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Rule 3a71-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) in part addresses the cross-border application of the “security-based swap dealer” definition, including the cross-border application of the de minimis exception to that definition.
Under the rule, non-U.S. persons that engage in security-based swap dealing activity are required to count—against the thresholds associated with the de minimis exception—their dealing transactions with non-U.S. counterparties if those dealing transactions were “arranged, negotiated, or executed” using U.S. personnel.
By separate action, the Commission has amended Rule 3a71-3 by adding new paragraph (d) to incorporate a conditional exception from the “arranged, negotiated, or executed” counting requirement.
That conditional exception is intended to address certain operational and market concerns that otherwise could arise were transactions to be counted against the applicable de minimis thresholds requirement solely because a transaction between two non-U.S. counterparties results from activity by U.S. personnel.
The Rule 3a71-3(d) exception is subject to a number of conditions designed to help protect the important interests that underpin the “arranged, negotiated, or executed” counting requirement. Those include, inter alia, the “listed jurisdiction” condition that is the subject of this Order.
II. “Listed Jurisdiction” Condition to the Exception
A. The “Listed Jurisdiction” Condition
To take advantage of the Rule 3a71-3(d) exception, the non-U.S. person must be subject to the margin and capital requirements of a “listed jurisdiction” when engaging in transactions subject to the exception from the “arranged, negotiated, or executed” counting requirement.
The Commission has explained that the “listed jurisdiction” condition is intended to deter dealers from attempting to use the exception to avoid Title VII “by simply booking their transactions to entities in jurisdictions that do not effectively require security-based swap dealers or comparable entities to meet certain financial responsibility standards.” 
Otherwise, the exception could “provide a competitive advantage to non-U.S. persons that conduct security-based swap dealing activity in the United States without being subject to sufficient financial responsibility standards.” 
The Commission also expressed the view that the “listed jurisdiction” condition is consistent with the view that applying capital and margin requirements to transactions between two non-U.S. persons that have been arranged, negotiated, or executed in the United States can help mitigate the potential for financial contagion to spread to U.S. market participants and to the U.S. financial system more generally.
B. Designation of “Listed Jurisdictions”
The exception provides that the Commission conditionally or unconditionally may determine “listed jurisdictions” by order, in response to applications or upon the Commission's own initiative.
The Commission by order, after notice and opportunity for comment, may modify or withdraw a listed jurisdiction determination if it determines that continued listed jurisdiction status no longer would be in the public interest based on a number of factors.
When evaluating a foreign jurisdiction's potential status as a “listed jurisdiction,” the Commission may consider factors relevant for purposes of assessing whether such an order would be in the public interest. These may include the “[a]pplicable margin and capital requirements of the foreign financial regulatory system.” 
These also may include the “effectiveness of the supervisory compliance program administered by, and the enforcement authority exercised by, the foreign financial regulatory authority in connection with such requirements, including the application of those requirements in connection Start Printed Page 6356with an entity's cross-border business.” 
In adopting the exception, the Commission rejected a commenter view that all G-20 jurisdictions should be deemed to be “listed jurisdictions.” 
While the Commission recognizes that reforms initiated by the G-20 can be relevant for assessing listed jurisdiction status, the implementation of capital and margin requirements, as well as associated supervision or enforcement practices, has the potential to vary significantly across G-20 jurisdictions. Also, many G-20 jurisdictions do not have substantial swap or security-based swap markets, and thus may not necessarily have the incentives or resources needed to promote the effective oversight of those markets.
The Commission also distinguished the evaluation of “listed jurisdictions” from the Commission's consideration of whether substituted compliance is appropriate in connection with foreign capital and margin requirements.
Although “listed jurisdiction” determinations may raise issues that are analogous to those that would accompany applications for substituted compliance, the determinations are made in materially distinct contexts. The Commission accordingly may reach different conclusions when considering substituted compliance than it does when considering listed jurisdiction status for the same jurisdiction.
III. Designation of Specific “Listed Jurisdictions”
For the reasons set forth below, the Commission has determined that it is in the public interest to designate the following jurisdictions as “listed jurisdictions” for purposes of the exception: Australia, Canada, France, Germany, Japan, Singapore, Switzerland, and the United Kingdom (the “Initial Listed Jurisdictions”).
Only non-U.S. persons that are subject to the margin and capital requirements applicable to entities that transact in security-based swaps of an Initial Listed Jurisdiction may rely on the listed jurisdiction designations that are the subject of this Order.
A. Implementation of Financial Responsibility Reforms
The Commission's action in part reflects consideration of financial responsibility regulation in the Initial Limited Jurisdictions, as well as the steps that those jurisdictions have taken to implement financial responsibility reforms. To offset the greater risk to security-based swap dealers from non-cleared security-based swaps, the Dodd-Frank Act mandated financial responsibility reform through capital and margin requirements that would help ensure the safety and soundness of security-based swap dealers and be appropriate for the risk associated with non-cleared security-based swaps.
In 2009, the G-20 made recommendations for financial responsibility reforms intended in part to reduce systemic risk attributable to over-the-counter (“OTC”) derivatives, including a recommendation that non-centrally cleared derivatives contracts should be subject to higher capital requirements.
As noted below, each of the Initial Listed Jurisdictions has adopted heightened capital requirements that address the risks presented by OTC derivatives.
In 2011, the G-20 recommended that margin requirements on non-centrally cleared derivatives be added to the reforms.
As noted below, each of the Initial Listed Jurisdictions has implemented margin requirements that address the counterparty risks presented by these derivatives products. While recognizing that the capital and margin rules and regulations of the Initial Listed Jurisdictions are not the same as those of the Commission,
the Commission believes that those jurisdictions' rules and regulations apply sufficient financial responsibility requirements on the relevant entities to support designation as “listed jurisdictions.”
The Australian Prudential Regulation Authority (“APRA”) has adopted capital requirements for “authorized deposit-taking institutions” designed to address the unique risks of OTC derivatives.
Further, the APRA has adopted margin requirements to address the counterparty risks of non-centrally cleared derivatives. To do this, among other things, APRA's margin regime incorporates variation and initial margin Start Printed Page 6357calculations and methodologies and additional risk mitigation requirements.
Canada's Office of the Superintendent of the Financial Institutions (“OSFI”) has adopted capital requirements for federally regulated financial institutions that reflect heightened capital for non-centrally cleared derivatives.
In addition, OSFI has adopted margin requirements that address the counterparty risks of non-centrally cleared derivatives and which, among other things, establish minimum standards for variation and initial margin and collateral requirements for non-centrally cleared derivative transactions undertaken by federally regulated financial institutions.
3. France/Germany/United Kingdom 
In 2012, the European Commission (“EC”) adopted the European Market Infrastructure Regulation (“EMIR”) in response to the G-20 leaders' statements on reform of the OTC derivatives market. Pursuant to EMIR, the EC adopted and has since revised capital requirements for financial institutions which are intended to address the risks of the OTC derivatives market and that reflect heightened capital for non-centrally cleared derivatives.
In addition, the EC has issued margin standards which set forth risk mitigation techniques for non-centrally cleared derivatives, including variation and initial margin calculations and methodologies, with the objective of reducing counterparty credit risk and mitigating systematic risk.
The capital and margin standards are found in EC regulations which are directly applicable to all EU member states without any further implementing measures.
The Japan Financial Services Agency (“JFSA”) has implemented specific financial responsibility reforms that include capital and margin requirements to address the risks of non-centrally cleared derivative products.
For example, the JFSA margin requirements include variation and initial margin calculations and methodologies that address the counterparty risks of non-centrally cleared derivatives.
The Monetary Authority of Singapore (“MAS”) has adopted heightened capital requirements in response to the G-20 recommendations for non-centrally cleared derivatives.
Further, the MAS has implemented a margin regime including variation and initial margin standards and collateral requirements with regard to non-centrally cleared derivatives.
As part of its financial responsibility rules reform, the Swiss Federal Council has implemented heightened capital requirements to address the risks of Start Printed Page 6358non-centrally cleared derivatives.
In addition, to reduce systemic risk, the Swiss Federation has adopted standards on margining and risk mitigation requirements to address the risks associated with non-centrally cleared derivatives which include variation and initial margin calculations and methodologies, along with other collateral requirements.
B. Supervisory or Enforcement Practices
This action further recognizes that, based upon the Commission's current experience with regulators and authorities in each of the Initial Listed Jurisdictions, including, for example, cooperative experiences in matters of supervision or enforcement with the securities and financial regulators in the Initial Listed Jurisdictions as well as joint participation in certain international organizations and bodies,
the Commission does not have reason to believe that the supervisory or enforcement practices in those jurisdictions would encourage market participants to restructure and book transactions into those jurisdictions to take advantage of a regulatory environment that as a practical matter does not require firms to comply with heightened capital requirements for OTC derivatives positions.
C. Location of Firms Likely To Engage in Security-Based Swap Dealing Activity Using Personnel Located in the United States
This action also accounts for the Commission's understanding of which non-U.S. firms are most likely to transact in security-based swaps using personnel located in the United States in such volume that designation of that jurisdiction by the Commission as a listed jurisdiction is warranted. This analysis is relevant both with regard to whether the foreign jurisdiction has a security-based swaps market that demonstrates a need for designation as a listed jurisdiction, and with regard to whether the applicable regulators have an incentive to effectively oversee the market. In particular, based on available data, including the volume of single-name credit default swap transactions referencing U.S. underliers, the Commission believes that dealing entities in the Initial Listed Jurisdictions are highly likely to be engaged in security-based swap transactions that they would otherwise be required to count toward the de minimis thresholds.
More generally, the Commission also believes that the security-based swap markets in the Initial Listed Jurisdictions are sufficiently developed that, coupled with the initiatives the applicable foreign financial regulators have taken in response to the G-20 leaders' statements regarding regulation of OTC derivatives, designation as a listed jurisdiction would be in the public interest.
For the reasons discussed above, the Commission concludes that it is in the public interest to designate the following jurisdictions as “listed jurisdictions” for purposes of the conditional exception, set forth in Exchange Act Rule 3a71-3(d), from having to count certain transactions involving U.S. activity against the thresholds associated with the security-based swap dealer de minimis exception. Accordingly,
It is hereby ordered, pursuant to Exchange Act Rule 3a71-3(a)(12) and 3a71-3(d)(2), that the following jurisdictions are designated as listed jurisdictions:
2. Canada; 
7. Switzerland; and
8. United Kingdom.
By the Commission.
Dated: December 18, 2019.
Vanessa A. Countryman,
[FR Doc. 2019-27761 Filed 2-3-20; 8:45 am]
BILLING CODE 8011-01-P