[Federal Register Volume 84, Number 240 (Friday, December 13, 2019)]
[Notices]
[Pages 68243-68246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26843]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87696; File No. SR-NSCC-2019-003]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change To Require
Confirmation of Cybersecurity Program
December 9, 2019.
I. Introduction
On October 15, 2019, National Securities Clearing Corporation
(``NSCC'') 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-NSCC-2019-003. 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. 87392 (October 24,
2019), 84 FR 58183 (October 30, 2019) (SR-NSCC-2019-003)
(``Notice'').
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II. Description of the Proposed Rule Change
NSCC proposes to modify its Rules and Procedures (``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);
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(2) require NSCC's members and applicants for membership to submit to
NSCC a Cybersecurity Confirmation (both as part of an initial
application for membership, and on an ongoing basis for members, at
least every two years); and (3) provide that NSCC may require a
Cybersecurity Confirmation from organizations that report trade data to
NSCC for comparison and trade recording.
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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 both Members and
Limited Members, as such terms are defined in the Rules.
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A. Background
NSCC plays a prominent role in providing clearance, settlement,
risk management, central counterparty services, and a guarantee of
completion for virtually all broker-to-broker trades involving equity
securities, corporate and municipal debt securities, American
depository receipts, exchange traded funds, and unit investment
trusts.\5\ In light of NSCC's critical role in the marketplace, NSCC
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 NSCC's unique position in
the marketplace, a failure or a disruption to NSCC 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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NSCC's members and trade data reporting organizations connect to
NSCC, 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 NSCC's parent company, The
Depository Trust & Clearing Corporation (``DTCC''), that connects a
nationwide complex of networks, processing centers, and control
facilities. Currently, NSCC does not require its members, applicants
for membership, or trade data reporting organizations to represent that
they maintain a cybersecurity program as a condition for connecting to
NSCC via the SMART network or other means.
NSCC states that many of its members, applicants for membership,
and trade data reporting organizations 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. NSCC further believes that some of its members,
applicants for membership, and trade data reporting organizations 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, NSCC 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
58184.
\9\ Id.
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Although NSCC believes that its members, applicants for membership,
and trade data reporting organizations may currently maintain robust
cybersecurity programs, NSCC seeks to better ensure the protection of
its network by requiring its members, applicants for membership, and
trade data reporting organizations to confirm that they are meeting
certain cybersecurity standards in order to connect to NSCC via the
SMART network or other means. Therefore, NSCC proposes to require all
members, applicants for membership, and certain trade data reporting
organizations to submit a written Cybersecurity Confirmation that
includes specific representations regarding the submitting entity's
cybersecurity program and framework. NSCC states that the information
contained in the Cybersecurity Confirmation would help NSCC to better
understand the cybersecurity programs and frameworks of entities
seeking to connect to NSCC, and thereby identify possible cyber risk
exposures.\10\ As a result, NSCC would be better able to establish
appropriate controls to mitigate such risks and their possible impacts
on NSCC's operations.
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\10\ Notice, supra note 3, at 58183.
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B. Proposed Changes
NSCC proposes to modify its Rules to: (1) Provide a detailed
definition of the Cybersecurity Confirmation; (2) require NSCC's
members and applicants for membership to submit to NSCC a Cybersecurity
Confirmation (both as part of an initial application for membership,
and on an ongoing basis for members, at least every two years); and (3)
provide that NSCC may require a Cybersecurity Confirmation from
organizations that report trade data to NSCC. Each of these proposed
rule changes is described in greater detail below.
1. Cybersecurity Confirmation
NSCC proposes to define the term ``Cybersecurity Confirmation'' to
mean a written form, in a format provided by NSCC 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 58183. See also NSCC Cybersecurity
Confirmation Form, submitted as Exhibit 3 to SR-FICC-2019-003,
available at https://www.sec.gov/rules/sro/nscc/2019/34-87392-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 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 NSCC 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. NSCC would
identify recognized frameworks, guidelines and standards in the form
of Cybersecurity Confirmation and in an Important Notice that NSCC
would issue from time to time. NSCC would also consider accepting
other standards upon request. Notice, supra note 3, at 58184.
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[[Page 68245]]
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 NSCC, 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 NSCC.
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 NSCC 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 NSCC 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). NSCC states that this regulation requires entities to
confirm that they have comprehensive cybersecurity programs as
described in the regulation, and NSCC believes this regime is
sufficient to meet the objectives of the proposed Cybersecurity
Confirmation. Notice, supra note 3, at 58184.
\14\ NSCC 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. NSCC would identify acceptable industry cybersecurity
frameworks and standards in the Cybersecurity Confirmation form and
in an Important Notice that NSCC would issue from time to time. NSCC
would also consider accepting other industry cybersecurity
frameworks and standards upon request. Notice, supra note 3, at
58185.
\15\ NSCC 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. NSCC would identify acceptable
industry standards and practices in the Cybersecurity Confirmation
form and in an Important Notice that NSCC would issue from time to
time. NSCC would also consider accepting other industry standards
and practices upon request. Notice, supra note 3, at 58185.
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NSCC 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 NSCC.\16\ NSCC believes that by requiring these
representations from members, applicants for membership, and trade data
reporting organizations, the proposed Cybersecurity Confirmation would
provide useful information designed to enable NSCC to make informed
decisions about risks or threats, perform additional monitoring, target
potential vulnerabilities, and otherwise protect the NSCC network.\17\
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\16\ Notice, supra note 3, at 58185.
\17\ Id.
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2. Initial and Ongoing Membership Requirement
NSCC proposes to require new applicants for NSCC membership to
submit a Cybersecurity Confirmation as part of their application
materials. NSCC also proposes to require all NSCC 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, NSCC 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.
3. Organizations Reporting Trade Data to NSCC
NSCC proposes to modify the Rules to provide that, when determining
whether to accept trade data from an organization for comparison and
trade recording,\18\ NSCC may require the organization to submit a
Cybersecurity Confirmation. Since such organizations are not NSCC
members, contracts (i.e., separate from the Rules) govern the
relationships between NSCC and such organizations. NSCC states that
this proposal would provide transparency regarding the steps NSCC may
take when determining whether to accept trade data from such
organizations.\19\
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\18\ See Rule 7 (Comparison and Trade Recording Operation),
supra note 4.
\19\ Notice, supra note 3, at 58185.
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C. Implementation Timeframe
The proposed rule change would be effective upon Commission
approval. New applicants for NSCC 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 NSCC at
the time the Commission approves the proposed rule change. For existing
NSCC members, NSCC would provide notice of the due date to submit a
Cybersecurity Confirmation, not later than 180 days prior to the due
date. Finally, NSCC 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 \20\ 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 NSCC. In particular, the
Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,\21\ and Rules 17Ad-22(e)(17)(i) and
(e)(17)(ii) promulgated under the Act,\22\ for the reasons described
below.
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\20\ 15 U.S.C. 78s(b)(2)(C).
\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ 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
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the clearing agency or for which it is responsible.\23\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, NSCC proposes to require its members,
applicants for membership, and trade data reporting organizations
seeking to connect to NSCC via the SMART network or other means, to
submit a Cybersecurity Confirmation, confirming the existence and
nature of their cybersecurity programs. The Cybersecurity Confirmations
should provide NSCC with useful information regarding the cybersecurity
programs of the submitting entities. By conditioning an entity's
connectivity to NSCC via the SMART network or other means on the
submission of a Cybersecurity Confirmation, NSCC 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 NSCC 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 NSCC's network and NSCC's ability to
clear and settle securities transactions, or to safeguard the
securities and funds which are in NSCC'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 NSCC or for which it is responsible, consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\24\
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\24\ 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.\25\ NSCC's operational risks include
protecting its electronic systems from cyber risks.
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\25\ 17 CFR 240.17Ad-22(e)(17)(i).
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As described above, entities connect electronically to NSCC via the
SMART network or other means. The proposed Cybersecurity Confirmation
requirement should reduce cyber risks to NSCC by requiring members,
applicants for membership, and trade data reporting organizations 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 NSCC to
mitigate its exposure to cyber risks, and thereby decrease the
operational risks presented to NSCC by its connections to such
entities. Thus, the proposed Cybersecurity Confirmations should enable
NSCC to better identify potential sources of external operational risks
and mitigate the possible impacts of those risks. Because the proposed
changes would help NSCC 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.\26\
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\26\ 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.\27\ As noted above, NSCC's operational risks include
protecting its electronic systems from cyber risks.
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\27\ 17 CFR 240.17Ad-22(e)(17)(ii).
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Although NSCC believes that its members, applicants for membership,
and trade data reporting organizations may currently maintain robust
cybersecurity programs, NSCC currently does not require those entities
to represent that they maintain a cybersecurity program as a condition
for connecting to NSCC via the SMART network or other means. NSCC
designed the proposed Cybersecurity Confirmation requirement to reduce
cyber risks by requiring its members, applicants, and trade data
reporting organizations 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
NSCC's SMART network and other systems by providing NSCC with
information designed to help manage its cyber-related operational
risks, which in turn, would enable NSCC to take steps necessary to
strengthen the security of its network to mitigate those risks. Since
the proposal would enhance NSCC'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.\28\
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\28\ 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
\29\ and the rules and regulations promulgated thereunder.
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\29\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\30\ that proposed rule change SR-NSCC-2019-003, be, and hereby is,
approved.\31\
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\30\ 15 U.S.C. 78s(b)(2).
\31\ 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.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26843 Filed 12-12-19; 8:45 am]
BILLING CODE 8011-01-P