[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

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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


