Monday, November 29, 2021

SEC grants first no-action relief to non-U.S. swap dealers under substituted compliance regime

By John Filar Atwood

The SEC’s Division of Trading and Markets has granted no-action relief to Swedish and Canadian banks that allows them to operate under the terms of European substituted compliance orders even though neither Sweden nor Canada has received such an order. The relief allows the banks to be registered as security-based swap dealers and file periodic unaudited financial and operational information pursuant to 1934 Act Rule 18a-7(a)(2) in accordance with an October 14, 2021 order (Manner and Format Order), and to present the financial information in accordance with Swedish or Canadian GAAP.

Over the past year, the SEC has issued orders granting conditional substituted compliance to non-U.S. security-based swap dealers (SBSDs) subject to regulation in various European jurisdictions in connection with certain requirements applicable to non-U.S. SBSDs and major security-based swap participants. The substituted compliance orders permit certain SBSDs with a prudential regulator (European Bank SBSDs) to apply substituted compliance with respect to the requirement of Rule 18a-7(a)(2) to file the FOCUS Report Part IIC on a quarterly basis subject to two conditions.

The first condition is that the European Bank SBSD is subject to and complies with certain specified European home jurisdiction reporting laws. The second condition is that the European Bank SBSD must file periodic unaudited financial and operational information with the Commission or its designee in compliance with the Manner and Format Order, which specifies how an SBSD must meet the manner and format condition in a substituted compliance order.

No-action requests. The staff received no-action requests from Sweden’s Skandinaviska Banken AB (SEB) and from the Canadian Banks Association on behalf of Bank of Montreal, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank (Six Canadian Banks).

SEB and the Six Canadian Banks requested that they be able to file required periodic unaudited financial and operational information with the Commission or its designee in the same manner and format as the European Bank SBSDs applying substituted compliance with respect to Rule 18a-7. They argued that without the relief, European Bank SBSDs would be subject to reporting requirements that accommodate home jurisdiction laws while SEB and the Six Canadian Banks would not have this benefit even though as prudentially regulated banks they present similar risks to the U.S. financial system.

SEB and the Six Canadian Banks noted, for example, that without the relief they would be required to present financial information in accordance with U.S. GAAP, provide information for line items in the FOCUS Report Part IIC that are only relevant for banks in the U.S. reporting under U.S. GAAP, and report regulatory capital in a manner that reflects a U.S. approach to calculating bank capital.

SEB position. The staff advised SEB that it would not recommend enforcement action under 1934 Act Section 15F(f) and Rule 18a-7(a)(2) if SEB is registered with the Commission as an SBSD and files periodic unaudited financial and operational information with the Commission pursuant to Rule 18a-7(a)(2) in accordance with the Manner and Format Order. The staff stated that SEB may present the financial information in the filing in accordance with Swedish GAAP.

The staff said that its position is conditioned upon SEB immediately notifying the Division staff if it fails to maintain the minimum amount of regulatory capital required under Swedish law and includes with the notification the contact information of an individual who can provide further information about the matter.

Canadian banks relief. The staff provided similar relief to the Six Canadian Banks, and agreed that they may present the financial information in their filings in accordance with Canadian GAAP. The position with respect to the Six Canadian Banks is conditioned upon them filing the financial and operational information within 35 days of the end of each Canadian reporting quarter. In addition, the Six Canadian Banks must immediately notify Division staff if they fail to maintain the minimum amount of regulatory capital required under Canadian law and include with the notification the contact information of an individual who can provide further information about the matter.