
[Federal Register Volume 88, Number 225 (Friday, November 24, 2023)]
[Notices]
[Pages 82441-82447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98979; File No. SR-OCC-2023-003]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change, as Modified by Partial 
Amendment No. 1, Concerning Clearing Member Cybersecurity Obligations

November 17, 2023.

I. Introduction

    On March 21, 2023, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2023-003 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder. The proposed rule change would amend certain provisions 
in OCC's Rules relating to each Clearing Member's obligation to address 
a ``Security Incident'' (i.e., the occurrence of a cyber-related 
disruption or intrusion of a Clearing Member's systems that is 
reasonably likely to pose an imminent risk or threat to OCC's 
operations) of that Clearing Member. The proposed rule change was 
published for public comment in the Federal Register on April 5, 
2023.\3\ The Commission has received comments regarding the proposed 
rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 97225 (Mar. 30, 2023), 
88 FR 20195 (Apr. 5, 2023) (File No. SR-OCC-2023-003) (``Notice of 
Filing'').
    \4\ Comments on the proposed rule change are available at 
https://www.sec.gov/comments/sr-occ-2023-003/srocc2023003.htm.
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    On May 18, 2023, pursuant to the Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve the proposed rule change.\6\ On May 24, 2023, OCC filed Partial 
Amendment No. 1 to the Notice of Filing.\7\ For the reasons discussed 
below, the Commission is approving the proposed rule change, as 
modified by Partial Amendment No. 1 (hereinafter, ``proposed rule 
change'').
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 97525 (May 18, 
2023), 88 FR 33655 (May 24, 2023) (File No. SR-OCC-2023-003).
    \7\ See Securities Exchange Act Release No. 97602 (May 26, 
2023), 88 FR 36351 (June 2, 2023) (File No. SR-OCC-2023-003) 
(``Notice of Partial Amendment''). OCC submitted Partial Amendment 
No. 1 in response to comments regarding the proposed definition of 
``Security Incident'' for purposes of proposed Rule 213(d), the 
notification requirements and procedure in the event of a Security 
Incident, factors considered when determining whether to disconnect 
or reduce a clearing member's access, and clarification related to 
reconnection.
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II. Background

    Currently, the only OCC Rule governing a Clearing Member's 
cybersecurity obligations to OCC is Rule 219, titled ``Cybersecurity 
Confirmation.'' \8\ It requires Clearing Members and applicants for 
clearing membership to submit to OCC a form called the ``Cybersecurity 
Confirmation'' at least every two years or as part of its application 
materials. Through the form,

[[Page 82442]]

Clearing Members and applicants confirm that they maintain a 
comprehensive cybersecurity program that meets certain criteria (e.g., 
the cybersecurity program is approved by senior management, it is 
reviewed and updated periodically, the cybersecurity program is 
designed to protect the segment of the Clearing Member's or applicant's 
system that interacts with OCC, it includes a process for the Clearing 
Member to remediate cyber issues, etc.). However, current Rule 219 does 
not require Clearing Members to notify OCC if they experience a 
cybersecurity incident that could impact OCC or otherwise address OCC's 
processes, or the Clearing Member's obligations with respect to OCC.
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    \8\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    The proposed rule change would renumber Rule 219 as Rule 213 and 
rename the rule ``Cybersecurity Obligations'' to reflect the expanded 
scope of the Rule.\9\ It also would add section headings to the Rule 
and replace references to ``OCC'' with references to ``the 
Corporation,'' but otherwise would not change the provisions regarding 
the existing Cybersecurity Confirmation form that confirms the 
existence of a Clearing Member's cybersecurity program.\10\
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    \9\ The renumbering follows proposed changes to OCC's clearing 
membership standards, which includes removal of current Rules 213 
through 218. See Securities Exchange Act Release No. 97150 (Mar. 15, 
2023), 88 FR 17046 (Mar. 21, 2023) (File No. SR-OCC-2023-002).
    \10\ Specifically, OCC would add the following headings: 
``Cybersecurity Confirmation Submission'' to paragraph (a); 
``Representations in the Cybersecurity Confirmation'' to paragraph 
(b); and ``Execution of the Cybersecurity Confirmation'' to 
paragraph (c).
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    The substantive changes to the Rule would be the addition of two 
new subsections--(d) and (e)--titled ``Occurrence of a Security 
Incident'' and ``Procedures for Connecting Following a Security 
Incident,'' respectively. New subsection (d) would require a Clearing 
Member to immediately notify OCC if the member becomes aware or should 
be aware of a Security Incident (as defined in the Rule). It would also 
specify that OCC may take actions reasonably necessary to mitigate any 
effects on its operations following a Security Incident. New subsection 
(e) would require a Clearing Member wishing to reconnect its systems to 
OCC's systems to provide OCC with a new form, titled ``Reconnection 
Attestation,'' that describes the Security Incident and attests to 
certain security requirements, as well as an associated checklist, 
titled ``Reconnection Checklist,'' that describes the affected Clearing 
Member's remediation efforts and other key information. Each of these 
proposed changes is described in greater detail below.

A. New Paragraph (d): Occurrence of a Security Incident

    Proposed Rule 213(d) would define a Security Incident as an 
incident that has occurred or is occurring involving a cyber-related 
disruption or intrusion of the Clearing Member's system(s) that is 
reasonably likely to pose an imminent risk or threat to OCC's 
operations.\11\ To provide guidance regarding the types of disruptions 
or intrusions that might be considered Security Incidents, the proposed 
rule includes a non-exhaustive list of examples. Specifically, a 
Security Incident may include any disruption or degradation of the 
normal operation of the Clearing Member's systems or any unauthorized 
entry into the Clearing Member's systems that would result in loss of 
OCC's data or system integrity, an unauthorized disclosure of sensitive 
information related to OCC, or the inability of OCC to conduct 
essential clearance and settlement functions.\12\
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    \11\ In response to public comment, OCC amended the proposed 
rule change to specify that a disruption or intrusion of a Clearing 
Member's systems would only be deemed a Security Incident if it is 
``reasonably likely to pose an imminent risk or threat to OCC's 
operations.'' See Notice of Partial Amendment, 88 FR at 36352.
    \12\ In response to public comment, OCC added the non-exhaustive 
list of potential Security Incidents to clarify that the focus of 
the Rule would be on the potential impact on OCC of a disruption or 
intrusion. See Notice of Partial Amendment, 88 FR at 36352.
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    Under the proposed rule, a Clearing Member would be required to 
immediately notify OCC if the member becomes aware or should be aware 
that there has been a Security Incident or that a Security Incident is 
occurring.\13\ The Clearing Member would also need to promptly confirm 
such notice in writing.
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    \13\ See Notice of Partial Amendment, 88 FR at 36352.
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    The proposed rule would specify that, if OCC receives notice of a 
Security Incident from a Clearing Member or has a reasonable basis to 
believe a Security Incident has occurred or is occurring, OCC may take 
actions reasonably necessary to mitigate any effects to its operations, 
including disconnecting the Clearing Member's access to OCC's 
information and data systems or modifying the scope and specifications 
of such access. Finally, paragraph (d) of the proposed rule would 
provide a non-exhaustive list of factors OCC may consider in 
determining whether to modify a Clearing Member's access to OCC's 
information and data systems, up to and including disconnection, in 
response to a Security Incident. Specifically, among other factors, OCC 
may consider the potential loss of control by a Clearing Member of its 
internal system(s), the potential loss of OCC's confidential data, the 
potential strain on or loss of OCC's resources due to OCC's inability 
to perform clearance and settlement functions, and the overall severity 
of the threat to the security and operations of OCC.\14\ Further, if 
the Corporation reasonably determines that disconnection of a Clearing 
Member is necessary, the Clearing Member must continue to meet its 
obligations to the Corporation, notwithstanding disconnection from the 
Corporation's systems.
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    \14\ In response to public comment, OCC amended its proposed 
rule to specify that these are the types of factors OCC would 
consider when determining whether to disconnect a Clearing Member. 
See Notice of Partial Amendment, 88 FR at 36353. OCC also clarified 
its anticipation that not all Security Incident notifications will 
result in a Clearing Member disconnection. See id. at 36352.
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B. New Paragraph (e): Procedures for Connecting Following a Security 
Incident That Results in Disconnection

    Proposed Rule 213(e) would clarify the process for a Clearing 
Member to request reconnection to OCC's systems following disconnection 
as a result of a Security Incident. In particular, the Clearing Member 
would need to complete and submit, upon OCC's request, a new form 
referred to by OCC as the ``Reconnection Attestation'' and a related 
checklist referred to by OCC as the ``Reconnection Checklist.'' The 
Reconnection Attestation would include a text box for the Clearing 
Member to provide a narrative description of the Security Incident and 
five representations to which, by signing the form, the Clearing Member 
would be attesting. Specifically, by signing the Reconnection 
Attestation, the Clearing Member would be attesting that it has:
     provided full, complete and accurate information in 
response to all requests made by OCC regarding the Security Incident, 
including all requests contained in the Reconnection Checklist, on a 
good faith, best efforts basis;
     provided full, complete and accurate information regarding 
any OCC data or systems that were potentially compromised during the 
Security Incident, including any potential exposure of credentials used 
to access OCC's systems, and will immediately notify OCC if it later 
becomes aware of a previously undetected or unreported compromise of 
OCC data or systems during the Security Incident;

[[Page 82443]]

     determined whether the Security Incident resulted, 
directly or indirectly, from any controls that failed or were 
circumvented by its employees, contractors or agents (``Failed 
Controls''); \15\
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    \15\ The proposed language would further specify that the 
Clearing Member has communicated the existence of Failed Controls to 
OCC and is remediating or has remediated all Failed Controls.
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     implemented, or will implement promptly, technical and 
operational changes, both preventative and detective, with the intent 
to prevent a recurrence of the Security Incident and has provided 
written summaries of such changes to OCC; and
     complied and will continue to comply with all applicable 
laws in connection with its response to the Security Incident, 
including any notifications required to be provided to government 
agencies, OCC, and third parties.\16\
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    \16\ See proposed Rule 213(e)(1)(A) through (E). Further, each 
Reconnection Attestation must be provided in writing and signed by a 
designated senior executive of the Clearing Member.
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    The associated Reconnection Checklist would include questions 
designed to elicit additional details regarding the Security Incident, 
including the potential cause of the incident, steps taken to contain 
it, the exposure and impact to OCC's systems or data, the Clearing 
Member's remediation efforts, and any other details relevant to the 
Clearing Member's request to reconnect to OCC's systems. The 
Reconnection Checklist would require the Clearing Member to respond to 
the following questions: \17\
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    \17\ The description of the checklist provided here is based on 
the Exhibit 3 to File No. SR-OCC-2023-003 provided by OCC at the 
time of filing.
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     was the disconnection the result of a cybersecurity-
related incident;
     describe the nature of the incident;
     what steps were taken to contain the incident;
     what OCC data, if any, was compromised during the 
incident;
     what OCC systems, if any, were impacted during the 
incident;
     was there any risk of exposure of credentials used to 
access OCC systems and, if so, were the credentials reissued;
     which controls were circumvented or failed that led to the 
incident occurring;
     what changes, preventative and detective, were implemented 
to prevent a reoccurrence;
     how has data integrity been preserved and what data checks 
have been performed prior to reconnecting to and sending/receiving data 
to/from OCC;
     have third-parties, including government agencies, been 
notified; and
     any additional details relevant to reconnection.\18\
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    \18\ These are the specific questions included in the 
Reconnection Checklist that OCC submitted as Exhibit 3 to the 
proposed rule change. See Exhibit 3 to File No. SR OCC2023-003. 
However, proposed Rule 213(e)(2) specifies that the Reconnection 
Checklist may require ``information including, but not limited to,'' 
the 11 questions noted above. This is to account for the evolving 
nature of Security Incidents and provide OCC with flexibility to 
modify the specific information requirements if necessary. See 
Notice of Filing, 88 FR at 20196.
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    According to OCC, the Reconnection Attestation and Reconnection 
Checklist are designed to accomplish several goals. First, they are 
designed to enable OCC to determine whether the risk or threat to OCC 
has been mitigated sufficiently for OCC to resume connectivity to the 
Clearing Member.\19\ Second, they are designed to provide OCC with 
evidence related to a Clearing Member's response to a Security 
Incident, including whether the Clearing Member has appropriate 
security requirements and carried out suitable remediation measures, to 
enable OCC to better understand and manage Security Incidents more 
broadly.\20\ Finally, they would better enable OCC to identify areas of 
interest, concern, or heightened risk by presenting information in a 
standardized format.\21\
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    \19\ See Notice of Filing, 88 FR at 20196.
    \20\ Id. at 20197.
    \21\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange 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 Exchange Act and the rules and regulations 
thereunder applicable to such organization.\22\ Under the Commission's 
Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \23\
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\24\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\25\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\26\
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    \24\ Id.
    \25\ Id.
    \26\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    After carefully considering the proposed rule change, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the 
Exchange Act \27\ and Rule 17Ad-22(e)(17)(i) \28\ thereunder as 
described in detail below.
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that a clearing agency's rules are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions.\29\ In addition to centralizing relevant information 
pertaining to Clearing Member Security Incidents in a single rule, the 
proposed rule change is designed to support OCC's management of 
potential cybersecurity risks by enhancing OCC's ability to identify 
and mitigate cybersecurity risks posed by a Security Incident 
experienced by one of OCC's Clearing Members. It also is designed to 
standardize OCC's cybersecurity risk management practices with respect 
to such Security Incidents. Among other things, the changes set forth 
Clearing Member obligations and the actions OCC may take if reasonably 
necessary to mitigate the effects of a Security Incident on its 
operations. As discussed further below, the changes also strengthen 
OCC's ability to manage its cyber-related risks by requiring Clearing 
Members to immediately notify OCC if the Clearing Member becomes aware 
of or should be aware that there has been a Security Incident or one is 
occurring, and promptly confirm such a notice in writing. Taken 
together, the proposed changes should strengthen OCC's cybersecurity 
risk management processes. By creating a consistent set of obligations 
on Clearing Members for identifying and reporting Security

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Incidents, OCC would enhance its ability to monitor, mitigate, and 
manage cybersecurity risks--such as unauthorized disclosure of 
sensitive information or a loss of data or system integrity--in the 
event a Clearing Member experiences a Security Incident. Because OCC's 
information, data, and systems support and enable OCC's ability to 
conduct essential clearance and settlement functions, enhancing OCC's 
ability to limit the impact of a Security Incident at a Clearing Member 
promotes OCC's ability to continue the prompt and accurate clearance 
and settlement of securities transactions.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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    Accordingly, and for the reasons discussed below, the proposal is 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Exchange Act.

B. Consistency With Rule 17Ad-22(e)(17)(i) of the Exchange Act

    Rule 17Ad-22(e)(17)(i) requires that a 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.\30\ 
In adopting Rule 17Ad-22(e)(17)(i), the Commission provided guidance, 
stating that a covered clearing agency generally should consider, among 
other things, whether it identifies, monitors, and manages the risks 
that key participants pose to its operations.\31\ To the extent they 
interact with OCC's systems, Clearing Member systems may present 
operational risk to OCC. As described above, OCC proposes requiring 
members to report any cyber-related disruption or intrusion that could 
pose a risk to OCC's operations, such as a degradation of normal 
operations that would result in the inability of OCC to conduct 
essential clearance and settlement functions. OCC also proposes 
numerous protective measures, such as the ability to take reasonably 
necessary actions to mitigate the effects of a Security Incident on its 
operations, including disconnecting the Clearing Member's access to 
OCC's systems; the ability to consider a non-exhaustive list of factors 
to determine whether to modify a Clearing Member's access to OCC's 
systems in response to a Security Incident, up to and including 
disconnection; and the requirement for disconnected Clearing Members to 
complete a Reconnection Attestation and Reconnection Checklist that OCC 
would review and evaluate as part of a determination to reconnect the 
Clearing Member to OCC's systems. Taken together, these proposals 
support OCC's ability to effectively identify, monitor, and manage the 
risks that Clearing Members pose to OCC operations, and are therefore 
consistent with Rule 17Ad-22(e)(17)(i).
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    \30\ 17 CFR 240.17Ad-22(e)(17)(i).
    \31\ See Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70838 
(Oct. 13, 2016).
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    A commenter opposed the proposal on a number of grounds.\32\ 
Specifically, the commenter expressed concerns about the proposed 
definition of Security Incident, stating that because the proposed 
definition applies to all of a Clearing Member's systems and therefore 
could include an incident that would not affect OCC systems, the 
definition is inconsistent with the risks identified by OCC in the rule 
filing, other regulatory and SRO requirements, and is potentially 
beyond the scope of OCC's authority.\33\ The commenter also stated that 
OCC's proposed definition of Security Incident is inconsistent with 
other regulatory and SRO requirements because it does not require that 
a loss or harm has occurred and it does not require that a clearing 
member be aware of the incident.\34\ The commenter stated that the 
definition of Security Incident should be limited to an incident that 
could result in ``loss of data or system integrity,'' ``unauthorized 
disclosure of sensitive information,'' or ``an inability [for the OCC] 
to conduct essential clearance and settlement functions.'' \35\ The 
commenter further requested clarification that the reference to 
``disruption or degradation of a clearing member's systems'' in the 
proposed definition of Security Incident is limited to cyber-related 
disruptions or intrusions resulting from malicious third-party activity 
as opposed to, for example, a power outage.\36\
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    \32\ See letter from Howard Meyerson, Managing Director, 
Financial Information Forum (``FIF''), dated April 26, 2023, to 
Vanessa Countryman, Secretary, Commission (``FIF Letter'').
    \33\ Id. at 2-3. FIF stated that, as drafted, a Security 
Incident could include an incident that would not affect OCC systems 
and this approach appears to be overly broad with the risks 
identified in the proposed rule change, indicating that the 
reference to ``disruption or degradation of a clearing member's 
systems'' in the proposed definition of Security Incident is 
ambiguous. Id. at 2.
    \34\ Id. at 4-5.
    \35\ Id. at 3.
    \36\ Id. at 5-6.
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    OCC responded by amending the proposed rule change in a number of 
ways.\37\ First, OCC amended the definition of Security Incident to 
limit it to a cyber-related disruption or intrusion of the Clearing 
Member's systems that is reasonably likely to pose an imminent risk or 
threat to OCC's operations.\38\ OCC further amended the definition of 
Security Incident to state that such an incident may include, but is 
not limited to, any disruption or degradation of the normal operation 
of the Clearing Member's systems or any unauthorized entry into the 
Clearing Member's systems that would result in loss of OCC's data or 
system integrity, unauthorized disclosure of sensitive information 
related to OCC, or the inability of OCC to conduct essential clearance 
and settlement functions.\39\ In amending the Security Incident 
definition this way, OCC reasonably addressed the commenter's concerns 
about the scope of the rule by clarifying that only occurrences that 
present certain risks or threats to OCC's operations are considered 
Security Incidents, and provided examples to help illustrate the types 
of risks and threats to OCC's operation that are covered by the rule. 
In response to the commenter's concern that the proposed definition of 
Security Incident does not require that a clearing member be aware of 
the Incident, OCC also amended the proposed definition to require 
notice only if the Clearing Member becomes aware or should be aware 
that such an incident has occurred or is occurring.\40\ The commenter 
further stated that OCC ``should incorporate into the notice provision 
a [condition] that only requires reporting when a clearing member has a 
reasonable basis to conclude that a reportable cybersecurity incident 
has occurred or determines that a reportable cybersecurity incident has 
occurred.'' \41\ As noted, OCC amended the proposed definition to 
require reporting only where a Clearing Member becomes or should be 
aware of a Security Incident. The proposed rule change therefore would 
require Clearing Members to engage in reasonable diligence to obtain 
and report to OCC readily discoverable information about a Security 
Incident, consistent with the Clearing Member's current obligation to 
maintain a comprehensive cybersecurity program that, among other 
things, is designed to protect the segment of the Clearing Member's 
system that interacts with OCC, but it would not require reporting of a 
cybersecurity incident if the member could not reasonably be aware of 
such an incident. OCC's

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response reasonably balances the commenter's concern about being 
required to report unknown information and OCC's need to ensure that 
its Clearing Members are diligently monitoring their own systems so 
that OCC can identify, monitor, and manage the impact of a Security 
Incident at a Clearing Member on OCC's systems and operations, as well 
as the listed options markets generally.
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    \37\ See Notice of Partial Amendment supra note 7.
    \38\ Id.
    \39\ Id.
    \40\ Id.
    \41\ FIF Letter at 5.
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    A commenter stated that the content of the notification should be 
limited in scope given the requirement for ``immediate'' notification, 
and recommended that OCC should provide more detail about the expected 
content in the notification.\42\ The commenter also expressed the view 
that the need for immediate written notice ``does not provide a 
clearing member with the opportunity to evaluate the incident prior to 
reporting.'' \43\ OCC addressed these comments in the amendment by 
clarifying the notification requirements and procedure in the event of 
a Security Incident. Specifically, because there are ``innumerable 
circumstances that could lead to a Security Incident,'' rather than 
requiring the notice to include specific, pre-determined content, OCC 
clarified that a Clearing Member can share information it believes is 
relevant, and that OCC can follow up directly as needed.\44\ OCC also 
noted that, given the urgency required to address a Security Incident 
quickly and remain functional as a systemically important financial 
market utility, OCC will provide a dedicated email address for Clearing 
Members to provide OCC with written notification (or confirmation) of a 
Security Incident.\45\ By clarifying that the notice is limited to 
information the affected Clearing Member believes is relevant and that 
OCC can follow up directly with the Clearing Member as needed, OCC's 
response reasonably balances the commenter's concern about the rule not 
specifying what information needs to be included in the notice and 
OCC's need to identify, monitor, and manage the impact of a Security 
Incident at a Clearing Member on OCC's systems and operations, as well 
as the listed options markets generally. Allowing Clearing Members to 
provide the information they believe is relevant together with OCC's 
ability to gather additional information as necessary and appropriate 
helps ensure that OCC gets timely information on Security Incidents, 
which supports OCC's ability to identify, monitor, and manage risks 
posed to its operations,\46\ consistent with the Commission's guidance 
regarding Rule 17Ad-22(e)(17)(i).
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    \42\ Id. at 5-6.
    \43\ Id. at 5.
    \44\ See Notice of Partial Amendment, 88 FR at 36352.
    \45\ See id.
    \46\ The clarification provided by OCC also addresses a 
commenter concern that the disclosure should ``take into account the 
fact that target firms often have incomplete information about a 
cybersecurity incident and engage in an investigative process over a 
period of time.'' FIF Letter at 7. OCC's ability to follow up 
directly as needed ensures that Clearing Members will have an 
opportunity to provide additional information as facts develop.
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    A commenter stated that OCC should enumerate threshold conditions 
that must be satisfied before OCC could disconnect or modify a Clearing 
Member's access.\47\ The commenter further requested clarification on 
the relationship between the proposed Security Incident notifications 
and the proposed disconnection and reconnection process.\48\ In 
response, as noted above, OCC amended the definition of Security 
Incident to limit it to a cyber-related disruption or intrusion of the 
Clearing Member's systems that is reasonably likely to pose an imminent 
risk or threat to OCC's operations.\49\ OCC also stated that because 
there are ``innumerable circumstances that could lead to a Security 
Incident,'' such a determination would require an evaluation of the 
specific facts and circumstances related to the Security Incident, and 
amended the proposed rule to include a non-exhaustive list of factors 
OCC will consider when making a disconnection determination.\50\ 
Specifically, as amended, the rule provides that OCC may consider any 
one or more of the following in determining whether or not to 
disconnect a member: the potential loss of control by a Clearing Member 
of its internal system(s), the potential loss of OCC's confidential 
data, the potential strain on or loss of OCC's resources due to OCC's 
inability to perform clearance and settlement functions, and the 
overall severity of the threat to OCC's security and operations. By 
amending the definition of a Security Incident in this way, OCC 
identified the threshold condition that must be satisfied before OCC 
could disconnect or modify a Clearing Member's access in response to a 
Security Incident. Specifically, unless the Clearing Member experiences 
a cyber-related disruption or intrusion of the Clearing Member's system 
that is reasonably likely to pose an imminent risk or threat to OCC's 
operations, OCC would not have a basis under the proposed rule to 
disconnect or modify a Clearing Member's access to OCC systems. 
Further, disconnection or modification of a Clearing Member's access to 
OCC's systems is not an automatic consequence in the event a Clearing 
Member notifies OCC of a Security Incident. OCC stated that it believes 
that not all Security Incident notifications will result in a Clearing 
Member disconnection, and the proposed rule does not mandate 
disconnection in response to a Security Incident. Rather, disconnection 
or modification of access are among the various mitigation actions that 
OCC may take if it determines that it is reasonably necessary to do so 
to mitigate a Security Incident's effects on its operations. In 
addition, OCC's non-exhaustive list of factors provides examples of 
specific risks or threats to OCC's operations that OCC would consider 
as factors in making a disconnection determination, and that are 
consistent with the Commission's guidance related to Rule 17Ad-
22(e)(17)(i). Given the extensive variety and rapidly evolving nature 
of cyber-related threats, it is reasonable for OCC to balance its need 
to evaluate the specific facts and circumstances of each cyber-related 
incident at a Clearing Member and the desire of Clearing Members to 
know in advance the specific conditions that could result in a 
disconnection or modification of its access to OCC's systems. OCC's 
proposed approach of defining a single, specific threshold condition--
namely, a cyber-related disruption or intrusion of the Clearing 
Member's system reasonably likely to pose an imminent risk or threat to 
OCC's operations--while providing an illustrative list of factors OCC 
will consider as it makes a disconnection determination, strikes this 
balance.
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    \47\ Id. at 6-7.
    \48\ Id. at 7.
    \49\ See Notice of Partial Amendment supra note 7.
    \50\ See Notice of Partial Amendment, 88 FR at 36353.
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    By making these amendments, OCC also clarified the connection 
between a Security Incident notification and the proposed disconnection 
and reconnection process. If OCC determines that disconnection is 
reasonably necessary to mitigate any effects to its operations, the 
process for the affected Clearing Member to reconnect to OCC's systems 
following the disconnection are set forth in paragraph (e) of proposed 
rule 213, ``Procedures for Connecting Following a Security Incident.'' 
Additionally, OCC amended the proposed rule to require a Clearing 
Member to complete the Reconnection Attestation and Reconnection 
Checklist only in the event that OCC disconnected the Clearing Member 
that has reported a

[[Page 82446]]

Security Incident.\51\ The information provided in the Reconnection 
Attestation and Reconnection Checklist would help OCC determine whether 
the risk to OCC has been mitigated sufficiently for OCC to resume 
connectivity to the Clearing Member. Taken together, these changes as 
well would allow OCC to identify and mitigate operational risks 
presented by its Clearing Members and secure its environment more 
effectively against potential vulnerabilities.
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    \51\ Id.
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    A commenter stated that the Reconnection Checklist appears to be a 
security incident notification form rather than a checklist for 
reconnection.\52\ As discussed above, the Reconnection Checklist is 
only required in the event that a Clearing Member is disconnected from 
OCC's systems as the result of a Security Incident. The checklist 
includes information such as the nature of the incident, the steps 
taken to contain the incident, and any OCC data that was compromised 
during the incident, all of which is used by OCC to determine whether 
the risk to OCC posed by the Security Incident has been mitigated 
sufficiently to resume the Clearing Member's connectivity. The 
commenter also stated that the proposed rule should establish a clear 
process for reconnection, including the process and timing for OCC to 
decide on a reconnection request and the process for OCC to communicate 
its determination.\53\ As noted above, the process for reconnection is 
set forth in paragraph (e) of proposed Rule 213. In addition, although 
the proposed rule does not mandate the specific timing for OCC to make 
a reconnection determination, the information provided to OCC by the 
Reconnection Attestation and Reconnection Checklist is designed to 
facilitate OCC's reconnection determinations, which should help 
expedite the process. Given the innumerable circumstances that could 
lead to a Security Incident and a resulting disconnection, the proposed 
rule strikes a reasonable balance between OCC's need to ensure that the 
operational risks presented by a Security Incident at a Clearing Member 
have been sufficiently mitigated before reconnecting to OCC's systems 
and the Clearing Member's desire to reconnect as quickly as possible.
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    \52\ FIF Letter at 8.
    \53\ Id.
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    A commenter expressed concern that the information required to be 
disclosed in Reconnection Checklist and Attestation is too detailed and 
could either provide a roadmap to malicious actors or subject the 
Clearing Member to third-party litigation risk.\54\ The commenter also 
requested clarification on the protection of information reported by 
Clearing Members to OCC.\55\ Any information disclosed to OCC in a 
Reconnection Checklist and Attestation would be kept confidential by 
OCC and would not be made publicly available, including to third 
parties and potential malicious actors, and therefore would not, by 
virtue of being provided to OCC, provide a roadmap to malicious actors 
or subject the reporting Clearing Member to third-party litigation 
risk. Further, OCC routinely receives, and is responsible for the 
protection of, confidential information related to its Clearing 
Members. For example, OCC routinely receives and protects confidential 
and sensitive information related Clearing Members' risk management 
practices,\56\ as well as information related to any financial or 
operational difficulty reported by Clearing Members to any regulatory 
organization.\57\
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    \54\ Id. at 7-8. For example, the commenter expressed concern 
that the level of detail required by the proposed rule change could 
provide a roadmap for malicious actors who wish to gain access to 
OCC's systems or could present third-party litigation risk to the 
Clearing Member.
    \55\ Id. at 6.
    \56\ See OCC Rule 305(b).
    \57\ See OCC Rule 306A(1).
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    The commenter also stated that OCC should provide an exception to 
disclosure when law enforcement directs the member not to disclose.\58\ 
However, the lack of the type of law enforcement exception suggested by 
the commenter is consistent with the Exchange Act. For example, OCC's 
current rules, as approved by the Commission, include various reporting 
and disclosure requirements, none of which provide the type of explicit 
law enforcement exception suggested by the commenter.\59\
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    \58\ FIF Letter at 6.
    \59\ See, e.g., OCC Rules 207 (Submission to and Retrieval of 
Items to and from the Corporation) and 306A (Event-Based Reporting).
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    The commenter also questioned whether the Clearing Members should 
be required to provide evidence of regulatory compliance to other 
government agencies and third parties.\60\ OCC's current rules, as 
approved by the Commission, require Clearing Members to notify OCC if 
the Clearing Member is required to notify any regulatory organization 
of any operational difficulty affecting the Clearing Member, or of any 
failure by the Clearing Member to be in compliance with the operational 
responsibility rules of any regulatory organization.\61\ Thus, a 
Clearing Member that experiences a Security Incident that subjects the 
Clearing Member to a regulatory notification requirement is already 
required, under existing OCC Rules, to notify OCC that it complied with 
that requirement. The proposed rule change does not create a new 
obligation for Clearing Members to notify OCC of regulatory notices to 
regulatory organizations; it merely specifies when a notification to 
OCC in connection with a Security Incident must be provided.
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    \60\ FIF Letter at 7. The commenter stated that many clearing 
members would be subject to numerous governmental and third-party 
notification requirements in the event of a cybersecurity incident 
and expressed confusion regarding why OCC would require an 
attestation relating to a clearing member's notification to other 
regulators and third-parties if the clearing member has provided all 
required notifications to the OCC. Id. The commenter also stated 
that any required attestation should be to the knowledge of the 
attesting executive. The proposed rule change states explicitly that 
the representations in the Reconnection Attestation would be made 
``on a good faith, best efforts basis,'' which necessarily means the 
attestation would be to the knowledge of the attesting executive. 
See proposed Rule 213(e)(1)(A).
    \61\ See OCC Rule 306A (Event-Based Reporting).
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    Finally, a commenter referenced a number of cybersecurity-related 
rule proposals recently published by the Commission and stated that the 
proposed rule change should be delayed at least until the Commission 
finalizes all the currently proposed cybersecurity rulemaking to ensure 
that investors are protected from cyber threats and unnecessary 
additional burdens are not placed on OCC Clearing Members.\62\ The 
commenter states further that the proposed rule change interconnects 
and may overlap with four different rules proposed by the 
Commission,\63\ and requests that the Commission extend the period for 
comment on the proposed rule change to allow time to analyze the 
proposed rule change alongside the rules proposed by the 
Commission.\64\
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    \62\ See letter from Melissa MacGregor, Managing Director, 
Deputy General Counsel & Corporate Secretary, SIFMA, dated April 25, 
2023, to Vanessa Countryman, Secretary, Commission, (``SIFMA 
Letter'') available at https://www.sec.gov/comments/sr-occ-2023-003/srocc2023003-20164982-334488.pdf. A similar perspective was provided 
by a second commenter. See FIF Letter at 8-9; see also Securities 
Exchange Act Release Nos. 97141 (Mar. 15, 2022), 88 FR 20616 (Apr. 
6, 2023); 97142 (Mar. 15, 2022), 88 FR 20212 (Apr. 5, 2023); 97143 
(Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023); 97144 (Mar. 15, 2023), 
88 FR 16921 (Mar. 21, 2023); 94382 (Mar. 9, 2022), 87 FR 16590 (Mar. 
23, 2022).
    \63\ SIFMA Letter at 2. SIFMA does not state how the proposed 
rule change interconnects or conflicts with the Commission's 
proposed rules.
    \64\ Id. This concern was echoed in a letter from the FIF. See 
FIF Letter (stating that OCC should withdraw the proposed rule 
change and resubmit after the comment periods for the Commission's 
proposals have expired).

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[[Page 82447]]

    Under the Exchange Act and relevant rules thereunder, SROs, 
including OCC, determine for themselves when to file a proposed rule 
change. The Exchange Act defines the process and time within which the 
Commission may act,\65\ and Section 19(b)(2)(C) of the Exchange Act 
requires the Commission to approve a proposed rule change of a SRO if 
it finds that such change is consistent with the Exchange Act and rules 
and regulations thereunder that are applicable to the SRO.\66\ Concerns 
regarding rules proposed by the Commission may be presented as comments 
to such rules so that the Commission may consider them in determining 
what, if any, final rule it will adopt.
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    \65\ See, e.g., 15 U.S.C. 78s(b)(2)(A)(ii) (allowing the 
Commission to extend the period for review by not more than 45 days 
if the Commission determines that a longer period is appropriate and 
publishes the reasons for such determination).
    \66\ 15 U.S.C. 78s(b)(2)(C).
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    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the requirements of Rule 17Ad-22(e)(17)(i) 
under the Exchange Act.\67\
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    \67\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Partial Amendment No. 1, is 
consistent with the requirements of the Exchange Act, and in 
particular, the requirements of Section 17A of the Exchange Act \68\ 
and the rules and regulations thereunder.
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    \68\ In approving this proposed rule change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\69\ that the proposed rule change (SR-OCC-2023-003), as 
modified by Partial Amendment No. 1, be, and hereby is, approved.
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    \69\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25883 Filed 11-22-23; 8:45 am]
BILLING CODE 8011-01-P


