[Federal Register Volume 84, Number 240 (Friday, December 13, 2019)]
[Notices]
[Pages 68266-68269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26844]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87697; File No. SR-FICC-2019-005]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Require Confirmation of
Cybersecurity Program
December 9, 2019.
I. Introduction
On October 15, 2019, FICC Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
[[Page 68267]]
FICC-2019-005. The proposed rule change was published for comment in
the Federal Register on October 30, 2019.\3\ The Commission did not
receive any comment letters on the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 87394 (October 24,
2019), 84 FR 58194 (October 30, 2019) (SR-FICC-2019-005)
(``Notice'').
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II. Description of the Proposed Rule Change
FICC proposes to modify its Government Securities Division
(``GSD'') Rulebook (``GSD Rules''), Mortgage-Backed Securities Division
(``MBSD'') Clearing Rules (``MBSD Rules''), and the Electronic Pool
Notification (``EPN'') Rules of MBSD (``EPN Rules,'' and, together with
the GSD Rules and the MBSD Rules, the ``Rules'') \4\ in order to (1)
define the term ``Cybersecurity Confirmation'' as a written
representation that addresses a submitting entity's cybersecurity
program (described more fully below); and (2) require FICC's members
and applicants for membership to submit to FICC a Cybersecurity
Confirmation (both as part of an initial application for membership,
and on an ongoing basis for members, at least every two years).
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\4\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
References to ``members'' in this Order include the participants of
GSD and MBSD, including GSD Netting Members, GSD Comparison-Only
Members, GSD Sponsoring Members, GSD CCIT Members, GSD Funds-Only
Settling Bank Members, MBSD Clearing Members, MBSD Cash Settling
Bank Members, and MBSD EPN Users as such terms are defined in the
respective Rules.
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A. Background
FICC plays a prominent role in the fixed income markets as the sole
clearing agency in the United States acting as a central counterparty
and provider of significant clearance and settlement services for cash
settled U.S. treasury and agency securities and the non-private label
mortgage-backed securities markets.\5\ In light of FICC's critical role
in the marketplace, FICC was designated a Systemically Important
Financial Market Utility (``SIFMU'') under Title VIII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010.\6\ Due to
FICC's unique position in the marketplace, a failure or a disruption to
FICC could, among other things, increase the risk of significant
liquidity problems spreading among financial institutions or markets,
and thereby threaten the stability of the financial system in the
United States.\7\
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\5\ See Financial Stability Oversight Counsel 2012 Annual
Report, Appendix A (``FSOC 2012 Report''), available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\6\ 12 U.S.C. 5465(e)(1). See FSOC 2012 Report, supra note 5.
\7\ See FSOC 2012 Report, supra note 5.
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FICC's members connect to FICC, either through the Securely Managed
and Reliable Technology (``SMART'') network or through other electronic
means, such as a third party service provider, service bureau, network,
or the internet. The SMART network is a technology managed by FICC's
parent company, The Depository Trust & Clearing Corporation (``DTCC''),
that connects a nationwide complex of networks, processing centers, and
control facilities. Currently, FICC does not require its members or
applicants for membership to represent that they maintain a
cybersecurity program as a condition for connecting to FICC via the
SMART network or other means.
FICC states that many of its members and applicants for membership
may currently be subject to regulations that are designed, in part, to
protect against cyberattacks.\8\ Accordingly, such entities would
currently be required to follow standards established by national or
international organizations focused on information security management,
and they would currently maintain protocols for their senior management
to verify the existence of cybersecurity programs sufficient to meet
regulatory obligations. FICC further believes that some of its members
and applicants for membership might also currently follow protocols
substantially similar to the regulations referred to earlier in this
paragraph in order to meet the evolving cybersecurity expectations of
regulators and/or their own institutional customers.\9\
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\8\ For example, depending on the type of entity, FICC states
that its members may be subject to one or more of the following
regulations: (1) Regulation S-ID, which requires ``financial
institutions'' or ``creditors'' under the rule to adopt programs to
identify and address the risk of identity theft of individuals (17
CFR 248.201-202); (2) Regulation S-P, which requires broker-dealers,
investment companies, and investment advisers to adopt written
policies and procedures that address administrative, technical, and
physical safeguards for the protection of customer records and
information (17 CFR 248.1-30); and (3) Rule 15c3-5 under the Act,
known as the ``Market Access Rule,'' which requires broker-dealers
to establish, document, and maintain a system for regularly
reviewing the effectiveness of its management controls and
supervisory procedures (17 CFR 240.15c3-5). Notice, supra note 3, at
58195.
\9\ Id.
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Although FICC believes that its members and applicants for
membership may currently maintain robust cybersecurity programs, FICC
seeks to better ensure the protection of its network by requiring its
members and applicants for membership to confirm that they are meeting
certain cybersecurity standards in order to connect to FICC via the
SMART network or other means. Therefore, FICC proposes to require all
members and applicants for membership to submit a written Cybersecurity
Confirmation that includes specific representations regarding the
submitting entity's cybersecurity program and framework. FICC states
that the information contained in the Cybersecurity Confirmation would
help FICC to better understand the cybersecurity programs and
frameworks of entities seeking to connect to FICC, and thereby identify
possible cyber risk exposures.\10\ As a result, FICC would be better
able to establish appropriate controls to mitigate such risks and their
possible impacts on FICC's operations.
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\10\ Notice, supra note 3, at 58194-95.
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B. Proposed Changes
FICC proposes to modify its Rules to: (1) Provide a detailed
definition of the Cybersecurity Confirmation; and (2) require FICC's
members and applicants for membership to submit to FICC a Cybersecurity
Confirmation (both as part of an initial application for membership,
and on an ongoing basis for members, at least every two years). Each of
these proposed rule changes is described in greater detail below.
1. Cybersecurity Confirmation
FICC proposes to define the term ``Cybersecurity Confirmation'' to
mean a written form, in a format provided by FICC and signed by the
submitting entity's designated senior executive with the authority to
attest to the cybersecurity matters contained in the form.\11\ The form
would contain specific representations regarding the submitting
entity's cybersecurity program and framework. Such representations
would cover the two years prior to the date of the most recently
provided Cybersecurity Confirmation. The Cybersecurity Confirmation
would include the following representations:
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\11\ Notice, supra note 3, at 58195. See also FICC Cybersecurity
Confirmation Form, submitted as Exhibit 3 to SR-FICC-2019-005,
available at https://www.sec.gov/rules/sro/ficc/2019/34-87394-ex3.pdf.
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The submitting entity has defined and maintains a
comprehensive cybersecurity program and framework that considers
potential cyber threats that impact the submitting entity's
organization, and protects the confidentiality, integrity, and
availability requirements of its systems and information.
The submitting entity has implemented and maintains a
written
[[Page 68268]]
enterprise cybersecurity policy or policies approved by the submitting
entity's senior management or board of directors, and the submitting
entity's cybersecurity framework is in alignment with standard industry
best practices and guidelines.\12\
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\12\ Examples of recognized frameworks, guidelines and standards
that FICC believes are adequate include the Financial Services
Sector Coordinating Council Cybersecurity Profile, the National
Institute of Standards and Technology Cybersecurity Framework
(``NIST CSF''), International Organization for Standardization
(``ISO'') standard 27001/27002 (``ISO 27001''), Federal Financial
Institutions Examination Council (``FFIEC'') Cybersecurity
Assessment Tool, Critical Security Controls Top 20, and Control
Objectives for Information and Related Technologies. FICC would
identify recognized frameworks, guidelines and standards in the form
of Cybersecurity Confirmation and in an Important Notice that FICC
would issue from time to time. FICC would also consider accepting
other standards upon request. Notice, supra note 3, at 58195.
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If the submitting entity uses a third party service
provider or service bureau(s) to connect or transact business or to
manage the connection with FICC, the submitting entity has an
appropriate program to evaluate the cyber risks and impact of these
third parties and to review the third party assurance reports.
The submitting entity's cybersecurity program and
framework protects the segment of its system that connects to and/or
interacts with FICC.
The submitting entity has in place an established process
to remediate cyber issues identified to meet its regulatory and/or
statutory requirements.
The submitting entity periodically updates the risk
processes of its cybersecurity program and framework based on a risk
assessment or changes to technology, business, threat ecosystem, and/or
regulatory environment.
The submitting entity's cybersecurity program and
framework has been reviewed by one of the following: (1) The submitting
entity, if it has filed and maintains a current Certification of
Compliance with the Superintendent of the New York State Department of
Financial Services confirming compliance with its Cybersecurity
Requirements for Financial Services Companies; \13\ (2) a regulator who
assesses the submitting entity's cybersecurity program and framework
against an industry cybersecurity framework or industry standard,
including those that are listed on the Cybersecurity Confirmation form
and in an Important Notice that is issued by FICC from time to time;
\14\ (3) an independent external entity with cybersecurity domain
expertise in relevant industry standards and practices, including those
that are listed on the Cybersecurity Confirmation form and in an
Important Notice that is issued by FICC from time to time; \15\ or (4)
an independent internal audit function reporting directly to the
submitting entity's board of directors or designated board of directors
committee, such that the findings of that review are shared with these
governance bodies.
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\13\ 23 N.Y. Comp. Codes R. & Regs. tit. 23, Sec. 500 et seq.
(2017). FICC states that this regulation requires entities to
confirm that they have comprehensive cybersecurity programs as
described in the regulation, and FICC believes this regime is
sufficient to meet the objectives of the proposed Cybersecurity
Confirmation. Notice, supra note 3, at 58196.
\14\ FICC states that current industry cybersecurity frameworks
and industry standards could include, for example, the Office of the
Comptroller of the Currency or the FFIEC Cybersecurity Assessment
Tool. FICC would identify acceptable industry cybersecurity
frameworks and standards in the Cybersecurity Confirmation form and
in an Important Notice that FICC would issue from time to time. FICC
would also consider accepting other industry cybersecurity
frameworks and standards upon request. Notice, supra note 3, at
58196.
\15\ FICC states that a third party with cybersecurity domain
expertise is one that follows and understands applicable industry
standards, practices, and regulations, such as ISO 27001
certification or NIST CSF assessment. FICC would identify acceptable
industry standards and practices in the Cybersecurity Confirmation
form and in an Important Notice that FICC would issue from time to
time. FICC would also consider accepting other industry standards
and practices upon request. Notice, supra note 3, at 58196.
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FICC states that it designed the representations in the
Cybersecurity Confirmation to provide information on how each
submitting entity manages cybersecurity with respect to its
connectivity to FICC.\16\ FICC believes that by requiring these
representations from members and applicants for membership, the
proposed Cybersecurity Confirmation would provide useful information
designed to enable FICC to make informed decisions about risks or
threats, perform additional monitoring, target potential
vulnerabilities, and otherwise protect the FICC network.\17\
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\16\ Notice, supra note 3, at 58196.
\17\ Id.
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2. Initial and Ongoing Membership Requirement
FICC proposes to require new applicants for FICC membership to
submit a Cybersecurity Confirmation as part of their application
materials. FICC also proposes to require all FICC members to submit a
Cybersecurity Confirmation at least every two years. With respect to
the requirement to submit a Cybersecurity Confirmation at least every
two years, FICC would provide all members with notice of the date on
which the Cybersecurity Confirmation would be due no later than 180
calendar days prior to the due date.
C. Implementation Timeframe
The proposed rule change would be effective upon Commission
approval. New applicants for FICC membership would be required to
submit a Cybersecurity Confirmation as part of their application
materials. The requirement to submit a Cybersecurity Confirmation would
also apply to applicants whose applications are pending with FICC at
the time the Commission approves the proposed rule change. For existing
FICC members, FICC would provide notice of the due date to submit a
Cybersecurity Confirmation, not later than 180 days prior to the due
date. Finally, FICC would provide such notice to its members at least
every two years going forward.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \18\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the proposed rule
change, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,\19\ and Rules 17Ad-22(e)(17)(i) and
(e)(17)(ii) promulgated under the Act,\20\ for the reasons described
below.
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\18\ 15 U.S.C. 78s(b)(2)(C).
\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ 17 CFR 240.17Ad-22(e)(17)(i) and (e)(17)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to, among other things, promote the prompt
and accurate clearance and settlement of securities transactions and
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\21\
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\21\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, FICC proposes to require its members and
applicants for membership to submit a Cybersecurity Confirmation,
confirming the existence
[[Page 68269]]
and nature of their cybersecurity programs. The Cybersecurity
Confirmations should provide FICC with useful information regarding the
cybersecurity programs of the submitting entities. By conditioning an
entity's connectivity to FICC via the SMART network or other means on
the submission of a Cybersecurity Confirmation, FICC should be better
enabled to reduce the cyber risks of electronically connecting to
entities that have not confirmed the existence and nature of their
cybersecurity programs. Accordingly, the proposed Cybersecurity
Confirmation requirement should provide FICC with information to better
identify its exposure to cyber risks and to take steps to mitigate
those risks.
If not adequately addressed, the risk of cyberattacks and other
cyber vulnerabilities could affect FICC's network and FICC's ability to
clear and settle securities transactions, or to safeguard the
securities and funds which are in FICC's custody or control, or for
which it is responsible. The proposed Cybersecurity Confirmation
requirement is a tool designed to address those risks as described
above. Therefore, the Commission finds the proposed Cybersecurity
Confirmation requirement would promote the prompt and accurate
clearance and settlement of securities transactions and assure the
safeguarding of securities and funds which are in the custody or
control of FICC or for which it is responsible, consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\22\
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\22\ Id.
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B. Consistency With Rule 17Ad-22(e)(17)(i) Under the Act
Rule 17Ad-22(e)(17)(i) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to manage the covered
clearing agency's operational risks by identifying the plausible
sources of operational risk, both internal and external, and mitigating
their impact through the use of appropriate systems, policies,
procedures, and controls.\23\ FICC's operational risks include
protecting its electronic systems from cyber risks.
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\23\ 17 CFR 240.17Ad-22(e)(17)(i).
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As described above, entities connect electronically to FICC via the
SMART network or other means. The proposed Cybersecurity Confirmation
requirement should reduce cyber risks to FICC by requiring members and
applicants for membership to confirm that they have defined and
maintain cybersecurity programs and frameworks that meet standard
industry best practices and guidelines. The representations in each
submitting entity's Cybersecurity Confirmation would provide
information that should help FICC to mitigate its exposure to cyber
risks, and thereby decrease the operational risks presented to FICC by
its connections to such entities. Thus, the proposed Cybersecurity
Confirmations should enable FICC to better identify potential sources
of external operational risks and mitigate the possible impacts of
those risks. Because the proposed changes would help FICC identify and
mitigate plausible sources of external operational risk, the Commission
finds the proposed changes are consistent with the requirements of Rule
17Ad-22(e)(17)(i) under the Act.\24\
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\24\ Id.
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C. Consistency With Rule 17Ad-22(e)(17)(ii) Under the Act
Rule 17Ad-22(e)(17)(ii) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to manage the covered
clearing agency's operational risks by ensuring, in part, that systems
have a high degree of security, resiliency, and operational
reliability.\25\ As noted above, FICC's operational risks include
protecting its electronic systems from cyber risks.
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\25\ 17 CFR 240.17Ad-22(e)(17)(ii).
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Although FICC believes that its members and applicants for
membership may currently maintain robust cybersecurity programs, FICC
currently does not require those entities to represent that they
maintain a cybersecurity program as a condition for connecting to FICC
via the SMART network or other means. FICC designed the proposed
Cybersecurity Confirmation requirement to reduce cyber risks by
requiring its members and applicants for membership to confirm that
they have defined and maintain cybersecurity programs and frameworks
that meet standard industry best practices and guidelines. The
representations in each submitting entity's Cybersecurity Confirmation
would provide more security for FICC's SMART network and other systems
by providing FICC with information designed to help manage its cyber-
related operational risks, which in turn, would enable FICC to take
steps necessary to strengthen the security of its network to mitigate
those risks. Since the proposal would enhance FICC's ability to ensure
that its systems have a high degree of security, resiliency, and
operational reliability, the Commission finds the proposed changes are
consistent with the requirements of Rule 17Ad-22(e)(17)(ii) under the
Act.\26\
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\26\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act
and, in particular, with the requirements of Section 17A of the Act
\27\ and the rules and regulations promulgated thereunder.
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\27\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\28\ that proposed rule change SR-FICC-2019-005, be, and hereby is,
APPROVED.\29\
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\28\ 15 U.S.C. 78s(b)(2).
\29\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26844 Filed 12-12-19; 8:45 am]
BILLING CODE 8011-01-P