
[Federal Register Volume 82, Number 191 (Wednesday, October 4, 2017)]
[Notices]
[Pages 46332-46335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21273]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81745; File Nos. SR-DTC-2017-014; SR-NSCC-2017-013; SR-
FICC-2017-017]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Fixed Income Clearing 
Corporation; Order Approving Proposed Rule Changes To Adopt the 
Clearing Agency Operational Risk Management Framework

September 28, 2017.

I. Introduction

    On July 25, 2017, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and 
collectively with DTC and FICC, the ``Clearing Agencies''), filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
changes SR-DTC-2017-014, SR-NSCC-2017-013, and SR-FICC-2017-017, 
respectively, pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed 
rule changes were published for comment in the Federal Register on 
August 14, 2017.\3\ The Commission did not receive any comment letters 
on the proposed rule changes. For the reasons discussed below, the 
Commission approves the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 81338 (August 8, 2017), 
82 FR 36049 (August 14, 2017) (SR-DTC-2017-014, SR-NSCC-2017-013, 
SR-FICC-2017-017) (``Notice'').
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II. Description of the Proposed Rule Changes

    The proposed rule changes would adopt the Clearing Agency 
Operational Risk Management Framework (``Framework'') of the Clearing 
Agencies, as described below.

A. Overview of the Framework

    The Framework would describe how each of Clearing Agency manages 
operational risk. Operational risk is defined by the Clearing Agencies 
in the Framework as the risk of direct or indirect loss or reputational 
harm resulting from an event, internal or external, that is the result 
of inadequate or failed processes, people, and systems (``Operational 
Risk'').\4\ More specifically, the Framework would describe how the 
Clearing Agencies (i) manage Operational Risk; (ii) manage their 
information technology risks; and (iii) manage their business 
continuity risks.\5\ The DTCC Operational Risk Management group 
(``ORM'') would maintain the Framework, on behalf of the Clearing 
Agencies.\6\
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    \4\ Notice, 82 FR at 37943.
    \5\ Id.
    \6\ Id. The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides a relevant service to a Clearing 
Agency.
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B. Operational Risk Management

    The Framework would describe how ORM is charged with establishing 
appropriate systems, policies, procedures, and controls to enable the 
Clearing Agencies to identify plausible sources of Operational Risk.\7\
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    \7\ Notice, 82 FR at 37943.
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    Specifically, the Framework would describe how the Clearing 
Agencies identify key risks, including Operational Risk, and set 
metrics to categorize such risks (e.g., from ``no impact'' to ``severe 
impact'') through ``Risk Tolerance Statements.'' \8\ The Framework 
would describe how the Risk Tolerance Statements identify the overall 
risk reduction or mitigation objectives of the Clearing Agencies, with 
respect to identified risks to the Clearing Agencies.\9\ The Framework 
would also explain how the Risk Tolerance Statements document the risk 
controls and other measures the Clearing Agencies would use to manage 
such identified risks (including escalation requirements in the event 
of risk metric breaches). The Framework would state that ORM would 
annually review, revise, update, and/or create, as necessary, each Risk 
Tolerance Statement.\10\
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    \8\ Id.
    \9\ Id.
    \10\ Id.
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    The Framework would also describe how the Clearing Agencies monitor 
key risks, including Operational Risk, through ``Risk Profiles.'' \11\ 
The Framework would state that ``Risk Profiles'' identify how risk is 
assessed for each of the Clearing Agencies' businesses and support 
areas (each a ``Clearing Agency Business'' and/or ``Clearing Agency 
Support Area'').\12\ The Framework would explain that the risk 
assessment documented in these profiles includes (1) assessment of 
inherent risk (i.e., risk without any mitigating controls); (2) 
evaluation of existing controls and, as appropriate, any new additional 
controls, as well as the evaluation of the same risk against the 
strength of such controls; and (3) identification of any residual risk 
and a determination to either further mitigate such risk or accept such 
risk by the applicable Clearing Agency Business or Clearing Agency 
Support Area.\13\
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    \11\ Id.
    \12\ Id.
    \13\ Id.
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    The Framework would then describe generally the responsibilities of 
ORM, which is part of the second line of defense within the Clearing 
Agencies' ``Three Lines of Defense'' approach to risk management.\14\ 
The Framework would identify ORM responsibilities

[[Page 46333]]

including, but not limited to, management of the Risk Tolerance 
Statements, and working with the Clearing Agency Businesses and 
Clearing Agency Support Areas to create and monitor Risk Profiles.\15\
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    \14\ Id. The Three Lines of Defense approach to risk management 
identifies the roles and responsibilities of different Clearing 
Agency Businesses or Clearing Agency Support Areas in identifying, 
assessing, measuring, monitoring, mitigating, and reporting certain 
key risks faced by the Clearing Agencies. The Three Lines of Defense 
approach is more fully described in a separate framework, the 
Clearing Agency Risk Management Framework. See Securities Exchange 
Act Release No. 81635 (September 15, 2017), 82 FR 44224 (September 
21, 2017)(SR-DTC-2017-013, SR-NSCC-2017-012, SR-FICC-2017-016).
    \15\ Notice, 82 FR at 37943.
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C. Information Technology Risks

    The Framework would describe how the Clearing Agencies address 
information technology risks.\16\ The Framework would state that the 
DTCC Technology Risk Management group (``TRM''), on behalf of the 
Clearing Agencies, is responsible for establishing appropriate 
programs, policies, procedures, and controls with respect to the 
Clearing Agencies' information technology risks.\17\ The Framework 
would indicate that these responsibilities would help respective 
Clearing Agency's management to ensure that systems have a high degree 
of security, resiliency, operational reliability, and adequate, 
scalable capacity.\18\ The Framework would describe some of the 
recognized information technology standards that TRM may use to execute 
its responsibilities (as applicable).\19\
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    \16\ Id.
    \17\ Id.
    \18\ Id.
    \19\ Id.
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    The Framework would also identify some of TRM's responsibilities, 
including (1) performing risk assessments to, among other things, 
facilitate the determination of the Clearing Agencies' investment and 
remediation priorities; (2) facilitating annual mandatory and periodic 
information security awareness, education, training, and communication 
to personnel of Clearing Agency Businesses and Clearing Agency Support 
Areas and relevant external parties; and (3) creating, implementing, 
and managing certain programs, including programs that (i) address 
information security throughout a system's lifecycle, (ii) facilitate 
compliance with evolving and established regulatory rules and 
guidelines that govern protection of the information assets of the 
Clearing Agencies and their participants, (iii) identify, prioritize, 
and manage the level of cyber threats to the Clearing Agencies, and 
(iv) assure that access to Clearing Agency information assets is 
appropriately authorized and authenticated based on current business 
need.\20\
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    \20\ Id.
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    Additionally, the Framework would note that TRM's risk strategy is 
closely aligned to the Clearing Agencies' business drivers and future 
strategic direction.\21\ The Framework would state that such risk 
strategy allows the Clearing Agencies to achieve information security 
threat mitigation objectives, resiliency of infrastructure supporting 
Clearing Agency critical business applications, and operational 
reliability.\22\ The Framework would also describe how TRM's early and 
consistent involvement in initiatives to develop new products and 
systems establishes this priority.\23\ The Framework would state that 
TRM is involved from the initial planning phase through the design, 
build, and operative phases of those initiatives, to address certain 
requirements.\24\ The Framework would then explain that TRM's 
involvement specifically addresses effectiveness, reliability, and 
availability requirements of those initiatives, incorporating those 
requirements into the initiatives' design and execution (from both a 
technology and cyber security perspective).\25\
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    \21\ Id.
    \22\ Notice, 82 FR at 37943-44.
    \23\ Notice, 82 FR at 37944.
    \24\ Id.
    \25\ Id.
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    The Framework would next describe the Clearing Agencies' security 
strategy and defense, stating that the Clearing Agencies' network 
security framework and preventive controls are designed to support a 
reliable and robust tiered security strategy and defense.\26\ The 
Framework would state that these controls include modern and 
technically advanced security firewalls, intrusion detection, system 
and data monitoring, and data protection tools.\27\ The Framework would 
also describe the Clearing Agencies' enhanced security features and the 
standards they use to assess vulnerabilities and potential threats.\28\
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    \26\ Id.
    \27\ Id.
    \28\ Id.
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D. Business Continuity Risks

    Finally, the Framework would describe how the Clearing Agencies 
establish and maintain business continuity plans to address events that 
may pose significant business continuity risks (i.e., disrupting of 
Clearing Agency operations).\29\ The Framework would identify how the 
business continuity process for each Clearing Agency Business and 
Clearing Agency Support Area is ranked by the significance of a 
possible disruption to its operation.\30\ The Framework would explain 
that these rankings fall within a range of tiers, from 0 to 5, based on 
criticality to each applicable Clearing Agency's operations (each a 
``Tier''), where Tier 0 equates to critical operations or support of 
such operations for which virtually no downtime is permitted under 
applicable regulatory standards, and Tier 5 equates to non-essential 
operations or support of such operations for which recovery times of 
greater than five days is permitted.\31\
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    \29\ Id.
    \30\ Id.
    \31\ Id.
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    The Framework would state that each Clearing Agency Business and 
Clearing Agency Support Area annually updates its own business 
continuity plan, as well as reviews and ratifies its business impact 
analysis.\32\ The Framework would describe that the DTCC Business 
Continuity Management department (``BCM'') uses that analysis, on 
behalf of the Clearing Agencies, to validate the Business' or Support 
Area's current Tier ranking, described above.\33\ The Framework would 
identify the key elements of the business impact analysis, including 
(1) an assessment of the criticality of the applicable Clearing Agency 
Business or Clearing Agency Support Area, based on potential impact to 
the Clearing Agency; (2) an estimation of the maximum allowable 
downtime for the applicable Clearing Agency Business or Clearing Agency 
Support Area; and (3) the identification of dependencies, and the 
ranking of such dependencies to align with the criticality of the 
applicable Clearing Agency Business's, or Clearing Agency Support 
Area's, recovery.\34\
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    \32\ Id.
    \33\ Id.
    \34\ Id.
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    The Framework would describe the Clearing Agencies' multiple data 
centers, and the emergency monitoring and back-up systems available at 
each site.\35\ The Framework would explain the capacity of the various 
data centers (including emergency monitoring and back-up systems).\36\ 
The Framework would also describe how the Clearing Agencies' operating 
centers (which may include data centers) assist in recovery efforts, 
and explain how each Clearing Agency Business and Clearing Agency 
Support Area creates and deploys its own work-area recovery strategy to 
mitigate the loss of primary workspace and/or associated desktop 
technology, as well as for purposes of appropriately locating 
personnel.\37\ The Framework would further indicate how each work-area 
recovery strategy is developed and

[[Page 46334]]

executed (based on the applicable Clearing Agency Business' and 
Clearing Agency Support Area's current Tier ranking, as described 
above).\38\
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    \35\ Id.
    \36\ Id.
    \37\ Id.
    \38\ Id.
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    The Framework would describe the responsibilities of BCM in 
managing a disruptive business event.\39\ The Framework would state 
that managing a disruptive business event would include coordination 
with a team of representatives from each Clearing Agency Business and 
Clearing Agency Support Area.\40\ Finally, the Framework would describe 
how the Clearing Agencies conduct regular exercises used to simulate 
loss of Clearing Agency locations, and would describe some of the 
preventive measures the Clearing Agencies take with respect to business 
continuity risk management.\41\
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    \39\ Id.
    \40\ Id.
    \41\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act 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.\42\ After carefully considering the proposed rule 
changes, the Commission finds that the proposed rule changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Clearing Agencies. 
Specifically, the Commission finds that the proposed rule changes are 
consistent with Section 17A(b)(3)(F) of the Act \43\ and Rules 17Ad-
22(e)(17)(i)-(iii) under the Act.\44\
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    \42\ 15 U.S.C. 78s(b)(2)(C).
    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ 17 CFR 240.17Ad-22(e)(17)(i)-(iii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency be designed to assure the safeguarding 
of securities and funds which are in the custody or control of the 
Clearing Agencies or for which they are responsible.\45\
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    \45\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the Framework would describe how the Clearing 
Agencies manage their Operational Risk. Specifically, the Frameworks 
would describe how the Clearing Agencies address their technology 
risks, information security risks, and their business continuity risks. 
The Framework would describe the processes, systems, and controls (as 
well as the supporting policies and procedures) used by the Clearing 
Agencies to identify, manage, and mitigate risks which threaten the 
Clearing Agencies' ability to function.
    By describing their Operational Risk practices in a clear and 
comprehensive manner, the Framework is designed to help the Clearing 
Agencies prevent and manage the risks that arise in, or are borne by, 
the Clearing Agencies. The Framework would explain how the Clearing 
Agencies identify and mitigate risks generally (through the Three Lines 
of Defense, Risk Tolerance Statements, and Risk Profiles), as well as 
how they specially identify and mitigate information technology risk 
(through the TRM's efforts) and business continuity risk (through data 
centers and operational centers). By better managing the risks that 
arise in or are bone by the Clearing Agencies through such risk 
mitigation practices, the Framework is designed to help reduce the 
possibility that a Clearing Agency fails. By better positioning the 
Clearing Agencies to continue their critical operations and services, 
and mitigating the risk of financial loss contagion caused by a 
Clearing Agency failure, the Framework is designed to help assure the 
safeguarding of securities and funds which are in the custody or 
control of the Clearing Agencies, or for which they are responsible. 
Accordingly, the Commission believes that the proposed rule changes are 
consistent with Section 17A(b)(3)(F) of the Act.\46\
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    \46\ Id.
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B. Consistency With Rule 17Ad-22(e)(17)(i)

    Rule 17Ad-22(e)(17)(i) under the Act requires, in part, 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.\47\
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    \47\ 17 CFR 240.17Ad-22(e)(17)(i).
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    As described above, the Framework would describe how the Risk 
Tolerance Statements and the Risk Profiles assist the Clearing Agencies 
identify and mitigate the plausible sources of Operational Risk, both 
internal and external. As described above, the Framework explains how 
the Risk Tolerance Statements (i) identify both internal and external 
Clearing Agency risks; (ii) categorize the respective Clearing 
Agencies' tolerance for those risks; and (iii) then identify governance 
process applicable to any breach of those tolerances. In this way, the 
Risk Tolerance Statements are designed to help the Clearing Agencies to 
identify and manage the internal and external risks. As also described 
above, the Framework would describe how the Risk Profiles are designed 
to serve a similar function, by serving as a tool for identifying and 
assessing inherent risks, and evaluating the controls around those 
risks. The Framework also describes the role of ORM, which includes 
oversight of both the Risk Tolerance Statements and Risk Profiles.
    By describing the functions of the Risk Tolerance Statements and 
Risk Profiles, (which, together, are designed to (i) assist the 
Clearing Agencies in effectively managing their operational risks by 
identifying the plausible sources of operational risk, both internal 
and external, and (ii) assist the Clearing Agencies in mitigating the 
impact of those risks), and by describing the role of ORM in overseeing 
the Risk Tolerance Statements and Risk Profiles, the Commission 
believes the Framework is consistent with the requirements of Rule 
17Ad-22(e)(17)(i).\48\
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    \48\ Id.
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C. Consistency With Rule 17Ad-22(e)(17)(ii)

    Rule 17Ad-22(e)(17)(ii) under the Act requires, in part, 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 that systems 
have a high degree of security, resiliency, operational reliability, 
and adequate, scalable capacity.\49\
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    \49\ 17 CFR 240.17Ad-22(e)(17)(ii).
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    As noted above, the Framework would describe how the Clearing 
Agencies manage their Operational Risk. Specifically, the Framework 
would describe TRM's role and responsibilities in managing the Clearing 
Agencies' information technology risks. In particular, the Framework 
would identify TRM's (i) programs, systems, and controls; (ii) 
information technology risk management standards; and (iii) continuous 
role in product and project initiatives to address security issues 
through the lifecycle of Clearing Agency initiatives.
    The Framework thereby describes how TRM is designed to safeguard 
the integrity of the Clearing Agencies' information technology, as well 
as the standards against which TRM's safeguards would be evaluated. In 
this manner, the Framework is designed to

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ensure that the Clearing Agencies' systems have a high degree of 
security, resiliency, and operational reliability. Furthermore, as the 
Framework indicates TRM's early and continuous involvement in the 
Clearing Agencies' initiatives, the Framework reveals how TRM would 
enable the Clearing Agencies to grow and evolve while accounting for 
technology and cyber security concerns, thereby ensuring the Clearing 
Agencies' adequate and scalable capacity.
    Therefore, by describing TRM's role and responsibilities in helping 
the Clearing Agencies maintain systems with a high degree of security, 
resiliency, operational reliability, and adequate, scalable capacity, 
the Commission believes the Framework is consistent with the 
requirements of Rule 17Ad-22(e)(17)(ii).\50\
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    \50\ Id.
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D. Consistency With Rule 17Ad-22(e)(17)(iii)

    Rule 17Ad-22(e)(17)(iii) under the Act requires, in part, 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 establishing and 
maintaining a business continuity plan that addresses events posing a 
significant risk of disrupting operations.\51\
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    \51\ 17 CFR 240.17Ad-22(e)(17)(iii).
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    As described above, the Framework would describe how the Clearing 
Agencies establish and maintain business continuity plans. 
Specifically, the Framework would describe the critical features of the 
Clearing Agencies' business continuity plans to demonstrate how they 
are designed to address events posing a significant risk of disrupting 
the Clearing Agencies' operations. The Framework would also indicate 
how each Clearing Agency Business and Clearing Agency Support Area 
reviews and ratifies its respective plan and its business impact 
analysis, relative to its assigned Tier. Therefore, as the Framework 
describes how the Clearing Agencies establish and maintain their 
business continuity plans, which are designed to address events posing 
a significant risk of disrupting operations, the Commission believes 
that the Framework is consistent with the requirements of Rule 17Ad-
22(e)(17)(iii).\52\
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    \52\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act \53\ 
and the rules and regulations thereunder.
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    \53\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule changes SR-DTC-2017-014, SR-NSCC-2017-013, and SR-
FICC-2017-017 be, and hereby are, approved.\54\
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    \54\ In approving the Proposed Rule Changes, 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.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21273 Filed 10-3-17; 8:45 am]
 BILLING CODE 8011-01-P


