, 48, 49, 50, 51, 52, 53, and 54; and 
BoS Circular 2/2016 articles 26, 27, 28, 29, 30, 31, 32, 33(4), 34, 35, 
36, 37, 38, 39, 40, 41, 46, 47, 48, 49, 50, 51, 52, and 60; and, if the 
Covered Entity is an investment firm, also SSMA articles 183(3), 184, 
184bis, 185, 185bis, 186, 188, 189(1) through (3) and (5), 189bis, 
189ter, and 192bis; and RD 217/2008 articles 14(1)(f), 20, 20bis, 21, 
22, 24, 31, 31bis, 36, 38, 39(1) and (2), 40, 88, 90, 91, 92, 93, 94, 
95, 96, 97(1)-(3), and 98;
    (D) CRR articles 286 through 288 and 293; and
    (E) EMIR Margin RTS article 2;
    (ii) If the Covered Entity is an investment firm, the Covered 
Entity is not exempt from certain provisions of RD 217/2008 pursuant to 
RD 217/2008 article 87(2) and/or (3) and/or exempt from SSMA article 
189 pursuant to SSMA article 189(6) and/or (7); and
    (iii) If the Covered Entity is an investment firm, the Covered 
Entity establishes, maintains, and implements policies and procedures 
for management of residual risk associated with the use

[[Page 47692]]

of recognized credit risk mitigation techniques described in RD 217/
2008 article 103(1)(c).
    (2) Trade acknowledgement and verification. The requirements of 
Exchange Act rule 15Fi-2, provided that the Covered Entity is subject 
to and complies with the requirements of EMIR article 11(1)(a) and EMIR 
RTS article 12.
    (3) Portfolio reconciliation and dispute reporting. The 
requirements of Exchange Act rule 15Fi-3, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of EMIR article 11(1)(b) and EMIR RTS articles 13 and 15; 
and
    (ii) The Covered Entity provides the Commission with reports 
regarding disputes between counterparties on the same basis as it 
provides those reports to competent authorities pursuant to EMIR RTS 
article 15(2).
    (4) Portfolio compression. The requirements of Exchange Act rule 
15Fi-4, provided that the Covered Entity is subject to and complies 
with the requirements of EMIR RTS article 14.
    (5) Trading relationship documentation. The requirements of 
Exchange Act rule 15Fi-5, other than paragraph (b)(5) to that rule when 
the counterparty is a U.S. person, provided that the Covered Entity is 
subject to and complies with the requirements of EMIR article 11(1)(a), 
EMIR RTS article 12, and EMIR Margin RTS article 2.

(c) Substituted Compliance in Connection With Internal Supervision and 
Compliance Requirements and Certain Exchange Act Section 15F(j) 
Requirements

    This Order extends to the following provisions related to internal 
supervision and compliance and Exchange Act section 15F(j) 
requirements:
    (1) Internal supervision. The requirements of Exchange Act rule 
15Fh-3(h) and Exchange Act sections 15F(j)(4)(A) and (j)(5), provided 
that:
    (i) The Covered Entity is subject to and complies with the 
requirements identified in paragraph (d)(3) of this Order and complies 
with the other conditions in that paragraph;
    (ii) The Covered Entity complies with paragraph (c)(4) of this 
Order; and
    (iii) This paragraph (c) does not extend to the requirements of 
paragraph (h)(2)(iii)(I) to rule 15Fh-3 to the extent those 
requirements pertain to compliance with Exchange Act sections 
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to the general and 
supporting provisions of paragraph (h) to rule 15Fh-3 in connection 
with those Exchange Act sections.
    (2) Chief compliance officers. The requirements of Exchange Act 
section 15F(k) and Exchange Act rule 15Fk-1, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements identified in paragraph (c)(3) of this Order and complies 
with the other conditions in that paragraph;
    (ii) All reports required pursuant to MiFID Org Reg article 
22(2)(c) must also:
    (A) Be provided to the Commission at least annually, and in the 
English language;
    (B) Include a certification signed by the chief compliance officer 
or senior officer (as defined in Exchange Act rule 15Fk-1(e)(2)) of the 
Covered Entity that, to the best of the certifier's knowledge and 
reasonable belief and under penalty of law, the report is accurate and 
complete in all material respects;
    (C) Address the Covered Entity's compliance with:
    (i) Applicable requirements under the Exchange Act; and
    (ii) The other applicable conditions of this Order in connection 
with requirements for which the Covered Entity is relying on this 
Order;
    (D) Be provided to the Commission no later than 15 days following 
the earlier of:
    (i) The submission of the report to the Covered Entity's management 
body; or
    (ii) The time the report is required to be submitted to the 
management body; and
    (E) Together cover the entire period that the Covered Entity's 
annual compliance report referenced in Exchange Act section 15F(k)(3) 
and Exchange Act rule 15Fk-1(c) would be required to cover.
    (3) Applicable supervisory and compliance requirements. (i) 
Paragraphs (c)(1) and (c)(2) are conditioned on the Covered Entity 
being subject to and complying with the following requirements:
    (A) MiFID articles 16 and 23; SSMA articles 193, 194, 208bis, 
220bis, 221, 222, 223, and 224; and RD 217/2008 articles 30, 30bis, 
30ter, 30qu[aacute]ter, 30quinqies, 30sexies, 32, 41, 42, 43, 44, 45, 
46, 47, 48, 61, 66, 67, 68, 69, 70, 71, 72, 72bis, 72ter, 73, 74, 
74bis, 74ter, 75, 75bis, 76, 76bis, and 79; and, if the Covered Entity 
is a credit institution, also BoS Circular 2/2016 article 43 and RD 84/
2015 article 22;
    (B) MiFID Org Reg articles 21 through 37, 72 through 76 and Annex 
IV;
    (C) CRD articles 74, 76, 79 through 87, 88(1), 91(1) and (2), 91(7) 
through (9), 92, 94, and 95; SSMA articles 182(1) and (2) and 183(1) 
and (2); and RD 217/2008 article 35; and, if the Covered Entity is a 
credit institution, also LOSSEC articles 24, 25, 26, 27, 28, 29, 32, 
33, 34, 36, 37, and 38; RD 84/2015 articles 29, 30, 31, 32, 33, 34, 35, 
36, 37, 39, 41, 42, 43, 44, 46, 47, 48, 49, 50, 51, 52, 53, and 54; and 
BoS Circular 2/2016 articles 26, 27, 28, 29, 30, 31, 32, 33(4), 34, 35, 
36, 37, 38, 39, 40, 41, 46, 47, 48, 49, 50, 51, 52, and 60; and, if the 
Covered Entity is an investment firm, also SSMA articles 183(3), 184, 
184bis, 185, 185bis, 186, 188, 189(1) through (3) and (5), 189bis, 
189ter, and 192bis; and RD 217/2008 articles 14(1)(f), 20, 20bis, 21, 
22, 24, 30, 31, 31bis, 36, 38, 39(1) and (2), 40, 88, 90, 91, 92, 93, 
94, 95, 96, 97(1)-(3), and 98;
    (D) CRR articles 286 through 288 and 293; and
    (E) EMIR Margin RTS article 2.
    (ii) Paragraphs (c)(1) and (c)(2) also are conditioned on the 
Covered Entity's compliance with the following conditions:
    (A) If the Covered Entity is an investment firm, the Covered Entity 
is not exempt from certain provisions of RD 217/2008 pursuant to RD 
217/2008 article 87(2) and/or (3) and/or exempt from SSMA article 189 
pursuant to SSMA article 189(6) and/or (7); and
    (B) If the Covered Entity is an investment firm, the Covered Entity 
establishes, maintains, and implements policies and procedures for 
management of residual risk associated with the use of recognized 
credit risk mitigation techniques described in RD 217/2008 article 
103(1)(c).
    (4) Additional condition to paragraph (c)(1). Paragraph (c)(1) 
further is conditioned on the requirement that the Covered Entity 
complies with the provisions specified in paragraph (c)(3) as if those 
provisions also require compliance with:
    (i) Applicable requirements under the Exchange Act; and
    (ii) The other applicable conditions of this Order in connection 
with requirements for which the Covered Entity is relying on this 
Order.

(d) Substituted Compliance in Connection With Counterparty Protection 
Requirements

    This Order extends to the following provisions related to 
counterparty protection:
    (1) Disclosure of information regarding material risks and 
characteristics. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material risks and characteristics of one or 
more security-based swaps subject thereto, provided that the Covered 
Entity, in relation to

[[Page 47693]]

that security-based swap, is subject to and complies with the 
requirements of MiFID article 24(4); SSMA articles 209(1) and (3) and 
210(1); RD 217/2008 articles 65 and 77(1); and MiFID Org Reg articles 
48-50.
    (2) Disclosure of information regarding material incentives or 
conflicts of interest. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material incentives or conflicts of interest 
that a Covered Entity may have in connection with one or more security-
based swaps subject thereto, provided that the Covered Entity, in 
relation to that security-based swap, is subject to and complies with 
the requirements of either:
    (i) MiFID article 23(2) and (3); RD 217/2008 article 61(2) and (3); 
and MiFID Org Reg articles 33-35;
    (ii) MiFID article 24(9); MiFID Delegated Directive article 11(5); 
and SSMA articles 220ter, 220qu[aacute]ter, and 220quinquies; RD 217/
2008 articles 62, 63, and 64; or
    (iii) MAR article 20(1) and MAR Investment Recommendations 
Regulation articles 5 and 6.
    (3) ``Know your counterparty.'' The requirements of Exchange Act 
rule 15Fh-3(e), as applied to one or more security-based swap 
counterparties subject thereto, provided that the Covered Entity, in 
relation to the relevant security-based swap counterparty, is subject 
to and complies with the requirements of MiFID article 16(2); SSMA 
article 193(2)(a); RD 217/2008 article 30; MiFID Org Reg articles 21, 
22, 25, and 26 and applicable parts of Annex I; CRD articles 74(1) and 
85(1); SSMA articles 182(1) and 193(3)(b); RD 217/2008 article 35; MLD 
articles 11 and 13; SMLA articles 3(1)-(2), 4, 5, 6, 7(1) through (4), 
7(7), 7(8), and 8; MLD articles 8(3) and 8(4)(a) as applied to internal 
policies, controls and procedures regarding recordkeeping of customer 
due diligence activities; and SMLA article 26 as applied to policies 
and procedures regarding recordkeeping of customer due diligence 
activities; and, if the Covered Entity is a credit institution, also 
LOSSEC article 29(1); RD 84/2015 articles 43 and 52(1); BoS Circular 2/
2016 article 28; and, if the Covered Entity is an investment firm, also 
SSMA article 189bis and RD 217/2008 article 96(1).
    (4) Suitability. The requirements of Exchange Act rule 15Fh-3(f), 
as applied to one or more recommendations of a security-based swap or 
trading strategy involving a security-based swap subject thereto, 
provided that:
    (i) The Covered Entity, in relation to the relevant recommendation, 
is subject to and complies with the requirements of MiFID articles 
24(2) and (3) and 25(1) and (2); SSMA articles 208ter(1) and (2), 
209(2), 212, 213, and 220sexies; RD 217/2008 articles 66, 71, 72, 
72bis, 72ter, 73, 74, 74bis, 74ter, 75, 75bis, 76bis, and 80; CNMV 
Technical Guide 4/2017; and MiFID Org Reg articles 21(1)(b) and (d), 
54, and 55; and
    (ii) The counterparty to which the Covered Entity makes the 
recommendation is a ``professional client'' mentioned in MiFID Annex II 
section I and in SSMA article 205 and RD 217/2008 article 58 and is not 
a ``special entity'' as defined in Exchange Act section 15F(h)(2)(C) 
and Exchange Act rule 15Fh-2(d).
    (5) Fair and balanced communications. The requirements of Exchange 
Act rule 15Fh-3(g), as applied to one or more communications subject 
thereto, provided that the Covered Entity, in relation to the relevant 
communication, is subject to and complies with the requirements of:
    (i) Either MiFID articles 24(1) and (3) and SSMA articles 208 and 
209(2) or MiFID article 30(1) and SSMA article 207(4); and
    (ii) MiFID articles 24(4) and (5); SSMA articles 209(1) and (3) and 
210(1); RD 217/2008 article 77; MiFID Org Reg articles 46-48; MAR 
articles 12(1)(c), 15 and 20(1); and MAR Investment Recommendations 
Regulation articles 3 and 4.
    (6) Daily mark disclosure. The requirements of Exchange Act rule 
15Fh-3(c), as applied to one or more security-based swaps subject 
thereto, provided that the Covered Entity is required to reconcile, and 
does reconcile, the portfolio containing the relevant security-based 
swap on each business day pursuant to EMIR articles 11(1)(b) and 11(2) 
and EMIR RTS article 13.

(e) Substituted Compliance in Connection With Recordkeeping, Reporting, 
and Notification Requirements

    This Order extends to the following provisions that apply to a 
Covered Entity related to recordkeeping, reporting, and notification:
    (1)(i) Make and keep current certain records. The requirements of 
the following provisions of Exchange Act rule 18a-5, provided that the 
Covered Entity complies with the relevant conditions in this paragraph 
(e)(1)(i) and with the applicable conditions in paragraph (e)(1)(ii):
    (A) The requirements of Exchange Act rule 18a-5(b)(1), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 74, 75, and Annex IV; MiFIR 
article 25(1);
    (B) The requirements of Exchange Act rule 18a-5(b)(2), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Delegated Directive article 2; MiFID Org Reg 
articles 72, 74 and 75; EMIR article 39(4); RD 217/2008 article 41;
    (C) The requirements of Exchange Act rule 18a-5(b)(3), provided 
that the Covered Entity is subject to and complies with the 
requirements of CRR article 103; MiFID articles 16(6), 25(5), and 
25(6); MiFID Org Reg articles 59, 74, 75 and Annex IV; MiFIR article 
25(1); EMIR articles 9(2) and 11(1)(a); SSMA articles 194(1), 218, and 
211; and RD 217/2008 articles 3, 32(1), and 82;
    (D) The requirements of Exchange Act rule 18a-5(b)(4), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg article 59; EMIR articles 9(2) and 
11(1)(a); MiFID articles 16(6), 25(5), and 25(6); SSMA articles 194(1), 
218, and 211; and RD 217/2008 articles 3, 32(1), and 82;
    (E) The requirements of Exchange Act rule 18a-5(b)(5), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 74, 75, and Annex IV; and MiFIR 
article 25(1);
    (F) The requirements of Exchange Act rules 18a-5(b)(6) and (b)(11), 
provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of CRR articles 103, 105(3), and 105(10); CRD article 73; 
MiFID articles 16(6), 25(5), 25(6); MiFID Delegated Directive article 
2; MiFID Org Reg articles 59, 74, 75, and Annex IV; MiFIR article 
25(1); EMIR articles 9(2), 11(1)(a), and 39(4); SSMA articles 194(1), 
218, 211, 276bis, 276ter, 276qu[aacute]ter, and 276quinquies; and RD 
217/2008 articles 3, 32(1), 41, and 82; and
    (2) The Covered Entity applies substituted compliance for the 
requirements of Exchange Act rule 15Fi-2 pursuant to this Order;
    (G) The requirements of Exchange Act rule 18a-5(b)(7), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFIR article 25(1); MLD4 articles 11 and 13; MiFID 
article 25(2); SMLA articles 3 through 7; and SSMA article 213;
    (H) The requirements of Exchange Act rule 18a-5(b)(8), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 21(1)(d), 35; CRD articles 88, 
91(1), 91(8); MiFID articles 9(1) and 16(3); SSMA articles 193(2)(b)

[[Page 47694]]

and 208bis; LOSSEC articles 24(1) and 29(2); and BoS Circular 2/2016 
Rule 32(1);
    (I) The requirements of Exchange Act rule 18a-5(b)(13), regarding 
one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1 for which 
substituted compliance is available under this Order, provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 72, 73, and Annex I; MiFID 
articles 16(6) and 25(2); MLD articles 11 and 13; EMIR article 39(5); 
SSMA articles 194(1) and 213; RD 217/2008 article 32(1); and SMLA 
articles 3 through 7, in each case with respect to the relevant 
security-based swap or activity;
    (2) With respect to the portion of Exchange Act rule 18a-5(b)(13) 
that relates to one or more provisions of Exchange Act rule 15Fh-3 for 
which substituted compliance is available under this Order, the Covered 
Entity applies substituted compliance for such business conduct 
standard(s) of Exchange Act rule 15Fh-3 pursuant to this Order, as 
applicable, with respect to the relevant security-based swap or 
activity; and
    (3) With respect to the portion of Exchange Act rule 18a-5(b)(13) 
that relates to Exchange Act rule 15Fk-1, the Covered Entity applies 
substituted compliance for Exchange Act section 15F(k) and Exchange Act 
rule 15Fk-1 pursuant to this Order;
    (J) The requirements of Exchange Act rule 18a-5(b)(14)(i) and (ii), 
provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of EMIR article 11(1)(b) and EMIR RTS article 15(1)(a); 
and
    (2) The Covered Entity applies substituted compliance for Exchange 
Act rule 15Fi-3 pursuant to this Order; and
    (K) The requirements of Exchange Act rule 18a-5(b)(14)(iii), 
provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of EMIR article 11(1)(b) and EMIR RTS article 15(1)(a), in 
each case with respect to such security-based swap portfolio(s); and
    (2) The Covered Entity applies substituted compliance for Exchange 
Act rule 15Fi-4 pursuant to this Order.
    (ii) Paragraph (e)(1)(i) is subject to the following further 
conditions:
    (A) Paragraphs (e)(1)(i)(A) through (C) and (G) are subject to the 
condition that the Covered Entity preserves all of the data elements 
necessary to create the records required by the applicable Exchange Act 
rules cited in such paragraphs and upon request furnishes promptly to 
representatives of the Commission the records required by those rules;
    (B) A Covered Entity may apply the substituted compliance 
determination in paragraph (e)(1)(i)(I) to records of compliance with 
Exchange Act rule 15Fh-3(b), (c), (e), (f) and (g) in respect of one or 
more security-based swaps or activities related to security-based 
swaps; and
    (C) This Order does not extend to the requirements of Exchange Act 
rule 18a-5(b)(9), (b)(10) or (b)(12).
    (2)(i) Preserve certain records. The requirements of the following 
provisions of Exchange Act rule 18a-6, provided that the Covered Entity 
complies with the relevant conditions in this paragraph (e)(2)(i) and 
with the applicable conditions in paragraph (e)(2)(ii):
    (A) The requirements of Exchange Act rule 18a-6(a)(2), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 72, 74, 75, and Annex IV; CRR 
article 103; MiFIR article 25(1); EMIR article 9(2); MiFID articles 
16(6) and 69(2); CRD article 73; MiFID Delegated Directive article 2; 
SSMA articles 194(1), 234, 276bis, 276ter, 276qu[aacute]ter, and 
276quinquies; and RD 217/2008 articles 32(1) and 41;
    (B) The requirements of Exchange Act rule 18a-6(b)(2)(i), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 72, 74, 75, and Annex IV; CRR 
article 103; MiFIR article 25(1); EMIR article 9(2); MiFID articles 
16(6) and 69(2); CRD article 73; MiFID Delegated Directive article 2; 
SSMA articles 194(1), 234, 276bis, 276ter, 276qu[aacute]ter, and 
276quinquies; and RD 217/2008 articles 32(1) and 41;
    (C) The requirements of Exchange Act rule 18a-6(b)(2)(ii), provided 
that the Covered Entity is subject to and complies with the 
requirements of CRR article 103; MiFID Org Reg articles 72, 73, 74, 75, 
76, Annex I and Annex IV; MiFIR article 25(1); EMIR article 9(2); CRD 
article 73; MiFID articles 16(6), 16(7); MiFID Delegated Directive 
article 2; SSMA articles 194(1) through (3), 276bis, 276ter, 
276qu[aacute]ter, and 276quinquies; and RD 217/2008 articles 32(1) 
through (8) and 41;
    (D) The requirements of Exchange Act rule 18a-6(b)(2)(iii), 
provided that the Covered Entity is subject to and complies with the 
requirements of EMIR article 9(2); MiFID Org Reg articles 72(1) and 73; 
MiFID article 16(6); SSMA articles 194(1); and RD 217/2008 article 
32(1);
    (E) The requirements of Exchange Act rule 18a-6(b)(2)(iv), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 72(1) and 73; MiFIR article 
25(1); EMIR article 9(2); MiFID article 16(6); SSMA articles 194(1); 
and RD 217/2008 article 32(1);
    (F) The requirements of Exchange Act rule 18a-6(b)(2)(vii), 
regarding one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1 
for which substituted compliance is available under this Order, 
provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of EMIR article 9(2); MLD articles 11 and 13; MiFID Org 
Reg article 72(1); MiFID article 16(6); SMLA articles 3 through 7; SSMA 
articles 194(1); and RD 217/2008 article 32(1), in each case with 
respect to the relevant security-based swap or activity;
    (2) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to one or more provisions of Exchange Act 
rule 15Fh-3 for which substituted compliance is available under this 
Order, the Covered Entity applies substituted compliance for such 
business conduct standard(s) of Exchange Act rule 15Fh-3 pursuant to 
this Order, as applicable, with respect to the relevant security-based 
swap or activity; and
    (3) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fk-1, the Covered 
Entity applies substituted compliance for Exchange Act section 15F(k) 
and Exchange Act rule 15Fk-1 pursuant to this Order;
    (G) The requirements of Exchange Act rule 18a-6(c), provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 21(1)(f) and 72(1); MiFID 
article 16(6); SSMA articles 194(1); and RD 217/2008 article 32(1); and
    (2) This Order does not extend to the requirements of Exchange act 
rule 18a-6(c) relating to Forms SBSE, SBSE-A, SBSE-C, SBSE-W, all 
amendments to these forms, and all other licenses or other 
documentation showing the registration of the Covered Entity with any 
securities regulatory authority or the U.S. Commodity Futures Trading 
Commission;
    (H) The requirements of Exchange Act rule 18a-6(d)(1), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 35 and 72(1); CRD articles 88, 
91(1), 91(8); MiFID article 9(1), 16(3), 16(6); LOSSEC articles 24(1) 
and 29(1)-(2); SSMA articles 193(2)(b), 194(1), and 208bis; RD 217/2008 
articles 30, 31, and 32(1); and BoS Circular 2/2016 Rule 32(1);

[[Page 47695]]

    (I) The requirements of Exchange Act rule 18a-6(d)(2)(ii), provided 
that the Covered Entity is subject to and complies with the 
requirements of EMIR article 9(2); MiFID Org Reg articles 72(1) and 
72(3); MiFID article 16(6); SSMA articles 194(1); and RD 217/2008 
article 32(1);
    (J) The requirements of Exchange Act rule 18a-6(d)(3)(ii), provided 
that the Covered Entity is subject to and complies with the 
requirements of MiFID Org Reg articles 21(1)(f), 72, 73, and Annex I; 
MiFID article 16(6); SSMA articles 194(1); and RD 217/2008 article 
32(1);
    (K) The requirements of Exchange Act rule 18a-6(d)(4) and (d)(5), 
provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of EMIR article 9(2); MiFID Org Reg articles 24, 25(2), 
72(1) and 73; MiFID articles 16(2), 16(6), and 25(5); SSMA articles 
193(2)(a), 194(1), and 218; and RD 217/2008 articles 30(2), 32(1), and 
82; and
    (2) The Covered Entity applies substituted compliance for Exchange 
Act rules 15Fi-3, 15Fi-4, and 15Fi-5 pursuant to this Order;
    (L) The requirements of Exchange Act rule 18a-6(e), provided that 
the Covered Entity is subject to and complies with the requirements of 
MiFID Org Reg articles 21(2), 58, 72(1) and 72(3); MiFID articles 
16(5), 16(6); SSMA articles 193(3) and 194(1); and RD 217/2008 article 
32(1); and
    (M) The requirements of Exchange Act rule 18a-6(f), provided that 
the Covered Entity is subject to and complies with the requirements of 
MiFID Org Reg article 31(1); MiFID article 16(5); and SSMA article 
193(3).
    (ii) Paragraph (e)(2)(i) is subject to the following further 
conditions:
    (A) A Covered Entity may apply the substituted compliance 
determination in paragraph (e)(2)(i)(F) to records related to Exchange 
Act rule 15Fh-3(b), (c), (e), (f) and (g) in respect of one or more 
security-based swaps or activities related to security-based swaps; and
    (B) This Order does not extend to the requirements of Exchange Act 
rule 18a-6(b)(2)(v), (b)(2)(vi), or (b)(2)(viii).
    (3) File Reports. The requirements of the following provisions of 
Exchange Act rule 18a-7, provided that the Covered Entity complies with 
the relevant conditions in this paragraph (e)(3):
    (i) The requirements of Exchange Act rule 18a-7(a)(2) and the 
requirements of Exchange Act rule 18a-7(j) as applied to the 
requirements of Exchange Act rule 18a-7(a)(2), provided that:
    (A) The Covered Entity is subject to and complies with the 
requirements of CRR articles 99, 394, 430 and Part Six: Title II and 
Title III; CRR Reporting ITS annexes I, II, III, IV, V, VIII, IX, X, 
XI, XII and XIII, as applicable; and
    (B) The Covered Entity files periodic unaudited financial and 
operational information with the Commission or its designee in the 
manner and format required by Commission rule or order and presents the 
financial information in the filing in accordance with generally 
accepted accounting principles that the Covered Entity uses to prepare 
general purpose publicly available or available to be issued financial 
statements in Spain.
    (4)(i) Provide Notification. The requirements of the following 
provisions of Exchange Act rule 18a-8, provided that the Covered Entity 
complies with the relevant conditions in this paragraph (e)(4)(i) and 
with the applicable conditions in paragraph (e)(4)(ii):
    (A) The requirements of Exchange Act rule 18a-8(c) and the 
requirements of Exchange Act rule 18a-8(h) as applied to the 
requirements of Exchange Act rule 18a-8(c), provided that the Covered 
Entity is subject to and complies with the requirements of LOSSEC 
articles 116, 119, 121, and 122; and SSMA articles 276bis, 276ter, 
276qu[aacute]ter, and 276quinquies;
    (B) The requirements of Exchange Act rule 18a-8(d) and the 
requirements of Exchange Act rule 18a-8(h) as applied to the 
requirements of Exchange Act rule 18a-8(d), provided that:
    (1) The Covered Entity is subject to and complies with the 
requirements of LOSSEC articles 116, 119, 121, and 122; and SSMA 
articles 276bis, 276ter, 276qu[aacute]ter, and 276quinquies; and
    (2) This Order does not extend to the requirements of Exchange Act 
rule 18a-8(d) to give notice with respect to books and records required 
by Exchange Act rule 18a-5 for which the Covered Entity does not apply 
substituted compliance pursuant to this Order;
    (ii) Paragraph (e)(4)(i) is subject to the following further 
conditions:
    (A) The Covered Entity:
    (1) Simultaneously sends a copy of any notice required to be sent 
by Spanish law cited in this paragraph of the Order to the Commission 
in the manner specified on the Commission's website; and
    (2) Includes with the transmission the contact information of an 
individual who can provide further information about the matter that is 
the subject of the notice; and
    (B) This Order does not extend to the requirements of paragraph (g) 
of rule 18a-8 or to the requirements of Exchange Act rule 18a-8(h) as 
applied to such requirements.
    (5) Daily Trading Records. The requirements of Exchange Act section 
15F(g), provided that the Covered Entity is subject to and complies 
with the requirements of SSMA Article 194(1); and RD 217/2008 Article 
32(1).
    (6) Examination and Production of Records. Notwithstanding the 
forgoing provisions of paragraph (e) of this Order, this Order does not 
extend to, and Covered Entities remain subject to, the requirement of 
Exchange Act section 15F(f) to keep books and records open to 
inspection by any representative of the Commission and the requirement 
of Exchange Act rule 18a-6(g) to furnish promptly to a representative 
of the Commission legible, true, complete, and current copies of those 
records of the Covered Entity that are required to be preserved under 
Exchange Act rule 18a-6, or any other records of the Covered Entity 
that are subject to examination or required to be made or maintained 
pursuant to Exchange Act section 15F that are requested by a 
representative of the Commission.
    (7) English Translations. Notwithstanding the forgoing provisions 
of paragraph (e) of this Order, to the extent documents are not 
prepared in the English language, Covered Entities must promptly 
furnish to a representative of the Commission upon request an English 
translation of any record, report, or notification of the Covered 
Entity that is required to be made, preserved, filed, or subject to 
examination pursuant to Exchange Act section 15F of this Order.

(f) Definitions

    (1) ``Covered Entity'' means an entity that:
    (i) Is a security-based swap dealer or major security-based swap 
participant registered with the Commission;
    (ii) Is not a ``U.S. person,'' as that term is defined in rule 
3a71-3(a)(4) under the Exchange Act; and
    (iii) Is an investment firm or a credit institution authorized by 
the CNMV and the ECB to provide investment services and/or perform 
investment activities in the Kingdom of Spain; and
    (iv) Is a significant institution supervised by the CNMV and the 
ECB (with the participation of the BoS).
    (2) ``MiFID'' means the ``Markets in Financial Instruments 
Directive,'' Directive 2014/65/EU, as amended from time to time.
    (3) ``MiFID Org Reg'' means Commission Delegated Regulation (EU) 
2017/565, as amended from time to time.

[[Page 47696]]

    (4) ``MiFID Delegated Directive'' means Commission Delegated 
Directive (EU) 2017/593, as amended from time to time.
    (5) ``MiFIR'' means Regulation (EU) 600/2014, as amended from time 
to time.
    (6) ``EMIR'' means the ``European Market Infrastructure 
Regulation,'' Regulation (EU) 648/2012, as amended from time to time.
    (7) ``EMIR RTS'' means Commission Delegated Regulation (EU) 149/
2013, as amended from time to time.
    (8) ``EMIR Margin RTS'' means Commission Delegated Regulation (EU) 
2016/2251, as amended from time to time.
    (9) ``CRD'' means Directive 2013/36/EU, as amended from time to 
time.
    (10) ``CRR'' means Regulation (EU) 575/2013, as amended from time 
to time.
    (11) ``CRR Reporting ITS'' means Commission Implementing Regulation 
(EU) 680/2014, as amended from time to time.
    (12) ``MLD'' means Directive (EU) 2015/849, as amended from time to 
time.
    (13) ``MAR'' means the ``Market Abuse Regulation,'' Regulation (EU) 
596/2014, as amended from time to time.
    (14) ``MAR Investment Recommendations Regulation'' means Commission 
Delegated Regulation (EU) 2016/958, as amended from time to time.
    (15) ``CNMV'' means the Spanish Comisi[oacute]n Nacional del 
Mercado de Valores.
    (16) ``BoS'' means the Spanish Banco de Espa[ntilde]a.
    (17) ``ECB'' means the European Central Bank.
    (18) ``Accounting Directive'' means Directive 2013/34/EU of the 
European Parliament and of the Council of 26 June 2013, as amended from 
time to time.
    (19) ``BRRD'' means Bank Recovery and Resolution Directive 2014/59/
EU of the European Parliament and of the Council of 15 May 2014, as 
amended from time to time.
    (20) ``SSMA'' means the Spanish Securities Market Act, Royal 
Legislative Decree 4/2015, of October 23, as amended from time to time.
    (21) ``RD 217/2008'' means Royal Decree 217/2008, of February 15, 
as amended from time to time.
    (22) ``LOSSEC'' means the Act on Regulation, Supervision, and 
Solvency of Credit Institutions, Law 10/2014, of June 26, as amended 
from time to time.
    (23) ``RD 84/2015'' means Royal Decree 84/2015, of February 13, as 
amended from time to time.
    (24) ``BoS Circular 2/2016'' means Circular 2/2016, of February 2, 
of the Bank of Spain, as amended from time to time.
    (25) ``SMLA'' means the Spanish Anti-Money Laundering Act, Law 10/
2010, of April 28, as amended from time to time.
    (26) ``Prudentially regulated'' means a Covered Entity that has a 
``prudential regulator'' as that term is defined in Exchange Act 
section 3(a)(74).

[FR Doc. 2021-18335 Filed 8-25-21; 8:45 am]
BILLING CODE 8011-01-P