2016-22413
Federal Register, Volume 81 Issue 181 (Monday, September 19, 2016)
[Federal Register Volume 81, Number 181 (Monday, September 19, 2016)]
[Rules and Regulations]
[Pages 64321-64340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22413]
[[Page 64321]]
Vol. 81
Monday,
No. 181
September 19, 2016
Part III
Commodity Futures Trading Commission
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17 CFR Part 39
System Safeguards Testing Requirements for Derivatives Clearing
Organizations; Final Rule
Federal Register / Vol. 81 , No. 181 / Monday, September 19, 2016 /
Rules and Regulations
[[Page 64322]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 39
RIN 3038-AE29
System Safeguards Testing Requirements for Derivatives Clearing
Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting enhanced requirements for testing by a derivatives clearing
organization (``DCO'') of its system safeguards, as well as additional
amendments to reorder and renumber certain paragraphs within the
regulations and make other minor changes to improve the clarity of the
rule text.
DATES: Effective date: This rule is effective September 19, 2016.
Compliance dates: DCOs must comply with Sec. 39.18(e)(2) and (6)
by March 20, 2017; Sec. 39.18(e)(3) through (5), and (7) by September
19, 2017; and all other provisions of Sec. 39.18 by September 19,
2016.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected], Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581; or Julie A. Mohr, Deputy Director,
(312) 596-0568, [email protected]; Tad Polley, Associate Director, (312)
596-0551, [email protected]; or Scott Sloan, Attorney-Advisor, (312)
596-0708, [email protected], Division of Clearing and Risk, Commodity
Futures Trading Commission, 525 West Monroe Street, Chicago, Illinois
60661.
SUPPLEMENTARY INFORMATION:
I. Background
A. System Safeguards Requirements for DCOs
Section 5b(c)(2) of the Commodity Exchange Act (``CEA'') \1\ sets
forth core principles with which a DCO must comply in order to be
registered and to maintain registration with the Commission. In
November 2011, the Commission adopted regulations \2\ to establish
standards for compliance with the core principles, including Core
Principle I, which concerns a DCO's system safeguards.\3\ In 2013, the
Commission adopted additional standards, including additional system
safeguards requirements,\4\ for compliance with the core principles for
systemically important DCOs (``SIDCOs'') and DCOs that elect to opt-in
to the SIDCO regulatory requirements (``Subpart C DCOs'').\5\
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\1\ 7 U.S.C. 7a-1.
\2\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011) (codified at 17 CFR part
39).
\3\ Core Principle I requires a DCO to: (1) Establish and
maintain a program of risk analysis and oversight to identify and
minimize sources of operational risk; (2) establish and maintain
emergency procedures, backup facilities, and a plan for disaster
recovery that allows for the timely recovery and resumption of the
DCO's operations and the fulfillment of each of its obligations and
responsibilities; and (3) periodically conduct tests to verify that
the DCO's backup resources are sufficient.
\4\ 17 CFR 39.34.
\5\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013) (codified at 17 CFR part 39).
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Regulation 39.18 implements Core Principle I and, among other
things, specifies: (1) The requisite elements, standards, and resources
of a DCO's program of risk analysis and oversight with respect to its
operations and automated systems; (2) the requirements for a DCO's
business continuity and disaster recovery plan, emergency procedures,
and physical, technological, and personnel resources described therein;
(3) the responsibilities, obligations, and recovery time objective of a
DCO following a disruption of its operations; and (4) other system
safeguards requirements related to reporting, recordkeeping, testing,
and coordination with a DCO's clearing members and service providers.
On December 23, 2015, the Commission proposed to enhance its system
safeguards requirements for DCOs by revising Sec. 39.18 to require
specific types of testing, and specifying the minimum frequency with
which such testing must be performed. The Commission also proposed
additional amendments to reorder and renumber certain paragraphs and
make other minor changes to improve the clarity of the rule text, as
well as corresponding technical corrections to Sec. 39.34 (the
``Proposal'').\6\
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\6\ See System Safeguards Testing Requirements for Derivatives
Clearing Organizations; Proposed Rule, 80 FR 80114 (Dec. 3, 2015)
(to be codified at 17 CFR part 39).
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The comment period for the Proposal ended on February 22, 2016. The
Commission received seven substantive comment letters in response to
the Proposal \7\ and, in consideration of those comments, is adopting
the Proposal subject to certain changes, as noted below.
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\7\ All comment letters are available through the Commission's
Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1649. The Commission received comments from the
following parties: Intercontinental Exchange, Inc.; NGX; The Options
Clearing Corporation; Minneapolis Grain Exchange; North American
Derivatives Exchange; LCH.Clearnet Group; and CME Group, Inc.
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B. Need for Cybersecurity Testing
In the Proposal, the Commission described the well-documented
increase in cyber threats, and the need to enhance its existing
requirements for cybersecurity testing in light of this increase.\8\ In
the current environment, cybersecurity testing is crucial to efforts by
exchanges, clearing organizations, swap data repositories, and other
entities in the financial sector to strengthen cyber defenses; mitigate
operational, reputational, and financial risk; and maintain cyber
resilience and the ability to recover from cyber attacks. To maintain
the effectiveness of cybersecurity controls, such entities must
regularly test their system safeguards in order to find and fix
vulnerabilities before an attacker exploits them.
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\8\ 80 FR 80114, at 80114-80115.
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Cybersecurity testing is a well-established best practice generally
and for financial sector entities. The National Institute of Standards
and Technology (``NIST'') Framework for Improving Critical
Infrastructure Cybersecurity calls for testing of cybersecurity
response and recovery plans and cybersecurity detection processes and
procedures.\9\ The Financial Industry Regulatory Authority (``FINRA'')
2015 Report on Cybersecurity Practices notes that ``[r]isk assessments
serve as foundational tools for firms to understand the cybersecurity
risks they face across the range of the firm's activities and assets,''
and calls for firms to develop, implement, and test cybersecurity
incident response plans.\10\ The Federal Financial Institutions
Examination Council (``FFIEC''),\11\ another important source of
[[Page 64323]]
cybersecurity best practices for financial sector entities, notes that
financial institutions should have a testing plan that identifies
control objectives; schedules tests of the controls used to meet those
objectives; ensures prompt corrective action where deficiencies are
identified; and provides independent assurance for compliance with
security policies.\12\
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\9\ NIST, Framework for Improving Critical Infrastructure
Cybersecurity, Feb. 2014, v. 1, Subcategory PR.IP-10, p. 28, and
Category DE.DP, p. 31, available at: http://www.nist.gov/cyberframework/upload/cybersecurity-framework-021214.pdf.
\10\ FINRA, Report on Cybersecurity Practices, Feb. 2015
(``FINRA Report''), pp. 1-2, available at: https://www.finra.org/sites/default/files/p602363%20Report%20on%20Cybersecurity%20Practices_0.pdf.
\11\ The FFIEC includes the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, the Consumer Financial
Protection Bureau, the National Credit Union Administration, and the
State Liaison Committee of the Conference of State Bank Supervision.
\12\ See FFIEC, E-Banking Booklet: IT Examination Handbook, Aug.
2003, p. 30, available at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_E-Banking.pdf.
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The Commission notes that Sec. 39.18(j)(1)(i) currently requires
DCOs to conduct regular, periodic, and objective testing and review of
their automated systems to ensure that these systems are reliable,
secure, and have adequate scalable capacity. This requirement must be
satisfied by following, at a minimum, generally accepted standards and
industry best practices. The final rule being adopted by the Commission
herein clarify these requirements by identifying particular types of
testing required by relevant generally accepted standards and industry
best practices. The Commission is requiring that independent
contractors conduct certain testing and specifying a minimum frequency
for each testing type, but otherwise is not changing the regulatory
requirement for DCOs as it exists today. The additional clarity
provided by the specific testing and frequency requirements as well as
the independent contractor requirements will help DCOs increase their
cyber resiliency and operate in a safe and efficient manner.
II. Comments on the Notice of Proposed Rulemaking
A. Vulnerability Testing
Proposed Sec. 39.18(a) would define ``vulnerability testing'' as
testing of a DCO's automated systems to determine what information may
be discoverable through a reconnaissance analysis of those systems and
what vulnerabilities may be present on those systems. Proposed Sec.
39.18(e)(2) would require the testing to be of a scope sufficient to
satisfy the testing scope requirements of proposed Sec. 39.18(e)(8).
Proposed Sec. 39.18(e)(2)(i) would require a DCO to conduct
vulnerability testing at a frequency determined by an appropriate risk
analysis, but at a minimum no less frequently than quarterly. Under
proposed Sec. 39.18(e)(2)(ii), the vulnerability tests would have to
include automated vulnerability scanning, which would have to be
conducted on an authenticated basis where indicated by an appropriate
risk analysis. Proposed Sec. 39.18(e)(2)(iii) would require a DCO to
engage independent contractors to conduct two of the required quarterly
tests each year. The other vulnerability tests could be conducted by
employees of the DCO who are not responsible for development or
operation of the systems or capabilities being tested.
1. Frequency
CME Group, Inc. (``CME'') supported the proposed frequency for the
required vulnerability testing. CME stated that testing on at least a
quarterly basis is likely an appropriate frequency for most
organizations for their most critical assets. Intercontinental
Exchange, Inc. (``ICE'') supported a quarterly requirement, but
believes that DCOs that meet the quarterly requirement should not be
subject to a formal risk assessment to potentially determine a higher
testing frequency as the Commission has not provided evidence that a
higher frequency is warranted.
Minneapolis Grain Exchange (``MGEX'') stated that frequency of
testing should be determined by the frequency of system changes and the
scope of exposure, and should not be reduced to a static minimum. NGX
stated that quarterly vulnerability testing is too costly for smaller
DCOs, and should be required semi-annually instead.
The Commission does not believe it is prudent to change the
frequency requirement for vulnerability tests. The requirement to
conduct vulnerability tests at a frequency based on a risk analysis and
at least quarterly is based on industry standards \13\ and will help
ensure that DCOs are responsive to new vulnerabilities as they arise.
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\13\ See NIST Special Publication 800-39, Managing Information
Security Risk, Mar. 2011 (``NIST SP 800-39''), pp. 47-48, available
at: http://csrc.nist.gov/publications/nistpubs/800-39/SP800-39-final.pdf; Security Standards Council, Payment Card Industry Data
Security Standards, Apr. 2016, v. 3.2 (``PCI-DSS''), p. 98,
available at: https://www.pcisecuritystandards.org/documents/PCI_DSS_v3-2.pdf; FFIEC, Information Security Booklet, IT
Examination Handbook, July 2006 (``FFIEC Handbook''), p. 82,
available at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_InformationSecurity.pdf.
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2. Risk Assessment
North American Derivatives Exchange, Inc. (``Nadex'') stated that
the rule should be clarified to provide that the expected level of
detail contained in the risk analysis used to determine the required
frequency of overall testing should be based on what is considered
reasonable in the industry. The Commission does not believe a
clarification is necessary because the rule as proposed is
appropriately based on industry standards.\14\
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\14\ See FFIEC Handbook, supra note 13, at 82.
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3. Authenticated Scanning
ICE argued that the Commission should eliminate the authenticated
vulnerability scanning requirement on the basis that it will increase
the cost and time of a scan, increase risk by requiring an operating
system login to be created and maintained on a new system, and increase
the quantity of findings, potentially diluting and obscuring important
results.
The Commission agrees with ICE that an explicit requirement for
authenticated scanning should be removed from the regulation.
Therefore, the Commission is revising proposed Sec. 39.18(e)(2)(ii) as
follows (added text in italics), ``Such vulnerability testing shall
include automated vulnerability scanning, which shall follow generally
accepted best practices.'' The regulation as adopted thus only requires
authenticated scanning to the extent it is required by industry
standards.
4. Independence Requirements
Several DCOs did not support the independent contractor
requirement, arguing that internal teams should be allowed to conduct
vulnerability testing. ICE noted that internal parties have the most
knowledge and experience with the systems.
CME, ICE, and MGEX argued that there are inherent risks in
providing outside parties access to critical systems and sensitive
information. Specifically, MGEX stated that it is concerned about the
breadth and volume of proprietary information that vendors would have
access to in order to perform the testing required, because having vast
quantities of industry information in the hands of vendors may actually
cause greater risk of harm as vendors may be at greater risk of a cyber
incident.
ICE, LCH.Clearnet Group (``LCH''), The Options Clearing Corporation
(``OCC''), and MGEX all noted significant costs associated with hiring
outside contractors to conduct vulnerability tests. LCH and MGEX
further stated that this requirement is especially burdensome to
smaller DCOs.
MGEX opposed the proposed requirement that only independent
contractors or employees who are not responsible for development or
operation of the systems or capabilities being tested may conduct
vulnerability testing. Specifically, MGEX stated that smaller
organizations like itself may not have qualified individuals outside of
the IT department who would have the
[[Page 64324]]
needed background and skills while also having the level of
independence which the Commission would require. Therefore, an entity
like MGEX would be forced to either bear significant cost to hire
dedicated employees exclusively for regulatory testing compliance or
bear significant cost to have independent contractors perform all four
tests.
OCC believes that requiring a DCO to use an independent contractor
to perform vulnerability testing during the same year that such person
is performing external penetration testing would unnecessarily increase
costs without an added benefit, because vulnerability testing is
largely subsumed within external penetration testing.
As explained in the Proposal, the Commission believes it is
important that vulnerability testing be conducted from the perspective
of an outsider, and as a result does not agree with MGEX that internal
employees responsible for development or operation of the tested
systems or capabilities should be permitted to conduct the tests. The
Commission agrees with various commenters, however, that the regulation
should permit but not require a DCO to use independent contractors to
conduct the required vulnerability testing. As a result, the Commission
is revising proposed Sec. 39.18(e)(2)(iii) as follows (added text in
italics), ``A derivatives clearing organization shall conduct
vulnerability testing by engaging independent contractors, or by using
employees of the derivatives clearing organization who are not
responsible for development or operation of the systems or capabilities
being tested.'' This revision aligns the regulation more closely with
industry standards, which call for vulnerability testing to be
conducted by independent employees while recognizing the benefits and
potential risks of engaging independent contractors.\15\
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\15\ FFIEC Handbook, supra note 13, at 81 (calling for such
tests to be performed ``by individuals who are also independent of
the design, installation, maintenance, and operation of the tested
system''); NIST Special Publication 800-115, Technical Guide to
Information Security Testing and Assessment, Sept. 2008 (``NIST SP
800-115''), p. 6-6, available at: http://csrc.nist.gov/publications/nistpubs/800-115/SP800-115.pdf (recognizing the benefits and risks
of engaging third parties to conduct testing).
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B. External Penetration Testing
Proposed Sec. 39.18(a) would define ``external penetration
testing'' as ``attempts to penetrate a [DCO's] automated systems from
outside the systems' boundaries to identify and exploit
vulnerabilities,'' and proposed Sec. 39.18(e)(3) would require the
testing to be of a scope sufficient to satisfy the testing scope
requirements of proposed Sec. 39.18(e)(8). Proposed Sec.
39.18(e)(3)(i) would require a DCO to conduct external penetration
testing at a frequency determined by an appropriate risk analysis, but
at a minimum no less frequently than annually. The proposed rule would
also provide that independent contractors must perform the required
annual external penetration test on behalf of the DCO. However, other
external penetration testing could be performed by appropriately
qualified DCO employees not responsible for development or operation of
the systems or capabilities being tested.
ICE and Nadex supported requiring external penetration testing as a
part of a DCO's program of risk analysis and oversight. OCC generally
supported external penetration testing by independent third parties.
ICE and CME supported performing the testing annually.
ICE suggested that the Commission should amend the definition of
``external penetration testing'' to include specific types of testing.
The Commission is declining to do so. Requiring specific tests would be
overly prescriptive and could stifle the development of new, more
advanced testing methods. Accordingly, upon review of the comments, the
Commission is adopting Sec. 39.18(e)(3) and the definition of
``external penetration testing'' as proposed.
C. Internal Penetration Testing
Proposed Sec. 39.18(a) would define ``internal penetration
testing'' as ``attempts to penetrate a [DCO's] automated systems from
inside the systems' boundaries to identify and exploit
vulnerabilities.'' Proposed Sec. 39.18(e)(4) would require the testing
to be of a scope sufficient to satisfy the testing scope requirements
of proposed Sec. 39.18(e)(8). Proposed Sec. 39.18(e)(4)(i) would
require a DCO to conduct internal penetration testing at a frequency
determined by an appropriate risk analysis, but no less frequently than
annually. The test could be conducted by independent contractors, or by
appropriately qualified DCO employees not responsible for development
or operation of the systems or capabilities being tested.
ICE and Nadex supported requiring internal penetration testing as a
part of a DCO's program of risk analysis and oversight.
ICE suggested that the Commission should amend the definition of
``internal penetration testing'' to include specific types of testing.
As with external penetration testing, the Commission is declining to
require specific forms of internal penetration tests. Requiring
specific tests would be overly prescriptive and could stifle the
development of new, more advanced testing methods.
CME stated that DCOs may find it challenging to recruit and retain
employees capable of conducting internal penetration testing without
introducing unnecessary risks into production and other sensitive
environments, because there is a scarcity of qualified professionals
with those skills. As a result, CME argued the Commission should
clarify that conducting annual internal penetration tests should be an
objective, and not a strict requirement, so that DCOs can prioritize
effective testing done by independent employees over conducting testing
at least annually simply to comply with a prescriptive testing
frequency requirement. ICE stated that the Commission should be silent
on parameters for voluntary internal testing, allowing each DCO to
determine its own methodology for such testing.
The Commission disagrees with CME's suggestion that internal
penetration testing should be merely an objective. The requirement for
internal penetration testing is based on industry standards.\16\ In
addition, because the regulation provides sufficient flexibility
regarding the individuals who are permitted to conduct the internal
penetration tests, the Commission does not believe a change to the
regulation based on CME's comment is necessary. In response to ICE's
comment regarding voluntary internal testing, the Commission notes that
the final rule does not impose any requirements on testing DCOs conduct
on a voluntary basis, beyond the requirements of the regulation.
Therefore, the Commission declines to make any changes in response to
these comments and confirms that final Sec. 39.18(e)(4) sets forth
requirements rather than objectives or a voluntary program.
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\16\ See NIST SP 800-115, supra note 15, at 2-5.
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MGEX stated that the required frequency of testing should be
determined by the frequency of systems changes and the scope of
exposure, and should not be reduced to a static minimum. The Commission
declines to amend the regulation in response to MGEX's comment, and
notes that that the frequency requirement in final Sec. 39.18(e)(4)(i)
is based on industry standards and is not overly prescriptive.\17\
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\17\ See id.; FFIEC Handbook, supra note 13, at 82.
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Accordingly, upon review of the comments, the Commission is
adopting Sec. 39.18(e)(4) and the definition of
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``internal penetration testing'' as proposed.
D. Controls Testing
Proposed Sec. 39.18(a) would define ``controls testing'' as an
assessment of the DCO's controls to determine whether such controls are
implemented correctly, are operating as intended, and are enabling the
DCO to meet the requirements of Sec. 39.18. Proposed Sec. 39.18(e)(5)
would require such testing to be of a scope sufficient to satisfy the
testing scope requirements of proposed Sec. 39.18(e)(8). Proposed
Sec. 39.18(e)(5)(i) would require a DCO to conduct controls testing,
which includes testing of each control included in its program of risk
analysis and oversight, at a frequency determined by an appropriate
risk analysis, but no less frequently than every two years.
Pursuant to proposed Sec. 39.18(e)(5)(ii), a DCO would be required
to engage independent contractors to test and assess its ``key
controls,'' which would be defined in proposed Sec. 39.18(a) as
controls that an appropriate risk analysis determines are either
critically important for effective system safeguards or intended to
address risks that evolve or change more frequently and therefore
require more frequent review to ensure their continuing effectiveness
in addressing such risks. A DCO may conduct any other non-key controls
testing by using independent contractors or employees of the DCO who
are not responsible for development or operation of the systems or
capabilities being tested.
CME and Nadex supported requiring controls testing as a part of a
DCO's program of risk analysis and oversight.
ICE recommended that the Commission remove the controls testing
requirements and the definition of ``key controls.'' ICE stated that
attempting to mandate controls testing will result in inconsistent and
confused implementation, distract from useful security activity, and
generate a superset of results that are already published in a more
focused fashion through vulnerability, external penetration, internal
penetration, or security response plan testing. Moreover, ICE believes
that the proposed controls testing requirements are already adequately
addressed in existing rules, both in the U.S. and globally, and through
current examination coverage. ICE added that the concept of a key
control is not universally adopted, and that the goal is not to test
such controls, but to eliminate reliance on them. ICE believes that the
key controls proposal imposes a large burden for little to no practical
improvement in security.
Despite ICE's comments, the Commission is adopting the controls
testing requirement, which is based on industry standards.\18\ The
Commission continues to believe that regular, ongoing testing of all of
an organization's system safeguards-related controls is a crucial part
of a DCO's risk analysis and oversight program. As NIST notes, the
results of such testing can allow organizations to, among other things,
identify potential cybersecurity problems or shortfalls, identify
security-related weaknesses and deficiencies, prioritize risk
mitigation decisions and activities, confirm that weaknesses and
deficiencies have been addressed, and inform related budgetary
decisions and capital investment.\19\ The Commission notes that the
definition of ``key controls'' provides adequate flexibility for a DCO
to determine which of its controls constitute key controls. While ICE
believes that the goal should be to eliminate reliance on key controls,
the Commission believes that so long as DCOs continue to rely on them,
it is crucial for DCOs to test their effectiveness.
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\18\ See, NIST Special Publication 800-53, Security and Privacy
Controls for Federal Information Systems and Organizations, rev. 4
(``NIST SP 800-53''), pp. app. F-CA at F-55, available at: http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.;
FFIEC Handbook, supra note 13, at 12.
\19\ NIST Special Publication 800-53A, Assessing Security and
Privacy Controls in Federal Information Systems and Organizations,
rev. 4 (``NIST SP 800-53A''), p. 3, available at: http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53Ar4.pdf.
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1. Frequency
CME and OCC stated that the costs of requiring controls testing
every two years outweigh the benefits. CME stated that DCOs should be
able to test in line with their risk analysis, which may result in a
cycle of longer than two years. CME stated that a three-year cycle
requirement would be more appropriate.
OCC agreed with the proposed testing frequency as applied to key
controls. However, OCC stated that, consistent with relevant industry
best practices, the Commission should alternatively consider permitting
a DCO to determine the frequency of controls testing based on the level
of risk a control is determined to present following an appropriate
controls risk analysis.
The Commission agrees with CME and OCC that requiring controls
testing no less frequently than every two years is not necessary. The
Commission further agrees with CME that three years is a more
appropriate minimum requirement and is revising proposed Sec.
39.18(e)(5)(i) as follows (added text in italics), ``A [DCO] shall
conduct controls testing, which includes testing of each control
included in its program of risk analysis and oversight, at a frequency
determined by an appropriate risk analysis, but shall test and assess
key controls no less frequently than every three years. A [DCO] may
conduct such testing on a rolling basis over the course of the required
period.'' The final rule would thus require key controls testing to
occur at least every three years rather than every two and would not
prescribe a minimum frequency for testing of non-key controls. The
Commission reiterates, however, that if a DCO's risk analysis indicates
a key control should be tested more frequently than every three years,
the DCO must comply with the shorter testing frequency. The changes
would further clarify that both key controls and non-key controls can
be tested on a rolling basis over the applicable time period.
2. Independence Requirements
CME stated that requiring non-employee independent contractors to
test key controls, without involvement by employees, may not provide
the most effective or efficient means for continued key controls
testing and enhancement. CME also stated that internal audit staff can
provide a strong and independent third line of defense where the
department is independent from management, objective in its findings,
professional, and able to have free and unlimited access to the books,
records, and people of a company. CME further stated that while
involving external resources may be beneficial, doing so should not
exclude participation by employees not involved in the development or
operation of the controls, systems, or capabilities being tested.
OCC recommended that DCOs be permitted to use independent
contractors or independent employees to test and assess the
effectiveness of key controls because, in contrast to penetration
testing, key controls testing does not require specialized expertise.
Moreover, OCC believes independent employees are more knowledgeable
about the DCO's business, risk profile, and control environment
generally, making them better positioned to perform effective testing
of key controls. OCC suggests that, at a minimum, the Commission should
make clear that whenever an independent contractor is used to perform
testing, the independent contractor is not required to work in
isolation but rather alongside independent employees of the DCO.
The Commission believes that independent testing provides critical
[[Page 64326]]
impartiality and credibility, and notes that generally accepted best
practices recognize the benefits of using independent contractors.\20\
The Commission is clarifying, however, that when a DCO must engage
independent contractors to conduct key controls testing, those
independent contractors may consult with independent employees of the
DCO when conducting the required testing so long as they produce an
independent report.
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\20\ NIST SP 800-115, supra note 15, at 6-6 (NIST also notes
that giving outsiders access to an organization's systems can
introduce additional risk, and recommends proper vetting and
attention to contractual responsibility in this regard); FFIEC
Handbook, supra note 13, at 81.
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Based on the changes to proposed Sec. 39.18(e)(5)(i), the
Commission is revising proposed Sec. 39.18(e)(5)(ii) in part as
follows (added text in italics), ``A [DCO] shall engage independent
contractors to test and assess the key controls included in the [DCO]'s
program of risk analysis and oversight no less frequently than every
three years.'' The regulation as finalized would thus require a DCO to
engage independent contractors to test each key control at least every
three years. If, however, a DCO's risk analysis concludes that certain
key controls must be tested more frequently than every three years, the
resulting additional tests may be conducted by independent contractors
or employees of the DCO who are not responsible for development or
operation of the systems or capabilities being tested.
E. Security Incident Response Plan Testing
Proposed Sec. 39.18(a) would define ``security incident response
plan testing'' as testing of a DCO's security incident response plan to
determine the plan's effectiveness, identifying its potential
weaknesses or deficiencies, enabling regular plan updating and
improvement, and maintaining organizational preparedness and resiliency
with respect to security incidents. Methods of conducting security
incident response plan testing would include, but not be limited to,
checklist completion, walk-through or table-top exercises, simulations,
and comprehensive exercises.
Proposed Sec. 39.18(e)(6)(i) would require a DCO to conduct the
testing at a frequency determined by an appropriate risk analysis, but
at a minimum no less frequently than annually. Proposed Sec.
39.18(e)(6)(ii) would require the DCO's security incident response plan
to include, without limitation, the DCO's definition and classification
of security incidents, its policies and procedures for reporting
security incidents and for internal and external communication and
information sharing regarding security incidents, and the hand-off and
escalation points in its security incident response process. Proposed
Sec. 39.18(e)(6)(iii) would also permit the DCO to coordinate its
security incident response plan testing with other testing required by
the regulation or with testing of its other business continuity-
disaster recovery and crisis management plans. Moreover, proposed Sec.
39.18(e)(6)(iv) would permit the DCO to conduct security incident
response plan testing by engaging independent contractors or by using
employees who are not responsible for development or operation of the
systems or capabilities being tested.
CME, ICE, and Nadex supported requiring security incident response
plan testing as a part of a DCO's program of risk analysis and
oversight.
CME stated that employees responsible for incident response, who
would not be responsible for the development or operation of the
functional systems or capabilities being tested, should be permitted to
both design a DCO's plan and be responsible for testing the plan. CME
stated that a DCO should be able to leverage its employees with
expertise in crisis and risk management, and incident response and
planning, for both planning and testing purposes.
The Commission agrees with CME that the employees who develop a
security incident response plan should be permitted to test the plan.
To allow DCOs additional flexibility regarding security incident
response plan testing, the Commission is revising proposed Sec.
39.18(e)(6)(iv) by deleting ``who are not responsible for development
or operation of the systems or capabilities being tested.'' This
revision allows security incident response plan testing to be conducted
by either independent contractors or employees, without restricting
which employees may lead or conduct the testing.
OCC noted that under the proposed rules, ``security incident'' is
defined as ``a cybersecurity or physical security event that actually
or potentially jeopardizes automated system operation, reliability,
security, or capacity, or the availability, confidentiality or
integrity of data.'' OCC argued that the inclusion of the term
``potentially'' renders the definition vague, and could be interpreted
to include most, if not all, cybersecurity events experienced by a DCO.
OCC suggested that the Commission revise its definition to either: (i)
Defer to the DCO's definition as set forth in its risk analysis plan;
or (ii) replace ``potentially jeopardizes'' with ``has a significant
likelihood of jeopardizing.''
The Commission recognizes OCC's concern and is amending the
proposed definition of ``security incident'' as follows (added text in
italics), ``Security incident means a cybersecurity or physical
security event that actually jeopardizes or has a significant
likelihood of jeopardizing automated system operation, reliability,
security, or capacity, or the availability, confidentiality or
integrity of data.'' This change provides additional clarity regarding
which cybersecurity events are considered a security incident for the
purposes of the regulation.
F. Enterprise Technology Risk Assessment
Proposed Sec. 39.18(a) would define an ``enterprise technology
risk assessment'' as a written assessment that includes, but is not
limited to, an analysis of threats and vulnerabilities in the context
of mitigating controls. Proposed Sec. 39.18(a) would also provide that
an enterprise technology risk assessment identifies, estimates, and
prioritizes risks to a DCO's operations or assets, or to market
participants, individuals, or other entities, resulting from impairment
of the confidentiality, integrity, or availability of data and
information or the reliability, security, or capacity of automated
systems.
Proposed Sec. 39.18(e)(7) would require such assessment to be of a
scope sufficient to satisfy the requirements of proposed Sec.
39.18(e)(8). Proposed Sec. 39.18(e)(7)(i) would require DCOs to
conduct an enterprise technology risk assessment at a frequency
determined by an appropriate risk analysis, but no less frequently than
annually. Proposed Sec. 39.18(e)(7)(ii) would permit a DCO to use
independent contractors or employees of the DCO not responsible for
development or operation of the systems or capabilities being assessed
to conduct an enterprise technology risk assessment.
Nadex requested that the Commission clarify whether information
related to the enterprise technology risk assessment could be combined
with the regular testing results presented to management and the board
of directors based on the internal reporting and review requirements.
In response to Nadex's comment, the Commission is clarifying that
the information required under the regulation can be presented to
management and the board of directors in the manner each DCO deems
[[Page 64327]]
appropriate, including by presenting it together with other information
DCOs must provide to management and the board of directors.
1. Frequency
ICE recommended that the Commission not adopt the enterprise
technology risk assessment requirements. ICE stated that attempting to
mandate enterprise technology risk assessments will result in
inconsistent and confused implementation, distract from useful security
activity, and generate a superset of results that are already published
in a more focused fashion through vulnerability, external penetration,
internal penetration or security response plan testing. Moreover, ICE
believes that the proposed enterprise technology risk assessment
requirements are already adequately addressed in existing rules, both
in the U.S. and globally, and through current examination coverage.
CME supported requiring DCOs to conduct an enterprise technology
risk assessment as a part of a DCO's program of risk analysis and
oversight, but believes an assessment should be required at least every
two years, rather than annually, to match the controls testing cycle.
The Commission is adopting the enterprise technology risk
assessment requirements generally as proposed. The regulation is based
on industry standards \21\ and will help each DCO produce a broad
determination of its system safeguards-related risks, regardless of the
source of the risks.
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\21\ See PCI-DSS, supra note 13, at 105; FINRA Report, supra
note 10, at 14.
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The Commission is, however, revising proposed Sec. 39.18(e)(7)(i)
to read as follows (added text in italics), ``A [DCO] shall conduct an
enterprise technology risk assessment at a frequency determined by an
appropriate risk analysis, but no less frequently than annually. A
[DCO] that has conducted an enterprise technology risk assessment that
complies with this section may conduct subsequent assessments by
updating the previous assessment.'' This change responds to a comment
received by the Commission on its system safeguards proposal for DCMs
and SDRs \22\ and clarifies that the required enterprise technology
risk assessment may build upon previous assessments. The comment noted
the burden and cost of an annual full assessment, and the Commission
believes this is a reasonable means to reduce both.
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\22\ Tradeweb Markets, LLC, Comment Letter on System Safeguards
Testing Requirements Proposed Rule (Feb. 22, 2016), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60657&SearchText.
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2. Independence Requirements
CME suggested that the Commission permit DCOs to allow internal
groups outside of the enterprise risk management function to handle
components of the enterprise technology risk assessment.
ICE stated that the enterprise technology risk assessment should be
the function of an enterprise risk program separate from the
information security groups.
In response to the comments, the Commission emphasizes that the
final regulation provides flexibility regarding who may conduct the
enterprise technology risk assessment. If a DCO chooses not to use
independent contractors, the enterprise technology risk assessment may
be conducted by employees who are not responsible for the development
or operation of the systems or capabilities being assessed.
G. Scope of Testing
Proposed Sec. 39.18(e)(8) would provide that the scope of all
system safeguards testing and assessment required by Sec. 39.18 must
be broad enough to include all testing of automated systems, networks,
and controls necessary to identify any vulnerability which, if
exploited or accidentally triggered, could enable an intruder or
unauthorized user or insider to: (1) Interfere with the entity's
operations or with fulfillment of the entity's statutory and regulatory
responsibilities; (2) impair or degrade the reliability, security, or
adequate scalable capacity of the entity's automated systems; (3) add
to, delete, modify, exfiltrate, or compromise the integrity of any data
related to the entity's regulated activities; or (4) undertake any
other unauthorized action affecting the entity's regulated activities
or the hardware or software used in connection with those activities.
CME and Nadex stated that the requirement to identify ``any
vulnerability'' that could compromise ``any data,'' or allow an
intruder to undertake ``any other unauthorized action'' is too broad.
CME argued that in being so broad, the Commission undermines the value
of a risk-based approach. Nadex suggested that the proposed requirement
be amended to limit responsibility to a reasonableness standard.
The Commission agrees that the proposed language is overly broad
and undermines a risk-based approach to system safeguards testing.
Therefore, the Commission is revising proposed Sec. 39.18(e)(8) as
follows (added text in italics), ``The scope of testing and assessment
required by this section shall be broad enough to include the testing
of automated systems and controls that a [DCO]'s required program of
risk analysis and oversight and its current cybersecurity threat
analysis indicate is necessary to identify risks and vulnerabilities
that could enable an intruder or unauthorized user or insider. . . .''
The revisions reinforce a risk-based approach to system safeguards
testing by basing the scope of testing on the DCO's program of risk
analysis and oversight and current cybersecurity threat assessment.
Nadex noted that the ``current cybersecurity threat analysis'' the
DCO would use to assess its possible adversaries' capabilities could be
interpreted to include not only the DCO's internal risk assessment, but
also warnings/notices generated from third party entities. Nadex
requested that the Commission confirm that the ``current cybersecurity
threat analysis'' refers only to the DCO's internal risk assessment.
The Commission does not believe that a DCO preparing a
cybersecurity threat assessment can appropriately ignore available
external warnings or notices. Thus, contrary to Nadex's recommendation,
the Commission is clarifying that a DCO is required to consider
reasonably available external analyses when preparing a current
cybersecurity threat assessment.
CME stated that adopting regulations requiring DCOs to identify
``any vulnerability'' underlies an assumption that DCOs falling victim
to the most sophisticated threats are singularly responsible for being
attacked. Therefore, CME recommended that the Commission adopt safe
harbors for DCOs who seek to comply with their core principle
responsibilities in order to encourage DCOs to seek out partnerships
and best serve the common goal of improving the industry's overall
state of cyber resilience.
In light of the revisions to proposed Sec. 39.18(e)(8) discussed
above, the Commission declines to provide a ``safe harbor'' for DCOs
``who seek to comply with their core principle responsibilities.'' As
the revisions make clear, the Commission is not seeking to hold DCOs
strictly liable for every cyber attack they might face.
H. Internal Reporting and Review
Proposed Sec. 39.18(e)(9) would provide that both the senior
management and the board of directors of the DCO must receive and
review reports setting forth the results of the testing and assessment
[[Page 64328]]
required by Sec. 39.18. Moreover, the DCO would be required to
establish and follow appropriate procedures for the remediation of
issues identified through this review, as provided in proposed Sec.
39.18(e)(10), and for evaluation of the effectiveness of testing and
assessment protocols.
Nadex stated that reports generated based on system testing are
often lengthy and technical, and that requiring management and the
board to review technical testing results would require individuals in
those positions to have a level of technical knowledge and
sophistication that may not otherwise be required of the position.
Therefore, Nadex requested that the Commission clarify whether a
narrative executive summary would satisfy the proposed requirement.
Additionally, Nadex requested that the Commission clarify whether the
reports may be presented to the board at its regularly scheduled
quarterly meetings.
CME, MGEX, and OCC stated that a DCO's board of directors should be
able to delegate the review required by proposed Sec. 39.18(e)(9) to a
board-level committee.
In response to Nadex, the Commission notes that providing a DCO's
board with a narrative executive summary is not sufficient to satisfy
the requirements of the regulation. Consistent with generally accepted
best practices, the final regulation requires that the board must
instead receive and review the technical reports containing testing
results and assessments.\23\ To the extent there is concern regarding
management's or the board of directors' ability to understand the
required reports, the Commission notes that nothing in the regulation
prevents a DCO from including additional, clarifying documents, such as
executive summaries or compilations, with the required reports. The
Commission believes that providing management or the board of directors
with appropriate summaries or compilations can be an effective way to
help a DCO fulfill the requirement in final Sec. 39.18(e)(9). The
Commission is further clarifying that the board may receive the
materials at a regularly scheduled board meeting and that the board may
delegate the review required under final Sec. 39.18(e)(9) to an
appropriate board-level committee. The Commission is adopting Sec.
39.18(e)(9) as proposed.
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\23\ FFIEC Handbook, supra note 13, at 5.
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I. Remediation
Proposed Sec. 39.18(e)(10) would require a DCO to analyze the
results of the testing and assessment required by Sec. 39.18 to
identify all vulnerabilities and deficiencies in its systems. The
proposed regulation would require a DCO to remediate those
vulnerabilities and deficiencies to the extent necessary to enable it
to fulfill its statutory and regulatory obligations. In addition, the
remediation would have to be timely in light of appropriate risk
analysis with respect to the risks presented by such vulnerabilities
and deficiencies.
Nadex stated that while it agrees with the proposed remediation
requirements generally, the language requiring identification of
``all'' vulnerabilities and deficiencies would essentially impose
strict liability on the firm for any breach of its security.
In response to Nadex's comment, the Commission is revising proposed
Sec. 39.18(e)(10) as follows, ``A [DCO] shall identify and document
vulnerabilities and deficiencies in its systems revealed by the testing
and assessment required by this section. The [DCO] shall conduct and
document an appropriate analysis of the risks presented by each
vulnerability or deficiency to determine and document whether to
remediate the vulnerability or deficiency or accept the associated
risk. When a [DCO] determines to remediate a vulnerability or
deficiency, it must remediate in a timely manner given the nature and
magnitude of the associated risk.'' The revisions require a DCO to
determine whether to remediate or accept the risks presented by a
vulnerability or deficiency based on an analysis of those risks, and to
document that analysis. The changes acknowledge that in some instances,
depending on the results of an appropriate risk analysis, a DCO may
reasonably choose to accept a given risk. The changes also remove any
suggestion that testing would necessarily identify every vulnerability,
or that a DCO must remediate all vulnerabilities.
The Commission believes that the terms ``remediate'' and ``accept''
provide the universe of appropriate responses to identified
vulnerabilities and deficiencies. Industry standards outlining
potential responses to cyber risks speak in terms of mitigating,
accepting, avoiding, and sharing or transfer \24\ of risk.\25\ NIST
describes risk mitigation as risk reduction, and the appropriate risk
response for that portion of risk that cannot be accepted, avoided,
shared, or transferred.\26\ The Commission believes that the term
``remediate'' as used in final Sec. 39.18(e)(10) captures mitigation.
NIST describes risk avoidance as taking specific actions to eliminate
the activities or technologies that are the basis for the risk or to
revise or reposition these activities or technologies in the
organizational mission/business processes to avoid the potential for
unacceptable risk.\27\ The Commission believes these types of avoidance
actions are also properly considered risk remediation.
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\24\ The Commission does not believe that risk sharing or
transfer is an appropriate response to systems risks, and does not
intend for it to constitute remediation under Sec. 39.18(e)(10) as
finalized. NIST describes risk sharing or transfer as the
appropriate risk response when organizations desire and have the
means to shift risk liability and responsibility to other
organizations. NIST SP 800-39, supra note 13, at 43. The
Commission's regulatory approach in this area, however, requires
that a DCO retain complete responsibility for its risk program. See
17 CFR 39.18(f)(2)(i) (to be re-codified as Sec. 39.18(d)(2)).
Additionally, NIST cautions that risk transfer reduces neither the
likelihood of harmful events occurring nor the consequences in terms
of harm to organizational operations and assets, individuals, other
organizations, or the nation. NIST SP 800-39, supra note 13, pp. 43.
The Commission does not believe that a risk response that does not
address the likelihood of a harmful event or its consequences is an
appropriate response.
\25\ See, e.g., NIST SP 800-39, supra note 13, at 41-43.
\26\ Id. at 42-43.
\27\ Id. at 42.
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Nadex also urged the Commission to establish safe harbor provisions
offering protection where it is apparent the DCO has acted in good
faith and maintains reasonable standards, consistent with at least the
minimum requirements prescribed by the regulations, to prevent,
monitor, detect, and address internal and external cyber threats. In
light of the revisions to Sec. 39.18(e)(10), the Commission does not
believe the addition of any safe harbor provision is necessary. The
final regulation imposes specific system safeguards testing and
remediation requirements, and does not seek to hold DCOs strictly
liable for every cyber attack.
J. Recovery Time Objective
Proposed Sec. 39.18(a) would revise the definition of ``recovery
time objective'' to make the language consistent with that used
elsewhere in Sec. 39.18.
OCC stated that it agrees with the 2-hour recovery time objective
for physical events, but believes that a reasonableness standard is
more appropriate for cybersecurity events.
[[Page 64329]]
OCC's comment relates to the recovery time objective period, which is
addressed in Sec. 39.34, rather than the ``recovery time objective''
definition that is at issue here. The Commission will take the comment
under advisement, but it is beyond the scope of this rulemaking.
Accordingly, the Commission is adopting the definition of ``recovery
time objective'' as proposed.
K. Additional Comments
The Commission received several general comments on the proposed
rule. CME, ICE, LCH, MGEX, and Nadex generally expressed support for
the Commission's rulemaking efforts.
1. Principles-Based Requirements
ICE, MGEX, and OCC favored a principles-based approach, and argue
that the Commission's approach is overly prescriptive. Specifically,
OCC suggested that the Commission adopt a framework similar to SEC
Regulation Systems Compliance and Integrity, which allows registrants
to design their own compliance plans using industry standards that meet
specified requirements that further the goals intended by the
regulation.
CME noted that it is important to allow entities, especially those
operating within multiple jurisdictions, the flexibility to look to the
best practices and standards that are most appropriate for addressing
their unique risks, noting that best practices and generally accepted
standards were not designed for the financial services industry.
MGEX stated that the expanded definition of ``information
security'' in proposed Sec. 39.18(b)(2) is overly prescriptive, and
that this ``check-the-box'' list would not keep up with evolving
markets, potentially giving the Commission a false sense of security.
The Commission declines to alter its approach of basing this
regulation on industry standards. This approach results in a regulation
that is not overly prescriptive and will provide DCOs with flexibility
to design systems and testing procedures based on the best practices
that are most appropriate for that DCO's risks.
2. International Harmonization
ICE, LCH, and OCC stated that it is important for the Commission to
consider harmonizing its regulations with international standards for
system safeguards testing. Specifically, OCC stated that it is
concerned that systemically important clearing houses that are subject
to multiple regulatory regimes will face compliance challenges,
particularly during regulatory exams, if regulators fail to coordinate
and align on a common set of guidelines or standards.
As stated above, the Commission believes that this regulation's
reliance on industry standards will provide DCOs, including those
subject to multiple regulatory regimes, with flexibility to design
systems and testing procedures based on the best practices that are
most appropriate for that DCO's risks. Additionally, the Commission
notes that the rule is consistent with the Guidance on Cyber Resilience
for Financial Market Infrastructures published by the Committee on
Payments and Market Infrastructures (``CPMI'') and the International
Organization of Securities Commissions (``IOSCO'') (together, ``CPMI-
IOSCO''). The report sets out internationally agreed upon guidelines
designed to help financial market infrastructures, including central
counterparties, enhance their cyber resilience.\28\
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\28\ CPMI-IOSCO Guidance on Cyber Resilience for Financial
Market Infrastructures, June 29, 2016, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD535.pdf.
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3. DCO/DCM Harmonization
MGEX noted that because it is registered with the Commission as
both a DCO and a DCM, it cannot avail itself of the benefits of the 5%
carve-out from the definition of ``covered designated contract market''
provided in the Commission's proposed regulation applicable to
DCMs.\29\ MGEX recommended that a 5% threshold be added to the DCO
rulemaking, and that the Commission provide adequate ramp-up and ramp-
down periods for organizations moving above or below this threshold.
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\29\ System Safeguards Testing Requirements, 80 FR 80140 (Dec.
23, 2015) (to be codified at 17 CFR part 38).
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MGEX also stated that the Commission should more closely harmonize
its DCO and DCM cybersecurity requirements. For example, with respect
to business continuity and disaster recovery plans, DCMs are required
to coordinate with members and other market participants upon whom the
DCM depends to provide liquidity, while a DCO is required to coordinate
with its clearing members. MGEX believes these requirements should be
harmonized and provide for coordination with other entities deemed
appropriate by an organization. MGEX is concerned that if clearing
members or other participants are required to coordinate extensively
with DCMs or DCOs there will be an incentive for them to work with
fewer organizations.
The Commission has worked to harmonize the regulations applicable
to DCOs and DCMs, and as a result, the regulations track each other
very closely. The Commission declines, however, to impose lighter
regulation on those DCOs that are also DCMs, but are not covered DCMs.
Unlike DCMs, DCOs hold member and customer funds, as well as records of
member and customer positions, which would be at risk in the event of a
cyber attack. Therefore the Commission believes that all DCOs must
satisfy a uniform set of requirements with respect to system
safeguards. With respect to the coordination requirement, DCMs and DCOs
by their nature have different interested parties, and the need for a
DCO to coordinate its business continuity and disaster recovery plan
with its clearing members has not changed as a result of this
rulemaking.
4. Independence Generally
CME, ICE, and MGEX stated that internal audit groups should be
permitted to continue in their current roles at those DCOs. CME noted
that industry standards and best practices recognize that independence
is determined not by employment, but impartiality. MGEX stated that the
independence requirements present a competitive disadvantage for
smaller entities that cannot afford full-time independent staff.
The Commission believes that the regulation adequately addresses
the use of independent employees in carrying out the requirements of
the regulation, and declines to make any changes to specifically
address the use of internal audit personnel. In addition, the
Commission does not believe it is necessary to change the independence
requirements for DCOs that do not want to pay for full-time independent
staff to conduct various required activities, as those DCOs are free to
engage outside consultants to conduct activities that do not warrant
full-time hires.
In the Proposal, the Commission requested comment on whether it
should define the term ``independent contractor'' and if so, how it
should define the term. LCH recommended that the Commission provide
further guidance or a specific definition of ``independent contractor''
to maintain a consistent approach by all DCOs, but did not identify any
specific lack of clarity that may result from use of the term absent a
Commission definition. After consideration, the Commission is
clarifying that as used in Sec. 39.18, the term independent contractor
does not include employees of a DCO's parent or
[[Page 64330]]
affiliate company or co-sourced individuals.\30\ In light of this
clarification, the Commission does not believe that a definition of
``independent contractor'' is necessary.
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\30\ Co-sourced individuals are non-employees who are integrated
directly into a business's organizational structure to perform an
ongoing function. The co-sourced individuals typically work in
collaboration with the business's employees.
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5. Books and Records
ICE stated that the Commission should only require regulated
entities, and not the entire firm of which the regulated entity is a
part, to produce books and records relevant to a particular
examination. According to ICE, overly burdensome production
requirements will limit the regulated entities from having open and
honest conversations related to risk. For example, risk is often
discussed at a firm-wide level and not by a specific regulated entity.
ICE contends that discussion regarding risks for non-CFTC regulated
companies is not of interest to the Commission, and jeopardizes the
confidentiality of those non-CFTC regulated companies. Further, ICE
believes that CFTC requests for information from non-CFTC regulated
companies would likely cause conflicts with other regulators and could
violate foreign laws or regulations.
The Commission believes that document production obligations during
the course of an examination are beyond the scope of the rulemaking,
but notes that Commission registrants are expected to produce required
materials to the Commission regardless of whether that information
resides at the registrant, at a related entity, or at an outside
consultant. In many cases, a DCO shares system safeguard programs with
other entities within the corporate structure. In these instances, the
Commission will continue to require production of all books and records
relating to the system safeguards of DCOs, including those relating to
the system safeguards risks and risk analysis and oversight programs of
parent companies where such risks or such programs are shared in whole
or in part by a DCO.
6. Indemnification
CME stated that removing language from the current version of Sec.
39.18 that expressly provides that a DCO is ``free to seek
indemnification'' from outside service providers reduces certainty for
the industry. CME added that because there is nothing within the
regulation to prohibit the use of indemnification, as the Commission
itself acknowledges, the Commission should not unnecessarily remove the
certainty the current language provides.
The Commission does not believe the ``free to seek
indemnification'' language suggested by CME is necessary and is not
changing the proposed regulation in this regard. Nothing in the final
rule suggests that a DCO could not seek indemnification, and the
Commission need not address the legal rights of DCOs with respect to
third parties.
7. Systems Developments
MGEX stated that the systems development requirements contained in
proposed Sec. 39.18(b)(2)(v) should be required on an ``as needed'' or
``as reasonable'' basis. The Commission is declining to make changes to
Sec. 39.18(b)(2)(v) based on MGEX's suggestion. Information regarding
systems development and quality assurance is appropriately part of the
DCO's program of risk analysis and oversight. If a DCO believes that it
does not have any information to include on this topic in its program
of risk analysis and oversight, it can document that position, and the
basis for it, in the program.
III. Dates
LCH stated that in setting a compliance date, the Commission should
consider the size and complexity of a DCO as well as the resources a
DCO will need to procure in order to comply with the new regulations.
The Commission has determined the following compliance dates on a
provision-by-provision basis, determining appropriate compliance dates
that it believes all DCOs, regardless of their size, complexity, or
resources, should reasonably be able to meet.
All of the regulations adopted herein will be effective upon
publication in the Federal Register. Except as otherwise provided
below, DCOs must comply with the requirements in Sec. 39.18 as of the
effective date. Based on comments that discussed a DCO's need for time
to develop appropriate policies and procedures to come into compliance,
the Commission is extending the date by which DCOs must come into
compliance for certain provisions as follows:
DCOs must comply with the following provisions 180 days after the
effective date: Vulnerability testing--Sec. 39.18(e)(2); and security
incident response plan testing--Sec. 39.18(e)(6).
DCOs must comply with the following provisions 1 year after the
effective date: external penetration testing--Sec. 39.18(e)(3);
internal penetration testing--Sec. 39.18(e)(4); controls testing--
Sec. 39.18(e)(5); and enterprise technology risk assessment--Sec.
39.18(e)(7).
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\31\
The final rule adopted by the Commission will impact DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\32\ The
Commission has previously determined that DCOs are not small entities
for the purpose of the RFA.\33\ Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
rule adopted herein will not have a significant economic impact on a
substantial number of small entities. The Chairman made the same
certification in the proposed rulemaking, and the Commission did not
receive any comments on the RFA.
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\31\ 5 U.S.C. 601 et seq.
\32\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
\33\ See New Regulatory Framework for Clearing Organizations, 66
FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \34\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number. This
rulemaking contains recordkeeping and reporting requirements that are
collections of information within the meaning of the PRA.
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\34\ 44 U.S.C. 3501 et seq.
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The final rule contains provisions that would qualify as
collections of information, for which the Commission has already sought
and obtained a control number from the Office of Management and Budget
(``OMB''). The title for this collection of information is ``Risk
Management Requirements for Derivatives Clearing Organizations'' (OMB
Control Number 3038-0076). Responses to this collection of information
are mandatory. As discussed in the Proposal, the
[[Page 64331]]
Commission believes that the final rule does not impose any new
recordkeeping or reporting requirements that are not already accounted
for in collection 3038-0076.\35\ The Commission did not receive any
comments on its assumptions regarding the recordkeeping or information
collection requirements resulting from the rule as proposed.
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\35\ See Risk Management Requirements for Derivatives Clearing
Organizations, OMB Control No. 3038-0076, available at: http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0076.
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The Commission notes that DCOs are already subject to system
safeguard-related recordkeeping and reporting requirements. As
discussed in the Proposal, the Commission is amending and renumbering
current Sec. 39.18(i) as Sec. 39.18(f), to clarify the system
safeguard recordkeeping and reporting requirements for DCOs. The
regulation requires DCOs, in accordance with Sec. 1.31,\36\ to provide
the Commission with the following documents promptly upon request of
Commission staff: (1) Current copies of the DCO's business continuity
and disaster recovery plan and other emergency procedures; (2) all
assessments of the DCO's operational risks or system safeguard-related
controls; (3) all required reports concerning system safeguards testing
and assessment, whether conducted by independent contractors or
employees of the DCO; and (4) all other documents requested by staff of
the Division of Clearing and Risk, or any successor division, in
connection with Commission oversight of system safeguards pursuant to
the CEA or Commission regulations, or in connection with Commission
maintenance of a current profile of the DCO's automated systems. The
pertinent recordkeeping and reporting requirements of final Sec.
39.18(f) are contained in the provisions of current Sec. 39.18(i),
which was adopted on November 8, 2011.\37\ Accordingly, the Commission
believes that final Sec. 39.18(f) would not impact the burden
estimates currently provided for in collection 3038-0076.
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\36\ Regulation 1.31(a)(1) specifically provides that all books
and records required to be kept by the CEA or by these regulations
shall be kept for a period of five years from the date thereof and
shall be readily accessible during the first 2 years of the 5-year
period. The rule further provides that all such books and records
shall be open to inspection by any representative of the Commission
or the United States Department of Justice. See 17 CFR 1.31(a)(1).
\37\ 76 FR 69334, at 69428.
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C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\38\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission's cost and benefit considerations in
accordance with section 15(a) are discussed below.
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\38\ 7 U.S.C. 19(a).
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To further the Commission's consideration of the costs and benefits
imposed by its regulation, the Commission invited comments from the
public on the costs and benefits associated with the proposed
regulation, and included a series of specific requests for comment
related to the potential costs and benefits resulting from, or arising
out of, requiring DCOs to comply with the proposed changes to Sec.
39.18.\39\ A number of commenters addressed the costs and benefits of
the Proposal, which the Commission addresses in the discussion that
follows. The Commission believes that the changes in the final
regulation will reduce the costs of compliance as compared to the
Proposal, which itself imposed only modest costs relative to those that
already exist under current Sec. 39.18.
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\39\ 80 FR 80114, at 80133.
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2. Background and Baseline for the Final Rule
As an initial matter, the Commission considers the incremental
costs and benefits of this regulation, meaning the costs and benefits
that are above the current system safeguard practices and requirements
under the CEA and the Commission's regulations for DCOs. Where
reasonably feasible, the Commission has endeavored to estimate
quantifiable costs and benefits. Where quantification is not feasible,
the Commission identifies and describes costs and benefits
qualitatively.\40\
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\40\ For example, to quantify benefits such as enhanced
protections for market participants and the public and financial
integrity of the futures and swaps markets would require
information, data, and/or metrics that either do not exist, or to
which the Commission generally does not have access.
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As discussed in the Proposal, the Commission believes that cyber
threats to the financial sector have expanded dramatically in recent
years.\41\ The current cyber threat environment highlights the need to
consider an updated regulatory framework with respect to cybersecurity
testing for DCOs. Although the Commission acknowledges that the
amendments would likely result in some additional costs for DCOs, the
final rule would also bring several overarching benefits to the futures
and swaps industry. As discussed more fully below, a comprehensive
cybersecurity testing program is crucial to efforts by DCOs to
strengthen cyber defenses, to mitigate operational, reputational, and
financial risk, and to maintain cyber resilience and ability to recover
from cyber attack. Significantly, to ensure the effectiveness of
cybersecurity controls, a DCO must test in order to find and fix its
vulnerabilities before an attacker exploits them.
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\41\ See 80 FR 80114, at 80114-80115.
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The Commission recognizes that any economic effects, including
costs and benefits, should be compared to a baseline that accounts for
current regulatory requirements. The baseline for this cost and benefit
consideration is the set of requirements under the CEA and the
Commission's regulations for DCOs. Currently, Sec. 39.18(j)(1)(i)
requires a DCO to conduct regular, periodic, and objective testing and
review of its automated systems to ensure that they are reliable,
secure, and have adequate scalable capacity.\42\ This requirement,
which forms part of the DCO risk analysis program required under Sec.
39.18(b), must be satisfied by following, at a minimum, ``generally
accepted standards and industry best practices.'' \43\ Further, current
Sec. 39.18(j)(2) requires that this testing be conducted by
independent contractors or employees of the DCO not responsible for
development or operation of the systems or capabilities being
tested.\44\
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\42\ 17 CFR 39.18(j).
\43\ See 17 CFR 39.18(d).
\44\ 17 CFR 39.18(j).
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In addition to referencing generally accepted standards and
industry best practices, this cost and benefit discussion uses
information provided by DCOs in connection with a survey of DCO system
safeguard costs and practices conducted by Commission staff (``February
2015 DCR Survey'').\45\
[[Page 64332]]
The Commission notes, however, that in certain instances the cost
estimates provided by the DCOs included estimates at the parent company
level of the DCO. Where parent-level estimates were provided, the DCOs
explained that they generally share the same automated systems and
system safeguard programs with other entities within the corporate
structure and were therefore unable to apportion the actual costs to
particular entities. The Commission further notes that some of the DCOs
that supplied cost information are also registered with the Commission
in other capacities (as DCMs and/or swap data repositories). These DCOs
provided cost estimates that cover all of their Commission-regulated
functions because they generally share the same automated systems and
system safeguard programs. Therefore, the Commission has attempted to
account for these distinctions, where appropriate.
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\45\ On February 19, 2015, the Division of Clearing and Risk
requested, pursuant to Sec. 39.19(c)(5)(i), information from each
registered DCO regarding the scope and costs of its current system
safeguard testing. Of the 14 DCOs contacted, 13 responded. ICE Clear
Credit, ICE Clear Europe, Ice Clear US, and the Clearing
Corporation, each subsidiaries of Intercontinental Exchange, Inc.,
provided a single response, indicating that their testing costs are
shared. LCH.Clearnet Ltd, LCH.Clearnet LLC, and LCH.Clearnet SA,
each subsidiaries of LCH.Clearnet Group Ltd., also provided a single
response, indicating that their testing costs are shared.
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In general, the final regulation clarifies existing system
safeguards requirements under current Sec. 39.18 by identifying
specific testing required by industry best practices. To the extent the
final rule imposes new requirements and thus additional costs, the
primary costs will result from more frequent testing, including some
testing that must be carried out by independent contractors on behalf
of the DCO. As a result, the final rule may increase operational costs
for DCOs by requiring additional resources. In addition, the Commission
notes that some DCOs are larger or more complex than others, and the
requirements may impact DCOs differently depending on their size and
the complexity of their systems. Thus, the Commission expects that the
costs and benefits may vary somewhat among DCOs. The Commission is
sensitive to the economic effects of the regulation, including costs
and benefits.
While certain costs are amenable to quantification, other costs
cannot be reasonably estimated, such as the costs to the public or
market participants in the event of a cybersecurity incident at a DCO.
The Commission's final regulation is intended to further mitigate the
frequency and severity of system security breaches or functional
failures, and therefore, serve an important, if unquantifiable, public
benefit. Although the benefits of effective regulation are difficult to
value in dollar terms, the Commission believes that they are no less
important to consider given the Commission's mission to protect market
participants and the public and to promote market integrity.
The discussion of costs and benefits that follows begins with a
discussion of the comments received regarding the costs and benefits of
the Proposal generally. Following the general discussion, the
Commission provides a summary of changes to the proposed rule that
resulted in the final rule, discusses the costs and benefits of the
final rule, and where relevant, the costs of the final rule relative to
the Proposal and addresses comments specific to the costs and benefits
of each proposal. At the conclusion of this discussion, the Commission
considers the costs and benefits of the final regulation collectively
in light of the five factors set forth in section 15(a) of the CEA.
3. General Comments Received
CME estimates that the proposed rule would cost CME Group
approximately $7.2 million over a two-year period. CME noted that its
cost estimate also includes the Commission's proposal applicable to
DCMs and does not separately estimate costs for clearing, trading, or
data reporting. As described more fully below, the Commission is
adopting the final regulation with modifications in certain key areas,
which should result in less cost and burden for DCOs relative to the
Proposal.
LCH recommended that the Commission consider the complexity created
by multiple standards coming into effect in different major
jurisdictions within the same timeframe. LCH stated that although
international DCOs will achieve compliance against the highest minimum
standards, the lead time for building testing programs and supportive
compliance controls to meet many sets of new standards could be longer
for larger and more complex DCOs than for smaller, regional DCO
operations. The Commission agrees with LCH and, as discussed above in
section III, has set individualized compliance dates for different
aspects of the regulation. The Commission believes that all DCOs,
regardless of their size, complexity, or resources, should generally be
able to comply by the specified dates.
MGEX stated that some entities may incur additional costs due to
the divergence between the Commission's proposed rules for DCMs and
DCOs, including the programs of risk analysis and oversight and
coordination of the business continuity and disaster recovery plan with
industry participants. The Commission notes that the rules for DCMs and
DCOs are largely harmonized, and that differences in the programs of
risk analysis and oversight for DCOs and DCMs are largely attributable
to the different risks faced by the two types of entities. The new
rules applicable to DCMs require that the program of risk analysis and
oversight include enterprise risk management and governance applicable
specifically to security and technology, but as noted in the Proposal,
any parallel requirements for DCOs must be addressed in a more
comprehensive fashion involving more than the system safeguards context
alone, and thus are not appropriate for this rulemaking.\46\
Additionally, the requirement for a DCO to coordinate its business
continuity and disaster recovery plan with clearing members is not a
new requirement, and has not been amended by this rulemaking. That
requirement has only been renumbered, and any compliance costs are not
properly attributed to this rulemaking.
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\46\ 80 FR 80114, at 80123 n. 127.
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LCH and MGEX stated that the Commission should consider the size
and complexity of the DCO in calculating the cost of the proposed
requirements. Specifically, MGEX noted that $8,383,222, a figure drawn
from the notice of proposed rulemaking for the system safeguards rules
applicable to DCMs, is ``excessively punitive'' for smaller entities.
It further stated that organizations like MGEX cannot bear these costs,
and that the Commission should not require them to comply because they
present lower overall risk to the industry, and have dramatically
smaller exposure to vulnerabilities compared to SIDCOs. The Commission
notes that the figure cited by MGEX is not an estimate of new costs
arising from this rulemaking. It was instead an average calculated from
preliminary information collected from some DCMs and SDRs regarding
their current costs associated with conducting vulnerability testing,
external and internal penetration testing, controls testing, and
enterprise technology risk assessments. The Commission nevertheless
acknowledges that this rulemaking will impose new costs on DCOs beyond
the current cost of compliance, and recognizes that the actual costs
may vary widely as a result of numerous factors including the size of
the organization, the complexity of the automated systems, and the
scope of the test. The Commission has attempted to limit costs for
smaller DCOs by providing the flexibility to design systems and testing
procedures that are
[[Page 64333]]
appropriate for each DCO's individual risks.
CME and LCH noted that the shortage of skilled professionals could
increase costs directly and indirectly as a result of the proposed
rule. The Commission notes that where appropriate, the final rule
provides additional flexibility regarding the ability of DCOs to choose
whether to use internal or external personnel to conduct certain tests.
MGEX noted that implementation on the scale required by this
rulemaking will include significant personnel and non-personnel
resources. These additional costs include IT and operations personnel
costs, purchase of software and hardware, legal and compliance costs,
and the cost of third-party testing vendors. MGEX anticipated that its
costs will go up two or three times if the rulemakings are made final
in their proposed form, explaining that the highest cost of compliance
would result from hiring of independent contractors/professionals. As
discussed more fully below and in the Proposal, the Commission
acknowledges that there will be some increases in the costs described
by MGEX. In the final rule, the Commission, where appropriate, has
provided DCOs with additional flexibility regarding who may conduct
certain tests. The Commission notes, however, that many of the costs
described by MGEX are attributable to compliance with the current rule
and not to additional requirements imposed by this rulemaking. For
example, the requirement to conduct testing with independent
contractors or independent employees already exists under current Sec.
39.18(j)(2). Further, based on industry standards, current Sec. 39.18
requires DCOs to conduct external penetration testing using an
independent contractor.
4. Consideration of Costs and Benefits Related to the Final Rule
This section discusses cost and benefit considerations related to
the final rule, including those aspects of the regulation that have
changed since the proposed rule, and those aspects of the regulation on
which the Commission received comments.
a. Regulation 39.18(e)(2)--Vulnerability Testing
i. Summary of Final Regulation
As discussed above in section II(A), the Commission is revising
proposed Sec. 39.18(e)(2)(ii) to remove the explicit requirement for
authenticated scanning where indicated by appropriate risk analysis.
The final rule requires that a DCO conduct automated vulnerability
scanning, which complies with generally accepted best practices. The
Commission is also revising Sec. 39.18(e)(2)(iii) to remove the
proposed requirement that two of the required quarterly vulnerability
tests be conducted by independent contractors. Under the final rule,
all four required tests may be conducted by independent contractors or
employees of the DCO who are not responsible for development or
operation of the systems or capabilities being tested. The Commission
is otherwise finalizing Sec. 39.18(e)(2) and the definition of
``vulnerability testing'' as proposed, and the Commission's
consideration of the costs and benefits associated with those sections
does not differ from those discussed in the Proposal.
ii. Costs
NGX commented that compliance with the proposed rule would not be
inordinately costly relative to the benefits, with the exception of the
requirements in Sec. 39.18(e)(2)(i) to conduct vulnerability testing
on a quarterly basis. NGX estimates that testing quarterly would cost
over $100,000 more per year than testing annually, and stated that the
costs were not warranted because little changes from quarter to
quarter. The Commission notes that industry best practices state that
vulnerability testing should be conducted ``at least quarterly.'' \47\
Accordingly, current Sec. 39.18 requires DCOs to conduct vulnerability
testing on a quarterly basis. Therefore, the Commission does not
believe that the frequency requirement of Sec. 39.18(e)(2)(i) will
impose new costs on DCOs.
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\47\ See FFIEC Handbook supra note 13 at 82.
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The Commission has determined not to adopt the proposed requirement
for authenticated scanning where indicated by appropriate risk analysis
in the final Sec. 39.18(e)(2)(ii). The rule as adopted will require
automated vulnerability scanning to comply with best practices. Because
current Sec. 39.18 requires DCOs to comply with industry best
practices, the Commission does not believe that DCOs will incur
additional costs as a result of the adoption of Sec. 39.18(e)(2)(ii).
ICE, LCH, OCC, and MGEX all noted significant costs associated with
hiring outside contractors to conduct vulnerability tests. OCC believes
that requiring a DCO to use an independent contractor to perform
vulnerability testing during the same year that such person is
performing external penetration testing would unnecessarily increase
costs without an added benefit, because vulnerability testing is
largely subsumed within external penetration testing. As discussed
above, the Commission has determined not to adopt the proposed
independent contractor requirement in final Sec. 39.18(e)(2)(iii).
Under the final rule, all required testing may be done by an
independent contractor or by independent employees. The final rule is
thus consistent with current Sec. 39.18(j)(2), which requires systems
safeguards testing to be conducted by independent contractors or
independent employees of the DCO. Because final Sec. 39.18(e)(2)(iii)
does not change the current requirement, it will not impose additional
costs on DCOs.
iii. Benefits
The Commission did not receive any comments specific to the
benefits of vulnerability testing and believes the benefits of final
Sec. 39.18(e)(2) do not differ from those discussed in the Proposal.
b. Regulation 39.18(e)(3)--External Penetration Testing
As discussed above in section II(B), the Commission is adopting
Sec. 39.18(e)(3) and the definition of ``external penetration
testing'' as proposed. The Commission did not receive any comments
specific to the costs or benefits of external penetration testing. The
Commission believes that the costs and benefits of Sec. 39.18(e)(3) do
not differ from those discussed in the Proposal.
c. Regulation 39.18(e)(4)--Internal Penetration Testing
As discussed above in section II(C), the Commission is adopting
Sec. 39.18(e)(4) and the definition of ``internal penetration
testing'' as proposed. The Commission did not receive any comments
specific to the costs or benefits of internal penetration testing. The
Commission believes that the costs and benefits of Sec. 39.18(e)(4) do
not differ from those discussed in the Proposal.
d. Regulation 39.18(e)(5)--Controls Testing
i. Summary of Final Regulation
As discussed above in section II(D), the Commission is revising
proposed Sec. 39.18(e)(5)(i) to remove a prescribed two-year minimum
testing period for all controls testing, and instead require that (a)
key controls be tested every three years; and (b) non-key controls be
tested at a frequency determined by an appropriate risk analysis. The
Commission is making a corresponding change to proposed Sec.
39.18(e)(5)(ii) to require that independent contractors test each key
control at least every three
[[Page 64334]]
years rather than every two. The Commission is otherwise finalizing
Sec. 39.18(e)(5) as well as the definitions of ``controls,''
``controls testing,'' and ``key controls'' as proposed, and the
Commission's consideration of the costs and benefits associated with
those sections does not differ from those discussed in the Proposal.
ii. Costs
CME and OCC stated that the costs of requiring controls testing
every two years outweigh the benefits. As discussed above, the
Commission is adopting proposed Sec. 39.18(e)(5)(i) with modifications
to require key controls testing to be conducted at a frequency
determined by an appropriate risk analysis, but no less frequently than
every three years. The Commission has determined not to adopt the
proposed minimum frequency requirement for non-key controls. As
discussed in the Proposal, the Commission acknowledges that the minimum
frequency requirement for key controls testing may increase costs for
DCOs. The Commission notes, however, that the February 2015 DCR Survey
indicated that most DCOs currently conduct controls testing at least
annually and some DCOs may not face an increase in costs based on this
requirement. Further, because of the modifications from the Proposal,
the testing frequency for some DCOs could be reduced, and therefore may
be less costly relative to the Proposal.
iii. Benefits
The Commission did not receive any comments specific to the
benefits of controls testing and believes the benefits of final Sec.
39.18(e)(5) do not differ from those discussed in the Proposal.
e. Regulation 39.18(e)(6)--Security Incident Response Plan Testing
i. Summary of Final Regulation
As discussed above in section II(E), the Commission is amending the
definition of ``security incident'' in proposed Sec. 39.18(a) in order
to provide additional clarity. Further, the Commission is adopting
proposed Sec. 39.18(e)(6)(iv) with modifications to remove the
restrictions on which employees are permitted to conduct security
incident response plan testing. The Commission is otherwise finalizing
Sec. 39.18(e)(6) as well as the definitions of ``security incident
response plan'' and ``security incident response plan testing'' as
proposed, and the Commission's consideration of the costs and benefits
associated with those sections does not differ from those discussed in
the Proposal.
ii. Costs
The Commission does not believe that the changes to the definition
of ``security incident'' will affect the costs of the rule. As
explained in the Proposal, the Commission does not believe proposed
Sec. 39.18(e)(6)(iv) will impose new costs on DCOs, because it is
consistent with current Sec. 39.18(j)(2). Further, without the
proposed restrictions regarding which employees may conduct security
incident response plan testing, Sec. 39.18(e)(6)(iv) as finalized may
lower costs for some DCOs by providing flexibility that does not exist
in the current rule.
The Commission did not receive any comments related to the costs of
security incident response plan testing.
iii. Benefits
The Commission did not receive any comments specific to the
benefits of security incident response plan testing and believes that
the benefits of final Sec. 39.18(e)(6) do not differ from those
discussed in the Proposal.
f. Regulation 39.18(e)(7)--Enterprise Technology Risk Assessment
In the Proposal, the Commission concluded that proposed Sec.
39.18(e)(7) is consistent with current industry standards \48\ and
would not impose additional costs on DCOs. As discussed above in
section II(F), the Commission is adopting Sec. 39.18(e)(7) and the
definition of ``enterprise technology risk assessment'' as proposed,
except for changes to Sec. 39.18(e)(7)(i) to clarify that a DCO that
has conducted an enterprise technology risk assessment that complies
with this section may conduct subsequent assessments by updating the
previous assessment. This was intended as a clarification rather than a
substantive change, and in any event will not impose any additional
costs on DCOs.
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\48\ See, e.g., PCI-DSS, supra note 13, at 105.
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The Commission did not receive any comments specific to the costs
or benefits of enterprise technology risk assessment testing. The
Commission believes that the costs and benefits of final Sec.
39.18(e)(7) do not differ from those discussed in the Proposal.
g. Regulation 39.18(e)(8)--Scope of Testing and Assessment
i. Summary of Proposed Regulation
As discussed above in section II(G), the Commission is revising
proposed Sec. 39.18(e)(8) to state that that the scope of testing and
assessment required by Sec. 39.18 shall be broad enough to include the
testing of automated systems and controls that a DCO's required program
of risk analysis and oversight and its current cybersecurity threat
analysis indicate is necessary to identify risks and vulnerabilities
that could enable an intruder or unauthorized user or insider to: (1)
Interfere with the entity's operations or with fulfillment of the
entity's statutory and regulatory responsibilities; (2) impair or
degrade the reliability, security, or adequate scalable capacity of the
entity's automated systems; (3) add to, delete, modify, exfiltrate, or
compromise the integrity of any data related to the entity's regulated
activities; and (4) undertake any other unauthorized action affecting
the entity's regulated activities or the hardware or software used in
connection with those activities.
ii. Costs and Benefits
In the Proposal, the Commission discussed the costs of proposed
Sec. 39.18(e)(8) in relation to each substantive testing requirement.
In each case, the Commission concluded that proposed Sec. 39.18(e)(8)
would not impose new costs on DCOs. The Commission believes that the
changes to proposed Sec. 39.18(e)(8) narrow the scope of testing in
the final rule. Rather than requiring that DCOs test all automated
systems and controls necessary to identify any of the enumerated risks
and vulnerabilities, the scope of testing under the final rule is
determined by a DCO's required program of risk analysis and oversight
and its current cybersecurity threat analysis. Therefore, the
Commission does not believe that final Sec. 39.18(e)(8) will impose
new costs on DCOs compared to the proposed rule or the current rule.
The Commission believes this risk-based approach will result in
improved and more cost-effective testing.
The Commission did not receive any comments specific to the costs
or benefits of the scope of testing.
h. Regulation 39.18(e)(9)--Internal Reporting and Review
As discussed above in section II(H), the Commission is adopting
Sec. 39.18(e)(9) as proposed. The Commission did not receive any
comments specific to the costs or benefits of internal reporting and
review. The Commission believes that the costs and benefits of final
Sec. 39.18(e)(9) do not differ from those discussed in the Proposal.
i. Regulation 39.18(e)(10)--Remediation
i. Summary of Final Regulation
As discussed above in section II(I), the Commission is revising
proposed Sec. 39.18(e)(10) to require a DCO to
[[Page 64335]]
identify and document the vulnerabilities and deficiencies in its
systems revealed by the testing and assessment required by the
regulation and to conduct and document an appropriate analysis of the
risks presented by such vulnerabilities and deficiencies to determine
and document whether to remediate or accept each risk.
ii. Costs
The final rule makes clear that a DCO is only required to consider
remediation of those vulnerabilities and deficiencies revealed through
testing, rather than all vulnerabilities and deficiencies. Further, the
final rule specifically allows DCOs to accept certain risks presented
by vulnerabilities and deficiencies when that is appropriate based on
an analysis of the risk presented. These changes to the Proposal will,
if anything, result in lower costs to DCOs relative to the proposed
rule. In any event, responding to vulnerabilities and deficiencies
revealed by cybersecurity testing is an industry best practice,\49\ and
DCOs are already required to comply with this requirement under current
Sec. 39.18.
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\49\ See, e.g., NIST SP 800-39, supra note 13, at 41-43; FFIEC
Handbook, supra note 13, at 5.
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The aspect of the final rule that could impose additional costs on
DCOs relative to the current rule is the express requirement that DCOs
document the vulnerabilities and deficiencies in its systems revealed
by the required testing and assessment, document an appropriate
analysis of the risks presented by such vulnerabilities, and document
whether to remediate or accept each risk. DCOs would have been required
under the proposed rule to analyze their testing results to determine
the extent of their required remediation, so the difference in the
final rule is the express documentation requirement. The express
requirement that DCOs document their analysis imposes at most a slight
additional cost on DCOs, particularly given that DCOs would likely have
documented the required analysis even absent the express requirement.
The Commission did not receive any comments specific to the costs
of remediation.
iii. Benefits
The documentation requirement described above has the joint
benefits of helping to ensure that DCOs carefully consider whether to
remediate or accept risks, and of allowing the Commission to review the
thought process behind these significant decisions. The Commission did
not receive any comments specific to the benefits of remediation.
5. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits of Sec. 39.18 in light of the specific
considerations identified in section 15(a) of the CEA as follows:
a. Protection of Market Participants and the Public
Automated systems are critical to a DCO's operations, which provide
essential counterparty credit risk protection to market participants
and the investing public. Final Sec. 39.18 is designed to further
enhance DCOs' risk analysis programs in order to ensure that such
automated systems are reliable, secure, and have an adequate scalable
capacity. Accordingly, the Commission believes that the final rule will
further help protect the derivatives markets by promoting more robust
automated systems and therefore fewer disruptions and market-wide
closures, systems compliance issues, and systems intrusions. Preventing
disruptions helps to ensure that market participants will have
continuous access to central clearing.
Additionally, providing the Commission with reports concerning the
system safeguards testing and assessments required by the final
regulation will further facilitate the Commission's oversight of
derivatives markets, augment the Commission's efforts to monitor
systemic risk, and will further the protection of market participants
and the public by helping to ensure that a DCO's automated systems are
available, reliable, secure, have adequate scalable capacity, and are
effectively overseen.
The costs of this rulemaking would be mitigated by the
countervailing benefits of improved design, more efficient and
effective processes, and enhanced planning that would lead to increased
safety and soundness of DCOs and the reduction of systemic risk, which
protect market participants and the public from the adverse
consequences that would result from a DCO's failure or a disruption in
its functioning.
b. Efficiency, Competitiveness and Financial Integrity
The amendments to Sec. 39.18 will help preserve the efficiency and
financial integrity of the derivatives markets by promoting
comprehensive oversight and testing of a DCO's operations and automated
systems. Specifically, the amendments will further reduce the
probability of a cyber attack that could lead to a disruption in
clearing services which could, in turn, cause disruptions to the
efficient functioning and financial integrity of the derivatives
markets. Preventing cyber attacks could prevent monetary losses to
DCOs, and thereby help protect their financial integrity.
The Commission does not anticipate the final rule to have a
significant impact on the competitiveness of the derivatives markets.
c. Price Discovery
The Commission does not anticipate the amendments to Sec. 39.18 to
have a direct effect on the price discovery process. However, ensuring
that DCOs' automated systems function properly to clear trades protects
the price discovery process to the extent that a prolonged disruption
or suspension in clearing at a DCO may cause potential market
participants to refrain from trading.
d. Sound Risk Management Practices
The amendments to Sec. 39.18 will strengthen and promote sound
risk management practices across DCOs. Specifically, the amendments
will build upon the current system safeguards requirements by ensuring
that tests of DCOs' key system safeguards are conducted at minimum
intervals and, where appropriate, by independent professionals. The
applicable tests are each recognized by industry best practices as
essential components of a sound risk management program. Moreover, the
benefits of the final rule will be shared by market participants and
the investing public as DCOs, by their nature, serve to provide such
parties with counterparty credit risk protection.
In addition, reliably functioning computer systems and networks are
crucial to comprehensive risk management, and being able to request
reports of the system safeguards testing required by the final
regulation will assist the Commission in its oversight of DCOs and will
bolster the Commission's ability to assess systemic risk levels.
e. Other Public Interest Considerations
The Commission notes the public interest in promoting and
protecting public confidence in the safety and security of the
financial markets. DCOs are essential to risk management in the
financial markets, both systemically and on an individual firm level.
Regulation 39.18, by explicating current requirements and identifying
several additional key tests and assessments, promotes the ability of
DCOs to perform these functions free from disruption due to both
internal and external threats to its systems.
[[Page 64336]]
List of Subjects in 17 CFR Part 39
Commodity futures, Reporting and recordkeeping requirements, System
safeguards.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 39 as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
2. Revise Sec. 39.18 to read as follows:
Sec. 39.18 System safeguards.
(a) Definitions. For purposes of this section and Sec. 39.34:
Controls mean the safeguards or countermeasures employed by the
derivatives clearing organization in order to protect the reliability,
security, or capacity of its automated systems or the confidentiality,
integrity, or availability of its data and information, and in order to
enable the derivatives clearing organization to fulfill its statutory
and regulatory responsibilities.
Controls testing means assessment of the derivatives clearing
organization's controls to determine whether such controls are
implemented correctly, are operating as intended, and are enabling the
derivatives clearing organization to meet the requirements established
by this section.
Enterprise technology risk assessment means a written assessment
that includes, but is not limited to, an analysis of threats and
vulnerabilities in the context of mitigating controls. An enterprise
technology risk assessment identifies, estimates, and prioritizes risks
to a derivatives clearing organization's operations or assets, or to
market participants, individuals, or other entities, resulting from
impairment of the confidentiality, integrity, or availability of data
and information or the reliability, security, or capacity of automated
systems.
External penetration testing means attempts to penetrate a
derivatives clearing organization's automated systems from outside the
systems' boundaries to identify and exploit vulnerabilities. Methods of
conducting external penetration testing include, but are not limited
to, methods for circumventing the security features of an automated
system.
Internal penetration testing means attempts to penetrate a
derivatives clearing organization's automated systems from inside the
systems' boundaries to identify and exploit vulnerabilities. Methods of
conducting internal penetration testing include, but are not limited
to, methods for circumventing the security features of an automated
system.
Key controls means those controls that an appropriate risk analysis
determines are either critically important for effective system
safeguards or intended to address risks that evolve or change more
frequently and therefore require more frequent review to ensure their
continuing effectiveness in addressing such risks.
Recovery time objective means the time period within which a
derivatives clearing organization should be able to achieve recovery
and resumption of processing, clearing, and settlement of transactions,
after those capabilities become temporarily inoperable for any reason
up to or including a wide-scale disruption.
Relevant area means the metropolitan or other geographic area
within which a derivatives clearing organization has physical
infrastructure or personnel necessary for it to conduct activities
necessary to the processing, clearing, and settlement of transactions.
The term ``relevant area'' also includes communities economically
integrated with, adjacent to, or within normal commuting distance of
that metropolitan or other geographic area.
Security incident means a cybersecurity or physical security event
that actually jeopardizes or has a significant likelihood of
jeopardizing automated system operation, reliability, security, or
capacity, or the availability, confidentiality or integrity of data.
Security incident response plan means a written plan documenting
the derivatives clearing organization's policies, controls, procedures,
and resources for identifying, responding to, mitigating, and
recovering from security incidents, and the roles and responsibilities
of its management, staff, and independent contractors in responding to
security incidents. A security incident response plan may be a separate
document or a business continuity-disaster recovery plan section or
appendix dedicated to security incident response.
Security incident response plan testing means testing of a
derivatives clearing organization's security incident response plan to
determine the plan's effectiveness, identify its potential weaknesses
or deficiencies, enable regular plan updating and improvement, and
maintain organizational preparedness and resiliency with respect to
security incidents. Methods of conducting security incident response
plan testing may include, but are not limited to, checklist completion,
walk-through or table-top exercises, simulations, and comprehensive
exercises.
Vulnerability testing means testing of a derivatives clearing
organization's automated systems to determine what information may be
discoverable through a reconnaissance analysis of those systems and
what vulnerabilities may be present on those systems.
Wide-scale disruption means an event that causes a severe
disruption or destruction of transportation, telecommunications, power,
water, or other critical infrastructure components in a relevant area,
or an event that results in an evacuation or unavailability of the
population in a relevant area.
(b) Program of risk analysis and oversight--(1) General. A
derivatives clearing organization shall establish and maintain a
program of risk analysis and oversight with respect to its operations
and automated systems to identify and minimize sources of operational
risk through:
(i) The development of appropriate controls and procedures; and
(ii) The development of automated systems that are reliable,
secure, and have adequate scalable capacity.
(2) Elements of program. A derivatives clearing organization's
program of risk analysis and oversight with respect to its operations
and automated systems, as described in paragraph (b)(1) of this
section, shall address each of the following elements:
(i) Information security, including, but not limited to, controls
relating to: Access to systems and data (including, least privilege,
separation of duties, account monitoring and control); user and device
identification and authentication; security awareness training; audit
log maintenance, monitoring, and analysis; media protection; personnel
security and screening; automated system and communications protection
(including, network port control, boundary defenses, encryption);
system and information integrity (including, malware defenses, software
integrity monitoring); vulnerability management; penetration testing;
security incident response and management; and any other elements of
information security included in generally accepted best practices;
(ii) Business continuity and disaster recovery planning and
resources, including, but not limited to the controls and capabilities
described in paragraph (c) of this section; and any other elements of
business continuity
[[Page 64337]]
and disaster recovery planning and resources included in generally
accepted best practices;
(iii) Capacity and performance planning, including, but not limited
to, controls for monitoring the derivatives clearing organization's
systems to ensure adequate scalable capacity (including, testing,
monitoring, and analysis of current and projected future capacity and
performance, and of possible capacity degradation due to planned
automated system changes); and any other elements of capacity and
performance planning included in generally accepted best practices;
(iv) Systems operations, including, but not limited to, system
maintenance; configuration management (including, baseline
configuration, configuration change and patch management, least
functionality, inventory of authorized and unauthorized devices and
software); event and problem response and management; and any other
elements of system operations included in generally accepted best
practices;
(v) Systems development and quality assurance, including, but not
limited to, requirements development; pre-production and regression
testing; change management procedures and approvals; outsourcing and
vendor management; training in secure coding practices; and any other
elements of systems development and quality assurance included in
generally accepted best practices; and
(vi) Physical security and environmental controls, including, but
not limited to, physical access and monitoring; power,
telecommunication, and environmental controls; fire protection; and any
other elements of physical security and environmental controls included
in generally accepted best practices.
(3) Standards for program. In addressing the elements listed under
paragraph (b)(2) of this section, a derivatives clearing organization
shall follow generally accepted standards and industry best practices
with respect to the development, operation, reliability, security, and
capacity of automated systems.
(4) Resources. A derivatives clearing organization shall establish
and maintain resources that allow for the fulfillment of each
obligation and responsibility of the derivatives clearing organization,
including the daily processing, clearing, and settlement of
transactions, in light of any risk to its operations and automated
systems. The derivatives clearing organization shall periodically
verify the adequacy of such resources.
(c) Business continuity and disaster recovery--(1) General. A
derivatives clearing organization shall establish and maintain a
business continuity and disaster recovery plan, emergency procedures,
and physical, technological, and personnel resources sufficient to
enable the timely recovery and resumption of operations and the
fulfillment of each obligation and responsibility of the derivatives
clearing organization, including, but not limited to, the daily
processing, clearing, and settlement of transactions, following any
disruption of its operations.
(2) Recovery time objective. A derivatives clearing organization's
business continuity and disaster recovery plan, as described in
paragraph (c)(1) of this section, shall have, and the derivatives
clearing organization shall maintain physical, technological, and
personnel resources sufficient to meet, a recovery time objective of no
later than the next business day following a disruption.
(3) Coordination of plans. A derivatives clearing organization
shall, to the extent practicable:
(i) Coordinate its business continuity and disaster recovery plan
with those of its clearing members, in a manner adequate to enable
effective resumption of daily processing, clearing, and settlement of
transactions following a disruption;
(ii) Initiate and coordinate periodic, synchronized testing of its
business continuity and disaster recovery plan with those of its
clearing members; and
(iii) Ensure that its business continuity and disaster recovery
plan takes into account the plans of its providers of essential
services, including telecommunications, power, and water.
(d) Outsourcing. (1) A derivatives clearing organization shall
maintain the resources required under paragraphs (b)(4) and (c)(1) of
this section either:
(i) Using its own employees as personnel, and property that it
owns, licenses, or leases; or
(ii) Through written contractual arrangements with another
derivatives clearing organization or other service provider.
(2) Retention of responsibility. A derivatives clearing
organization that enters into a contractual outsourcing arrangement
shall retain complete responsibility for any failure to meet the
requirements specified in paragraphs (b) and (c) of this section. The
derivatives clearing organization must employ personnel with the
expertise necessary to enable it to supervise the service provider's
delivery of the services.
(3) Testing of resources. The testing referred to in paragraph (e)
of this section shall apply to all of the derivatives clearing
organization's own and outsourced resources, and shall verify that all
such resources will work together effectively. Where testing is
required to be conducted by an independent contractor, the derivatives
clearing organization shall engage a contractor that is independent
from both the derivatives clearing organization and any outside service
provider used to design, develop, or maintain the resources being
tested.
(e) Testing--(1) General. A derivatives clearing organization shall
conduct regular, periodic, and objective testing and review of:
(i) Its automated systems to ensure that they are reliable, secure,
and have adequate scalable capacity; and
(ii) Its business continuity and disaster recovery capabilities,
using testing protocols adequate to ensure that the derivatives
clearing organization's backup resources are sufficient to meet the
requirements of paragraph (c) of this section.
(2) Vulnerability testing. A derivatives clearing organization
shall conduct vulnerability testing of a scope sufficient to satisfy
the requirements set forth in paragraph (e)(8) of this section.
(i) A derivatives clearing organization shall conduct such
vulnerability testing at a frequency determined by an appropriate risk
analysis, but no less frequently than quarterly.
(ii) Such vulnerability testing shall include automated
vulnerability scanning, which shall follow generally accepted best
practices.
(iii) A derivatives clearing organization shall conduct
vulnerability testing by engaging independent contractors or by using
employees of the derivatives clearing organization who are not
responsible for development or operation of the systems or capabilities
being tested.
(3) External penetration testing. A derivatives clearing
organization shall conduct external penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (e)(8) of
this section.
(i) A derivatives clearing organization shall conduct such external
penetration testing at a frequency determined by an appropriate risk
analysis, but no less frequently than annually.
(ii) A derivatives clearing organization shall engage independent
contractors to conduct the required annual external penetration test. A
derivatives clearing organization may conduct other external
penetration testing by using employees of the derivatives clearing
organization
[[Page 64338]]
who are not responsible for development or operation of the systems or
capabilities being tested.
(4) Internal penetration testing. A derivatives clearing
organization shall conduct internal penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (e)(8) of
this section.
(i) A derivatives clearing organization shall conduct such internal
penetration testing at a frequency determined by an appropriate risk
analysis, but no less frequently than annually.
(ii) A derivatives clearing organization shall conduct internal
penetration testing by engaging independent contractors, or by using
employees of the derivatives clearing organization who are not
responsible for development or operation of the systems or capabilities
being tested.
(5) Controls testing. A derivatives clearing organization shall
conduct controls testing of a scope sufficient to satisfy the
requirements set forth in paragraph (e)(8) of this section.
(i) A derivatives clearing organization shall conduct controls
testing, which includes testing of each control included in its program
of risk analysis and oversight, at a frequency determined by an
appropriate risk analysis, but shall test and assess key controls no
less frequently than every three years. A derivatives clearing
organization may conduct such testing on a rolling basis over the
course of the required period.
(ii) A derivatives clearing organization shall engage independent
contractors to test and assess the key controls included in the
derivatives clearing organization's program of risk analysis and
oversight no less frequently than every three years. A derivatives
clearing organization may conduct any other controls testing required
by this section by using independent contractors or employees of the
derivatives clearing organization who are not responsible for
development or operation of the systems or capabilities being tested.
(6) Security incident response plan testing. A derivatives clearing
organization shall conduct security incident response plan testing
sufficient to satisfy the requirements set forth in paragraph (e)(8) of
this section.
(i) The derivatives clearing organization shall conduct such
security incident response plan testing at a frequency determined by an
appropriate risk analysis, but no less frequently than annually.
(ii) The derivatives clearing organization's security incident
response plan shall include, without limitation, the derivatives
clearing organization's definition and classification of security
incidents, its policies and procedures for reporting security incidents
and for internal and external communication and information sharing
regarding security incidents, and the hand-off and escalation points in
its security incident response process.
(iii) The derivatives clearing organization may coordinate its
security incident response plan testing with other testing required by
this section or with testing of its other business continuity-disaster
recovery and crisis management plans.
(iv) The derivatives clearing organization may conduct security
incident response plan testing by engaging independent contractors or
by using employees of the derivatives clearing organization.
(7) Enterprise technology risk assessment. A derivatives clearing
organization shall conduct enterprise technology risk assessments of a
scope sufficient to satisfy the requirements set forth in paragraph
(e)(8) of this section.
(i) A derivatives clearing organization shall conduct an enterprise
technology risk assessment at a frequency determined by an appropriate
risk analysis, but no less frequently than annually. A derivatives
clearing organization that has conducted an enterprise technology risk
assessment that complies with this section may conduct subsequent
assessments by updating the previous assessment.
(ii) A derivatives clearing organization may conduct enterprise
technology risk assessments by using independent contractors or
employees of the derivatives clearing organization who are not
responsible for development or operation of the systems or capabilities
being assessed.
(8) Scope of testing and assessment. The scope of testing and
assessment required by this section shall be broad enough to include
the testing of automated systems and controls that a derivatives
clearing organization's required program of risk analysis and oversight
and its current cybersecurity threat analysis indicate is necessary to
identify risks and vulnerabilities that could enable an intruder or
unauthorized user or insider to:
(i) Interfere with the derivatives clearing organization's
operations or with fulfillment of its statutory and regulatory
responsibilities;
(ii) Impair or degrade the reliability, security, or capacity of
the derivatives clearing organization's automated systems;
(iii) Add to, delete, modify, exfiltrate, or compromise the
integrity of any data related to the derivatives clearing
organization's regulated activities; or
(iv) Undertake any other unauthorized action affecting the
derivatives clearing organization's regulated activities or the
hardware or software used in connection with those activities.
(9) Internal reporting and review. Both the senior management and
the board of directors of the derivatives clearing organization shall
receive and review reports setting forth the results of the testing and
assessment required by this section. The derivatives clearing
organization shall establish and follow appropriate procedures for the
remediation of issues identified through such review, as provided in
paragraph (e)(10) of this section, and for evaluation of the
effectiveness of testing and assessment protocols.
(10) Remediation. A derivatives clearing organization shall
identify and document the vulnerabilities and deficiencies in its
systems revealed by the testing and assessment required by this
section. The derivatives clearing organization shall conduct and
document an appropriate analysis of the risks presented by each
vulnerability or deficiency to determine and document whether to
remediate the vulnerability or deficiency or accept the associated
risk. When a derivatives clearing organization determines to remediate
a vulnerability or deficiency, it must remediate in a timely manner
given the nature and magnitude of the associated risk.
(f) Recordkeeping. A derivatives clearing organization shall
maintain, and provide to staff of the Division of Clearing and Risk, or
any successor division, promptly upon request, pursuant to Sec. 1.31
of this chapter:
(1) Current copies of the derivatives clearing organization's
business continuity and disaster recovery plan and other emergency
procedures. Such plan and procedures shall be updated at a frequency
determined by an appropriate risk analysis, but no less frequently than
annually;
(2) All assessments of the derivatives clearing organization's
operational risks or system safeguards-related controls;
(3) All reports concerning testing and assessment required by this
section, whether conducted by independent contractors or by employees
of the derivatives clearing organization; and
(4) All other documents requested by staff of the Division of
Clearing and Risk, or any successor division, in connection with
Commission oversight of system safeguards pursuant to the Act or
Commission regulations, or in connection with Commission maintenance of
a current profile of the
[[Page 64339]]
derivatives clearing organization's automated systems.
(5) Nothing in paragraph (f) of this section shall be interpreted
as reducing or limiting in any way a derivatives clearing
organization's obligation to comply with Sec. 1.31 of this chapter.
(g) Notice of exceptional events. A derivatives clearing
organization shall notify staff of the Division of Clearing and Risk,
or any successor division, promptly of:
(1) Any hardware or software malfunction, security incident, or
targeted threat that materially impairs, or creates a significant
likelihood of material impairment, of automated system operation,
reliability, security, or capacity; or
(2) Any activation of the derivatives clearing organization's
business continuity and disaster recovery plan.
(h) Notice of planned changes. A derivatives clearing organization
shall provide staff of the Division of Clearing and Risk, or any
successor division, timely advance notice of all material:
(1) Planned changes to the derivatives clearing organization's
automated systems that may impact the reliability, security, or
capacity of such systems; and
(2) Planned changes to the derivatives clearing organization's
program of risk analysis and oversight.
0
3. In Sec. 39.34, revise paragraphs (a), (b)(3), and (c) to read as
follows:
Sec. 39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) Notwithstanding Sec. 39.18(c)(2), the business continuity and
disaster recovery plan described in Sec. 39.18(c)(1) for each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall have the objective of enabling,
and the physical, technological, and personnel resources described in
Sec. 39.18(c)(1) shall be sufficient to enable, the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization to recover its operations and resume daily
processing, clearing, and settlement no later than two hours following
the disruption, for any disruption including a wide-scale disruption.
(b) * * *
(3) The provisions of Sec. 39.18(d) shall apply to these resource
requirements.
(c) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization must conduct regular,
periodic tests of its business continuity and disaster recovery plans
and resources and its capacity to achieve the required recovery time
objective in the event of a wide-scale disruption. The provisions of
Sec. 39.18(e) shall apply to such testing.
* * * * *
Issued in Washington, DC, on September 9, 2016, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to System Safeguards Testing Requirements for Derivatives
Clearing Organizations--Commission Voting Summary, Chairman's
Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
I strongly support the two rules the Commission has finalized
today.
The risk of cyberattack probably represents the single greatest
threat to the stability and integrity of our markets today.
Instances of cyberattacks are all too familiar both inside and
outside the financial sector. Today, they often are motivated not
just by those with a desire to profit, but by those with a desire
deliberately to disrupt or destabilize orderly operations.
That is why these system safeguard rules are so important. The
rules we have finalized today will apply to the core infrastructure
in our markets--the exchanges, clearinghouses, trading platforms,
and trade repositories. And they will ensure that those private
companies are regularly evaluating cyber risks and testing their
cybersecurity and operational risk defenses. While our rules already
require this generally, the measures we approved today add greater
definition--not by being overly prescriptive, but by setting some
principles-based standards, and requiring specific types of testing,
all rooted in industry best practices.
I've said many times that as regulators, we must not just look
backwards to address the causes of past failures or crises. We also
must look ahead--ahead to the new opportunities and challenges
facing our markets. Financial markets constantly evolve, and we must
ensure our regulatory framework is adapting to these changes.
These new rules are one good example of how we are looking ahead
and addressing these new challenges. They will serve as a strong and
important complement to the many other steps being taken by
regulators and market participants to address cybersecurity. For
example, government agencies and market participants are already
working together to share information about potential threats and
risks--and learn from one another.
I want to thank all those who provided feedback on the proposed
rules the Commission approved last December. We received a number of
thoughtful comments from market participants, most of which
expressed broad support for the proposals. Commenters also
highlighted some areas of concern, and we made adjustments based on
that feedback. For example, we have reduced the frequency of
controls testing and narrowed the instances where independent
contractor testing is required. We have also clarified definitions
of key terms, and made clear that the scope of required testing will
be based on appropriate risk and threat analysis.
I also thank Commission staff for their hard work on these
measures, particularly our staff in the Division of Market Oversight
and Division of Clearing and Risk, as well as the support that is
always provided by staff in the Office of General Counsel, the
Office of Chief Economist and other staff who comment on the rules.
I also thank my fellow Commissioners Bowen and Giancarlo for their
support of and suggestions regarding these final rules.
Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen
I will be voting yes on both systems safeguards rules. There is
not much more to say than what I said when these rules were proposed
on December 10, 2015.\1\ Cybersecurity is a top concern for American
companies, especially financial firms. These rules are a good step
forward in addressing these concerns.
---------------------------------------------------------------------------
\1\ Concurring Statement of Commissioner Sharon Y. Bowen
Regarding Notice of Proposed Rulemaking on System Safeguards Testing
Requirements (Dec. 10, 2015), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/bowenstatement121615b.
---------------------------------------------------------------------------
As I noted when they were proposed, there are many aspects of
these proposals that I like:
First, they set up a comprehensive testing regime by: (a) defining
the types of cybersecurity testing essential to fulfilling system
safeguards testing obligations, including vulnerability testing,
penetration testing, controls testing, security incident response
plan testing, and enterprise technology risk assessment; (b)
requiring internal reporting and review of testing results; and (c)
mandating remediation of vulnerabilities and deficiencies. Further,
for certain significant entities, based on trading volume, it
requires heightened measures such as minimum frequency requirements
for conducting certain testing, and specific requirements for the
use of independent contractors.
Second, there is a focus on governance--requiring, for instance,
that firms' Board of Directors receive and review all reports
setting forth the results of all testing. And third, these
rulemakings are largely based on well-regarded, accepted best
practices for cybersecurity, including The National Institute of
Standards and Technology
[[Page 64340]]
Framework for Improving Critical Infrastructure Cybersecurity
(``NIST Framework'').\2\
---------------------------------------------------------------------------
\2\ Id. See also NIST Framework, Subcategory PR.IP-10, at 28,
and Category DE.DP, at 31, available at http://www.nist.gov/cyberframework/upload/cybersecurity-framework-021214.pdf.
I was also an early proponent of including all registered
entities, including SEFs, in this rule. I am glad to see them
included, and look forward to the staff roundtable to discuss how to
apply heightened standards to the significant SEFs. Thank you and I
look forward to the staff's presentation.
Appendix 4--Statement of Commissioner J. Christopher Giancarlo
Good regulation should be balanced. It should have a positive
impact on the marketplace while mitigating costs to the extent
possible. I believe today's system safeguards final rule for
derivatives clearing organizations (DCOs) generally achieves such
balance although I have concerns about the cost impact on smaller
DCOs.
As I have said, cyber and system security is one of the most
important issues facing markets today in terms of integrity and
financial stability.\1\ Given its importance, it is right that the
Commission implements rules requiring DCOs and other registrants to
conduct regular testing of their systems. I am pleased that the
final rule requires DCOs to follow industry adopted standards and
best practices. I believe this approach recognizes the rapid
evolution of cyber threats and will allow DCOs the flexibility to
continually update their cyber defenses in response to these
threats. I also recognize that the final rule addresses my concern
that being hacked by itself cannot be considered a rule violation
subject to enforcement. The final rule clarifies that the Commission
it is not seeking to hold DCOs strictly liable for being attacked.
---------------------------------------------------------------------------
\1\ System Safeguards Testing Requirements, 80 FR 80140, 80190-
191 (Dec. 23, 2015).
---------------------------------------------------------------------------
While the final rule generally takes the right approach, I am
concerned about its cost on smaller DCOs. I have expressed my
concern about the cost of regulation on smaller market participants
on numerous past occasions.\2\ One commenter to this rulemaking
noted that its costs will likely increase two to three times if
these rules are finalized as proposed.\3\ The independent contractor
and employee testing requirement is especially costly for these
small DCOs. While the parallel designated contract market (DCM)
system safeguards rulemaking addresses this cost concern through the
``covered-DCM'' concept, the DCO rule does not. Although the DCO
rule does not have such a concept, I understand from our Division of
Clearing and Risk that they are willing to discuss the concerns of
smaller DCOs. I encourage those DCOs to raise their concerns with
the Division and encourage the Division to act with appropriate
practicality.
---------------------------------------------------------------------------
\2\ See e.g., Regulation Automated Trading, 80 FR 78824, 78946
(Dec. 17, 2015); Guest Lecture of Commissioner J. Christopher
Giancarlo, Harvard Law School, Fidelity Guest Lecture Series on
International Finance, Dec. 1, 2015.
\3\ Minneapolis Grain Exchange, Inc. Comment Letter at 13, Feb.
22, 2016.
---------------------------------------------------------------------------
I note approvingly that the Commission has alleviated some
burdens from the proposed rulemaking such as increasing the
frequency of key controls testing from two years to three years,
removing the requirement for independent contractors to conduct
vulnerability testing and removing the explicit requirement for
authenticated scanning, among other requirements.
I support the final DCO system safeguards rule despite concerns
about its costs. Although I would have preferred that the rule take
a less one-size-fits-all approach, I am a firm supporter of
effective cyber and system security policies and procedures given
the serious threat that cyber belligerents pose. I commend staff for
their hard work and generally practical approach to system
safeguards for DCOs. I also appreciate that they responded to many
comments in an effort to reduce some of the burdens of the final
rule. I therefore vote to adopt this rule.
[FR Doc. 2016-22413 Filed 9-16-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: September 19, 2016