[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Proposed Rules]
[Pages 80114-80138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32144]



[[Page 80113]]

Vol. 80

Wednesday,

No. 246

December 23, 2015

Part IV





Commodity Futures Trading Commission





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17 CFR Part 39





System Safeguards Testing Requirements for Derivatives Clearing 
Organizations; Proposed Rule

  Federal Register / Vol. 80 , No. 246 / Wednesday, December 23, 2015 / 
Proposed Rules  

[[Page 80114]]


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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: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing enhanced requirements for a derivatives clearing 
organization's testing 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: Comments must be received by February 22, 2016.

ADDRESSES: You may submit comments, identified by RIN 3038-AE29, by any 
of the following methods:
     CFTC Web site: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method. All comments 
must be submitted in English, or if not, accompanied by an English 
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that may be exempt from disclosure under the Freedom of Information 
Act, a petition for confidential treatment of the exempt information 
may be submitted under Sec.  145.9 of the Commission's regulations (17 
CFR 145.9).
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; M. Laura Astrada, Associate Director, 
202-418-7622, [email protected]; or Eileen Chotiner, Senior Compliance 
Analyst, (202) 418-5467, [email protected], in each case, at the 
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]; or 
Joseph Opron, Special Counsel, (312) 596-0653, [email protected], in each 
case, at the 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 derivatives clearing organization 
(``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 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'').
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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.
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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. 
As discussed below, the Commission is proposing clarifications and 
enhanced requirements for a DCO's testing of its system safeguards, as 
well as additional amendments to reorder and renumber certain 
paragraphs and make other minor changes to improve the clarity of the 
rule text. The Commission is also proposing corresponding technical 
corrections to Sec.  39.34.

B. Escalating and Evolving Cybersecurity Threats

    Recent studies have identified a consistent, growing cybersecurity 
threat to the financial sector. A survey of 46 global securities 
exchanges conducted by the International Organization of Securities 
Commissions (``IOSCO'') and the World Federation of Exchanges (``WFE'') 
found that as of July 2013, over half of exchanges worldwide had 
experienced a cyber attack during the previous year.\4\ Indeed, 
cybersecurity now ranks as the number one concern for nearly half of 
financial institutions in the United States.\5\ Further, the sheer 
volume of cyber attacks today is remarkable. The annual Pricewaterhouse 
Coopers Global State of Information Security Survey (``PWC Survey'') 
for 2015, which included 9,700 participants, found that the total 
number of security incidents detected in 2014 increased by 48% over 
2013, for a total of 42.8 million incoming attacks, the equivalent of 
more than 117,000 attacks per day, every day.\6\ As the PWC Survey 
pointed out, these numbers do not include undetected attacks. Verizon's 
2015 Data Breach Investigations Report noted that during

[[Page 80115]]

2014, the financial services sector experienced an average of 350 
malware attacks per week.\7\
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    \4\ OICV-IOSCO and WFE, Cyber-crime, securities markets and 
systemic risk, Staff Working Paper (SWP2/2013), July 16, 2013 
(``IOSCO-WFE Staff Report''), p. 3, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD460.pdf.
    \5\ Depository Trust & Clearing Corporation, Systemic Risk 
Barometer Study, Q1 2015, p. 1, available at: http://dtcc.com/~/
media/Files/pdfs/Systemic-Risk-Report-2015-Q1.pdf.
    \6\ Pricewaterhouse Coopers, Managing Cyber Risks in an 
Interconnected World: Key Findings from the Global State of 
Information Security Survey 2015, Sept. 30, 2014, p. 7, available 
at: www.pwc.com/gsiss2015.
    \7\ Verizon, 2015 Data Breach Investigations Report, p. 21, 
available at: http://www.verizonenterprise.com/DBIR/2015/.
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    Concerned about these developments, in March 2015, Commission staff 
held a Roundtable on Cybersecurity and System Safeguards Testing 
(``CFTC Roundtable'') to, among other things, discuss the issue and 
identify critical areas of concern.\8\ Similarly, a June 2015 Market 
Risk Advisory Committee (``MRAC'') meeting focused on cybersecurity. 
Commissioner Sharon Bowen, the sponsor of MRAC, noted that cyber 
attacks on U.S. businesses have been ``alarmingly increasing'' and 
stated that ``it's critical that the financial industry have strong 
protections in place.'' \9\
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    \8\ See generally CFTC Staff Roundtable on Cybersecurity and 
System Safeguards Testing, Transcript, Mar. 18, 2015 (``CFTC 
Roundtable''), pp. 11-91, available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/transcript031815.pdf.
    \9\ See Market Risk Advisory Committee Meeting, Transcript, June 
2, 2015, p. 6, available at: http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/mrac_060215_transcript.pdf.
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    Experts have identified a number of important topics surrounding 
cybersecurity that financial institutions should take into 
consideration. First, the financial sector is facing increasing numbers 
of more dangerous cyber adversaries, with expanding and worsening 
motivations and goals.\10\ Until recently, most cyber attacks on 
financial sector institutions were conducted by criminals whose aim was 
monetary theft or fraud.\11\ While such attacks continue, recently 
there has been a rise in attacks by politically motivated 
``hacktivists'' or terrorists, and by state-sponsored intruders, aimed 
at disruption of their targets' operations; theft of data or 
intellectual property; extortion, cyber espionage, corruption or 
destruction of data; and degradation or destruction of automated 
systems.\12\ IOSCO and the WFE note that attacks on securities 
exchanges now tend to be disruptive in nature, which ``suggests a shift 
in motive for cyber-crime in securities markets, away from financial 
gain and towards more destabilizing aims.'' \13\
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    \10\ CFTC Roundtable, supra note 8, at 22-24.
    \11\ Id. at 18-24, 42-43.
    \12\ Id. at 12, 14-15, 17-24, 42-44, 47.
    \13\ IOSCO-WFE Staff Report, supra note 4, at 3-4.
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    Second, financial institutions face increasing cyber capabilities 
from both non-state actors and state-sponsored intruders. For example, 
there has been an increase in sophistication on the part of most actors 
in the cyber arena, both in terms of technical capability and the 
capacity to organize and carry out attacks.\14\
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    \14\ Statement of Mr. Michael Daniel, White House Cybersecurity 
Coordinator, CFTC Roundtable, supra note 8, at 21-23.
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    Third, the financial sector is experiencing an increase in the 
duration of cyber attacks.\15\ While attacks aimed at monetary theft or 
fraud tend to manifest themselves quickly, today's more sophisticated 
attacks may involve cyber adversaries having a presence inside a 
target's automated systems for an extended period of time, while 
avoiding detection.\16\
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    \15\ Id. at 77, 82-83.
    \16\ IOSCO and the WFE noted in 2013: ``The rise of a relatively 
new class of cyber-attack is especially troubling. This new class is 
referred to as an `Advanced Persistent Threat' (APT). . . . [APTs] 
are usually directed at business and political targets for political 
ends. APTs involve stealth to persistently infiltrate a system over 
a long period of time, without the system displaying any unusual 
symptoms.'' IOSCO-WFE Staff Report, supra note 4, at 3.
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    Fourth, financial institutions face a broadening cyber threat 
field. They must consider cyber vulnerabilities not only with respect 
to desktop computers and their own automated systems, but also with 
respect to mobile devices and data in the cloud.\17\ Further, adequate 
risk analysis must address not just the vulnerabilities of the entity's 
automated systems, but also the human vulnerabilities posed by social 
engineering \18\ or disgruntled employees.\19\ Notably, today's cyber 
threat environment also includes automated systems that are not 
directly internet-facing.\20\ For example, internet-facing corporate 
information technology and non-internet-facing operations technology 
can be, and often are, connected for maintenance purposes or in 
error.\21\ Non-internet-facing systems are also vulnerable to insertion 
of malware-infected removable media, phishing attacks, and other social 
engineering techniques, and to supply-chain risk involving both 
hardware and software.\22\
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    \17\ CFTC Roundtable, supra note 8, at 22.
    \18\ ``In a social engineering attack, an attacker uses human 
interaction (social skills) to obtain or compromise information 
about an organization or its computer systems. An attacker may seem 
unassuming and respectable, possibly claiming to be a new employee, 
repairperson, or researcher and even offering credentials to support 
that identity. However, by asking questions, he or she may be able 
to piece together enough information to infiltrate an organization's 
network. If an attacker is not able to gather enough information 
from one source, he or she may contact another source within the 
same organization and rely on the information from the first source 
to add to his or her credibility.'' See U.S. Computer Emergency 
Readiness Team, Dep't of Homeland Sec., Security Tip (ST04-014), 
Avoiding Social Engineering and Phishing Attacks, available at: 
https://www.us-cert.gov/ncas/tips/ST04-014 (last visited Sept. 14, 
2015).
    \19\ CFTC Roundtable, supra note 8, at 14, 79-80.
    \20\ Id. at 60-70.
    \21\ Id. at 73.
    \22\ Id. at 62-66, 77-79.
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    Finally, financial institutions cannot achieve cyber resilience by 
addressing threats to themselves alone: They also face threats due to 
the increasing interconnectedness of financial services firms.\23\ As 
such, a financial entity's risk assessments need to consider 
cybersecurity across the breadth of the financial sector, from 
exchanges and clearing organizations to counterparties and customers, 
technology providers, other third party service providers, and the 
businesses and products in the entity's supply chain.\24\
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    \23\ Id. at 25-26.
    \24\ Id. at 48-57.
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C. Need for Cybersecurity Testing

    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.
    An entity's testing should be informed by how its controls and 
countermeasures stack up against the techniques, tactics, and 
procedures used by its potential attackers.\25\ Adequate testing needs 
to include periodic risk assessments made in light of changing business 
conditions, the changing threat landscape, and changes to automated 
systems. It also needs to include recurring tests of controls and 
automated system components to verify their effectiveness and 
operability, as well as continuous monitoring and scanning of system 
operation and vulnerabilities. Testing should include a focus on the 
entity's ability to detect, contain, respond to, and recover from cyber 
attacks within its systems, not just on its defenses designed to 
prevent intrusions.\26\ This should include detection, containment, and 
recovery from compromise of data integrity--perhaps the greatest threat 
with respect to financial sector data--in addition to addressing 
compromise of data availability or confidentiality, which tend to be 
the main focus of many best

[[Page 80116]]

practices.\27\ Finally, both internal testing by the entity itself and 
independent testing by third party service providers are essential 
components of an adequate testing regime.\28\
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    \25\ Id. at 45-46.
    \26\ Id. at 80-84.
    \27\ Id. at 15-16, 65, 71-74, 82-83.
    \28\ Id. at 89-90, 101-108, 167-168, 172-173, 244-253.
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    Cybersecurity testing is a well-established best practice generally 
and for financial sector entities. The Federal Information Security 
Management Act (``FISMA''), which is a source of cybersecurity best 
practices and also establishes legal requirements for federal 
government agencies, calls for ``periodic testing and evaluation of the 
effectiveness of information security policies, procedures, and 
practices, to be performed with a frequency depending on risk, but no 
less than annually. . . .'' \29\ 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.\30\ 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.\31\ FINRA notes that one common deficiency 
with respect to cybersecurity is ``failure to conduct adequate periodic 
cybersecurity assessments.'' \32\ The Council on Cybersecurity's 
Critical Security Controls for Effective Cyber Defense (the 
``Controls'') call for entities to ``[c]ontinuously acquire, assess, 
and take action on new information in order to identify 
vulnerabilities, remediate, and minimize the window of opportunity for 
attackers.'' \33\ The Controls further state that ``[o]rganizations 
that do not scan for vulnerabilities and proactively address discovered 
flaws face a significant likelihood of having their computer systems 
compromised.'' \34\ The Controls also call for entities to ``[t]est the 
overall strength of an organization's defenses (the technology, the 
processes, and the people) by simulating the objectives and actions of 
an attacker.'' \35\ The Controls recommend conducting ``regular 
external and internal penetration tests to identify vulnerabilities and 
attack vectors that can be used to exploit enterprise systems 
successfully,'' from both outside and inside the boundaries of the 
organization's network perimeter,\36\ and also call for use of 
vulnerability scanning and penetration testing in concert.\37\
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    \29\ 44 U.S.C. 3544(b)(5).
    \30\ 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.
    \31\ 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.
    \32\ Id. at 8.
    \33\ Council on Cybersecurity, The Critical Security Controls 
for Effective Cyber Defense, v. 5.1 (``Council on Cybersecurity''), 
p. 28, available at: http://www.counciloncybersecurity.org/bcms-media/Files/Download?id=a52977d7-a0e7-462e-a4c0-a3bd01512144.
    \34\ Id.
    \35\ Id. at 102.
    \36\ Id.
    \37\ Id. at 103.
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    The Federal Financial Institutions Examination Council 
(``FFIEC''),\38\ another important source of cybersecurity best 
practices for financial sector entities, summarized the need for 
cybersecurity testing in today's cyber threat environment:
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    \38\ 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.

    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. Security tests are necessary to 
identify control deficiencies. An effective testing plan identifies 
the key controls, then tests those controls at a frequency based on 
the risk that the control is not functioning. Security testing 
should include independent tests conducted by personnel without 
direct responsibility for security administration. Adverse test 
results indicate a control is not functioning and cannot be relied 
upon. Follow-up can include correction of the specific control, as 
well as a search for, and correction of, a root cause. Types of 
tests include audits, security assessments, vulnerability scans, and 
penetration tests.\39\
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    \39\ See FFIEC, E-Banking Booklet: IT Examination Handbook, Aug. 
2003, p. 30, available at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_E-Banking.pdf.

    Some experts further note that cybersecurity testing may become a 
requirement for obtaining cyber insurance. Under such an approach, 
insurance coverage might be conditioned on cybersecurity testing and 
assessment, followed by implementation of appropriate prevention and 
detection procedures.\40\
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    \40\ See PricewaterhouseCoopers, Insurance 2020 and Beyond: 
Reaping the Dividends of Cyber Resilience, 2015, available at: 
http://www.pwc.com/gx/en/insurance/publications/assets/reaping-dividends-cyber-resilience.pdf.
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    Cybersecurity testing is also supported internationally. IOSCO has 
emphasized the importance of testing to ensure effective controls, in 
light of risks posed by the complexity of markets caused by 
technological advances.\41\ According to IOSCO, ``regulatory 
authorities have also recognized the need for [t]rading [v]enues to 
appropriately monitor critical systems and have appropriate control 
mechanisms in place.'' \42\ Similarly, the European Securities and 
Markets Authority (``ESMA'') guidelines for automated trading systems 
call for trading platforms to test trading systems and system updates 
to ensure that systems meet regulatory requirements, that risk 
management controls work as intended, and that the systems can function 
effectively in stressed market conditions.\43\ Further, the Principles 
for Financial Market Infrastructures published by the Bank for 
International Settlements' Committee on Payments and Market 
Infrastructures (``CPMI'') and IOSCO's Technical Committee (together, 
``CPMI-IOSCO'') note that with respect to operational risks, which 
include cyber risk, ``[a financial market infrastructure]'s 
arrangements with participants, operational policies, and operational 
procedures should be periodically, and whenever necessary, tested and 
reviewed, especially after significant changes occur to the system or a 
major incident occurs. . . .'' \44\ The Commission also 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. Finally, the Commission notes that this requirement 
must be satisfied by following, at a

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minimum, generally accepted standards and industry best practices.\45\ 
As further explained below, the proposed rules would clarify existing 
system safeguards requirements by identifying relevant generally 
accepted standards and industry best practices. With few exceptions, 
such as requirements for independent contractors to conduct certain 
testing, the Commission is not changing the regulatory requirement for 
DCOs as it exists today.
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    \41\ IOSCO Consultation Report, Mechanisms for Trading Venues to 
Effectively Manage Electronic Trading Risks and Plans for Business 
Continuity, Apr. 2015, p. 3, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD483.pdf.
    \42\ Id. at 9.
    \43\ ESMA, Guidelines: Systems and controls in an automated 
trading environment for trading platforms, investment firms and 
competent authorities, Feb. 24, 2012, p. 7, available at: http://www.esma.europa.eu/system/files/esma_2012_122_en.pdf.
    \44\ CPMI-IOSCO, Principles for Financial Market 
Infrastructures, Apr. 2012, at 96, available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. See also CPMI, 
Cyber resilience in financial market infrastructures, Nov. 2014, 
available at: http://www.bis.org/cpmi/publ/d122.pdf.
    \45\ For a more detailed discussion of current testing 
requirements for DCOs, please see the System Safeguards Requirements 
for DCOs in section I.A. above and the Consideration of Costs and 
Benefits in section IV.C. below.
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II. Proposed Amendments

A. Enhanced Testing Requirements

    As discussed above, Sec.  39.18 requires a DCO to establish and 
maintain a program of risk analysis and oversight with respect to its 
operations and automated systems. As part of this program, a DCO is 
required 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. DCOs are specifically required, under 
Sec.  39.18(d), to follow ``generally accepted standards and industry 
best practices with respect to the development, operation, reliability, 
security, and capacity of automated systems'' in addressing the 
categories of risk analysis and oversight specified in Sec.  39.18. As 
discussed in the Commission's proposing release for Sec.  39.18, ``DCO 
compliance with generally accepted standards and best practices with 
respect to the development, operation, reliability, security, and 
capacity of automated systems can reduce the frequency and severity of 
automated system security breaches or functional failures, thereby 
augmenting efforts to mitigate systemic risk.'' \46\ This requirement 
was further designed to allow DCOs flexibility in adapting their 
programs to current industry best practices, which the Commission 
recognized would evolve over time. Similarly, the additional testing 
provisions that the Commission is proposing have been constructed to 
set forth certain minimum requirements, with the expectation that DCOs' 
testing may change as accepted standards and industry best practices 
develop over time and are reflected in the DCO's risk analysis.
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    \46\ See Risk Management Requirements for Derivatives Clearing 
Organizations, 76 FR 3698, 3713 (Jan. 20, 2011).
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    Specifically, the Commission is proposing to strengthen the current 
system safeguards regulatory framework by specifying five fundamental 
types of systems testing and assessment that are required under Sec.  
39.18. The Commission is proposing to require that these types of 
testing and assessment be conducted at a frequency determined by an 
appropriate risk analysis, but no less frequently than a proposed 
minimum, which varies based on the particular type of testing or 
assessment. To strengthen the objectivity and reliability of the 
testing, assessment, and information available to the Commission in 
this regard, the Commission is proposing to require that independent 
contractors perform a significant portion of the testing and 
assessment. In developing these requirements, the Commission has relied 
on various industry standards and best practices for assessment of 
information security systems, which are referenced in the following 
discussion. The Commission has not proposed a definition of the term 
``independent contractor.'' Proposed definitions of terms related to 
the proposed testing requirements are discussed in the respective 
section setting forth each proposed testing requirement.
1. Vulnerability Testing
    Identification of cyber and automated system vulnerabilities is a 
critical component of a DCO's ongoing assessment of risks to its 
systems. NIST standards call for organizations to scan for automated 
system vulnerabilities both on a regular and ongoing basis, and when 
new vulnerabilities potentially affecting their systems are identified 
and reported.\47\ NIST adds that organizations should employ 
vulnerability scanning tools and techniques that automate parts of the 
vulnerability management process.\48\ NIST also calls for the 
organization to remediate vulnerabilities identified by vulnerability 
testing, in accordance with its assessments of risk.\49\ Similarly, the 
Controls recommend that organizations ``continuously acquire, assess, 
and take action on new information in order to identify 
vulnerabilities, remediate, and minimize the window of opportunity for 
attackers.'' \50\
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    \47\ NIST Special Publication 800-53, Security and Privacy 
Controls for Federal Information Systems and Organizations, rev. 4 
(``NIST SP 800-53''), Control RA-5, available at: http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.
    \48\ Id.
    \49\ Id.
    \50\ Council on Cybersecurity, supra note 33, at 28.
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    The proposed minimum standards and frequencies for vulnerability 
testing are intended to strengthen a DCO's systems oversight program. 
Accordingly, in Sec.  39.18(a) the Commission is proposing to define 
``vulnerability testing'' as the 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. This definition is consistent with NIST 
standards for such testing.\51\ For purposes of this definition, the 
term ``reconnaissance analysis'' is used to combine various aspects of 
vulnerability testing.\52\ The proposed definition deliberately refers 
broadly to vulnerability testing in order to avoid prescribing use of 
any particular technology or tools, because vulnerability assessments 
may not always be automated, and technology may change.\53\
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    \51\ See NIST SP 800-53, supra note 47, at F-153.
    \52\ See, e.g., NIST Special Publication 800-115, Technical 
Guide to Information Security Testing and Assessment, Sept. 2008 
(``NIST SP 800-115''), p. 24, available at: http://csrc.nist.gov/publications/nistpubs/800-115/SP800-115.pdf (noting that 
``[e]xternal testing often begins with reconnaissance techniques 
that search public registration data, Domain Name System (DNS) 
server information, newsgroup postings, and other publicly available 
information to collect information (e.g., system names, Internet 
Protocol [IP] addresses, operating systems, technical points of 
contact) that may help the assessor to identify vulnerabilities'').
    \53\ See SANS Institute, Penetration Testing: Assessing Your 
Overall Security Before Attackers Do, p. 7, available at: https://www.sans.org/reading-room/whitepapers/analyst/penetration-testing-assessing-security-attackers-34635 (last visited Sept. 30, 2015) 
(noting, ``A wide variety of tools may be used in penetration 
testing. These tools are of two main types; reconnaissance or 
vulnerability testing tools and exploitation tools. While 
penetration testing is more directly tied to the exploitation tools, 
the initial scanning and reconnaissance is often done using less 
intrusive tools.'').
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    Proposed Sec.  39.18(e)(2) would also require that vulnerability 
testing include automated vulnerability scanning, as well as an 
analysis of the test results to identify and prioritize all identified 
vulnerabilities that require remediation.\54\ Moreover, the Commission 
recognizes that automated scans may be authenticated (i.e., conducted 
using usernames or passwords) or unauthenticated (i.e., conducted 
without using usernames or

[[Page 80118]]

passwords). However, the Commission proposes requiring that, where 
indicated by appropriate risk analysis, a DCO conduct such scanning on 
an authenticated basis.\55\ Where scanning is conducted on an 
unauthenticated basis, a DCO would be required to implement effective 
compensating controls.\56\
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    \54\ See Security Standards Council, Payment Card Industry Data 
Security Standards, Apr. 2015, v. 3.1 (``PCI-DSS''), p. 94, 
available at: https://www.pcisecuritystandards.org/documents/PCI_DSS_v3-1.pdf (defining a vulnerability scan as ``a combination 
of automated or manual tools, techniques, and/or methods run against 
external and internal network devices and servers, designed to 
expose potential vulnerabilities that could be found and exploited 
by malicious individuals''). See also NIST SP 800-115, supra note 
52, at 2-2 (noting that testing techniques that include 
vulnerability scanning ``can identify systems, ports, services, and 
potential vulnerabilities, and may be performed manually but are 
generally performed using automated tools'').
    \55\ See Securities Standards Council, The PCI Monitor: Weekly 
news, updates and insights from PCI SSC, June 25, 2014, available 
at: http://training.pcisecuritystandards.org/the-pci-monitor-weekly-news-updates-and-insights-from-pci-ssc2?ecid=ACsprvuuirRbrU3vDlk76s_ngGKJKEYlvaBJzvvUMldZv4KKh6V1guIKOR5VLTNfAqPQ_Gmox3zO&utm_campaign=Monitor&utm_source=hs_email&utm_medium=email&utm_content=13292865&_hsenc=p2ANqtz-_LIkkHURyUmyq1p2OxB39R5nOpRh1XHE_jW6wCC6EEUAow15E7AuExcIGwdYxyh_6YNxVvKorcurk6r90E3d7dG71fbw&_hsmi=13292865#web.
    \56\ See PCI-DSS, supra note 54, app. B at 112 (``Compensating 
controls may be considered . . . when an entity cannot meet a 
requirement explicitly as stated, due to legitimate technical or 
documented business constraints, but has sufficiently mitigated the 
risk associated with the requirement through implementation of 
other, or compensating, controls.'').
---------------------------------------------------------------------------

    Furthermore, the Commission is proposing to require DCOs to conduct 
vulnerability testing at a frequency determined by an appropriate risk 
analysis, but no less frequently than quarterly.\57\ The Commission 
notes that while ``[t]he frequency of testing should be determined by 
the institution's risk assessment,'' \58\ best practices call for risk 
assessments to include consideration of a number of important factors, 
including, for example, the frequency and extent of changes in the 
organization's automated systems and operating environment; the 
potential impact if risks revealed by testing are not addressed 
appropriately; the degree to which the relevant threat environment or 
potential attacker profiles and techniques are changing; and the 
results of other testing.\59\ Frequency appropriate to risk analysis 
can also vary depending on the type of monitoring involved; for 
example, with whether automated monitoring or procedural testing is 
being conducted.\60\ Nonetheless, the Commission notes that the PCI-DSS 
standards provide that entities should run internal and external 
network vulnerability scans ``at least quarterly,'' as well as after 
any significant network changes, new system component installations, 
firewall modifications, or product upgrades.\61\ Because best practices 
call for vulnerability testing at a frequency determined by an 
appropriate risk analysis, and call for such testing to be conducted no 
less than quarterly, this proposed rule does not impose new 
requirements on DCOs. Rather, it is designed to give additional clarity 
to DCOs concerning what is currently required under existing 
regulations. In light of these best practices and the current level of 
cyber threat to the financial sector discussed above, the Commission 
believes that this proposed rule is appropriate in today's 
cybersecurity environment. For the same reasons, and because the 
Commission understands that DCOs currently conduct vulnerability 
testing on at least a quarterly basis and in many cases more 
frequently, the Commission also believes that this minimum frequency 
requirement for vulnerability testing will impose only de minimis 
additional costs, if any, on DCOs.
---------------------------------------------------------------------------

    \57\ See FFIEC, Information Security Booklet, IT Examination 
Handbook, July 2006 (``FFIEC Handbook''), p. 82, available at: 
http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_InformationSecurity.pdf (noting that ``firewall 
policies and other policies addressing access control between the 
financial institution's network and other networks should be audited 
and verified at least quarterly'').
    \58\ Id.
    \59\ 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; see also FFIEC Handbook, supra note 57, at 82.
    \60\ Id.
    \61\ See Requirement 11.2, PCI-DSS, supra note 54, at 94.
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    In addition, the proposed rule would require DCOs to engage 
independent contractors to conduct two of the required quarterly 
vulnerability tests each year, while permitting DCOs to conduct other 
vulnerability testing using employees who are not responsible for 
development or operation of the systems or capabilities being tested. 
The Commission believes that important benefits are provided when a 
testing program includes both testing by independent contractors and 
testing by entity employees not responsible for building or operating 
the system being tested. While testing needs to be performed 
internally, it also needs to be conducted from the viewpoint of an 
outsider, particularly where testing against the possible tactics or 
techniques of a particular threat actor is concerned.\62\ For example, 
entity employees can use viewpoints that the outside world would not 
have, based on intimate knowledge of the entity.\63\ Conversely, 
independent contractors provide an outsider's perspective, and may 
search for vulnerabilities in a system that entity employees may not 
have contemplated during the design or operation of the system 
involved.\64\
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    \62\ See generally CFTC Roundtable, supra note 8, at 89-90.
    \63\ Id. at 178.
    \64\ Id. at 172-173.
---------------------------------------------------------------------------

    The Commission also notes that best practices support having 
testing conducted by both independent contractors and entity employees. 
Regarding the benefits provided by independent contractor testing, NIST 
notes that engaging third parties (e.g., auditors, contractor support 
staff) to conduct the assessment offers an independent view and 
approach that internal assessors may not be able to provide. 
Organizations may also use third parties to provide specific subject 
matter expertise that is not available internally.\65\ FFIEC states 
that testing by independent contractors provides credibility to test 
results.\66\ Acknowledging the use of entity employees to conduct 
testing, FFIEC calls for such tests to be performed ``by individuals 
who are also independent of the design, installation, maintenance, and 
operation of the tested system.'' \67\ Similarly, with respect to 
system safeguards testing by internal auditors, FFIEC further states 
that the auditors should have both independence and authority from the 
Board of Directors to access all records and staff necessary for their 
audits, and that auditors should not participate in activities that may 
compromise or appear to compromise their independence.\68\ Further, the 
data security standards of the Payment Card Industry Security Standards 
Council call for conducting both internal and external vulnerability 
scans, with external scans performed by an approved vendor.\69\
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    \65\ NIST SP 800-115, supra note 52, 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.
    \66\ FFIEC Handbook, supra note 57, at 81.
    \67\ Id.
    \68\ FFIEC, Audit Booklet: IT Examination Handbook, Apr. 2012, 
p.6, available at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_Audit.pdf.
    \69\ See Requirement 11, PCI-DSS, supra note 54, at 94-96.
---------------------------------------------------------------------------

    Accordingly, following consideration of the recommendations set 
forth in the standards mentioned above, the Commission believes that 
requiring two of the four tests to be conducted by independent 
contractors is a balanced approach. Other vulnerability tests may be 
performed by employees of the DCO who are not responsible for 
development or operation of the systems or capabilities being tested. 
In light of the best practices and the current level of cyber threat to 
the financial sector discussed above, the Commission believes that the 
proposed rule provisions regarding vulnerability testing by independent 
contractors are

[[Page 80119]]

appropriate in today's cybersecurity environment.
2. Penetration Testing
    Though complementary to vulnerability testing, penetration testing 
differs from vulnerability testing in that its purpose is to identify 
ways that the vulnerabilities identified above could be exploited.\70\ 
In other words, penetration testing attempts to exploit cyber and 
automated system vulnerabilities, and subjects the system to real-world 
attacks by testing personnel in order to identify both the extent to 
which an attacker could compromise the system before the organization 
detects and counters the attack, and the effectiveness of the 
organization's response mechanisms.\71\
---------------------------------------------------------------------------

    \70\ See Security Standards Council, PCI-DSS Information 
Supplement: Penetration Testing Guidance, Mar. 2015 (``PCI-DSS 
Penetration Testing''), p. 3, available at: https://www.pcisecuritystandards.org/documents/Penetration_Testing_Guidance_March_2015.pdf.
    \71\ See FFIEC Handbook, supra note 57, at 81.
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    NIST defines penetration testing as ``[a] test methodology in which 
assessors, typically working under specific constraints, attempt to 
circumvent or defeat the security features of an information system.'' 
\72\ As noted in the FINRA Report, ``[a]n advanced persistent attack 
may involve an outsider gaining a progressively greater foothold in a 
firm's environment, effectively becoming an insider in the process. For 
this reason, it is important to perform penetration testing against 
both external and internal interfaces and systems.'' \73\ As further 
explained, external security testing ``is conducted from outside the 
organization's security perimeter[, which] offers the ability to view 
the environment's security posture as it appears outside the security 
perimeter--usually as seen from the Internet--with the goal of 
revealing vulnerabilities that could be exploited by an external 
attacker.'' \74\ Internal penetration testing, on the other hand, is 
conducted ``from the internal network and [assessors] assume the 
identity of a trusted insider or an attacker who has penetrated the 
perimeter defenses.'' \75\ Internal penetration testing can therefore 
reveal vulnerabilities that could be exploited, and demonstrates the 
potential damage this type of attacker could cause.\76\
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    \72\ NIST SP 800-53, supra note 47, app. B at B-16.
    \73\ FINRA Report, supra note 31, at 22.
    \74\ NIST SP 800-115, supra note 52, at 2-4.
    \75\ Id. at 2-5. See also, e.g., SANS, Penetration Testing in 
the Financial Services Industry, 2010, p. 17, available at: https://www.sans.org/reading-room/whitepapers/testing/penetration-testing-financial-services-industry-33314 (``Penetration testing is 
essential given the context of high operational risk in the 
financial services industry.'').
    \76\ See NIST SP 800-115, supra note 52, at 2-5.
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    In addition, generally accepted standards and industry best 
practices support annual penetration testing. For example, NIST calls 
for at least annual penetration testing of an organization's network 
and systems.\77\ Moreover, the FFIEC calls for independent penetration 
testing of high risk systems at least annually, and for quarterly 
testing and verification of the efficacy of firewall and access control 
defenses.\78\ Data security standards for the payment card industry 
provide that entities should perform both external and internal 
penetration testing at least annually, as well as after any significant 
network changes, new system component installations, firewall 
modifications, or product upgrades.\79\
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    \77\ Id. at 5-6.
    \78\ FFIEC Handbook, supra note 57, at 82.
    \79\ See Requirements 11.3.1 and 11.3.2, PCI-DSS, supra note 54.
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    The primary benefit of a penetration test is that it identifies the 
extent to which a system can be compromised before the attack is 
identified and assesses the effectiveness of the response 
mechanism.\80\ Accordingly, the Commission is proposing to require both 
external and internal penetration testing. In Sec.  39.18(a), the 
Commission proposes to define ``external penetration testing'' as 
attempts to penetrate a DCO's automated systems or networks from 
outside the system and network boundaries to identify and exploit 
vulnerabilities (including, but not limited to, methods for 
circumventing the security features of an application, system, or 
network).\81\ Proposed Sec.  39.18(e)(3) would require external 
penetration testing to be conducted at a frequency determined by an 
appropriate risk analysis, but no less frequently than annually.\82\ 
The Commission proposes to define ``internal penetration testing'' in 
Sec.  39.18(a) as attempts to penetrate a DCO's automated systems or 
networks from inside the system and network boundaries to identify and 
exploit vulnerabilities (including, but not limited to, methods for 
circumventing the security features of an application, system, or 
network).\83\ In Sec.  39.18(e)(4), the Commission also proposes to 
require that internal penetration testing be conducted at a frequency 
determined by an appropriate risk analysis, but no less frequently than 
annually.
---------------------------------------------------------------------------

    \80\ FFIEC Handbook, supra note 57, at 81.
    \81\ See NIST SP 800-53, supra note 47, app. B at B-16 (defining 
``penetration testing'' as ``[a] test methodology in which 
assessors, typically working under specific constraints, attempt to 
circumvent or defeat the security features of an information 
system''); see also NIST Special Publication 800-137, Information 
Security Continuous Monitoring for Federal Information Systems and 
Organizations, Sept. 2011 (``NIST SP 800-137''), app. B, p. B-10, 
available at: http://csrc.nist.gov/publications/nistpubs/800-137/SP800-137-Final.pdf.
    \82\ See PCI-DSS Penetration Testing, supra note 70, at 8 
(noting that ``[p]enetration testing should be performed at least 
annually and after any significant change--for example, 
infrastructure or application upgrade or modification--or new system 
component installations'').
    \83\ Id. at 2.
---------------------------------------------------------------------------

    As discussed above, the Commission notes that generally accepted 
standards and industry best practices require annual penetration 
testing. Moreover, DCOs currently are required to follow generally 
accepted standards and industry best practices, which support a minimum 
frequency of annually for internal penetration testing, and as 
discussed in more detail in the Cost-Benefit Analysis in Section IV.C. 
below, DCOs are conducting penetration testing on at least an annual 
basis. However, the Commission acknowledges that Securities and 
Exchange Commission (``SEC'') Regulation SCI, which is applicable to 
DCOs that are registered with the SEC as clearing agencies,\84\ 
requires that penetration testing be conducted every three years.\85\ 
Nonetheless, given the importance of DCOs to the U.S. financial system, 
the Commission believes that annual internal penetration testing is 
appropriate in order to sufficiently address risks to a DCO's systems.
---------------------------------------------------------------------------

    \84\ Of the 15 DCOs currently registered with the Commission, 
four also are registered with the SEC as clearing agencies: Chicago 
Mercantile Exchange, Inc. (``CME''), ICE Clear Credit LLC, ICE Clear 
Europe Limited, and Options Clearing Corporation. However, on August 
3, 2015, CME filed with the SEC a written request to withdraw from 
registration as a clearing agency. See Securities Exchange Act 
Release No. 34-75762 (Aug. 26, 2015), 80 FR 52815 (Sept. 1, 2015).
    \85\ 17 CFR 240.1003. The SEC noted in its adopting release that 
``SCI entities may, however, determine that based on its [sic] risk 
assessment, it is appropriate and/or necessary to conduct such 
penetration test reviews more frequently than once every three 
years.'' Regulation Systems Compliance and Integrity, 79 FR 72252, 
72344 (Dec. 5, 2014).
---------------------------------------------------------------------------

    In addition, and consistent with generally accepted standards and 
industry best practices, proposed Sec.  39.18(e)(3) would require DCOs 
to engage independent contractors to perform the required annual 
external penetration tests. Independent testing provides for 
impartiality, meaning that penetration testers are free from conflicts 
of interest with respect to the development, operation, or management 
of the system(s) that are the targets of the testing.\86\ The 
Commission believes that the impartiality provided by independent 
contractors, including their lack of a stake in the outcome, is an

[[Page 80120]]

important factor in conducting external penetration testing and 
enhances the credibility of the test results.\87\ Proposed Sec.  
39.18(e)(4) would, however, permit internal penetration testing to be 
conducted by either independent contractors or employees of the DCO who 
are not responsible for development or operation of the systems or 
capabilities being tested.\88\
---------------------------------------------------------------------------

    \86\ NIST SP 800-53, supra note 47, app. F-CA at F-62.
    \87\ FFIEC Handbook, supra note 57, at 81 (noting that 
``[i]ndependence provides credibility to the test results'').
    \88\ See, e.g., PCI-DSS, supra note 54, at 97.
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3. Controls Testing
    Controls provide reasonable assurance that security management is 
effective, and adequate control testing is therefore critical to 
ensuring the confidentiality, integrity, and availability of 
information and information systems.\89\ Regular, ongoing testing of 
all of an organization's system safeguards-related controls for these 
purposes is a crucial part of a DCO's risk analysis and oversight 
program.\90\
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    \89\ See generally U.S. Gov't Accountability Office, GAO-09-
232G, Federal Information System Controls Audit Manual, Feb. 2009, 
available at: http://www.gao.gov/assets/80/77142.pdf.
    \90\ See generally 17 CFR 39.18 and 17 CFR 39.34.
---------------------------------------------------------------------------

    Generally accepted standards and industry best practices call for 
organizations to conduct regular, ongoing controls testing that over 
time includes testing of all their system safeguards-related controls. 
For example, NIST calls for organizations to assess ``the security 
controls in the information system and its environment of operation to 
determine the extent to which the controls are implemented correctly, 
operating as intended, and producing the desired outcome with respect 
to meeting established security requirements.'' \91\ NIST notes that 
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.\92\ FFIEC calls for controls testing 
because ``[c]ontrols should not be assumed to be completely 
effective,'' and states that a controls testing program ``is sound 
industry practice and should be based on an assessment of the risk of 
non-compliance or circumvention of the institution's controls.'' \93\
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    \91\ NIST SP 800-53, supra note 47, app. F-CA at F-55.
    \92\ 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.
    \93\ FFIEC Handbook, supra note 57, at 12.
---------------------------------------------------------------------------

    Consistent with industry best practices, the Commission proposes to 
define ``controls testing'' in Sec.  39.18(a) as an assessment of a 
DCO's controls to determine whether such controls are implemented 
correctly, are operating as intended, and are enabling the DCO to meet 
the system safeguards requirements set forth in Sec.  39.18.\94\ 
Furthermore, the Commission proposes to define ``controls'' as the 
safeguards or countermeasures \95\ employed by the DCO in order to 
protect the reliability, security, or capacity of its automated systems 
or the confidentiality, integrity, or availability of its data and 
information, in order to enable the DCO to fulfill its statutory and 
regulatory responsibilities. Regulation 39.18(a) would also define 
``key controls'' as 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. In today's 
cybersecurity threat environment, the Commission believes that 
effective testing of this subset of the system safeguards controls 
maintained by a DCO is particularly important.
---------------------------------------------------------------------------

    \94\ See generally NIST SP 800-53A, supra note 92.
    \95\ NIST SP 800-53, supra note 47, app. B at B-5 (defining 
``countermeasures'' as ``[a]ctions, devices, procedures, techniques, 
or other measures that reduce the vulnerability of an information 
system. Synonymous with security controls and safeguards'').
---------------------------------------------------------------------------

    In addition, the Commission is proposing to require controls 
testing in Sec.  39.18(e)(5), which would include testing of each 
control included in the DCO's risk analysis and oversight program, to 
be conducted at a frequency indicated by an appropriate risk analysis, 
but no less frequently than every two years. The Commission believes 
that this would ensure that each such control is tested with sufficient 
frequency to confirm the continuing adequacy of the DCO's system 
safeguards. The Commission recognizes, however, that appropriate risk 
analysis may well determine that more frequent testing of either 
certain key controls or all controls is necessary. The Commission notes 
that industry best practices support information security continuous 
monitoring (``ISCM''), which is defined as ``maintaining ongoing 
awareness of information security, vulnerabilities, and threats to 
support organizational risk management decisions.'' \96\ Nonetheless, 
recognizing that it is impractical to test every security control at 
all times, these standards note that ``[t]he frequency of assessments 
should be sufficient to assure adequate security commensurate with 
risk, as determined by system categorization and ISCM strategy 
requirements.'' \97\ Thus, consistent with industry best practices, the 
Commission is proposing minimum frequency for the testing of each 
control of no less than every two years.
---------------------------------------------------------------------------

    \96\ NIST SP 800-137, supra note 81, at vi.
    \97\ Id. at 11.
---------------------------------------------------------------------------

    The Commission also proposes to permit such testing to be conducted 
on a rolling basis over the course of the period determined by 
appropriate risk analysis in recognition of the fact that an adequate 
system safeguards program for a DCO must necessarily include large 
numbers of controls, and therefore it could be impracticable and unduly 
burdensome to require testing of all controls in a single test. This 
provision is designed to give a DCO flexibility concerning how and when 
to test controls during the applicable minimum period, and is intended 
to reduce burdens associated with testing every control to the extent 
possible while still safeguarding and managing the DCO's security.\98\
---------------------------------------------------------------------------

    \98\ Id. at 25-27.
---------------------------------------------------------------------------

    The proposed rule would also require testing of key controls to be 
conducted by independent contractors. As noted above, the Commission 
believes that the impartiality and credibility provided by independent 
testing supports the proposed requirement that testing of key controls 
be done by independent contractors. However, the Commission is 
proposing to give DCOs the discretion to test other controls using 
either independent contractors or employees of the DCO who are 
independent of the systems being tested.\99\
---------------------------------------------------------------------------

    \99\ See discussion supra section II.A.1.
---------------------------------------------------------------------------

4. Security Incident Response Plan Testing
    The Commission recognizes that adequate cyber resilience requires 
organizations to have sufficient capacity to detect, contain, 
eliminate, and recover from a cyber intrusion, and believes that 
security incident response plans,\100\ and testing of those plans, are 
essential to such capabilities.
---------------------------------------------------------------------------

    \100\ As discussed in more detail below, the Commission proposes 
to define ``security incident response plan testing'' as the testing 
of a DCO's security incident response plan to determine the plan's 
effectiveness, identify potential weaknesses or deficiencies, enable 
regular plan updating and improvement, and maintain organizational 
preparedness and resiliency with respect to security incidents.

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[[Page 80121]]

    NIST urges organizations to have a security incident response plan 
that ``establishes procedures to address cyber attacks against an 
organization's information systems. These procedures are designed to 
enable security personnel to identify, mitigate, and recover from 
malicious computer incidents, such as unauthorized access to a system 
or data, denial of service, or unauthorized changes to system hardware, 
software, or data (e.g., malicious logic, such as a virus, worm, or 
Trojan horse).'' \101\
---------------------------------------------------------------------------

    \101\ NIST Special Publication 800-34, Contingency Planning 
Guide for Federal Information Systems, rev. 1 (``NIST SP 800-34''), 
p. 10, available at: http://csrc.nist.gov/publications/nistpubs/800-34-rev1/sp800-34-rev1_errata-Nov11-2010.pdf. Specifically, NIST 
recommends that an organization develop, document, and distribute to 
the appropriate personnel ``[a]n incident response policy that 
addresses purpose, scope, roles, responsibilities, management 
commitment, coordination among organizational entities, and 
compliance,'' as well as ``[p]rocedures to facilitate the 
implementation of the incident response policy and associated 
incident response controls.'' NIST SP 800-53, supra note 47, at F-
103. See also NIST Special Publication 800-61, Computer Security 
Incident Handling Guide, rev. 2 (``NIST SP 800-61''), p. 8, 
available at: http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-61r2.pdf. Such incident response plan should:
    a. Provide the organization with a roadmap for implementing its 
incident response capability;
    b. Describe the structure and organization of the incident 
response capability;
    c. Provide a high-level approach for how the incident response 
capability fits into the overall organization;
    d. Meet the unique requirements of the organization, which 
relate to mission, size, structure, and functions;
    e. Define reportable incidents;
    f. Provide metrics for measuring the incident response 
capability within the organization;
    g. Define the resources and management support needed to 
effectively maintain and mature an incident response capability; and
    h. Be reviewed and approved by [appropriate organization-defined 
personnel or roles].
    Id. at F-109. Finally, copies of the plan should be distributed 
to appropriate personnel; reviewed at an appropriate frequency; 
updated to address system or organizational changes, or problems 
encountered during plan implementation, execution, or testing, with 
plan changes communicated to appropriate personnel; and protected 
from unauthorized disclosure and modification. Id.
---------------------------------------------------------------------------

    In addition, NIST states that organizations should test their 
security incident response capabilities, at appropriate frequencies, to 
determine their effectiveness, and to document test results.\102\
---------------------------------------------------------------------------

    \102\ NIST SP 800-53, supra note 47, app. F-IR at F-104.
---------------------------------------------------------------------------

    FINRA's best practices also call for firms to have security 
incident response plans. FINRA's 2015 Report on Cybersecurity Practices 
states: ``Firms should establish policies and procedures, as well as 
roles and responsibilities for escalating and responding to 
cybersecurity incidents. Effective practices for incident response 
include . . . involvement in industry-wide and firm-specific simulation 
exercises as appropriate to the role and scale of a firm's business.'' 
\103\ Similarly, the FFIEC also calls for security incident response 
plan testing, stating that ``[f]inancial institutions should assess the 
adequacy of their preparation by testing incident response guidelines 
to ensure that the procedures correspond with business continuity 
strategies.'' \104\ Moreover, the Controls argue that organizations 
should protect their information, as well as their reputations, by 
developing and implementing a security incident response plan,\105\ and 
``conduct[ing] periodic incident scenario sessions for personnel 
associated with the incident handling team, to ensure that they 
understand current threats and risks, as well as their responsibilities 
in supporting the incident handling teams.'' \106\
---------------------------------------------------------------------------

    \103\ FINRA Report, supra note 31, at 23.
    \104\ FFIEC, Business Continuity Planning Booklet: IT 
Examination Handbook, Feb. 2015 (``FFIEC BCP Booklet''), p. 26, 
available at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_BusinessContinuityPlanning.pdf.
    \105\ Council on Cybersecurity, supra note 33, at 96.
    \106\ Id. at 97.
---------------------------------------------------------------------------

    The Commission believes that industry best practices require the 
development, implementation, and testing of a security incident 
response plan.\107\ Proposed Sec.  39.18(e)(6) would require that DCOs 
have a security incident response plan that is tested at a frequency 
determined by an appropriate risk analysis, but no less frequently than 
annually. Because Sec.  39.18 already calls for a DCO's risk analysis 
and oversight program to follow best practices, this requirement should 
not impose any additional burdens or costs on DCOs. In addition, the 
Commission notes that having such plans regularly tested will help DCOs 
address security incidents more quickly and effectively when they 
actually happen. Moreover, the Commission notes that annual testing is 
consistent with industry best practices and an important part of a 
DCO's business continuity and disaster recovery plan.
---------------------------------------------------------------------------

    \107\ See, e.g., FINRA Report, supra note 31, at 23; and FFIEC 
BCP Booklet, supra note 104, at 25 (noting that ``[e]very financial 
institution should develop an incident response policy that is 
properly integrated into the business continuity planning 
process'').
---------------------------------------------------------------------------

    The proposed rule would define a ``security incident'' 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.\108\ The Commission further proposes defining a ``security 
incident response plan'' as a written plan documenting the DCO'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. Under the 
proposed definition, 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. However, 
the Commission proposes requiring the DCO's security incident response 
plan to include 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.
---------------------------------------------------------------------------

    \108\ NIST defines an ``incident'' as ``[a]n occurrence that 
actually or potentially jeopardizes the confidentiality, integrity, 
or availability of an information system or the information the 
system processes, stores, or transmits, or that constitutes a 
violation or imminent threat of violation of security policies, 
security procedures, or acceptable use policies.'' NIST SP 800-53, 
supra note 47, at B-9. NIST further defines a ``computer security 
incident'' as ``a violation or imminent threat of violation of 
computer security policies, acceptable use policies, or standard 
security practices.'' NIST SP 800-61, supra note 101, at 6. The 
FFIEC notes that a security incident represents ``the attempted or 
successful unauthorized access, use, modification, or destruction of 
information systems or customer data. If unauthorized access occurs, 
the financial institution's computer systems could potentially fail 
and confidential information could be compromised.'' FFIEC BCP 
Booklet, supra note 104, at 25.
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    The Commission proposes to define ``security incident response plan 
testing'' in Sec.  39.18(a) as the testing of a DCO's security incident 
response plan to determine the plan's effectiveness, identify 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 would not be limited 
to, checklist completion, walk-through or table-top exercises, 
simulations, and comprehensive exercises.\109\ Pursuant to

[[Page 80122]]

proposed Sec.  39.18(e)(6), a DCO would also be permitted to coordinate 
its security incident response plan testing with other testing required 
by proposed Sec.  39.18(e),\110\ or with the testing of its other 
business continuity-disaster recovery and crisis management plans. In 
addition, a DCO would be permitted to conduct security incident 
response plan testing by engaging independent contractors or by using 
employees of the DCO who are not responsible for development or 
operation of the systems or capabilities being tested. The Commission 
notes that discussion at the CFTC Roundtable included concerns about 
performing tests in a production environment, as the tests could have 
the unintended consequence of disrupting business as usual and 
potentially cause an event.\111\ Accordingly, the Commission proposes 
to give DCOs discretion to decide whether the testing is completed in a 
production or non-production environment.
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    \109\ See NIST SP 800-53, supra note 47, app. F-IR at F-104 
(stating that ``[i]ncident response testing includes, for example, 
the use of checklists, walk-through or tabletop exercises, 
simulations (parallel/full interrupt), and comprehensive exercises. 
Incident response testing can also include a determination of the 
effects on organizational operations (e.g., reduction in mission 
capabilities), organizational assets, and individuals due to 
incident response'').
    \110\ In addition to the changes proposed herein, the Commission 
is proposing to renumber Sec.  39.18(j) as Sec.  39.18(e).
    \111\ CFTC Roundtable, supra note 8, at 87-88, 118, 321-326, 
345-346.
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5. Enterprise Technology Risk Assessment (``ETRA'')
    ETRA is an important part of a DCO's risk assessment program 
because it helps the DCO produce a broad determination of its system 
safeguards-related risks.\112\ In a sense, ETRA can be seen as a 
strategic approach through which a DCO identifies risks and aligns its 
systems goals accordingly. A well-conducted ETRA, and the knowledge and 
prioritization of risks that it provides, can also inform and guide the 
ongoing testing process and result in more effective cybersecurity risk 
management.
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    \112\ NIST SP 800-39, supra note 59, at 1.
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    The Commission notes that with respect to ETRA, best practices 
provide a number of sources for such risk assessment frameworks,\113\ 
and a DCO would generally be free to choose the assessment framework it 
believes most appropriate to its particular circumstances, provided 
that its choice is congruent with best practices and is consistent with 
the DCO's risk profile. For example, FINRA notes that approaches to 
integrating threats and vulnerabilities in an overall risk assessment 
report often differ, with some organizations following proprietary risk 
assessment methodologies and other using vendor products tailored to 
their particular needs, and with firms using a variety of cyber 
incident and threat intelligence inputs for their risk 
assessments.\114\
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    \113\ See, e.g., FFIEC Handbook, supra note 57; NIST SP 800-39, 
supra note 59.
    \114\ FINRA Report, supra note 31, at 14.
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    The Commission proposes to define ``ETRA'' in Sec.  39.18(a) as a 
written assessment that includes, but is not limited to, an analysis of 
threats and vulnerabilities in the context of mitigating controls. An 
ETRA identifies, estimates, and prioritizes risks to a DCO's operations 
or assets (which include, for example, mission, functions, image, and 
reputation risks), or to market participants, individuals, and other 
entities, resulting from impairment of the confidentiality, integrity, 
or availability of data and information or the reliability, security, 
or capacity of automated systems.\115\ Proposed Sec.  39.18(e)(7) would 
provide DCOs flexibility by permitting the ETRA to be completed by 
independent contractors or employees of the DCO not responsible for 
development or operation of the systems or capabilities being assessed. 
The proposal would, however, require an ETRA to be completed at a 
frequency determined by an appropriate risk analysis by the DCO, but no 
less frequently than annually.\116\ As noted in the PCI-DSS standards, 
``[p]erforming risk assessments at least annually and upon significant 
changes allows the organization to keep up to date with organizational 
changes and evolving threats, trends, and technologies.'' \117\ 
However, the Commission emphasizes that the proposed requirement to 
prepare a written assessment on at least an annual basis is not 
intended to substitute for the DCO's obligation to conduct risk 
assessment and monitoring on an ongoing basis; rather, its purpose is 
to formalize the risk assessment process and ensure that it is 
documented at a minimum frequency. As noted in the FFIEC Handbook: 
``Monitoring and updating the security program is an important part of 
the ongoing cyclical security process. Financial institutions should 
treat security as dynamic with active monitoring; prompt, ongoing risk 
assessment; and appropriate updates to controls.'' \118\
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    \115\ NIST SP 800-53, supra note 47, app. B at B-19.
    \116\ See, e.g., FINRA Report, supra note 31, at 14 (stating 
that firms conducting defined risk assessment processes do so either 
annually or on an ongoing basis throughout the year, in either case 
culminating in an annual risk assessment report).
    \117\ See, e.g., PCI-DSS, supra note 54, at 100.
    \118\ FFIEC Handbook, supra note 57, at 86.
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B. Scope of Testing and Assessment

    The Commission believes that the scope of a DCO's testing should be 
based on a proper risk analysis that takes into account the DCO's 
particular automated systems and networks and vulnerabilities, 
including any recent changes to them, as well as the nature of the 
DCO's possible adversaries and their capabilities as revealed by 
current cybersecurity threat analysis.\119\ The Commission recognizes 
that, however, the scope set for particular instances of the various 
types of cybersecurity testing can vary appropriately.\120\ Thus, 
proposed Sec.  39.18(e)(8) would give a DCO flexibility in setting the 
scope of particular cybersecurity tests, so long as its overall testing 
program is sufficient to provide adequate assurance of the overall 
effectiveness of its cybersecurity controls with respect to its system 
safeguards-related risks. The Commission believes that such flexibility 
should reduce costs and burdens associated with the proposed scope 
while still effectively measuring the resilience of the DCO system 
safeguards.
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    \119\ CFTC Roundtable, supra note 8, at 98, 101-103, 108-113, 
128-130, 140-142, 173-180.
    \120\ Id.
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    Accordingly, the Commission is proposing that the scope of all 
testing and assessment required by its system safeguards regulations 
for DCOs should be broad enough to include all testing of automated 
systems and controls necessary to identify any vulnerability which, if 
exploited or accidentally triggered, could enable an intruder or 
unauthorized user or insider to: Interfere with the DCO's operations or 
with fulfillment of its statutory and regulatory responsibilities; 
impair or degrade the reliability, security, or capacity of the DCO's 
automated systems; add to, delete, modify, exfiltrate, or compromise 
the integrity of any data related to the DCO's regulated activities; or 
undertake any other unauthorized action affecting the DCO's regulated 
activities or the hardware or software used in connection with those 
activities. The Commission believes that this proposed scope is broad 
enough to address all significant threats to the DCO, while still 
providing sufficient guidance regarding the elements of the DCO's 
program.

C. Internal Reporting, Review, and Remediation

    Under current Sec.  39.18(j)(3) \121\ reports on testing protocols 
and results must be communicated to, and reviewed by,

[[Page 80123]]

senior management of the DCO. However, consistent with industry best 
practices, in Sec.  39.18(e)(9) the Commission is proposing to expand 
this reporting requirement to include communication to, and review by, 
the DCO's board of directors. The Commission notes that active 
management with board level involvement ``is an essential effective 
practice to address cybersecurity threats[, because] [w]ithout that 
involvement and commitment, a firm is unlikely to achieve its 
cybersecurity goals.'' \122\ Further, the Commission notes that FINRA 
observes that ``[b]oards should play a leadership role in overseeing 
firms' cybersecurity efforts,'' and states that the board of directors 
should understand and approach cybersecurity as an enterprise-wide risk 
management issue rather than merely an information technology 
issue.\123\ The Commission also notes that FFIEC states that regular 
reports to the board of directors should address the results of the 
organization's risk assessment process and of its security monitoring 
and testing, including both internal and external audits and 
reviews.\124\ In addition, FFIEC calls for boards to review 
recommendations for changes to the information security program 
resulting from testing and assessment, and to review the overall 
effectiveness of the program.\125\
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    \121\ The Commission is further proposing to renumber Sec.  
39.18(j)(3) as Sec.  39.18(e)(9).
    \122\ FINRA Report, supra note 31, at 7.
    \123\ Id.
    \124\ FFIEC Handbook, supra note 57, at 5.
    \125\ Id.
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    Accordingly, proposed Sec.  39.18(e)(10) would also require DCOs to 
establish and follow appropriate procedures for the remediation of 
issues identified through such review, and for evaluation of the 
effectiveness of testing and assessment protocols. The proposed rule 
would also add a provision requiring a DCO to analyze the results of 
the testing and assessment required by the applicable system safeguards 
rules, in order to identify all vulnerabilities and deficiencies in its 
systems, and to remediate those vulnerabilities and deficiencies to the 
extent necessary to enable the DCO to fulfill the requirements of part 
39 and meet its statutory and regulatory obligations. The proposed rule 
would require such remediation to be timely in light of appropriate 
risk analysis with respect to the risks presented.

D. Additional Amendments

    In addition to the changes discussed above, the Commission is 
proposing to reorder and renumber certain paragraphs in Sec.  39.18 to 
make certain technical corrections to improve the clarity of the rule 
text.
1. Definitions
    The Commission is proposing to amend the introductory text of Sec.  
39.18(a) to make clear that the definitions therein are also applicable 
to Sec.  39.34, which sets forth additional system safeguards 
requirements for SIDCOs and Subpart C DCOs.
    The Commission also is proposing to revise the definitions of 
``relevant area'' and ``recovery time objective'' to make the language 
consistent with that used elsewhere in Sec.  39.18.
    Finally, the Commission is proposing to change references to ``the 
clearing and settlement of existing and new products'' to ``the 
processing, clearing, and settlement of transactions'' and a single 
reference to ``an entity'' to ``a [DCO].''
2. Program of Risk Analysis and Oversight
    Regulation 39.18(b) requires a DCO to have a program of risk 
analysis and oversight with respect to its operation and systems that 
addresses the following elements, set forth in Sec.  39.18(c): (1) 
Information security; (2) business continuity and disaster recovery 
planning and resources; (3) capacity and performance planning; (4) 
systems operations; (5) systems development and quality assurance; and 
(6) physical security and environmental controls. Specific requirements 
concerning business continuity and disaster recovery are addressed in 
Sec.  39.18(e), but the regulation does not provide any further 
guidance on the other five elements. Therefore, the Commission is 
proposing to amend Sec.  39.18(c) (renumbered as Sec.  39.18(b)(2)) 
\126\ to provide more detail for each of those other five 
elements.\127\
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    \126\ The Commission is further proposing to renumber Sec.  
39.18(d) as Sec.  39.18(b)(3); renumber Sec.  39.18(e)(2) as Sec.  
39.18(b)(4); and delete Sec.  39.18(e)(3) and fold its requirements 
into Sec.  39.18(c)(2). The Commission is also proposing conforming 
changes to the text of the renumbered provisions.
    \127\ Although the Commission is proposing, in a concurrent 
notice of proposed rulemaking, to require that the program of risk 
analysis and oversight for designated contract markets (``DCMs'') 
include enterprise risk management and governance applicable 
specifically to security and technology, at this time the Commission 
is not proposing such a requirement for DCOs. The Commission 
believes that DCOs face a wider array of risks than DCMs, and 
therefore any enterprise risk management requirements for DCOs would 
not be limited to the system safeguards context but rather would 
need to be addressed in a more comprehensive fashion. The Commission 
is considering this issue and may address it in a future rulemaking.
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3. Business Continuity and Disaster Recovery Plan
    Regulation 39.18(e)(1) requires that a DCO 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 DCO following any disruption 
of its operations. Regulation 39.18(e)(2) explains that the 
``responsibilities and obligations'' described in Sec.  39.18(e)(1) 
include the daily processing, clearing, and settlement of transactions. 
Because these provisions are so closely linked, the Commission is 
proposing to combine them into a new Sec.  39.18(c)(1).\128\
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    \128\ The Commission is further proposing to renumber Sec.  
39.18(e)(3) as Sec.  39.18(c)(2), and Sec.  39.18(k) as Sec.  
39.18(c)(3). The Commission is also proposing conforming changes to 
the text of the renumbered provisions.
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4. Location of Resources; Outsourcing
    Regulation 39.18(f) allows a DCO to satisfy the resource 
requirement in Sec.  39.18(e)(1) (renumbered as Sec.  39.18(c)(1)) 
using its own employees and property or through written contractual 
arrangements with another DCO or other service provider (i.e., 
outsourcing). The Commission is proposing to amend this provision (and 
renumber it as Sec.  39.18(d)) to clarify that a DCO is also permitted 
to use outsourcing to satisfy Sec.  39.18(b)(2) (renumbered as Sec.  
39.18(b)(4)), which requires a DCO to establish and maintain resources 
that allow for the fulfillment of each obligation and responsibility of 
the DCO in light of the risks identified by the DCO's program of risk 
analysis and oversight.
    In addition, the Commission is proposing to amend Sec.  
39.18(f)(2)(i) (renumbered as Sec.  39.18(d)(2)), which states that, if 
a DCO chooses to use outsourced resources, the DCO retains liability 
for any failure to meet the responsibilities specified in Sec.  
39.18(e)(1) (renumbered as Sec.  39.18(c)(1)), ``although it is free to 
seek indemnification from the service provider.'' Regulation 39.18 
contains no restrictions that would prevent a DCO from seeking 
indemnification from its service provider; therefore, the Commission is 
proposing to delete this unnecessary language.
5. Recordkeeping
    Under current Sec.  39.18(i), a DCO is required to maintain, and 
provide to Commission staff upon request, current

[[Page 80124]]

copies of its business continuity plan and other emergency procedures, 
its assessments of its operational risks, and records of testing 
protocols and results. The Commission is proposing to renumber Sec.  
39.18(i) as Sec.  39.18(f), and to amend the language to conform with 
the testing requirements proposed herein.
6. Notice of Exceptional Events
    Under current Sec.  39.18(g)(1), a DCO is required to promptly 
notify Commission staff of any cybersecurity incident that materially 
impairs, or creates a significant likelihood of material impairment of, 
automated system operation, reliability, security, or capacity. The 
Commission is proposing a conforming amendment to Sec.  39.18(g)(1), to 
replace the term ``cybersecurity incident'' with ``security incident,'' 
as the proposed definition of ``security incident'' would include a 
cybersecurity incident.
7. System Safeguards for SIDCOs and Subpart C DCOs
    The Commission is proposing to amend Sec.  39.34 to update several 
cross-references to various provisions of Sec.  39.18.

III. Request for Comment

    The Commission requests comment on all aspects of the proposed 
amendments to Sec. Sec.  39.18 and 39.34. With respect to testing, the 
Commission is particularly interested in the following:
    Are the testing requirements being proposed in Sec.  39.18 
consistent with the DCO core principles set forth in the CEA, 
particularly the goals of Core Principle I? If so, in what ways? If 
not, why not?
    Are the proposed testing frequencies sufficient to safeguard DCOs 
against cyber attacks? In particular, should the proposed control 
testing be done more frequently, or less frequently? In each case, 
please provide any data you may have that supports an alternate 
frequency for such testing.
    Should the Commission define the term ``independent contractor''? 
If so, how should such term be defined? If not, why not?
    What alternatives, if any, would be more effective in reducing 
systemic risk, mitigating the growing cybersecurity threats faced by 
DCOs, and achieving compliance with the DCO core principles set forth 
in the CEA?
    The Commission requests that commenters include a detailed 
description of any such alternatives and estimates of the costs and 
benefits of such alternatives. Can the proposed changes to Sec.  39.18 
be effectively implemented and complied with? If not, what changes 
could be made to increase the likelihood of effective implementation 
and compliance?

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.\129\ 
The rules proposed 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.\130\ The Commission has 
previously determined that DCOs are not small entities for the purpose 
of the RFA.\131\ Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed rules will not have a significant economic impact on a 
substantial number of small entities.
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    \129\ 5 U.S.C. 601 et seq.
    \130\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
    \131\ 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'') \132\ 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 
proposed rulemaking contains recordkeeping and reporting requirements 
that are collections of information within the meaning of the PRA.
---------------------------------------------------------------------------

    \132\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The proposed rulemaking 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). If adopted, responses to this collection of 
information would be mandatory. As discussed below, the Commission 
believes the proposal will not impose any new recordkeeping or 
reporting requirements that are not already accounted for in collection 
3038-0076.\133\ Accordingly, the Commission invites public comment on 
the accuracy of its estimate that no additional recordkeeping or 
information collection requirements or changes to existing collection 
requirements would result from the proposal.
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    \133\ 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 will protect proprietary information according to 
the Freedom of Information Act (``FOIA'') and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the Act, from making public ``data and information that 
would separately disclose the business transactions or market positions 
of any person and trade secrets or names of customers.'' The Commission 
is also required to protect certain information contained in a 
government system of records according to the Privacy Act of 1974.
1. Clarification of Collection 3038-0076
    The Commission notes that DCOs are already subject to system 
safeguard-related recordkeeping and reporting requirements. As 
discussed above in section II, the Commission is proposing to amend and 
renumber current Sec.  39.18(i) as Sec.  39.18(f), to clarify the 
system safeguard recordkeeping and reporting requirements for DCOs. The 
proposed regulation would require DCOs, in accordance with Sec.  
1.31,\134\ 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

[[Page 80125]]

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 proposed Sec.  39.18(f) are contained in the provisions 
of current Sec.  39.18(i), which was adopted on November 8, 2011.\135\ 
Accordingly, the Commission believes that proposed Sec.  39.18(f) would 
not impact the burden estimates currently provided for in collection 
3038-0076.
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    \134\ 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).
    \135\ 76 FR 69334.
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2. Information Collection Comments
    The Commission invites comment on any aspect of the proposed 
information collection requirements discussed above. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission will consider public comments on 
such proposed requirements in: (1) Evaluating whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have a practical use; (2) evaluating the accuracy of the Commission's 
estimate of the burden of the proposed collection of information, 
including the validity of the methodology and assumptions used; (3) 
enhancing the quality, utility, and clarity of the information proposed 
to be collected; and (4) minimizing the burden of collection of 
information on those who are to respond, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Persons desiring to 
submit comments on the proposed information collection requirements 
should send those comments to: The Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503, Attention: Desk Officer of the 
Commodity Futures Trading Commission; (202) 395-6566 (fax); or 
[email protected] (email). Please provide the Commission with 
a copy of submitted comments so that all comments can be summarized and 
addressed in the final rulemaking, and please refer to the ADDRESSES 
section of this rulemaking for instructions on submitting comments to 
the Commission. OMB is required to make a decision concerning the 
proposed information collection requirements between thirty (30) and 
sixty (60) days after publication of the proposal in the Federal 
Register. Therefore, a comment to OMB is best assured of receiving full 
consideration if OMB (as well as the Commission) receives it within 
thirty (30) days of publication of the proposal.

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.\136\ 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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    \136\ 7 U.S.C. 19(a).
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    As an initial matter, the Commission considers the incremental 
costs and benefits of these regulations, that is 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.\137\
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    \137\ 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.
---------------------------------------------------------------------------

    The Commission requests comment on the costs and benefits 
associated with the proposed regulations. As discussed below, the 
Commission has identified certain costs and benefits associated with 
the proposed regulations and requests comment on all aspects of its 
proposed consideration of costs and benefits, including identification 
and assessment of any costs and benefits not discussed herein. In 
addition, the Commission requests that commenters provide data and any 
other information or statistics that the commenters relied on to reach 
any conclusions regarding the Commission's proposed consideration of 
costs and benefits, including the series of questions in section 3(f).
2. Background and Baseline for the Proposal
    As discussed above, the Commission believes that the current cyber 
threats to the financial sector have expanded dramatically over recent 
years.\138\ Accordingly, 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 proposed amendments would likely result in some 
additional costs for DCOs, the proposal 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.\139\ 
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.\140\
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    \138\ See supra section I.B.
    \139\ See also supra section I.C.
    \140\ See supra section II.A.
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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.\141\ 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.'' \142\ In addition to 
the generally accepted standards and industry best practices discussed 
in section II above, this cost and benefit discussion uses information 
provided by DCOs in connection with a recent survey of DCO system 
safeguard costs and practices conducted by Commission staff (``February 
2015 DCR Survey'').\143\
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    \141\ 17 CFR 39.18(j).
    \142\ See 17 CFR 39.18(d).
    \143\ 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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[[Page 80126]]

    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.
    The Commission believes that certain entities that would be subject 
to the proposal already comply with most of the testing requirements 
while others may need some modest enhancements to their system 
safeguard program to achieve compliance. In this same regard, the 
Commission notes that some DCOs are larger or more complex than others, 
and the proposed 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 also believes that to the extent the new requirements impose 
additional costs, the primary costs will be in the form of more 
frequent testing, including some testing that would have to be carried 
out by independent contractors on behalf of the DCO. As a result, the 
proposed rules may increase operational costs for DCOs by requiring 
additional resources. The Commission is sensitive to the economic 
effects of the proposed regulations, including costs and benefits. 
Accordingly, the Commission seeks comment on the costs and benefits of 
the proposed regulations, including where possible, quantitative data.
    While certain costs are amenable to quantification, other costs are 
not easily estimated, such as the costs to the public or market 
participants in the event of a cybersecurity incident at a DCO. The 
Commission's proposed regulations are 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 
summary of the current testing requirements and sources for industry 
best practices as well as a summary of each proposed regulation and a 
consideration of the corresponding costs and benefits. At the 
conclusion of this discussion, the Commission considers the costs and 
benefits of the proposed regulations collectively in light of the five 
factors set forth in section 15(a) of the CEA.
3. Consideration of Costs and Benefits Related to the Proposed Rules
a. Regulation 39.18(a)--Definitions
(i) Summary of Proposed Regulations
    As discussed above in section II, proposed Sec.  39.18(a) would add 
to the existing list of definitions, definitions for the following 
terms: (1) Controls; (2) controls testing; (3) enterprise technology 
risk assessment; (4) external penetration testing; (5) internal 
penetration testing; (6) key controls; (7) security incident; (8) 
security incident response plan; (9) security incident response plan 
testing; and (10) vulnerability testing.
(ii) Costs and Benefits
    The proposed definitions simply provide context to the specific 
system safeguard tests and assessments that a DCO would be required to 
conduct on an ongoing basis. Accordingly, the costs and benefits of 
these terms are attributable to the substantive testing requirements 
and, therefore, are discussed in the cost and benefit considerations 
related to the rules describing the requirements for each test.
b. Regulation 39.18(e)(2)--Vulnerability Testing
(i) Summary of Proposed Regulations
    As discussed above in section II(A)(1), proposed Sec.  39.18(a) 
defines ``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. Regulation 39.18(e)(2) requires such 
testing to be of a scope sufficient to satisfy the testing scope 
requirements of proposed Sec.  39.18(e)(8). Regulation 39.18(e)(2)(i) 
requires a DCO to conduct vulnerability testing at a frequency 
determined by an appropriate risk analysis, but at a minimum no less 
frequently than quarterly. Among the four vulnerability tests conducted 
annually, the proposed regulations would require a DCO to engage 
independent contractors to perform two of the required quarterly tests 
each year for the DCO, although other vulnerability testing may be 
conducted by employees of the DCO who are not responsible for 
development or operation of the systems or capabilities being tested. 
The vulnerability test would also require automated vulnerability 
scanning, which may be authenticated or unauthenticated.
(ii) Costs
    The Commission believes that the scope requirement of proposed 
Sec.  39.18(e)(2) will not impose new costs on DCOs. Comprehensive 
vulnerability testing is an industry best practice,\144\ and therefore 
required to be conducted under current Commission regulations. 
Moreover, the Commission believes, based on the representations made by 
DCOs to Commission staff in administering the Commission's examination 
program and DCO responses to the February 2015 DCR Survey, that most 
DCOs are currently conducting vulnerability testing sufficient to meet 
the scope requirements of proposed Sec.  39.18(e)(2). The Commission 
also believes that the frequency requirement of proposed Sec.  
39.18(e)(2)(i) will not impose new costs on DCOs. The Commission notes 
that industry best practices state that vulnerability testing should be 
conducted ``at least quarterly.'' \145\ Accordingly, current Sec.  
39.18 requires DCOs to conduct vulnerability testing on a quarterly 
basis. In addition, the Commission notes that all 13 DCOs responding to 
the February 2015 DCR Survey conduct vulnerability testing on a 
quarterly basis at a minimum.\146\
---------------------------------------------------------------------------

    \144\ See, e.g., NIST SP-800-53, supra note 47, at F-153; FFIEC 
Handbook, supra note 57, at 10 (``Financial institutions should 
assess potential threats and vulnerabilities of their information 
systems.''); PCI-DSS, supra note 54, at 94.
    \145\ See supra section II.A.1.; see also supra note 57 and 
accompanying text.
    \146\ The frequency of vulnerability testing ranged from 5 to 
200 tests per year.
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    Proposed Sec.  39.18(e)(2)(ii) would require a DCO to conduct 
vulnerability tests that include automated vulnerability scanning on an

[[Page 80127]]

authenticated basis, or, where not conducted on an authenticated basis, 
to implement compensating controls.\147\ The Commission notes that 
industry best practices specifically recommend authenticated 
scanning.\148\ Likewise, current Sec.  39.18 requires DCOs to conduct 
authenticated scanning and Commission staff has examined DCOs for 
compliance with such requirement. Accordingly, the Commission does not 
believe that DCOs will incur additional costs as a result of the 
adoption of proposed Sec.  39.18(e)(2)(ii).
---------------------------------------------------------------------------

    \147\ See supra notes 55 and 56 and accompanying text.
    \148\ See, e.g., NIST SP 800-53, supra note 47, at F-154 
(``Privileged access authorization to selected system components 
facilitates more thorough vulnerability scanning and also protects 
the sensitive nature of such scanning.'').
---------------------------------------------------------------------------

    Under proposed Sec.  39.18(e)(2)(iii), for at least two of the 
required quarterly vulnerability tests each year, vulnerability testing 
must be conducted by an independent contractor. However, the remaining 
two vulnerability tests may be conducted by a DCO's employees so long 
as those employees are not responsible for development or operation of 
the systems or capabilities being tested.\149\ The Commission notes 
that at least 9 of the 13 DCOs responding to the February 2015 DCR 
Survey currently conduct at least some of their vulnerability testing 
using independent contractors. The Commission does not, however, have 
quantification or estimation of the costs associated with proposed 
Sec.  39.18(e)(2)(iii). Nonetheless, in qualitative terms, the 
Commission recognizes that, compared to the status quo, this proposed 
requirement may impose some costs on DCOs equal to the difference 
between conducting vulnerability testing in-house and hiring an 
independent contractor. In particular, these proposed regulations may 
require DCOs to establish and implement internal policies and 
procedures that are reasonably designed to address the workflow 
associated with the test, which may include the communication and 
cooperation between the entity and independent contractor, 
communication and cooperation between the entity's legal, business, 
technology, and compliance departments, appropriate authorization to 
remediate vulnerabilities identified by the independent contractor, 
implementation of the measures to address such vulnerabilities, and 
verification that these measures are effective and appropriate. The 
Commission requests comment on the potential costs of proposed Sec.  
39.18(e)(2)(iii) on DCOs, including, where possible, quantitative data.
---------------------------------------------------------------------------

    \149\ See supra section II.A.1.
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(iii) Benefits
    Vulnerability testing identifies, ranks, and reports 
vulnerabilities that, if exploited, may result in an intentional or 
unintentional compromise of a system.\150\ The complex analysis and 
plan preparation that a DCO undertakes to complete vulnerability 
testing, including designing and implementing changes to existing 
plans, are likely to contribute to a better ex ante understanding by 
the DCO's management of the challenges the DCO would face in a cyber 
threat scenario, and thus better preparation to meet those challenges. 
This improved preparation helps reduce the possibility of market 
disruptions and financial losses to clearing members and their 
customers. Regularly conducting vulnerability tests enables a DCO to 
mitigate the impact that a cyber threat to, or a disruption of, a DCO's 
operations would have on customers, clearing members, and, more 
broadly, the stability of the U.S. financial markets. Accordingly, the 
Commission believes that such testing strengthens DCOs' systems, 
thereby protecting clearing members and their customers from a 
disruption in clearing services.
---------------------------------------------------------------------------

    \150\ PCI-DSS Penetration Testing, supra note 70, at 3.
---------------------------------------------------------------------------

    The Commission acknowledges, as described above, that some DCOs may 
incur additional costs as a result of the new requirement in proposed 
Sec.  39.18(e)(2)(iii) that independent contractors complete the 
vulnerability testing. Nevertheless, the Commission believes that the 
use of independent contractions for vulnerability testing--a practice 
that many DCOs report already doing--will strengthen this important 
system safeguard, significantly benefitting the DCO, financial markets, 
and the public by mitigating systemic risk.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(2), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
c. Regulation 39.18(e)(3)--External Penetration Testing
(i) Summary of Proposed Regulations
    As discussed above in section II(A)(2), proposed Sec.  39.18(a) 
defines ``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) 
requires 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)(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 also provides that independent contractors must perform 
the required annual external penetration test on behalf of the DCO. 
However, other external penetration testing may be performed by 
appropriately qualified DCO employees not responsible for development 
or operation of the systems or capabilities being tested.
(ii) Costs
    The Commission believes that the scope requirement of proposed 
Sec.  39.18(e)(3) will not impose new costs on DCOs. Comprehensive 
external penetration testing is an industry best practice \151\ and, 
based on the representations made by DCOs to Commission staff in 
administering the Commission's examination program and DCO responses to 
the February 2015 DCR Survey, the Commission believes that most DCOs 
are currently conducting external penetration testing sufficient to 
meet the scope requirements of proposed Sec.  39.18(e)(3).
---------------------------------------------------------------------------

    \151\ See, e.g., NIST SP 800-53, supra note 47, app. F-CA at F-
62; FFIEC Handbook, supra note 57, at 81; PCI-DSS, supra note 54, at 
96-97; see also section II.A.2.
---------------------------------------------------------------------------

    In addition, the Commission believes that the frequency requirement 
of proposed Sec.  39.18(e)(3)(i) will not impose new costs on DCOs. The 
Commission notes that industry best practices specifically state that 
external penetration testing should be conducted ``at least annually.'' 
\152\ Therefore current Commission regulations require annual 
penetration testing. Moreover, the Commission notes that at least 11 of 
the 13 DCOs responding to the February 2015 DCR Survey conduct, at a 
minimum, annual external penetration testing, with two DCOs responding 
that they conduct periodic external penetration testing.
---------------------------------------------------------------------------

    \152\ See, e.g., PCI-DSS, supra note 54, at 96-97; see also 
section II.A.2.

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[[Page 80128]]

    The Commission believes that the requirement of proposed Sec.  
39.18(e)(3)(ii) to use an independent contractor will not impose new 
costs on DCOs. Current Sec.  39.18(j)(2) requires external penetration 
testing to be conducted by a qualified, independent professional, who 
can be employed by the DCO so long as he or she is not responsible for 
development or operation of the systems or capabilities being tested. 
However, as discussed above,\153\ the Commission notes that it is 
industry best practice for DCOs to employ independent contractors to 
conduct their external penetration testing, and therefore it is 
currently required under Sec.  39.18. The Commission notes that at 
least 11 of the 13 DCOs responding to the February 2015 DCR Survey 
already employ independent contractors to conduct their external 
penetration testing. The Commission is proposing Sec.  39.18(e)(3)(ii) 
to make clear that independent contractors must conduct the required 
annual external penetration test.
---------------------------------------------------------------------------

    \153\ See supra section II.A.2.
---------------------------------------------------------------------------

    The Commission requests comment on the potential costs of proposed 
Sec.  39.18(e)(3) on DCOs, including, where possible, quantitative 
data.
(iii) Benefits
    External penetration testing benefits DCOs by identifying the 
extent to which its systems can be compromised before an attack is 
identified.\154\ Such testing is conducted outside a DCO's security 
perimeter to help reveal vulnerabilities that could be exploited by an 
external attacker. Accordingly, the Commission believes that the 
external penetration testing strengthens DCOs' systems, thereby 
protecting clearing members and their customers from a disruption in 
clearing services, which could potentially disrupt the functioning of 
the broader financial markets.
---------------------------------------------------------------------------

    \154\ FFIEC Handbook, supra note 57, at 81; see also supra 
section II.A.2.
---------------------------------------------------------------------------

    As stated above, industry best practices require DCOs to engage 
independent contractors to conduct annual external penetration testing. 
Further, to the extent there is a lack of clarity regarding the 
applicability of certain industry best practices in light of the 
language in current Sec.  39.18(j)(2), proposed Sec.  39.18(e)(3)(ii) 
would provide additional clarity. Moreover, the Commission believes 
that testing by an independent contractor has particular value with 
respect to external penetration testing because the test comes from the 
viewpoint of an outsider, which may differ from the views of current 
tactics, techniques, and threat vectors of current threat actors held 
by DCO employees. The Commission believes that external penetration 
testing helps DCOs, which constitute critical infrastructures important 
to the national economy, to be adequately protected against the level 
of cybersecurity threat now affecting the financial sector.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(3), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
d. Regulation 39.18(e)(4)--Internal Penetration Testing
(i) Summary of Proposed Regulations
    As discussed above in section II(A)(2), proposed Sec.  39.18(a) 
defines ``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) 
requires 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)(4)(i) requires a DCO to conduct internal penetration 
testing at a frequency determined by an appropriate risk analysis, but 
no less frequently than annually. The test may be conducted by 
independent contractors, or by appropriately qualified DCO employees 
not responsible for development or operation of the systems or 
capabilities being tested.
(ii) Costs
    The Commission believes that the scope requirement of proposed 
Sec.  39.18(e)(4) will not impose new costs on DCOs. Comprehensive 
internal penetration testing is an industry best practice,\155\ and is 
therefore required under current regulations. In addition, based on the 
representations made by DCOs to Commission staff in administering the 
Commission's examination program and responses to the February 2015 DCR 
Survey, the Commission believes that most DCOs are currently conducting 
internal penetration testing sufficient to meet the scope requirements 
of proposed Sec.  39.18(e)(4).
---------------------------------------------------------------------------

    \155\ See, e.g., NIST SP 800-53, supra note 47, at F-62; FFIEC 
Handbook, supra note 57, at 81; PCI-DSS, supra note 54, at 96-97; 
see also supra section II.A.2.
---------------------------------------------------------------------------

    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. As 
discussed above, industry best practices require annual internal 
penetration testing, as well as after any significant infrastructure or 
application upgrade or modification.'' \156\ Moreover, the Commission 
notes that the February 2015 DCR Survey indicated that most DCOs 
conduct internal penetration testing at least annually.
---------------------------------------------------------------------------

    \156\ See, e.g., PCI-DSS, supra note 54, at 96-97; see also 
supra section II.A.2.
---------------------------------------------------------------------------

    The Commission also believes that proposed Sec.  39.18(e)(4)(ii) 
will not impose new costs on DCOs. Proposed Sec.  39.18(e)(4)(ii) 
requires DCOs to conduct internal penetration testing by engaging 
independent contractors, or by using employees of the DCO who are not 
responsible for development or operation of the systems or capabilities 
being tested. Regulation 39.18(j)(2) currently requires testing to be 
conducted by a qualified, independent professional, who can be employed 
by the DCO so long as he or she is not responsible for development or 
operation of the systems or capabilities being tested. Accordingly, 
proposed Sec.  39.18(e)(4)(ii) would not change current regulatory 
requirements.
    The Commission requests comment on the potential costs of proposed 
Sec.  39.18(e)(4) on DCOs, including, where possible, quantitative 
data.
(iii) Benefits
    By attempting to penetrate a DCO's automated systems from inside 
the systems' boundaries, internal penetration tests allow DCOs to 
assess system vulnerabilities from attackers that penetrate the DCO's 
perimeter defenses and from trusted insiders, such as former employees 
and contractors. In addition to being an industry best practice, the 
Commission believes that an annual internal penetration testing is 
important because such potential attacks by trusted insiders generally 
pose a unique and substantial threat due to their more sophisticated 
understanding of a DCO's systems. Moreover, ``[a]n advanced persistent 
attack may involve an outsider gaining a progressively greater foothold 
in a firm's environment, effectively becoming an insider in the 
process. For this reason, it is important to perform penetration 
testing against both external and internal interfaces and systems.'' 
\157\

[[Page 80129]]

The Commission also believes that internal penetration testing 
strengthens DCOs' systems, thereby protecting clearing members and 
their customers from a disruption in clearing services, which could 
potentially disrupt the functioning of the broader financial markets.
---------------------------------------------------------------------------

    \157\ FINRA Report, supra note 31, at 22.
---------------------------------------------------------------------------

    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(4), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
e. Regulation 39.18(e)(5)--Controls Testing
(i) Summary of Proposed Regulations
    As discussed above in section II(A)(3), proposed Sec.  39.18(a) 
defines ``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 proposed Sec.  39.18, and proposed Sec.  39.18(e)(5) 
requires 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 are 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.'' DCOs 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.
(ii) Costs
    The Commission does not believe that the scope requirement of 
proposed Sec.  39.18(e)(5) will impose new costs on DCOs. Comprehensive 
controls testing is an industry best practice.\158\ Accordingly, 
current Sec.  39.18 requires DCOs to conduct comprehensive controls 
testing. In addition, based on the representations made by DCOs to 
Commission staff in administering the Commission's examination program 
and responses to the February 2015 DCR Survey, the Commission believes 
that most DCOs are currently conducting controls testing sufficient to 
meet the scope requirements of proposed Sec.  39.18(e)(5).
---------------------------------------------------------------------------

    \158\ See, e.g., NIST SP 800-137, supra note 81, at vi; PCI-DSS, 
supra note 54, at 13; see also supra section II.A.3.
---------------------------------------------------------------------------

    Proposed Sec.  39.18(e)(5)(i) would require control testing to be 
conducted at a frequency determined by an appropriate risk analysis, 
but no less frequently than every two years. The Commission recognizes, 
however, that appropriate risk analysis may well determine that more 
frequent testing of either certain key controls or all controls is 
necessary. For example, the Commission notes that the February 2015 DCR 
Survey indicated that most DCOs conduct controls testing at least 
annually.\159\
---------------------------------------------------------------------------

    \159\ Seven of the responding DCOs conduct controls testing 
annually, three DCOs conduct controls testing biannually, two DCOs 
conduct controls testing triennially, and one DCO does not conduct 
controls testing.
---------------------------------------------------------------------------

    Proposed Sec.  39.18(e)(5)(ii) would require DCOs to engage 
independent contractors to test and assess its key controls. Regulation 
39.18(j)(2) currently requires testing to be conducted by a qualified, 
independent professional, who can be employed by the DCO so long as he 
or she is not responsible for development or operation of the systems 
or capabilities being tested. The Commission notes that at least 11 of 
the 13 DCOs responding to the February 2015 DCR Survey already employ 
independent contractors to conduct key controls testing.
    The Commission does not have quantification or estimation of the 
costs associated with proposed Sec.  39.18(e)(5)(i) or proposed Sec.  
39.18(e)(5)(ii). Nonetheless, in qualitative terms, the Commission 
recognizes that, compared to the status quo, this proposed requirement 
may impose some costs on DCOs equal to the difference between 
conducting controls testing every two years in-house and hiring an 
independent contractor to do so. In addition, with respect to the 
frequency requirement in the proposed rule, a DCO would be required to 
test each control included in its program of system safeguards-related 
risk analysis oversight, at a frequency determined by appropriate risk 
analysis, but no less frequently than every two years. The Commission 
further recognizes that actual costs may vary as a result of numerous 
factors, including the size of the DCO and the complexity of the 
automated systems. Moreover, these proposed regulations may require 
DCOs to establish and implement internal policies and procedures that 
are reasonably designed to address the workflow associated with the 
controls test, which may include the communication and cooperation 
between the DCO and independent contractor, communication and 
cooperation between the DCO's legal, business, technology, and 
compliance departments, appropriate authorization to remediate 
vulnerabilities identified by the independent contractor, 
implementation of the measures to address such vulnerabilities, and 
verification that these measures are effective and appropriate.
    The Commission requests comment on the potential costs of proposed 
Sec.  39.18(e)(5) on DCOs, including, where possible, quantitative 
data.
(iii) Benefits
    Controls testing is essential in determining risk to an 
organization's operations and assets, to individuals, and to other 
organizations, and to the Nation resulting from the use of the 
organization's systems.\160\ In other words, controls testing is vital 
because it allows firms to be nimble in preventing, detecting, or 
recovering from an attack.\161\ The Commission believes that the 
complex analysis and plan preparation that a DCO undertakes with 
respect to controls testing, including designing and implementing 
changes to existing plans, likely contributes to a better ex ante 
understanding by the DCO's management of the challenges the DCO would 
face in a cyber threat scenario, and thus better preparation to meet 
those challenges. This improved preparation would help reduce the 
possibility of market disruptions and financial losses to clearing 
members and their customers. Moreover, regularly conducting controls 
testing enables a DCO to mitigate the impact that a cyber threat to, or 
a disruption of, a DCO's operations would have on customers, clearing 
members, and, more broadly, the stability of the U.S. financial 
markets. Accordingly, the Commission believes that such testing 
strengthens a DCO's systems, thereby protecting

[[Page 80130]]

clearing members and their customers from a disruption in clearing 
services
---------------------------------------------------------------------------

    \160\ See NIST SP 800-53A, supra note 92, at 1; see also supra 
section II.A.3.
    \161\ Statement of Mr. Mark Clancy, Chief Executive Officer, 
Soltra, CFTC Roundtable, supra note 8.
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that, as described above, 
some DCOs may incur some additional costs as a result of the need to 
conduct testing by an independent contractor. However, the Commission 
believes that testing by an independent contractor has particular value 
because the test comes from the viewpoint of an outsider, which may 
differ from the views of current tactics, techniques, and threat 
vectors of current threat actors held by DCO employees. The Commission 
also acknowledges that, as described above, some DCOs may incur some 
additional costs as a result of the need to accelerate the testing of 
some controls in order to comply with the two-year cycle requirement. 
Nevertheless, the Commission believes that it is essential for each 
control to be tested within the two-year cycle requirement in order to 
confirm the continuing adequacy of the DCO's system safeguards and 
maintain market stability. Additionally, the Commission notes that the 
proposed rule would permit such testing to be conducted on a rolling 
basis over the course of a two year period or period determined by 
appropriate risk analysis. The rolling basis provision in the proposed 
rule is designed to give a DCO flexibility concerning when controls are 
tested during the required minimum frequency period. This flexibility 
is intended to reduce burdens associated with testing every control 
while still ensuring the needed minimum testing frequency. The 
Commission also notes that testing on a rolling basis is consistent 
with best practices.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(5), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
f. Regulation 39.18(e)(6)--Security Incident Response Plan Testing
(i) Summary of Proposed Regulations
    As discussed above in section II(A)(4), proposed Sec.  39.18(a) 
defines 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 DCOs to conduct such 
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 entity'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. Under proposed Sec.  39.18(e)(6)(iii), the DCO 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. 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 
its own employees.
(ii) Costs
    The Commission believes that proposed Sec.  39.18(e)(6)(i) will not 
impose new costs on DCOs. Security incident response plan testing is an 
industry best practice and therefore is required to be conducted under 
current Commission regulations.\162\ Moreover, the Commission notes 
that industry best practices state that security incident response plan 
testing should be conducted annually.\163\ Accordingly, proposed Sec.  
39.18(e)(6)(ii) will not impose new costs on DCOs because current Sec.  
39.18 requires DCOs to conduct security incident response plan testing 
on an annual basis. Finally, as stated above, Sec.  39.18(e)(6)(iii) 
and (iv) do not contain explicit requirements, but rather provide a DCO 
with flexibility to: (1) Coordinate its security incident response plan 
testing with other testing required by Sec.  39.18 or with testing of 
its other business continuity-disaster recovery and crisis management 
plans; and (2) consistent with current Sec.  39.18(j)(2), engage 
independent contractors or use employees of the DCO who are not 
responsible for development or operation of the systems or capabilities 
being tested. Accordingly, these provisions will not impose new costs 
on DCOs.
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    \162\ See e.g., NIST SP 800-34, supra note 101, at 11; FINRA 
Report, supra note 31, at 23; FFIEC BCP Booklet, supra note 104, at 
25; and Council on Cybersecurity, supra note 33, at CSC 18; see also 
supra section II.A.4. Similarly, the Commission proposes to 
expressly require DCOs to update their business continuity and 
disaster recovery plans and other emergency plans at least annually. 
The Commission notes that updating such plans and procedures at 
least annually is an industry best practice. See NIST SP 800-61, 
supra note 101, at 8. Thus, annual updates are required under 
current Commission regulations. Therefore, the Commission does not 
believe that this proposal would impose new costs on DCOs. The 
Commission acknowledges that this proposal could impose additional 
burdens or costs on DCOs. The Commission believes, however, that 
DCOs must be adequately protected in today's environment.
    \163\ See, e.g., NIST Special Publication 800-84, Guide to Test, 
Training, and Exercise Programs for IT Plans and Capabilities, Sept. 
2006, p. ES-2, available at: http://csrc.nist.gov/publications/nistpubs/800-84/SP800-84.pdf; PCI-DSS, supra note 54, at 108; see 
also supra section II.A.4.
---------------------------------------------------------------------------

    The Commission requests comment on the potential costs of proposed 
Sec.  39.18(e)(6) on DCOs, including, where possible, quantitative 
data.
(iii) Benefits
    Security incident response plans, and adequate testing of such 
plans, reduce the damage caused by breaches of a DCO's network 
security. Network security breaches are highly likely to have a 
substantial negative impact on a DCO's operations. They can increase 
costs through lost productivity, lost current and future market 
participation or swap data reporting, compliance penalties, and damage 
to the DCO's reputation and brand. Moreover, the longer a cyber 
intrusion continues, the more its impact may be compounded.
    As noted above, and consistent with industry best practices, the 
Commission believes that annual security incident response testing 
increases the ability of a DCO to mitigate the duration and impact in 
the event of a security incident.\164\ Thus, a DCO may be better 
positioned to minimize any potential impacts to automated system 
operations, reliability, security, or capacity, or the availability, 
confidentiality, or integrity of its derivatives data.
---------------------------------------------------------------------------

    \164\ As noted above, the proposed provision that would require 
DCOs to update their business continuity and disaster recovery plans 
and other emergency plans at least annually reflects what is already 
considered an industry best practice. Further, annual updates are 
important because once an organization has developed a business 
continuity and disaster recovery plan, ``the organization should 
implement the plan and review it at least annually to ensure the 
organization is following the roadmap for maturing the capability 
and fulfilling their [sic] goals for incident response.'' NIST SP 
800-61, supra note 101, at 8.

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[[Page 80131]]

    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(6), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
g. Regulation 39.18(e)(7)--Enterprise Technology Risk Assessment
(i) Summary of Proposed Regulations
    Proposed Sec.  39.18(a) defines 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) also provides 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) requires 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) requires 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) provides that DCOs may 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.
(ii) Costs
    The Commission does not believe that the scope requirement of 
proposed Sec.  39.18(e)(7) will impose new costs on DCOs. Comprehensive 
enterprise technology risk assessments are an industry best 
practice.\165\ Accordingly, current Sec.  39.18 requires DCOs to 
conduct enterprise technology risk assessments. In addition, based on 
the representations made by DCOs to Commission staff in administering 
the Commission's examination program and responses to the February 2015 
DCR Survey, the Commission believes that most DCOs are currently 
conducting enterprise technology risk assessments sufficient to meet 
the scope requirements of proposed Sec.  39.18(e)(7).
---------------------------------------------------------------------------

    \165\ See, e.g., NIST SP 800-39, supra note 59; FFIEC Handbook, 
supra note 57, at 86; PCI-DSS, supra note 54, at 100; see also supra 
section II.A.5.
---------------------------------------------------------------------------

    Proposed Sec.  39.18(e)(7)(i) would require a DCO to conduct an 
enterprise technology risk assessment at a frequency determined by an 
appropriate risk analysis, but no less frequently than annually. As 
discussed above,\166\ industry best practices require enterprise 
technology risk assessments at least annually and upon significant 
changes to the environment.\167\ Thus, current regulations require DCOs 
to conduct enterprise technology risk assessments on an annual basis. 
Accordingly, the Commission does not believe that proposed Sec.  
39.18(e)(7)(i) will impose new costs on DCOs. Moreover, the Commission 
notes that responses to the February 2015 DCR Survey indicated that 
most DCOs conduct an enterprise technology risk assessment at least 
annually.
---------------------------------------------------------------------------

    \166\ See supra section II.A.5.
    \167\ PCI-DSS, supra note 54, at 100.
---------------------------------------------------------------------------

    Proposed Sec.  39.18(e)(7)(ii) requires DCOs to conduct enterprise 
technology risk assessments by using independent contractors or 
employees of the DCO not responsible for development or operation of 
the systems or capabilities being assessed. Regulation 39.18(j)(2) 
currently requires testing to be conducted by a qualified, independent 
professional, who can be employed by the DCO so long as he or she is 
not responsible for development or operation of the systems or 
capabilities being tested. Accordingly, the Commission does not believe 
that DCOs will incur additional costs as a result of the adoption of 
proposed Sec.  39.18(e)(7)(ii).
(iii) Benefits
    The Commission believes that enterprise technology risk assessments 
are essential components of a comprehensive system safeguard program. 
Enterprise technology risk assessments can be viewed as a strategic 
approach through which a DCO identifies risks and aligns its systems 
goals accordingly. The Commission believes that these requirements are 
necessary to support a strong risk management framework for DCOs, 
thereby helping to protect DCOs, their members, and other market 
participants, and helping to mitigate the risk of market disruptions.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(7), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
h. Regulation 39.18(e)(8)--Scope of Testing and Assessment
(i) Summary of Proposed Regulations
    As discussed above in section II(B), proposed Sec.  39.18(e)(8) 
provides that the scope for all system safeguards testing and 
assessment required by proposed 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; 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
    The Commission believes that the costs and benefits associated with 
the scope for testing and assessment are generally attributable to the 
substantive testing requirements, and therefore, are discussed above in 
the cost and benefit considerations related to the rules describing the 
requirements for each test or assessment.
i. Regulation 39.18(e)(9)--Internal Reporting and Review
(i) Summary of Proposed Regulations
    As discussed above in section II(C), proposed Sec.  39.18(e)(9) 
provides 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 required by proposed Sec.  39.18. Moreover 
the DCO would be required to establish and follow appropriate 
procedures for the remediation of issues identified through such 
review, as provided in proposed Sec.  39.18(e)(10), and for evaluation 
of the effectiveness of testing and assessment protocols.
(ii) Costs
    As discussed above, review of system safeguard testing and 
assessments by

[[Page 80132]]

senior management and the DCO's board of directors is an industry best 
practice and is therefore required to be conducted under current 
Commission regulations.\168\ Accordingly, the Commission does not 
believe that DCOs will incur additional costs as a result of the 
adoption of the proposed rules.
---------------------------------------------------------------------------

    \168\ See supra section II.C.
---------------------------------------------------------------------------

    Nevertheless, the Commission requests comment on any potential 
costs of proposed Sec.  39.18(e)(9) on DCOs, including, where possible, 
quantitative data.
(iii) Benefits
    The Commission believes that internal reporting and review are an 
essential component of a comprehensive and effective system safeguard 
program. While senior management and the DCO's board of directors may 
have to devote resources to reviewing testing and assessment reports, 
active supervision by these individuals promotes responsibility and 
accountability by ensuring they receive and review the results of all 
system safeguard testing and assessments, thereby affording them the 
opportunity to evaluate the effectiveness of the testing and assessment 
protocols. Moreover, the attention by the board of directors and senior 
management should help to promote a focus on such reviews and issues, 
and enhance communication and coordination regarding such reviews and 
issues among the business, technology, legal, and compliance personnel 
of the DCO. Such focus could cause a DCO to internalize and/or more 
appropriately allocate certain costs that would otherwise be borne by 
clearing members, customers of clearing members, and other relevant 
stakeholders. Active supervision by senior management and the board of 
directors also promotes a more efficient, effective, and reliable DCO 
risk management and operating structure. Consequently, the DCO should 
be better positioned to strengthen the integrity, resiliency, and 
availability of its automated systems.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(9), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
j. Regulation 39.18(e)(10)--Remediation
(i) Summary of Proposed Regulations
    As discussed above in section II(C), proposed Sec.  39.18(e)(10) 
requires a DCO to analyze the results of the testing and assessment 
required by proposed Sec.  39.18 to identify all vulnerabilities and 
deficiencies in its systems. The DCO would also be required to 
remediate those vulnerabilities and deficiencies to the extent 
necessary to enable the DCO to fulfill its statutory and regulatory 
obligations. The remediation would have to be timely in light of 
appropriate risk analysis with respect to the risks presented by such 
vulnerabilities and deficiencies.
(ii) Costs
    The Commission believes that, based on a DCO's risk analysis, the 
DCO generally remediates the vulnerabilities and deficiencies revealed 
by testing and assessment in the ordinary course of business to 
mitigate harm to the DCO and to satisfy current statutory and 
regulatory requirements. As discussed above, remediation of 
vulnerabilities and deficiencies revealed by cybersecurity testing is 
an industry best practice,\169\ and DCOs are already required to comply 
with this requirement. Accordingly, the Commission does not believe 
that DCOs will incur additional costs as a result of the adoption of 
the proposed rules.
---------------------------------------------------------------------------

    \169\ See, e.g., FFIEC Handbook, supra note 57, at 5; see also 
supra section II.C.
---------------------------------------------------------------------------

    The Commission requests comment on any potential costs of proposed 
Sec.  39.18(e)(10) on DCOs, including, where possible, quantitative 
data.
(iii) Benefits
    The Commission believes that effective remediation is a critical 
component of a comprehensive and effective system safeguard program. As 
discussed above, the Commission believes that the remediation of 
vulnerabilities and deficiencies revealed by cybersecurity testing is a 
current industry best practice and therefore already required under 
current regulations. Moreover, remediation may reduce the frequency and 
severity of systems disruptions and breaches for DCOs. In addition, 
remediation helps ensure that DCOs dedicate appropriate resources to 
timely address system safeguard-related deficiencies and would place an 
emphasis on mitigating harm to market participants while promoting 
market integrity. Without a timely remediation requirement, the impact 
of the vulnerabilities or deficiencies identified by the testing or 
assessment could persist and have a detrimental effect on the 
derivatives markets generally, as well as market participants. The 
Commission also believes that remediation could potentially result in 
DCOs reviewing and revising their existing policies and procedures to 
ensure that they are sufficiently thorough in the context of the new 
regulatory requirements, which would also assist their staffs in 
responding appropriately to vulnerabilities or deficiencies identified 
by the testing and assessments.
    The Commission requests comments on the potential benefits to a DCO 
in complying with all aspects of proposed Sec.  39.18(e)(10), and any 
benefits that would be realized by members of DCOs and their customers, 
as well as other market participants or the financial system more 
broadly. The Commission specifically requests comment on alternative 
means to address these issues, and the benefits associated with such 
alternatives.
4. Section 15(a) Factors
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. Proposed 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 proposed rules 
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.
    Additionally, providing the Commission with reports concerning the 
system safeguards testing and assessments required by the proposed 
regulations 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 proposed 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

[[Page 80133]]

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 proposed amendments to Sec.  39.18 would 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 proposed 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 proposed amendments to have 
a significant impact on the competitiveness of the derivatives markets.
c. Price Discovery
    The Commission does not anticipate the proposed 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 proposed amendments to Sec.  39.18 would strengthen and promote 
sound risk management practices across DCOs. Specifically, the proposed 
amendments would 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 proposed rules 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 proposed 
regulations 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. 
Proposed Sec.  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.
5. Request for Comment
    In addition to the requests for comment specified above, the 
Commission requests comment on the following:
    What are the potential costs and benefits resulting from, or 
arising out of, requiring DCOs to comply with the proposed changes to 
Sec.  39.18? In considering costs and benefits, commenters are 
requested to address the effect of the proposed regulation not only on 
a DCO, but also on the DCO's clearing members, the customers of 
clearing members, and the financial system more broadly. The Commission 
requests that, where possible, commenters provide quantitative data in 
their comments, particularly with respect to estimates of costs and 
benefits.
    The Commission has identified the baseline as current regulatory 
requirements. Is this baseline correct? If not, what should the 
baseline be, and how would the alternative baseline change the costs 
and benefits associated with the proposed changes to Sec.  39.18?
    Do rules impose costs above those required by current system 
safeguards rule and identified by the Commission? Specify and provide 
data to support.
    Do rules provide benefits above those required by current system 
safeguards rule and identified by the Commission? Specify and provide 
data to support.
    Do the costs or impacts of the proposed rules differ depending on 
the size of a DCO? Do they differ depending on the complexity of a 
DCO's systems?

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 proposes to amend 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, 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.

[[Page 80134]]

    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 or potentially jeopardizes 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 (e.g., 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 
(e.g., network port control, boundary defenses, encryption); system and 
information integrity (e.g., 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 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 (e.g., 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 (e.g., 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

[[Page 80135]]

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. Where indicated by appropriate risk analysis, 
such scanning shall be conducted on an authenticated basis, e.g., using 
log-in credentials. Where scanning is conducted on an unauthenticated 
basis, the derivatives clearing organization shall implement effective 
compensating controls.
    (iii) A derivatives clearing organization shall engage independent 
contractors to conduct two of the required quarterly vulnerability 
tests each year. A derivatives clearing organization may conduct other 
vulnerability testing 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 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 no less frequently than every two years. 
A derivatives clearing organization may conduct such testing on a 
rolling basis over the course of the period determined by such risk 
analysis.
    (ii) A derivatives clearing organization shall engage independent 
contractors to test and assess the key controls, as determined by 
appropriate risk analysis, included in the derivatives clearing 
organization's program of risk analysis and oversight no less 
frequently than every two 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

[[Page 80136]]

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 who are not 
responsible for development or operation of the systems or capabilities 
being tested.
    (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.
    (ii) A derivatives clearing organization may conduct enterprise 
technology risk assessments by using independent contractors or 
employees of the derivatives clearing organization not responsible for 
development or operation of the systems or capabilities being assessed.
    (8) Scope of testing and assessment. The scope of all testing and 
assessment required by this section shall be broad enough to include 
testing of all automated systems and controls necessary to identify any 
vulnerability which, if exploited or accidentally triggered, 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 analyze 
the results of the testing and assessment required by this section to 
identify all vulnerabilities and deficiencies in its systems. The 
derivatives clearing organization shall remediate those vulnerabilities 
and deficiencies to the extent necessary to enable the derivatives 
clearing organization to fulfill the requirements of this chapter and 
meet its statutory and regulatory obligations. Such remediation must be 
timely in light of appropriate risk analysis with respect to the risks 
presented by such vulnerabilities and deficiencies.
    (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 derivatives clearing organization's automated 
systems.
    (5) Nothing in this 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. Revise paragraphs (a), (b)(3), and (c) of Sec.  39.34 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

[[Page 80137]]

provisions of Sec.  39.18(e) shall apply to such testing.
* * * * *

    Issued in Washington, DC, on December 17, 2015, 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 Commissioner's Statement

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 this proposed rule.
    The risk of cyberattacks is perhaps the most important single 
issue we face in terms of financial market stability and integrity.
    The examples of cyberattacks or significant technological 
disruptions from inside and outside the financial sector are all too 
frequent and familiar.
    Today, the aims of these attacks can go beyond traditional 
financial motives. Today, we must be concerned about the possibility 
of attacks intended to destroy information and disrupt or 
destabilize our markets.
    The risk to American businesses and the economy is dramatic. And 
the interconnectedness of our financial institutions and markets 
means that a failure in one institution can have significant 
repercussions throughout the system.
    The proposed rule that we are issuing today is an important step 
toward enhancing the protections in our markets. It builds on our 
core principles--which already require clearinghouses to focus on 
system safeguards--by setting standards consistent with best 
practices. It requires robust testing of cyber protections, setting 
forth the types of testing that must be conducted, the frequency of 
testing and whether tests should be conducted by independent 
parties. In addition, it enhances standards for incident response 
planning and enterprise technology risk assessments.
    Our requirements should come as no surprise--clearinghouses 
should already be doing extensive testing. Indeed, we hope that 
today's proposal sets a baseline that is already being met.
    The proposal also complements what we as a Commission already 
do. We focus on these issues in our examinations to determine 
whether an institution is following good practices and paying 
adequate attention to these risks at the board level and on down.
    This rule is largely in line with another system safeguards 
proposal that the Commission also approved today, which applies the 
same standards to other critical market infrastructure.
    Since the 2009 G-20 agreement and the enactment of Dodd-Frank, 
clearinghouses have become increasingly important the financial 
system. As a result, I believe we must do all we can to ensure their 
strength and stability. This proposed rule is a critical component 
of this effort.
    I thank the staff for their hard work on this proposal. Of 
course, we welcome public comment on both our system safeguards 
proposals, which will be carefully taken into account before we take 
any final action.

Appendix 3--Statement of Commissioner Sharon Y. Bowen

    Today, we are considering two rule proposals that address an 
issue which is right at the heart of systemic risk in our markets--
cybersecurity. The question that we face is: with a problem as 
immense as cybercrime, and the many measures already being employed 
to combat it, what would today's proposed rules accomplish? In 
answer to that question, I want to say a few words about our 
cybercrime challenge, what is currently being done to address it, 
and what I hope these proposed regulations would add to these 
efforts.
    The problem is clear--our firms are facing an unrelenting 
onslaught of attacks from hackers with a number of motives ranging 
from petty fraud to international cyberwarfare. We have all heard of 
notable and sizable companies that have been the victim of 
cybercrime, including: Sony, eBay, JPMorgan, Target, and Staples--
even the U.S. government has fallen victim.
    In recent testimony before the House Committee on Financial 
Services, Subcommittee on Oversight and Investigations about 
cybercrime, the Director of the Center for Cyber and Homeland 
Security noted that the ``U.S. financial services sector in 
particular is in the crosshairs as a primary target.'' \1\ He cited 
one US bank which stated that it faced 30,000 cyber-attacks in one 
week--averaging an attack every 34 seconds.\2\
---------------------------------------------------------------------------

    \1\ Testimony of Frank J. Cilluffo, Director, Center for Cyber 
and Homeland Security, Before the U.S. House of Representatives, 
Committee on Financial Services, Subcommittee on Oversight and 
Investigations, 1 (June 16, 2015) (noting that ``the following 
figures which were provided to me recently by a major U.S. bank on a 
not-for-attribution basis: just last week, they faced 30,000 cyber-
attacks. This amounts to an attack every 34 seconds, each and every 
day. And these are just the attacks that the bank actually knows 
about, by virtue of a known malicious signature or IP address. As 
for the source of the known attacks, approximately 22,000 came from 
criminal organizations; and 400 from nation-states.''), available at 
https://cchs.gwu.edu/sites/cchs.gwu.edu/files/downloads/A%20Global%20Perspective%20on%20Cyber%20Threats%20-%2015%20June%202015.pdf.
    \2\ Id.
---------------------------------------------------------------------------

    Given the magnitude of the problem, it is not at all surprising 
that a lot is already being done to address it. The Department of 
Homeland Security and others have been working with private firms to 
shore up defenses. Regulators have certainly been active. The 
Securities and Exchange Commission (SEC), the Federal Deposit 
Insurance Corporation (FDIC), the Federal Reserve Board (FRB), the 
Federal Housing Finance Agency (FHFA), and our self-regulatory 
organization, the National Futures Association (NFA), have issued 
cybersecurity guidance. In Europe, the Bank of England (BOE) 
introduced the CBEST program to conduct penetration testing on 
firms, based on the latest data on cybercrime. We heard a 
presentation from the BOE about CBEST at a meeting of the Market 
Risk Advisory Committee this year.
    I wanted to hear what market participants were doing to address 
the challenge of our cybersecurity landscape so I met with several 
of our large registrant dealers and asked them about their 
cybersecurity efforts. After these discussions, I was both alarmed 
by the immensity of the problem and heartened by efforts of these 
larger participants to meet that problem head on. They were 
employing best practices such as reviewing the practices of their 
third party providers, using third parties to audit systems, sharing 
information with other market participants, integrating 
cybersecurity risk management into their governance structure, and 
staying in communication with their regulators.
    We have also been vigilant in our efforts to address 
cybersecurity. Under our current rule structure, many of our 
registrants have system safeguards requirements. They require, among 
other things, that the registrants have policies and resources for 
risk analysis and oversight with respect to their operations and 
automated systems, as well as reporting, recordkeeping, testing, and 
coordination with service providers. These requirements clearly 
include appropriate cybersecurity measures. We also regularly 
examine registrants for their adherence to the system safeguards 
requirements, including effective governance, use of resources, 
appropriate policies, and vigilant response to attacks.
    So if all of this is happening, what would more regulation 
accomplish? In other words, what is the ``value add'' of the rules 
being proposed today? The answer is: A great deal. While some firms 
are clearly engaging in best practices, we have no guarantee that 
all of them are. And as I have said before, in a system as 
electronically interconnected as our financial markets, ``we're 
collectively only as strong as our weakest link, and so we need a 
high baseline level of protection for everyone . . .'' \3\ We need 
to incentivize all firms under our purview to engage in these 
effective practices.
---------------------------------------------------------------------------

    \3\ Commissioner Sharon Y. Bowen, Commodity Futures Trading 
Commission, ``Remarks of CFTC Commissioner Sharon Y. Bowen Before 
the 17th Annual OpRisk North America,'' March 25, 2015, available at 
http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.
---------------------------------------------------------------------------

    We have to do this carefully though because once a regulator 
inserts itself into the cybersecurity landscape at a firm--the firm 
now has two concerns: Not just fighting the attackers, but managing 
its reputation with its regulator. So, if not done carefully, a 
regulator's attempt to bolster cybersecurity at a firm can instead 
undermine it by incentivizing the firm to cover up any weaknesses in 
its cybersecurity

[[Page 80138]]

infrastructure, instead of addressing them. Further, we must be 
careful not to mandate a one-size-fits-all standard because firms 
are different. Thus, we must be thoughtful about how to engage on 
this issue. We need to encourage best practices, while not hampering 
firms' ability to customize their risk management plan to address 
their cybersecurity threats.
    I think these rulemakings are a great first step in 
accomplishing that balance. 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 Framework for Improving Critical 
Infrastructure Cybersecurity (``NIST Framework'').\4\
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

    In all, I think the staff has put together two thoughtful 
proposals. Clearly, however, this is only a first step since all our 
registrants, not just exchanges, SEFs, SDRs and DCOs, need to have 
clear cybersecurity measures in place. I am also very eager to hear 
what the general public has to say about these proposals. Do they go 
far enough to incentivize appropriate cybersecurity measures? Are 
they too burdensome for firms that do not pose significant risk to 
the system? And given that this is a dynamic field with a constantly 
evolving set of threats, what next steps should we take to address 
cybercrime? Please send in all your thoughts for our consideration.

[FR Doc. 2015-32144 Filed 12-22-15; 8:45 am]
 BILLING CODE 6351-01-P