[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Notices]
[Pages 72128-72146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19762]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100852; File No. SR-FICC-2024-803]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Extension of Review Period of Advance Notice To 
Host Certain Core Clearance and Settlement Systems in a Public Cloud

August 28, 2024.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, entitled Payment, Clearing 
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') 
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 
1934 (``Act''),\3\ notice is hereby given that on August 14, 2024, 
Fixed Income Clearing Corporation (``FICC'') filed with the Securities 
and Exchange Commission (``Commission'') an advance notice as described 
in Items I, II and III below, which Items have been prepared primarily 
by the clearing agency. The Commission is publishing this notice to 
solicit comments on the advance notice from interested persons and to 
extend the review period of the advance notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    FICC files this advance notice seeking no objection to host a 
specified set of core clearance, settlement, and risk applications, 
including any Regulation Systems Compliance and Integrity (``Reg. 
SCI'') systems and Critical SCI systems,\4\ (``Core C&S Systems'') on 
an on-demand network of configurable information technology resources 
running on a public cloud infrastructure (``Cloud'' or ``Cloud 
Infrastructure'') hosted by a single, third-party service provider 
(``Cloud Service Provider'' or ``CSP'') (altogether, the ``Cloud 
Proposal''), as described in greater detail below.
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    \4\ 17 CFR 242.1000 et seq.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the advance notice 
and discussed any comments it received on the advance notice. The text 
of these statements may be examined at the places specified in Item IV 
below. The clearing agency has prepared summaries, set forth in 
sections A and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    FICC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, FICC will amend 
this filing to publicly file such comments as an Exhibit 2 to this 
filing, as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting written comments are cautioned that, according 
to Section IV (Solicitation of Comments) of the Exhibit 1A in the 
General Instructions to Form 19b-4, the Securities and Exchange 
Commission (``Commission'') does not edit personal identifying 
information from comment submissions. Commenters should submit only 
information that they wish to make available publicly, including their 
name, email address, and any other identifying information.
    All prospective commenters should follow the Commission's 
instructions on How to Submit Comments, available at www.;sec.gov/
regulatory-actions/how-

[[Page 72129]]

to-submitcomments. General questions regarding the rule filing process 
or logistical questions regarding this filing should be directed to the 
Main Office of the Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    FICC reserves the right to not respond to any comments received.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Clearing, 
and Settlement Supervision Act

I. Description of the Proposal

    Pursuant to the Clearing Supervision Act and Rule 19b-4(n)(1)(i) 
under the Exchange Act,\5\ FICC files this advance notice seeking no 
objection to the Cloud Proposal, as described herein.
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    \5\ 17 CFR 240.19b-4(n)(1)(i).
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    The specified set of Core C&S Systems that the Clearing Agencies 
intend to host in the Cloud, and the transition schedule for such 
hosting, are listed in Exhibit 3 to this advance notice filing.\6\ 
However, the Clearing Agencies recognize that it may become necessary 
to deviate from the proposed transition schedule as risks change over 
time and the proposed implementation would occur over several years. 
The Clearing Agencies' process for monitoring, assessing, and 
escalating such risks, which may result in a deviation, is described in 
Section I.D, below. If the Clearing Agencies would need to deviate from 
that schedule, they would provide Commission staff notice of such 
deviation, the reason for the deviation, and how the implementation 
schedule would be updated to account for the deviation. Further, the 
Clearing Agencies recognize that deviating from the proposed transition 
schedule would necessitate a separate analysis to determine whether 
such deviation could materially affect the nature or level of risk 
posed by each of the Clearing Agencies.
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    \6\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the proposed 
transition schedule (i.e., the Core C&S Systems to Move to Cloud). 
The Clearing Agencies have provided this schedule in confidential 
Exhibit 3 to this advance notice filing.
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    FICC's two affiliate clearing agencies, The Depository Trust 
Company (``DTC'') and National Securities Clearing Corporation 
(``NSCC'' and together with FICC and DTC, the ``Clearing Agencies'') 
\7\ have each filed with the Commission advance notices to adopt the 
same Cloud Proposal. Accordingly, each respective advance notice filing 
is written from the perspective of the Clearing Agencies, collectively, 
instead of FICC, DTC, and NSCC individually.\8\
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    \7\ The Clearing Agencies are each a subsidiary of The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared service model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides relevant services to the Clearing 
Agencies.
    \8\ Capitalized terms not otherwise defined herein have the 
meaning as set forth in respective rules of the Clearing Agencies, 
available at https://www.dtcc.com/legal/rules-and-procedures.
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A. The Current System and Summary of Proposed Change
    Today, the Clearing Agencies' Core C&S Systems are hosted using 
Compute,\9\ Storage and Networking, as defined below, running in 
private data centers (i.e., on-premises). The current data-center 
footprint consists of a single data center in each of two regions. Each 
regional data center has a corresponding data bunker used for 
synchronous data protection and restoration.\10\
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    \9\ The existing Compute platform consists of both on-premises 
mainframe and private cloud platforms.
    \10\ Note: The data bunkers cannot run applications, as they are 
only for data protection and restoration.
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    The Clearing Agencies view the proposed transition to using a Cloud 
Infrastructure to host the specified set of Core C&S Systems as a 
natural progression of the Clearing Agencies' information technology 
strategy that aligns with their overall corporate strategy--to deliver 
on modernization and maximize the value of their platforms for 
stakeholders and continue to invest in risk management excellence.
    For over 11 years, the Clearing Agencies have honed their expertise 
in operating non-Core C&S Systems within the Cloud.\11\ Throughout that 
time, the Clearing Agencies have continually refined their capabilities 
across technical, risk, legal, and compliance dimensions, in tandem 
with the Cloud's own evolution and the industry's increasing adoption 
of it. Given this extensive maturity and development over the past 
decade, the Clearing Agencies believe that hosting Core C&S Systems in 
the Cloud, via a single CSP, is now appropriate and essential. By 
consolidating resources under a single CSP, the Clearing Agencies can 
optimize efficiency, reduce costs, mitigate risks, and maintain a 
cohesive environment for seamless collaboration and operation.
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    \11\ Some of the non-Core C&S Systems already operating in Cloud 
include systems that support risk analysis, various reporting 
engines, and shared infrastructure capabilities. More specifically, 
for risk analysis, there are applications for certain risk testing 
and calculations used to assess industry risk postures for various 
Clearing Agency clients, as well as warehousing large sets of risk 
data for quantitative analytics. For the various report engines, 
there are applications that provide publicly disseminatable data 
sets and documentation, certificate imaging, as well as certain 
archival storage capabilities. For shared infrastructure 
capabilities, there are applications that support the Clearing 
Agencies' engineering and development departments for dev-op 
capabilities such as code scanning, code repositories, and 
infrastructure-as-code deployment pipelines.
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    As described in greater detail in this advance notice, the Clearing 
Agencies propose to provision, within a single CSP, logically 
segregated sections of the Cloud Infrastructure that would provide the 
Clearing Agencies with the virtual equivalent of physical data center 
resources, including scalable resources that can (i) handle various 
computationally intensive applications with load-balancing and resource 
management (``Compute''); (ii) provide configurable storage 
(``Storage''); and (iii) provide network resources and services 
(``Network''). These resources would be logically segregated from other 
customers of the CSP. The Clearing Agencies would leverage the CSP's 
IaaS (i.e., infrastructure as a service) and PaaS (i.e., platform as a 
service) services for building and running Core C&S Systems.
    The Clearing Agencies do not propose to transition all Core C&S 
Systems entirely out of their regional data centers at this time, but 
rather, to host a specified set of Core C&S Systems in a Cloud 
Infrastructure while maintaining the remaining applications in the 
Clearing Agencies' regional data centers for the near term. The 
proposed transition would be achieved incrementally over a course of 
several years and would result in the Clearing Agencies hosting some 
Core C&S Systems on-premises and others in a Cloud Infrastructure.\12\
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    \12\ A result of the Cloud Proposal would be that the Clearing 
Agencies would operate Reg. SCI and Critical SCI systems both on-
premises and on a Cloud Infrastructure.
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    This phased approach to transitioning to Cloud is to reduce risk. 
The Clearing Agencies believe that a ``big-bang'' approach of moving 
all applications at once introduces significant execution risk, 
primarily driven by the sheer scale and scope of such an effort. 
Moreover, many clearance and settlement applications on the Clearing 
Agencies' mainframe are still tightly coupled together. Even after such 
applications are modernized, many could experience latency dependencies 
with other applications that have not yet been modernized, hence the 
need to keep some applications in the Clearing Agencies' existing data 
centers for the near term. However, applications with little to no 
coupling, particularly those applications that have already been 
modernized, are ripe for Cloud

[[Page 72130]]

transition and the subject of this Cloud Proposal. As for the remaining 
clearance and settlement applications that are not part of this 
proposal and would continue to be hosted on-premises, the Clearing 
Agencies have not thoroughly assessed when those applications would 
transition to Cloud, which may take several years, or whether such 
transition would be the subject of a later, separate advance notice 
proposal.
    Integration between on-premises and Cloud-based Core C&S Systems 
would, as it is for non-Core C&S Systems that are already hosted in 
private and public cloud, leverage existing patterns and processes. The 
primary methods of application integration are application program 
interfaces (a/k/a APIs), messaging queues (a/k/a MQ messaging), and 
file transfer. All three are used to integrate internal and client 
applications, and all three methods provide interoperability between 
applications running on mainframe, private cloud, and public cloud.
    For these reasons, the Clearing Agencies strongly believe that the 
phased approach enables the Clearing Agencies to best approach the 
transition to Cloud, safely and confidently.
B. Why Use Cloud
    The Clearing Agencies believe there are very strong and compelling 
reasons to use Cloud as part of their diverse, platform strategy, 
including, as discussed below, the waning of the on-premises industry, 
improved resilience, expanded security capabilities, and increased 
scalability.
1. Waning On-Premises Industry
    Although on-premises mainframes have been a stalwart for hosting 
critical applications for many years, it is the Clearing Agencies' 
experience that industry investment and development in on-premises 
platforms is waning, and the ability to source skilled and experienced 
staff to operate such platforms is increasingly challenging. Meanwhile, 
vendor consolidations are beginning to negatively affect investment and 
innovation in the private cloud space.\13\ As investment dollars are 
increasingly allocated to Cloud, vendor choice, innovation, and support 
will continue to diminish for on-premises platforms. This poses a 
growing risk to the Clearing Agencies, who today continue to rely 
primarily upon on-premises mainframes and private cloud solutions from 
a resiliency perspective.\14\ The Clearing Agencies believe the best 
way to manage against this risk at this time is to leverage a diverse 
platform strategy that will increase the use of and reliance upon 
Cloud. The use of Cloud, as part of a broader platform strategy, serves 
as an important tool in enabling the Clearing Agencies to anticipate 
and manage these and other risks more effectively.
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    \13\ For example, the VBlock platform, which has been the core, 
private cloud distributed hosting platform of the Clearing Agencies 
for over a decade, is no longer available for purchase. Another 
example is the continued consolidation in the private cloud software 
space, which has concentrated the industry and reduce aggregate 
investment in innovation.
    \14\ In this context, ``resiliency'' is the ``ability to 
anticipate, withstand, recover from, and adapt to adverse 
conditions, stresses, attacks, or compromises on systems that 
include cyber resources.'' Systems Security Engineering: Cyber 
Resiliency Considerations for Engineering of Trustworthy Secure 
Systems, Spec. Publ. NIST SP No. 800-160, vol. 2 (2018).
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2. Improved Resilience
    The Clearing Agencies must ensure that any Core C&S Systems in the 
Cloud have resiliency and recovery capabilities commensurate with the 
Clearing Agencies' importance to the functioning of the U.S. financial 
markets. As explained in detail below, the Clearing Agencies believe 
that Cloud will enhance the resiliency of their Core C&S Systems by 
virtue of the Clearing Agencies' architectural design decisions, and 
the Cloud's redundancy, availability, and the Clearing Agencies' 
disciplined approach to deployment of Core C&S Systems to Cloud. In 
particular, the Clearing Agencies believe that Cloud will enhance their 
ability to withstand and recover from adverse conditions by 
provisioning redundant Compute, Storage, and Network resources in three 
availability zones, in each of two autonomous and geographically 
diverse regions, for a total of six availability zones that are 
comprised of many data centers.
    The primary/hot region would be operational and accepting traffic, 
while the secondary/warm region would receive replicated data from the 
hot region with applications on stand-by. This solution significantly 
reduces operational complexity, mitigates the risk of human error by 
providing tools for automating routine tasks and orchestrating complex 
workflows, thereby reducing the need for manual intervention,\15\ and 
provides resiliency and assured capacity (although, the Clearing 
Agencies would continue to periodically review the CSP's capacity 
planning process through quarterly reviews).\16\
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    \15\ The CSP's built-in security features in its Cloud 
Infrastructure also can reduce the risk of security breaches caused 
by human error, such as misconfigurations or improper access 
controls.
    \16\ The Clearing Agencies would continue to perform periodic 
business continuity and disaster recovery tests to verify business 
continuity plans and disaster recovery infrastructure will support a 
two-hour recovery time objective for critical systems.
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    The Clearing Agencies are assured of adequate capacity with the 
proposed hot/warm architecture because the Compute resources of the 
warm, ``recovery'' region would be already running with needed 
capacity. Additionally, the Clearing Agencies have reviewed the effect 
of a large, regional outage with the CSP, which indicated that a vast 
majority of the CSP's customers are not configured to use the secondary 
region as a failover region; thus, they would not be using capacity in 
that region. Moreover, a review of data from two large outages in the 
primary region did not show a change in capacity availability in the 
secondary region.
    The Clearing Agencies also believe that Cloud reduces capacity-
management risks when compared with on-premises platforms in three 
important ways: (1) capacity in Cloud can be added almost instantly; 
(2) such capacity can be added at magnitudes greater than what is 
possible with traditional, on-premises platforms; and (3) the risk of a 
supply chain effect on capacity realization (i.e., the risks associated 
with receiving and deploying servers necessary to create more capacity) 
is greatly reduced.
    The proposed hot/warm configuration also enables application 
rotation between regions. The Clearing Agencies would have the ability 
to operationally rotate either a single application, groups of 
applications, or all applications to the warm region for both planned 
and unplanned events. Collectively, the proposed design of the Cloud 
Infrastructure helps ensure that the Clearing Agencies can meet any 
applicable two-hour recovery time objective.
    Each availability zone, in each of the two regions, would be 
comprised of multiple physical data centers. Each data center would 
have its own distinct physical infrastructure with separate staff and 
dedicated connections to utility power, standalone backup power 
sources, independent mechanical services, and independent network 
connectivity.
    Although not dependent on each other, availability zones of a 
region are connected to each other with private, fiber-optic 
networking, enabling Core C&S Systems to automatically failover between 
a region's availability zones

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without interruption. Since each availability zone can operate 
independently, but failover capability is nearly instantaneous, a loss 
of one availability zone would not affect operation in another; 
therefore, no Core C&S System would be reliant on the functioning of a 
single availability zone.\17\
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    \17\ To further ensure the resiliency of the Compute, Storage, 
and Network capabilities, the CSP's services are divided into ``data 
plane'' and ``control plane'' services. The Clearing Agencies' 
applications would run using data plane services, while control 
plane services are used to configure the environment. Resources and 
requests are further partitioned into cells, or multiple 
instantiations of a service that are segregated from each other and 
invisible to the CSP's customers, on each plane, again minimizing 
the effect of a potential incident to the smallest footprint 
possible.
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    Altogether, the proposed Cloud Infrastructure would afford the 
Clearing Agencies six levels of redundancy (i.e., three availability 
zones, made up of many data centers, in each of the two regions), with 
primary/secondary regions running in a hot/warm configuration, 
respectively, in geographically separate and segregated locations, and 
with each region containing multiple copies of the data. Thus, even if 
an availability zone is lost in the primary region, the Cloud can 
continue to seamlessly operate Core C&S Systems in the primary region, 
thereby significantly reducing availability risk and any attendant 
consequences for the Clearing Agencies' participants and customers. As 
a result, the Cloud Infrastructure offers the Clearing Agencies 
multiple redundancies within which to run Core C&S Systems, limits the 
effect of an incident at the CSP to the smallest footprint possible, 
and mitigates the possibility of the Clearing Agencies suffering an 
intra-, inter-, or multi-region outage.
    By comparison, the Clearing Agencies' current on-premises hosting 
capabilities, both mainframe and private cloud, are operating on one 
primary data center in one region, with a second, recovery data center 
in a second region (excluding data bunkers, which do not have Compute 
capabilities). In other words, it is many times less likely that an 
unplanned, out of region failover would be needed for Core C&S Systems 
hosted in Cloud than currently hosted on-premises. (Even in the 
unlikely event that the Clearing Agencies needed to fail over to the 
secondary Cloud region, the decision and process of doing so would 
continue to be in the sole discretion of the Clearing Agencies.) This 
increased redundancy represents a material improvement in resiliency 
for the Clearing Agencies and a material reduction in risk for the 
industry.
    Additionally, transitioning to Cloud offers the Clearing Agencies a 
more effective strategy for avoiding technical debt and system 
degradation because the CSP, in its role as such, would be performing 
regular system upgrades and maintenance, helping to ensure the Cloud's 
resiliency. Unlike on-premises solutions that may struggle to keep pace 
with evolving technology, due in part to the waning demand for on-
premises infrastructure, CSPs take on the responsibility of regularly 
updating and maintaining their cloud infrastructure, which they do in a 
competitive environment. This approach helps ensure that the CSP's 
cloud infrastructure remains up to date, secure, and performs at its 
best, minimizing the likelihood of accumulating technical debt and 
preventing the decline of system capabilities and resiliency over time. 
This is not to say that on-premises infrastructures are not updated or 
maintained today but, instead, that the CSP does it better and faster. 
CSPs excel in ensuring that systems remain up to date, secure, and 
perform at their best by leveraging automation, scalability, built-in 
security measures, service level agreements (``SLAs''), economies of 
scale, and continuous monitoring and improvement processes. These 
advantages collectively enable CSPs to provide more reliable, 
resilient, and high-performance services compared to traditional on-
premises environments.
3. Expanded Security Capabilities
    Hosting Core C&S Systems in Cloud would not change the physical and 
cybersecurity standards to which the Clearing Agencies currently 
align--the National Institute of Standards and Technology (``NIST'') 
\18\ and Center for internet Security (``CIS'').\19\ Application of 
NIST is considered a best practice for financial services use of 
cloud.\20\ Moreover, as discussed further below, the Clearing Agencies 
would continue to apply existing security processes and standards to 
include network and identity and access management (``IAM'') controls, 
security governance and controls for sensitive data, security 
configuration, provisioning, logging and monitoring, and security 
testing and validations.
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    \18\ National Institute of Standards and Technology (2023) The 
NIST Cybersecurity Framework 2.0. (National Institute of Standards 
and Technology, Gaithersburg, MD), NIST Cybersecurity White Paper 
(NIST CSWP) 29 ipd, Released August 8, 2023. https://doi.org/10.6028/NIST.CSWP.29.ipd.
    \19\ Center for internet Security Benchmarks, cisecurity.org/cis-benchmarks.
    \20\ U.S. Department of the Treasury, The Financial Services 
Sector's Adoption of Cloud Services (February 8, 2024), available at 
https://home.treasury.gov/system/files/136/Treasury-Cloud-Report.pdf.
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    By hosting in Cloud through the CSP that the Clearing Agencies have 
engaged, the Clearing Agencies would be able to add cloud-specific 
security capabilities and measures provided by the CSP, as well as 
third-party tools. For example, such capabilities and measures would 
include automation, monitoring, and security incident response 
capabilities, as well as default separation between Reg. SCI and non-
Reg. SCI operating domains, and ubiquitous encryption, all of which are 
not available in the current on-premises data centers. Similarly, 
micro-segmentation of applications and infrastructure provided by the 
CSP, which also is not available in the Clearing Agencies data centers, 
limits the effect of a security incident and reduces the time to 
detection and recovery.\21\
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    \21\ For example, the CSP provides infrastructure capable of 
withstanding Distributed Denial of Service (``DDoS'') attacks at far 
greater magnitudes than the Clearing Agencies' current capabilities, 
as the CSP has exponentially more internet bandwidth, given their 
business function, than the Clearing Agencies. (DDoS is a 
cyberattack in which the attacker floods a server with illegitimate 
traffic/requests to prevent legitimate users from accessing online 
services, websites, or computers connected to the attacked server.)
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4. Increased Scalability
    Cloud implementation would allow for greater scalability of 
Compute, Storage, and Network resources that support Core C&S 
Systems.\22\ With a Cloud Infrastructure, the Clearing Agencies could 
quickly provision or de-provision Compute, Storage, or Network 
resources to meet demands, including elevated trade volumes, and 
provide more flexibility to create development and test environments, 
as well as other system development needs.\23\ For

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example, the CSP could support elastic workloads and scale dynamically 
without the need for the Clearing Agencies to procure, test, and 
install additional servers, storage, or other hardware.
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    \22\ The Clearing Agencies would continue to follow existing 
policies and procedures regarding capacity planning and change 
management. The Clearing Agencies have separately submitted a 
request for confidential treatment to the Commission regarding the 
Change Management Policy and the Technology Capacity and Demand 
Assessment Policy. The Clearing Agencies have provided these 
documents in confidential Exhibit 3 to this advance notice filing.
    \23\ The Clearing Agencies periodically perform capacity and 
availability planning analyses that result in capacity baselines and 
forecasts, as an input to technology delivery and strategic planning 
to ensure cost-justifiable support of operational business needs. 
These analyses are based on the collection of performance data, 
trending, scenarios, and periodic high-volume capacity stress tests 
and include storage capacity for log and record retention. Results 
are reported to senior technology management as inputs to 
performance management and investment planning. In addition, each 
quarter, the Clearing Agencies review the CSP's capacity planning 
accuracy for the prior quarter and review the upcoming quarter's 
forecast, along with providing input to the CSP for anticipated 
major changes in the Clearing Agencies' proposed use of resources. 
The Clearing Agencies' IT Governance Committee is the designated 
escalation point for handling capacity management issues.
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    The Clearing Agencies would pre-provision Compute and Storage 
resources proactively, in addition to scaling resources on-demand. This 
means that the Clearing Agencies would be able to increase Compute 
capacity in one or both regions via manual or automated processes for 
Core C&S Systems. The rapid deployment of Compute capacity would allow 
the Clearing Agencies to obtain access to resources far more quickly 
than with on-premises data centers. The Clearing Agencies would combine 
the pre-provisioning of primary capacity with regular capacity stress 
testing to verify that the underlying Compute can sustain required 
business volumes. The stress testing data would be used to determine 
the base levels of pre-provisioned capacity.
    The ability to quickly scale workloads materially improves the 
Clearing Agencies ability to respond to unexpected market events and 
external scenarios, such as a global pandemic.\24\ This capability also 
enables the Clearing Agencies to run risk calculations more frequently, 
at greater speeds, and with more compute-intensive models than is 
economically feasible compared to the Clearing Agencies' on-premises 
infrastructure.
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    \24\ Supply chain challenges during the Covid-19 pandemic 
highlighted a lack of resiliency and scalability in traditional IT 
vendors' abilities to deliver resources when needed. Lead times of 
up to 18 months were experienced and delayed many efforts to expand 
capacity. This was not the case with CSPs, which did not experience 
capacity constraints or an ability to meet demand. This further 
demonstrates how the option to host Core C&S Systems in Cloud is a 
critical risk mitigation tool for managing against the long-term 
risk of a waning on-premises industry.
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    In sum, transitioning to Cloud not only enhances scalability but 
also significantly improves agility beyond the Clearing Agencies' on-
premises capabilities. The on-demand resources provided by the CSP 
enable dynamic scalability, helping to ensure optimal performance 
during peak times, efficient resource allocation during periods of 
lower demand, and the ability to innovate faster to meet evolving 
business requirements.
C. Why a Single CSP is Appropriate
    The Clearing Agencies strongly believe that hosting Core C&S 
Systems with a single CSP is appropriate. The Clearing Agencies have 
assessed the capabilities of the CSP in adherence with the Clearing 
Agency Risk Management Framework,\25\ which requires the respective 
Board of Directors of the Clearing Agencies to approve policies 
governing relationships with service providers, such as the CSP, thus 
helping to ensure alignment with the Clearing Agencies' risk management 
principles.
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    \25\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the Clearing 
Agency Risk Management Framework. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
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    Beyond simply being a well-known, reputable, industry-leading, and 
capable CSP, the Clearing Agencies and the CSP have spent several years 
discussing the Clearing Agencies' needs, including operational, legal, 
and regulatory obligations; what-if scenarios; and commercial 
implications. That extensive effort led to a number of benefits, 
including the CSP introducing new products \26\ and the establishment 
of an exhaustive contractual agreement between the Clearing Agencies 
and the CSP that addresses the Clearing Agencies' needs for hosting 
Core C&S Systems in Cloud (``Cloud Agreement'').\27\ \28\
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    \26\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding two examples 
of CSP Whitepapers. The Clearing Agencies have provided these 
documents in confidential Exhibit 3 to this advance notice filing.
    \27\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the Cloud 
Agreement. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
    \28\ Among other things, the Cloud Agreement sets forth the 
CSP's responsibility to maintain the hardware, software, networking, 
and facilities that run Cloud services. See also the separately 
submitted Table of Reg. SCI Provisions provided in confidential 
Exhibit 3 to this advance notice filing that provides a summary of 
the terms and conditions of the Cloud Agreement that the Clearing 
Agencies believe help enable their compliance with Reg. SCI.
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    Meanwhile, it is generally understood that in the present 
environment adding a secondary CSP or an on-premises backup introduces 
significant complexity, costs, and risks that outweigh expected 
benefits.\29\ An on-premises or secondary CSP backup would require the 
Clearing Agencies to engineer their primary Cloud Infrastructure to the 
lowest common denominator, so that the systems operating on the primary 
infrastructure also could run on a completely separate and distinct 
secondary, backup infrastructure. This approach would severely reduce 
the value that Cloud provides, introduce significant cost with little 
benefit, and greatly increase operational complexity, all of which 
would result in negative consequences for the efficiency and resiliency 
of the Clearing Agencies, their participants, and the industry.
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    \29\ As noted in the U.S. Department of Treasury's report, The 
Financial Services Sector's Adoption of Cloud Services, ``No 
financial institution reported the capability to [run applications 
across multiple CSPs] for more complex use cases, such as running 
core operations on multiple public clouds. Running an application 
across multiple CSPs at the same time may also be less desirable, 
given the costs, staffing, and complexity involved in doing so, 
particularly given the complexity associated with identifying and 
managing risk across multiple cloud environments.'' Available at 
https://home.treasury.gov/system/files/136/Treasury-Cloud-Report.pdf 
at 6.
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    Notwithstanding the extensive benefits from moving to Cloud, the 
Clearing Agencies fully appreciate and are committed to managing the 
risks presented in relying on a single CSP, as identified and discussed 
in Section II.A, further below.
D. Transition Timeframe
    The Clearing Agencies believe that transitioning certain Core C&S 
Systems to the Cloud is critical to managing the risks that are 
inherent in technology and vendor selection. However, as stated above 
in Section I.A, the intent of the Cloud Proposal is not to move all 
Core C&S Systems to Cloud at one time. The Clearing Agencies believe 
that a ``big-bang'' transition would introduce unnecessary execution 
risk, primarily driven by the sheer scale and scope of such an effort. 
Moreover, many applications on the mainframe are still tightly coupled 
together and not ready to be moved to public cloud. Rather, at this 
time, the Clearing Agencies are proposing to move only a subset of the 
Core C&S Systems to the Cloud and to do so on an incremental basis, in 
consideration of the specifics of each application and the needs of the 
Clearing Agencies.\30\ This approach helps enable the hosting of Core 
C&S Systems on the most appropriate platform, at the most appropriate 
time, in an efficient and secure manner.
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    \30\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Global Business Continuity and Resilience Policy and Standards, 
which defines the governance structure, high-level roles and 
responsibilities, and the framework for business continuity and 
resilience processes at the Clearing Agencies. The Clearing Agencies 
have provided this document in confidential Exhibit 3 to this 
advance notice filing.
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    The subset of Core C&S Systems selected for this proposal have been 
initially identified based on several

[[Page 72133]]

preliminary criteria, including, but not limited to, whether:
     the application would benefit from the presence of data 
sets already present in Cloud;
     the application would benefit from elasticity enabled by 
Cloud (e.g., user interfaces); and
     the application already meets certain architectural 
patterns for Cloud (e.g., the application has already been modernized 
and currently hosted in private cloud and/or is a siloed application--
little to no coupling with other applications).
    Assuming the Clearing Agencies would receive no regulatory 
objection to this advance notice, each application of the proposed 
subset of Core C&S Systems then would undergo an in-depth, 
architectural review that would follow the Clearing Agencies' 
governance process, governed by the System Delivery Process.\31\ The 
governance process includes, where applicable, a detailed review and 
approval by the Information Technology Architecture Review Board 
(``ARB''),\32\ the New Initiatives process,\33\ to include the Business 
Case Council and the Risk Assessment Council that vet the financials 
and risks of the proposed move, and the Investment Management 
Committee.\34\ Further escalations would be made to the Executive 
Committee and applicable Board of Directors of the Clearing Agencies, 
as needed. Re-platforming efforts also would be communicated to 
regulators in accordance with the change reporting requirements of 
Section 1003(a)(1) of Reg. SCI, as applicable.\35\
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    \31\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
System Delivery Policy. The System Delivery Policy defines 
requirements that support adherence to the System Delivery Process 
for application development projects. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
    \32\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the IT 
Architecture Policy (``ITA Policy''). The ITA Policy provides a set 
of controls that must be followed to adequately address applicable 
risks. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
    \33\ The Clearing Agencies also have separately submitted a 
request for confidential treatment to the Commission regarding the 
New Initiatives Policy. The New Initiatives Policy provides the 
governance and oversight structure for the Clearing Agencies to 
bring initiatives to market timely and efficiently while minimizing 
risk. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
    \34\ Such reviews and decisions are based on high-level 
architectural principles that may be applicable to more than one 
application.
    \35\ 17 CFR 242.1003, et seq.
---------------------------------------------------------------------------

    The above-described governance process does not include a specific 
set of criteria or thresholds for the ultimate determination on whether 
an application should or should not be moved to Cloud--it is not a 
formulaic decision. Rather, the Clearing Agencies employ a more 
qualitative evaluation process that involves various reviews and 
considers high-level architectural principles that may be applicable to 
more than one application. However, at this time, none of the Core C&S 
Systems that have been initially identified as part of the Cloud 
Proposal, based on the preliminary criteria listed above, have 
completed that more detailed governance review process. Given the 
extensiveness of the process, it would not begin until after the 
Clearing Agencies would receive no regulatory objection to this advance 
notice.
    Although the Clearing Agencies do not anticipate needing to deviate 
from the proposed transition schedule for the selected Core C&S 
Systems, the Clearing Agencies recognize that deviation may be 
necessary, given that the more in-depth governance review process has 
not completed and because risks could change over the proposed, 
multiyear implementation period. For example, a deviation may be 
necessary to address a business need or a change in industry or 
regulatory requirements or standards. Regardless, any deviation would 
follow the same detailed governance process, and the Clearing Agencies 
would provide notice of such deviation to Commission staff, the reason 
for the deviation, and how the proposed implementation schedule would 
be updated to account for the deviation. Further, the Clearing Agencies 
recognize that deviating from the proposed transition schedule would 
necessitate a separate analysis to determine whether such deviation 
could materially affect the nature or level of risk posed by each of 
the Clearing Agencies.
    Even though certain on-premises infrastructure components would be 
decommissioned after applications are moved to Cloud, the Clearing 
Agencies' private cloud, mainframe services, and data-center facilities 
would remain available for no less than five more years to help 
facilitate exit plans from Cloud that rely on an on-premises option. 
However, to be clear, the on-premises option would not be available to 
address short-term disruptions, where the Cloud is temporarily 
unavailable. Management of such disruptions is discussed in Section 
II.B, further below.

II. Expected Effects on Risks to the Clearing Agencies, Their 
Participants, or the Market

    Although the Clearing Agencies are not proposing to transition all 
Core C&S Systems to Cloud for the reasons described in Sections I.A and 
D, above, transitioning the proposed subset of Core C&S Systems from an 
on-premises infrastructure supported by a consolidating industry, as 
described in Section I.B.1, above, to a new Cloud Infrastructure 
maintained by an industry-leading CSP provides numerous advantages, as 
described in Sections I.B.2-4 and C, above. However, such transition is 
not without risk, as discussed below.
A. Risks Presented by the Cloud Proposal
1. Concentration Risk
    The Clearing Agencies appreciate that reliance on a single CSP for 
hosting the subset of Core C&S Systems that are the subject of this 
proposal creates concentration risk, particularly in the event of the 
CSP choosing to terminate its services (i.e., commercial risk) or is 
unexpectedly unavailable (i.e., operational risk). The Clearing 
Agencies also appreciate that they would have some reliance on the CSP 
to help meet certain regulatory obligations of the Clearing Agencies 
(i.e., regulatory risk), thus introducing the familiar concept of 
concentration risk in a relatively new context. However, concentration 
risk exists today as the Clearing Agencies are dependent on a single 
mainframe provider, a single database provider for the mainframe, and a 
single virtualization provider for private cloud. Moreover, the 
Clearing Agencies believe that they have adequately addressed these 
risks, as discussed throughout Sections II.B.1-4., below.
2. Cloud Management Risk
    Managing the applicable subset of Core C&S Systems hosted on a 
Cloud Infrastructure presents different risks and challenges than 
managing such systems hosted on-premises because many activities and 
services previously provided by the Clearing Agencies would now be 
provided by the CSP. For example, the Clearing Agencies would be 
dependent upon the CSP for fulfilling all of its contractual 
obligations, including security of the Cloud, proper capacity planning, 
and protection of Cloud services from prolonged operational outages. As 
such, overseeing the CSP becomes a critical activity to ensure the CSP 
is delivering services that meet or exceed the Clearing Agencies' 
requirements for operating those select Core C&S Systems. As discussed 
in Sections II.B.1-4, below, the Clearing Agencies believe that they 
have adequately addressed this risk.

[[Page 72134]]

B. Management and Mitigation of Identified Risks
1. Cloud Agreement
    The Clearing Agencies believe that the Cloud Agreement, including 
all its amendments and addendums, is a strong tool in helping to 
effectively mitigate the commercial and regulatory risks borne from the 
concentration risk, as described in Section II.A.1, above, as well as 
risks in managing the CSP that would host the subset of selected Core 
C&S Systems in the Cloud, as described in Section II.A.2, above. 
Following is a summary of some of the key terms and conditions covered 
in the agreement and how they help mitigate these risks.
i. Adequate Notice
    Under the Cloud Agreement, the CSP may not unilaterally terminate 
the relationship with the Clearing Agencies absent good cause or 
without sufficient notice to allow the Clearing Agencies to transition 
their applications elsewhere. Specifically, the CSP must provide an 
extensive notice if it wishes to terminate the Cloud Agreement for 
convenience or if it wishes to terminate an individual CSP service 
offering or lower an existing SLA on which the Clearing Agencies 
rely.\36\
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    \36\ The Cloud Agreement permits an exception to this sufficient 
notice provision in the event the CSP must terminate the individual 
service offering if necessary to comply with the law or requests of 
a government entity or to respond to claims, litigation, or loss of 
license rights related to third-party intellectual property rights. 
In this event, the CSP must provide reasonable notice to the 
Clearing Agencies of the termination of the individual service 
offering. See Reg. SCI Addendum, Section 10 Termination. The 
Clearing Agencies have provided this document in confidential 
Exhibit 3 to this advance notice filing.
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    The CSP is permitted to terminate the Cloud Agreement with shorter 
notice periods in the event of a critical breach \37\ or an uncured 
material breach \38\ \39\ of the Cloud Agreement. In the highly 
unlikely event that a critical breach or uncured material breach 
occurs, the Clearing Agencies would have sufficient notice to shift 
their operations away from the CSP. Contract provisions that allow a 
party to terminate for uncured material breaches are designed to limit 
the types of actions that could lead to contract termination and to 
establish a period of time to resolve an aggrieved party's claim (often 
30 days) followed by an additional extended period in which to 
remediate the claim. This gives the parties time and incentive to 
address the problem without having to resort to termination. In other 
words, even if the CSP notifies the Clearing Agencies of an alleged 
breach (material or critical), termination of services is not 
immediate. Additionally, regardless of the need to shift operations 
elsewhere--convenience or breach--the Cloud Agreement provides for the 
parties to work together and for the CSP to provide professional 
services to assist with such a shift.\40\
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    \37\ Critical breaches are material breaches (i) for which the 
Clearing Agencies knew their behavior would cause a material breach 
(such as a willful violation of Cloud Agreement terms); (ii) that 
cause ongoing material harm to the CSP, its services, or its 
customers (e.g., criminal misuse of the services); or (iii) for 
undisputed non-payment under the Cloud Agreement. See Reg. SCI 
Addendum, Section 10 Termination. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
    \38\ Typically, a breach is considered material only if it goes 
to the root of the agreement between the parties or is so 
substantial that it defeats the object of the parties in making the 
contract. See Reg. SCI Addendum, Section 10 Termination. The 
Clearing Agencies have provided this document in confidential 
Exhibit 3 to this advance notice filing.
    \39\ See Reg. SCI Addendum, Section 10 Termination. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
    \40\ See Reg. SCI Addendum, Section 11 Post-Termination 
Services. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
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    The Clearing Agencies believe the risk of termination under the 
above-discussed shorter notice period is minimal. In all cases of an 
alleged breach, the CSP must notify the Clearing Agencies in writing 
and provide time for them to cure the alleged breach (``Notice 
Period'').\41\ With respect to an alleged material breach, which 
requires the CSP to extend the Notice Period if the Clearing Agencies 
demonstrate a good faith effort to cure the alleged material breach, 
the Clearing Agencies would use the Notice Period to attempt to cure 
the alleged material breach while also preparing to transition 
elsewhere. As a result, it is highly unlikely that a critical breach or 
a material breach would remain uncured beyond the Notice Period. If one 
does remain uncured, however, the CSP can only terminate the rights or 
accounts associated with the breach, not the entire Cloud Agreement; 
\42\ meanwhile, and the Clearing Agencies would have ample notice to 
shift operations to avoid a disruption to Core C&S Systems, if needed.
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    \41\ See Reg. SCI Addendum, Section 10 Termination. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
    \42\ See Amendment 1, Section 8 Temporary Suspension, of the 
Cloud Agreement. The Clearing Agencies have provided this document 
in confidential Exhibit 3 to this advance notice filing.
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    As explained above, adequate notice under the Cloud Agreement plays 
an important role in managing concentration risk by providing the 
Clearing Agencies with advance warning of potential disruptions or 
changes in the agreement or services thereunder, which would allow the 
Clearing Agencies to take proactive measures in mitigating the 
potential impact of commercial and regulatory risk, thereby reducing 
concentration risk.
ii. Regulatory Compliance and CSP Oversight
    The Clearing Agencies' transition to Cloud does not alter their 
responsibility to maintain compliance with applicable regulations. 
Consistent with FFIEC Guidance (as defined and discussed further 
below), the Clearing Agencies' will continue to fully comply with all 
applicable regulatory obligations, particularly Reg. SCI.\43\
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    \43\ Reg. SCI imposes certain information security and incident 
reporting standards on the Clearing Agencies and requires them to 
adopt an information technology governance framework reasonably 
designed to ensure that ``SCI systems,'' and for purpose of 
security, ``indirect SCI systems,'' have adequate levels of 
capacity, integrity, resiliency, availability, and security. 17 CFR 
242.1000 et seq.
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    The Clearing Agencies believe the combination of the following 
would provide them with reasonable assurance that the proposed 
transition to Cloud would enable them to continue to fully satisfy 
their regulatory obligations, including Reg. SCI, thus helping to 
mitigate the regulatory risk highlighted in Section II.A.1, above: (i) 
the Cloud Agreement; (ii) the CSP's compliance programs as described in 
its whitepapers \44\ and publicly available policies (e.g., its 
Penetration Testing Policy),\45\ \46\ \47\ \48\ and user guides; (iii)

[[Page 72135]]

the CSP's SLAs; \49\ \50\ \51\ (iv) the CSP's Systems Organization 
Controls reports (e.g., SOC 1, SOC 2, SOC 3) \52\ and International 
Organization for Standardization (``ISO'') certifications (e.g., ISO 
27001); \53\ (v) the CSP's size, scale, and ability to deploy extensive 
resources to protect and secure its facilities and services; and (vi) 
the CSP's commercial incentive to perform.
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    \44\ Supra note 25.
    \45\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the 
Operational & Technology Risk Technology Risk Management (``OTR 
CS&TRM'') Procedure--Application Penetration Test which describes 
the application penetration test procedures for the Clearing 
Agencies' web applications and supports compliance with the 
Information Systems Acquisition Policy, Development and Maintenance 
Policy Security Control Standards, and Ethical Application 
Penetration Testing (``EAPT'') Control Standards. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
    \46\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the EAPT 
Control Standards. The Clearing Agencies have provided this document 
in confidential Exhibit 3 to this advance notice filing.
    \47\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Systems Acquisition Development and 
Maintenance Policy and Control Standards, which governs the security 
aspects of information systems acquisition, development, and 
maintenance for DTCC and its subsidiaries. The Clearing Agencies 
have provided this document in confidential Exhibit 3 to this 
advance notice filing.
    \48\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Communications and Operations Policy and 
Control Standards, which helps ensure the correct and secure 
operation of information processing facilities. The Clearing 
Agencies have provided this document in confidential Exhibit 3 The 
Clearing Agencies have provided this document in confidential 
Exhibit 3to this advance notice filing.
    \49\ The Clearing Agencies have provided the CSP's SLAs in 
confidential Exhibit 3 to this advance notice filing.
    \50\ Amendment 2, Section 2.2 To the Service Level Agreements of 
the Cloud Agreement provides that the CSP may change its SLAs from 
time to time but must provide prior notice to the Clearing Agencies 
before material reducing the benefits offered under the SLAs. The 
Clearing Agencies have provided Cloud Agreement in confidential 
Exhibit 3 to this advance notice filing.
    \51\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Legal Review of Third Party Vendor Contracts Policy, which (1) 
defines the scope of Vendor Contracts, (2) clarifies what agreements 
fall outside the scope and are excluded from the definition of 
Vendor Contracts, (3) details the process the Clearing Agencies 
follow when receiving requests to review Vendor Contracts and 
related materials from CPS Contracts, and (4) establishes the 
requirements around the creation, maintenance, update, review, and 
use of contract templates and negotiation guidelines for third party 
relationships. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
    \52\ The FFIEC Guidance provides that the Clearing Agencies may 
obtain SOC reports, other independent audits, or ISO certification 
reports to gain assurance that the CSP's controls are operating 
effectively. See FFIEC, Security in a Cloud Computing Environment at 
7. The Clearing Agencies review the CSP's SOC-2 on an annual basis.
    \53\ The CSP has certifications for the following frameworks: 
NIST, Cloud Security Alliance, Control Objectives for Information 
and Related Technology (``COBIT''), ISO, and the Federal Information 
Security Management Act (``FISMA'').
---------------------------------------------------------------------------

    Moreover, as noted in Section II.B.ii., above, oversight of the CSP 
relationship and services has become a standing practice of the 
Clearing Agencies to ensure that the CSP is meeting or exceeding its 
contractual obligations, including helping the Clearing Agencies 
demonstrate their regulatory compliance. Such oversight, which also 
helps mitigate the cloud management risk raised in Section II.A.2, 
above, would include a strong relationship between the CSP and the 
Clearing Agencies, including between their senior management. Within 
the Cloud Agreement itself, there are established obligations on the 
CSP to provide the Clearing Agencies' information necessary for the 
Clearing Agencies to satisfy certain compliance and regulatory 
requirements, particularly Reg. SCI. For example, the Cloud Agreement 
obligates the CSP to provide the Clearing Agencies with immediate 
notification where a systems intrusion by an unauthorized party or a 
systems disruption is suspected.\54\ The agreement also provides for 
detailed quarterly briefing meetings between the Clearing Agencies and 
the CSP, during which the Clearing Agencies would be provided 
information on and could review service level performance, material 
systems changes, capacity management, SLA updates, and important 
security notices.\55\
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    \54\ See Reg. SCI Addendum, Sections 8.1 Systems Intrusion 
Notification and 4 Briefing Meetings. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
    \55\ Id.
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    The Cloud Agreement permits the Clearing Agencies to perform an 
annual review of the CSP's documentation and services to gain comfort 
that the CSP is meeting its contractual requirements and that the 
notification procedures are in place to allow the Clearing Agencies to 
meet their regulatory requirements, particularly Reg. SCI. The 
agreement also allows a regulator of the Clearing Agencies to receive 
information about the Clearing Agencies' usage of the CSP services, and 
it allows the regulator to perform its own on-site review, if 
requested.\56\
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    \56\ See Reg. SCI Addendum, Sections 3 Customer Right of Access 
and Audit and 4 Briefing Meetings. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
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2. Cloud Architecture
    To mitigate operational risk associated with the concentration risk 
from relying on a single CSP, the Clearing Agencies would architect the 
Cloud Infrastructure hosting their Core C&S Systems to be highly 
resilient, improving the availability of such systems and related 
Clearing Agency services during any degradation in CSP services:
     Use of multiple availability zones per region. The 
Clearing Agencies would use at least three availability zones, in each 
of the two CSP regions, with each availability zone made up of multiple 
data centers.
     Multi-regions. In the event of a primary region outage, 
the Clearing Agencies would recover in the secondary region. Out-of-
region recovery would be tested annually by the Clearing Agencies, and 
a primary/secondary (i.e., hot/warm) model would be used to ensure 
continuous data replication and recovery is achieved.\57\ Recovery 
exercises of non-Core C&S Systems currently hosted in cloud demonstrate 
the ability to recover applications within required recovery time 
objectives, including meeting a 2-hour recovery time objective for 
relevant applications in the event of an out-of-region recovery.
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    \57\ See Reg. SCI Addendum, Section 5 Customer Testing of CSP 
Systems. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
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     Multi-node, high availability clusters across availability 
zones. Clusters (i.e., three or more servers or nodes) protect against 
local hardware and service failures providing uninterrupted operations. 
Each cluster would be distributed across three availability zones. 
Clusters synchronously replicate data across all nodes to protect 
against data loss and provide continuous availability.
     Static stability and static capacity models. Static 
capacity would be pre-provisioned for compute, storage, and memory for 
applications based on capacity stress testing results and capacity 
requirements. The Clearing Agencies would pre-provision capacity needed 
for applications and services and would not rely on capacity on-demand 
models, thus reducing the risk of running out of capacity.
     Exit plans. The Clearing Agencies' existing policies 
require that all applications hosted in Cloud have documented exit 
plans, with each plan updated annually.\58\ The Clearing Agencies' 
Cloud architecture also reduces ``vendor lock-in'' by using 
capabilities such as ``containers'' \59\ that can exist in both the 
public and private cloud, where appropriate and applicable. For the 
foreseeable future, the Clearing Agencies plan to continue to own or 
lease private data center space to host private cloud and mainframe 
capabilities. The Clearing Agencies private, on-premises data centers 
help enable a long-term exit plan from Cloud, if needed. However, such 
data centers would not be a means to address a short-term incident at 
the CSP. Additionally, for the second CSP that the Clearing Agencies 
already have contracted and connected with for hosting non-Core C&S 
Systems, they are now working on the contractual and operational 
requirements that would be necessary to possibly host Core C&S

[[Page 72136]]

Systems in its Cloud to further enable exit plans from the primary CSP.
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    \58\ Supra note 29.
    \59\ A container is a standard unit of software that packages up 
code and all its dependencies, so the application runs reliably from 
one computing environment to another (e.g., public and private 
clouds).
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     Regional Isolation Architecture. A cross-regional outage 
is highly unlikely at the CSP, as the CSP has designed and implemented 
a series of controls to ensure that defects cannot be introduced to 
more than a single region at a time.\60\ Services are regionally 
isolated with a single exception--the IAM service. The IAM service is 
not regionally isolated and depends on a single region. If the primary 
region for the IAM service fails, the service will continue to operate 
but as read-only. To mitigate this risk, the Clearing Agencies would 
architect applications and infrastructure services in such a manner 
that they would not require updates (i.e., writes) to the IAM service 
in order to rotate out of region.
---------------------------------------------------------------------------

    \60\ The CSP owns the control and has provided documentation of 
the control to the Clearing Agencies.
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    In summary, cloud architecture helps mitigate operational risk 
borne from concentration risk, as raised in Section II.A.1, above, by 
providing resilient infrastructure, scalable resources, robust security 
measures, and disaster recovery capabilities, all of which assist in 
minimizing the impact of disruptions.
3. Standing Risk Management Practices
    The Clearing Agencies' standing risk management practices also help 
minimize operational risk by systemically identifying, assessing, 
mitigating, monitoring, and responding to risk. For example, the 
Clearing Agencies have considered the possibility of the CSP being 
completely and unexpectedly unavailable, whether due to technical 
issues or other reasons. The parallel risk exists today with respect to 
the Clearing Agencies' existing infrastructure. Just like with the CSP, 
it is possible that the Clearing Agencies' two existing data centers--
one primary and one backup--become completely and unexpectedly 
unavailable. In fact, it is more likely that those two data centers 
become unavailable than the CSP's data centers because the CSP has so 
many more data centers for each availability zone, in both its primary 
and secondary regions, with each data center, not just the associated 
region or availability zone, having its own physical infrastructure, 
staff, power, backup power, mechanical services, and network 
connectivity, as discussed in Section I.B.2, above. Even for the CSP's 
IAM service that runs cross regions, the applications in each region 
operate off read-only versions of the IAM roles and responsibilities, 
such that loss of the primary would not affect operation of those 
applications. Nevertheless, to help manage a crisis event, such as the 
Clearing Agencies' or the CSP's data centers becoming unavailable, the 
Clearing Agencies have standing risk management plans and practices 
already in place, as described below.\61\
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    \61\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the 
Operational Response Capabilities Matrix. The Clearing Agencies have 
provided these documents in confidential Exhibit 3 to this advance 
notice filing.
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    In the very unlikely event of an unexpected single- or multi-region 
outage in which the Clearing Agencies operate, or a complete and 
unexpected CSP outage, the Clearing Agencies would initiate the 
existing Major Incident Management (``MIM'') process, which is an 
existing process that involves evaluating the technical impact of the 
event, and if the event is deemed to have a material impact to the 
business, the Business Incident Management System (``BIMS'') \62\ would 
be activated. Depending on the severity of the event, the DTCC Global 
Business Continuity and Resilience (``BCR'') Policy would provide a 
predictable structure to be utilized during crises and could be 
leveraged to address, respond to, and manage an outage.\63\ In addition 
to internal risk management practices, the Clearing Agencies have plans 
to help address various outage scenarios and the potential effects of 
an outage.\64\
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    \62\ MIM is part of the IT organization that manages technology 
specific incidents at the Clearing Agencies that are typically 
resolved at the application or hardware level with support from the 
appropriate subject matter experts (``SMEs''). Incidents that have a 
business impact are escalated to BIMS and appropriate SMEs are added 
to manage the impact, which includes Business Continuity and 
Resilience. BIMS participants can request the Crisis Management Team 
be activated if the incident requires discussion or has escalated to 
a potential disaster that may require a declaration of disaster.
    \63\ The Clearing Agencies are taking into consideration the 
forthcoming requirements of adopted and effective Rule 17ad-25(i) 
under the Exchange Act, 17 CFR 240.17ad-25(i), and anticipate that 
the Clearing Agencies' approach in managing the risk presented by a 
CSP outage for Core C&S Systems would be consistent with those 
requirements.
    \64\ For example, there is an existing plan to manage a Fedwire 
protracted outage. A Fedwire protracted outage is an interruption or 
outage of Federal Reserve Bank hardware or software that prevents 
the bank from processing payment orders online and that is not 
expected to be resolved before the bank's next Fedwire Funds Service 
Funds Transfer Business Day. In the event of such an outage, the 
Clearing Agencies will assess the situation and employ, as needed 
and applicable, the steps outlined in the BCR Policy and Standards, 
the Federal Reserve Banks Operating Circulars (see, e.g., Operating 
Circular No. 6, available at https://www.frbservices.org/binaries/content/assets/crsocms/resources/rules-regulations/070123-operating-circular-6.pdf), and any other regulatory guidance.
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    The BCR Policy and Standards is structured to employ existing DTCC 
and Clearing Agency teams and committees, which become the tactical 
leadership to react, respond, and manage a crisis situation.\65\ The 
teams are comprised of the following:
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    \65\ The Clearing Agencies have established a list of situations 
that are covered under the BCR Policy and Standards, any of which 
could escalate to a disaster and trigger use of the Standards. The 
technology events include (i) infrastructure outage, (ii) external 
hosting provider service outage, and (iii) loss of logical access to 
a Clearing Agency facility. The Clearing Agencies have separately 
submitted a request for confidential treatment to the Commission 
regarding the BCR Policy and Standards which define the governance 
structure, high-level roles and responsibilities, and the framework 
for business continuity and resilience processes at the Clearing 
Agencies. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
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     Crisis Management Team. Comprised of the Management 
Committee, site General Managers, Head of the Board Risk Committee,\66\ 
and other SMEs, as needed.
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    \66\ The Board Risk Committee is a Board level committee 
established by the Boards of the Clearing Agencies to assist their 
respective Boards in fulfilling their responsibilities for oversight 
of risk management activities at the Clearing Agencies. This 
includes oversight of credit, market, liquidity, operational, and 
systemic risks.
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     Crisis Response Teams.
    [cir] Business Continuity Coordinators and Plan Approvers--These 
are individuals who manage business continuity at a plan level.
    [cir] Fair and Orderly Markets Groups--These are crisis teams 
comprised of internal stakeholders and top executives from external 
firms deemed necessary to ensure a fair and orderly market. They would 
be activated (based on impact to the legal entity) to gather 
information during a large systemic event when operational coordination 
is required with clients and the sector.
    [cir] IT Management Team--Comprised of Information Technology 
managing directors and SMEs.
    [cir] Management Risk Committee--Comprised of senior members across 
the enterprise.
    [cir] Senior Site Management Team (``SSMT'')--Each DTCC office with 
a facility level resilience plan (``FLRP'') has an SSMT, that is 
comprised of senior leadership from the site.
    [cir] Site Assessment Team (``SAT'')--Sites with an FLRP have a SAT 
that responds to site-specific events. This team is comprised of a 
primary/back-up site General Manager and representatives from BCR, IT, 
Workplace Design and Service, Global Security Management, and Human 
Resources. A Data Center Services representative also is added for 
sites that have a data center.

[[Page 72137]]

    [cir] MIM and BIMS Teams--Part of the IT organization that manages 
technology specific and are typically resolved at the application or 
hardware level with support from the appropriate SMEs.
     Crisis Communication Team. The Crisis Communication Team 
is comprised of officer-level members from Marketing and Communication, 
Human Resources, General Counsel's Office, and Regulatory Relations, as 
well as members of their staffs, as applicable.
    The Clearing Agencies believe that these standing risk management 
practices are key to managing the operational risk borne from 
concentration risk outlined in Section II.A.1, above, by helping to 
promote proactive risk management culture, enhancing operational 
resilience, and enabling the Clearing Agencies to better navigate 
uncertainties and maintain business continuity.
4. Industry Standards for Cloud Management
i. Cloud Management: Federal Financial Institutions Examination Council 
Cloud Computing Guidance (``FFIEC'')
    On April 30, 2020, FFIEC \67\ issued a joint statement to address 
the use of Cloud computing services and security risk management 
principles in the financial services sector (``FFIEC Guidance'').\68\ 
While the FFIEC Guidance does not contain regulatory obligations, it 
highlights risk management practices that financial institutions should 
adopt for the safe and sound use of Cloud computing services in five 
broad areas (``FFIEC Risk Management Categories''): Governance, Cloud 
Security Management, Change Management, Resilience and Recovery, and 
Audit and Control Assessment. As discussed below, the Clearing Agencies 
would implement practices consistent with the FFIEC Risk Management 
Categories for Core C&S Systems operated in Cloud to help address cloud 
management risk, as highlighted in Section II.A.2, above, by providing 
frameworks, guidelines, and best practices, that enhance transparency, 
reliability, and security.
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    \67\ FFIEC is a formal interagency body empowered to prescribe 
uniform principles, standards, and report forms for the federal 
examination of financial institutions by the Board of Governors of 
the Federal Reserve System, the Federal Deposit Insurance 
Corporation, the National Credit Union Administration, the Office of 
the Comptroller of the Currency, and the Consumer Financial 
Protection Bureau, and to make recommendations to promote uniformity 
in the supervision of financial institutions.
    \68\ Available at https://www.ffiec.gov/press/pr043020.htm.
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(a) Governance
    The Clearing Agencies and the CSP rely on a shared responsibility 
model that differentiates between security ``of'' the Cloud and 
security ``in'' the Cloud.\69\ This model is not specific to the 
agreement between the Clearing Agencies and the CSP; rather, it is a 
more universally followed model for public cloud services. Under the 
model, the CSP maintains sole responsibility and control over the 
security and resiliency ``of'' the Cloud, and their customers are 
responsible for the security and resiliency ``in'' the Cloud (i.e., 
security and resiliency of hosted applications and data). This means 
that the Clearing Agencies must manage their own application 
architectures, data backups, change management controls, network 
configurations within applications, and response to application 
failures. In addition, the Clearing Agencies must manage their own data 
usage and data-at-rest encryption configuration, IAM access policies 
and roles, operating system upkeep, security group configurations, and 
network traffic encryption in transit configurations. The Clearing 
Agencies also manage how they place workloads onto the CSP's platform.
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    \69\ ``Shared responsibility'' conveys the responsibility of the 
Clearing Agencies and the CSP vis-[agrave]-vis each other from a 
business operations perspective. It does not mean that the CSP has 
taken on or that the Clearing Agencies have relinquished any of 
their Reg. SCI compliance requirements.
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    Meanwhile, the CSP must manage backend hardware services for 
Compute, Storage, Networking, database, and global architectures such 
as regions, availability zones, data centers, power, and HVAC, as well 
as backend security services that protect core infrastructures. The CSP 
manages the underlying infrastructure and upkeep, so that the Clearing 
Agencies (and other customers) can place workloads on the CSP platform 
with proper security and separation without having to manage these 
traditional data center tasks. The Clearing Agencies review the CSP's 
policies and procedures for these functions during the quarterly 
reviews and during annual risk assessments.
    When looking more closely at hardware management, the Clearing 
Agencies believe there are benefits in how the CSP manages hardware for 
Cloud compared to how the Clearing Agencies manage hardware for their 
own data centers. For example, with on-premises data centers, the 
Clearing Agencies must oversee a multifaceted supply chain, involving 
many vendors to obtain and administer physical Compute, Storage, and 
Network capacity. Delivery times may fluctuate, and scarcities can 
affect project outcomes, as seen during the Covid-19 pandemic. In 
contrast, with the proposed Cloud Infrastructure, the CSP controls the 
hardware supply chain and even partakes in key areas of the 
manufacturing process to circumvent typical problems such as chip 
shortages. Moreover, the Clearing Agencies get to review the CSP's 
equipment forecast for each upcoming quarter, affording the Clearing 
Agencies the opportunity to address potential supply chain 
difficulties, if any, without jeopardizing their access to adequate 
capacity, by leveraging capabilities such as reserved capacity. 
Altogether, the Clearing Agencies believe the CSP's management of Cloud 
hardware will be a benefit to them.
    The CSP would perform its own risk and vulnerability assessments of 
the CSP infrastructure on which the Clearing Agencies would run their 
Core C&S Systems. In published documentation and in meetings conducted 
with the CSP, the CSP asserts that it maintains an industry-leading 
automated test system, with strong executive oversight, and conducts 
full-scope assessments of its hardware, infrastructure, internal 
threats, and application software. The CSP asserts that it has an 
aggressive program for conducting internal adversarial assessments 
(``Red Team'') designed not only to evaluate system security but also 
the processes used to monitor and defend its infrastructure. The CSP 
also uses external, third-party assessments as a cross-check against 
its own results and to ensure that testing is conducted in an 
independent fashion. Pursuant to the CSP's documentation, results of 
these processes are reviewed weekly by the CSP's Chief Information 
Security Officer and the Chief Executive Officer with senior CSP 
leaders to discuss security and action plans.\70\
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    \70\ The CSP does not provide assessment results to its 
customers, as doing so would constitute a breach of generally 
accepted security best practices. Instead, the CSP provides its 
customers with industry-standard reports--such as SOC2 Type II--
prepared by an independent third-party auditor to provide relevant 
contextual information to its customers. The CSP also conducts 
periodic audit meetings specifically designed to discuss security 
concerns with its customers discussed later during the ``CSP Audit 
Symposium.'' Additionally, the Clearing Agencies have certain audit 
rights (pursuant to Section 3 Customer Rights of Access and Audit of 
the Reg. SCI Addendum) to review information about the nature and 
scope of the CSP's vulnerability management program.
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    The Clearing Agencies have the responsibility to perform risk 
assessments and technical security testing, including control 
validation, penetration testing, and adversarial

[[Page 72138]]

testing of their applications running on the Cloud Infrastructure. This 
includes testing of the application interface layer of some CSP 
provided services such as storage and key management.
    As mentioned, the Clearing Agencies' testing includes assessing the 
configuration of the CSP provided services. The Clearing Agencies' 
Technology Risk Management staff would work with the Clearing Agencies' 
Information Technology staff to ensure that the CSP tools are 
configured to appropriately manage and mitigate potential sources of 
risk and will assess the effectiveness of those configurations.\71\ The 
Technology Risk Management staff has developed an application, Cloud 
Governance Insights (``CGI''), to continuously monitor all Cloud 
Infrastructure for alignment to security baselines and configurations 
best practices.\72\ The CGI dashboard allows Information Technology and 
Technology Risk Management staff to understand the environment risk 
posture and reporting of key risk indicators (``KRIs''). The Clearing 
Agencies' Red Team would operate freely ``in the Cloud,'' attempting to 
subvert or circumvent controls.\73\ The testing would include probing 
of the CSP provided services to look for weaknesses in the Clearing 
Agencies' deployment of those tools.
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    \71\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the OTR TRM 
Core Process Procedure--Security Configuration Violation Rules, 
which is used to manage enterprise information security risk by 
ensuring a consistent configuration violation scoring process that 
provides timely identification of configuration violations and their 
severity ratings. The Clearing Agencies have provided this document 
in confidential Exhibit 3 to this advance notice filing.
    \72\ CGI is the Clearing Agencies' internally developed solution 
to perform Cloud Security Posture Management and assess Cloud 
Infrastructure compliance against TRM Control Standards and Security 
Baselines in near real-time.
    \73\ Supra note 47.
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    Technology Risk Management staff would routinely report test 
results to the Technology Risk Management Steering Committee and the 
Management Risk Committee, appropriate functional Operations and 
Information Technology management, senior management, and the Board of 
Directors of the Clearing Agencies.74 75 Automated 
vulnerability scanning reports, source code analysis, and results of 
specific assessments would be risk-rated and assigned a priority for 
remediation in accordance with Clearing Agency Information Security 
Program requirements.76 77
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    \74\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Information Security Management Policy and 
Control Standards, which defines the roles, responsibilities, and 
accountabilities for DTCC's security practices and organization 
structure suited to protect DTCC's critical systems and business 
assets. Information Security Management evaluates DTCC's information 
security program's overall effectiveness, and establishes, 
maintains, communicates, and periodically reassesses information 
security policies and a comprehensive information security program 
that are approved by management. The Clearing Agencies have provided 
this document in confidential Exhibit 3 to this advance notice 
filing.
    \75\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Risk Management Policy and Control Standards, 
which provides (i) requirements for establishing, implementing, 
maintaining, and continually improving the information risk 
management program, (ii) a governance structure utilized for the 
escalation of information risks to an appropriate management level, 
and (iii) organizational roles and responsibilities for the delivery 
of comprehensive information security and technology risk management 
program. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
    \76\ Supra note 46.
    \77\ Supra note 47.
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    Management and oversight of the Cloud implementation follows the 
Clearing Agencies' standard governing principles for large information 
technology projects.\78\ To maintain accountability over the CSP's 
performance, regular reporting to the Boards of the Clearing Agencies 
by senior management is essential and required, pursuant to the DTCC 
Third Party Risk Procedures.\79\ Such reporting helps ensure that 
senior management takes appropriate actions to address significant 
performance deterioration, changing risks, or material issues 
identified through ongoing monitoring, thereby helping to ensure 
proactive risk management and continuous improvement.\80\ The Clearing 
Agencies' Board of Directors has established a Technology and Cyber 
Committee to assist the Board of Directors in overseeing information 
technology and cybersecurity strategy and capabilities.
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    \78\ Supra note 32.
    \79\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Third Party Risk Procedures, which establish the standards and 
practices to be used by certain business line departments and/or 
functional units to manage the potential risks associated with 
engaging with an external service provider. The Clearing Agencies 
have provided these documents in confidential Exhibit 3 to this 
advance notice filing.
    \80\ Supra note 62.
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    Information Technology and the Enterprise Program Management Office 
(``EPMO'') are responsible for the identification, management, 
monitoring, and reporting on the risks associated with the 
modernization and migration of applications to Cloud. To that end, 
reports on the status and progress of these efforts are reported to 
applicable Clearing Agency committees based on escalation criteria in 
the EPMO Procedure.\81\ These reports include overall risk and issue 
summaries and analysis of key risk indicators for the migration of 
applications to the public cloud.
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    \81\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the 
Enterprise Program Management Office Procedure, which outlines the 
minimum standards and practices the Clearing Agencies use to manage, 
measure, and monitor the performance of key processes aligned to the 
Enterprise Program Management Office Policy. The Clearing Agencies 
have provided these documents in confidential Exhibit 3 to this 
advance notice filing.
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    Finally, the Clearing Agencies' Internal Audit Department 
(``IAD''), as the independent third line of defense, is responsible for 
assessing and challenging the firm's control environment and risk 
management and control frameworks, which include those related to the 
Cloud, including, but not limited to, security controls and 
configurations, and report the results of those assessments to 
management and the Audit Committee of the Board.\82\
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    \82\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the Internal 
Audit Department Policies and Procedures, which contains the 
policies and guidance that direct the activities of the Clearing 
Agencies' IAD. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
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    Ultimately, there is no primary/secondary relationship, as the 
Clearing Agencies and the CSP each have their own set of 
responsibilities which, when combined, address the entire risk space.
(b) Cloud Security Management
    The Clearing Agencies have established a robust Cloud security 
program to (i) manage the security of the Core C&S Systems that would 
be running on the Cloud Infrastructure hosted by the CSP, and (ii) 
assess and monitor the CSP management of security of the Cloud 
Infrastructure that it operates. The security program is built upon 
Clearing Agency Information Security Policies and Control Standards 
that establish requirements that apply to any technology system as well 
as any tool that provides technology services.83 84 85 86 
Below describes

[[Page 72139]]

elements of the Clearing Agencies' Cloud security management in the 
areas of (i) IAM controls (i.e., determining who is accessing the 
systems, granting access to the applications, and then controlling what 
information they can access); (ii) security governance and controls for 
sensitive data; (iii) security configuration, provisioning, logging, 
and monitoring; and (iv) security testing.
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    \83\ Supra notes 46-47, 73-74.
    \84\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Asset Security Policy and Control Standards, 
which governs management of security for the information assets of 
the Clearing Agencies. The Clearing Agencies have provided this 
document in confidential Exhibit 3 to this advance notice filing.
    \85\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Monitoring and Incident Management Policy and 
Control Standards, which governs DTCC's information security 
monitoring and incident management and specifies requirements for 
(i) detecting unauthorized information processing activities, (ii) 
ensuring information security events and weaknesses associated with 
information systems are communicated in a manner allowing timely 
corrective action to be taken, and (iii) ensuring a consistent and 
effective approach is applied to the management of information 
security incidents. The Clearing Agencies have provided this 
document in confidential Exhibit 3 to this advance notice filing.
    \86\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Asset Access Control Policy and Standards, 
which governs management of security for the information assets of 
the DTCC and its subsidiaries. The Clearing Agencies have provided 
this document in confidential Exhibit 3 to this advance notice 
filing.
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(1) Network and IAM Controls
    The Clearing Agencies recognize that robust network security 
configuration and IAM would provide reasonable assurance that users--
including Clearing Agency employees, market participants, and service 
accounts for systems \87\--are granted least-privileged access \88\ to 
the network, applications, and data in the Cloud. The Clearing Agencies 
would use third-party tools to automate appropriate role-based access 
to the Core C&S Systems running in the Cloud. By enforcing strict 
separation of duties and least-privileged access for infrastructure, 
applications, and data, the Clearing Agencies would protect the 
confidentiality, availability, and integrity of the data in the Cloud.
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    \87\ Service accounts are non-interactive accounts that permit 
application access to support activities such as monitoring, 
logging, or backup. Service accounts are also used for machine-to-
machine communications.
    \88\ Least-privileged access means users only have the 
permission needed to perform their work, and no more.
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    The Clearing Agencies have established IAM requirements that build 
upon the least-privileged model.\89\ As part of the IAM program, all 
users must be assigned an appropriate enterprise identification. 
Additionally, the Clearing Agencies have established Highly Privileged 
Access Management capabilities and policies to further restrict highly 
privileged access to be used only in pre-determined scenarios that must 
be tied to a change, incident, request, or release records.\90\
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    \89\ Supra note 85.
    \90\ Id.
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    Cloud users would be granted access to systems via a standardized 
and auditable approval process. The user identifications and granted 
access would be managed through their full lifecycle from a centralized 
IAM system maintained and administered by the Clearing Agencies. Role-, 
attribute-, and context-based access controls would be used as defined 
by internal standards \91\ consistent with industry recommended 
practices to promote the principles of least-privileged access and 
separation of duties.\92\
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    \91\ Id.
    \92\ (1) ISO/IEC 27002:2013--Information technology--Security 
techniques--Code of practice for information security controls; (2) 
NIST Cybersecurity Framework (CSF) Version 1.1; (3) NIST Special 
Publication 800-53 Revision 4--Security and Privacy Controls for 
Federal Information Systems and Organizations.
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    The Clearing Agencies would use and manage third-party tools not 
otherwise provided by nor managed by the CSP for single sign-on and 
least-privileged access.\93\ The network also would include hardware 
and software to limit and monitor ingress and egress traffic, encrypt 
data in transmission, and isolate traffic between the Clearing Agencies 
and the Cloud.\94\ Since the Clearing Agencies would continue to 
provide cryptographic services, including key management, the CSP and 
other network service providers would not be able to decrypt Clearing 
Agency data either at rest or while in transit.
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    \93\ For example, the Clearing Agencies currently use Bravura 
Security Privileged Access Management (a/k/a PAM) for highly 
privileged access management.
    \94\ Supra notes 47, 84-85.
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(2) Security Governance and Controls for Sensitive Data
    The Clearing Agencies' data governance framework that would apply 
to Cloud implementation is identified within the Clearing Agency 
Information Security Policies and Control Standards.\95\ The Clearing 
Agency Information Security Policies and Control Standards address data 
moving between systems within the Cloud as well as data transiting and 
traversing both trusted and untrusted networks. For example, the 
Clearing Agencies' Information Security Policies and Control Standards 
require a system or Software as a Service (i.e., SaaS) to (i) store 
data and information, including all copies of data and information in 
the system, in the U.S., throughout its lifecycle; (ii) be able to 
retrieve and access the data and information throughout its lifecycle; 
(iii) for data in the system hosted in the Cloud, encrypt such data 
with key pairs kept and owned by the Clearing Agencies; (iv) comply 
with U.S. federal and applicable state data regulations regarding data 
location; and (v) enable secure disposition of non-records in 
accordance with the Clearing Agencies' Information Governance 
Policy.\96\
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    \95\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC Data 
Risk Management Policy, which establishes requirements for the sound 
management of data risk across the data lifecycle. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
    \96\ Supra note 85.
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    Furthermore, the Clearing Agencies' policies establish the overall 
data governance framework applied to the management, use, and 
governance of Clearing Agency information to include digital 
instantiations, storage media, or whether the information is located, 
processed, stored, or transmitted on the Clearing Agencies' information 
systems and networks; public, private, or hybrid cloud infrastructures; 
third-party data centers and data repositories; or SaaS 
applications.\97\ The Information Classification and Handling Policy 
\98\ classifies the Clearing Agencies' information into categories. 
System owners of technology that enable classification and/or labeling 
of information are responsible for ensuring the correct classification 
level is designated in the system of record and the applicable controls 
are enforced. All information requiring disposal is required to be 
disposed of securely in accordance with all applicable procedures. 
Sensitive data must be handled in a manner consistent with requirements 
in the Information Classification and Handling Policy.
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    \97\ Supra note 46.
    \98\ Supra note 83.
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    The Clearing Agencies would implement key security components, 
namely ubiquitous authentication, and encryption via use of an 
automated public key infrastructure, coupled with responsive, highly 
available authentication, authorization tools, and key management 
strategies to ensure appropriate industry standard security controls 
are in place for sensitive data both in transit to and at rest in 
Cloud.\99\
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    \99\ Supra note 47.
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    External connectivity to the Clearing Agencies' systems hosted by 
the CSP would be provided, as it is now, through dedicated private 
circuits or over encrypted tunnels through the internet. These network 
links also would have additional security controls, including 
encryption during transmission and restrictions on network access to 
and

[[Page 72140]]

from the Cloud. Additionally, the Clearing Agencies would use dedicated 
redundant private network connections between the Clearing Agencies 
data centers and the CSP infrastructure. The Clearing Agencies 
currently maintains two data centers and will do so in the near term to 
provide redundant, geographically diverse connectivity for market 
participants.
    All network communications between the Clearing Agencies and the 
Cloud Infrastructure would rely on industry standard encryption for 
traffic while in transit. Data at rest would be safeguarded through 
pervasive encryption. The Clearing Agencies' Encryption Standards \100\ 
describe requirements for implementation of the minimum required 
strengths, encryption at rest, and cryptographic algorithms approved 
for use in cryptographic technology deployments across the Clearing 
Agencies. All Clearing Agency identifying data is encrypted in transit 
using industry standard methods. The Key Management Service (``KMS'') 
Strategy \101\ dictates that all CSP endpoints support HTTPS for 
encrypting data in transit. The Clearing Agencies also secure 
connections to the endpoint service by using virtual private computer 
endpoints and ensures client applications are properly configured to 
ensure encapsulation between minimum and maximum Transport Layer 
Security versions pursuant to the Clearing Agencies' encryption 
standard.
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    \100\ Supra note 91.
    \101\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Information Security--Public Key Infrastructure Policy and Control 
Standards, which governs the public key infrastructures implemented 
and used within DTCC and its subsidiaries. The Clearing Agencies 
have provided this document in confidential Exhibit 3 to this 
advance notice filing.
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    The Clearing Agencies would have exclusive control over the 
encryption keys; only Clearing Agency authorized users and approved 
third parties would be able to access Clearing Agency data. The CSP 
systems and staff would not have access to the Clearing Agencies' 
certificates or keys.\102\ The Clearing Agencies would be responsible 
for the application architecture, software, configuration, and use of 
the CSP services, and for the maintenance of the environment, including 
ongoing monitoring of the application environment to achieve the 
appropriate security posture. To do this, the Clearing Agencies would 
follow (i) existing security design and controls; (ii) Cloud-specific 
information security controls defined in the Clearing Agencies' 
Information Security Policies and Control Standards; \103\ and (iii) 
regulatory compliance requirements detailed in sources or information 
technology practices that are widely available and issued by an 
authoritative body that is a U.S. governmental entity or agency 
including NIST-CSF,\104\ COBIT,\105\ and the FFIEC Guidelines.\106\
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    \102\ Certificate management is the process of creating, 
monitoring, and handling digital keys (certificates) to encrypt 
communications.
    \103\ Supra note 91.
    \104\ NIST Cybersecurity Framework Version 1.1.
    \105\ COBIT 2019 Framework: Governance and Management 
Objectives.
    \106\ FFIEC Information Technology Examination Handbook--
Information Security (September 2016).
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    The Clearing Agencies would use third-party and custom developed 
tools for CSP security compliance monitoring, security scanning, and 
reporting. Alerts and all API-level actions would be gathered using 
both CSP provided, Clearing Agency developed, and third-party 
monitoring tools. The CSP provided monitoring tool would be enabled by 
default at the organization level to monitor all CSP services activity. 
Centralized logging provides near real-time analysis of events and 
contains information about all aspects of user and role management, 
detection of unauthorized, security relevant configuration changes, and 
inbound and outbound communication.
    As discussed just above, the Clearing Agencies would use a KMS 
Strategy to encrypt data in transit and at rest in the Cloud. KMS is 
designed so that no one, including CSP employees, can retrieve customer 
plaintext keys and use them. The Federal Information Processing 
Standards 140-2 validated Host Security Modules (``HSMs'') in KMS 
protect the confidentiality and integrity of Clearing Agency customer 
keys.\107\ Customer plaintext keys are not written to disk and are only 
used in protected, volatile memory of the HSMs for the time needed to 
perform the customer's requested cryptographic operation. KMS keys are 
not transmitted outside of Cloud regions in which they were created. 
Updates to the KMS HSM firmware will be controlled by quorum-based 
access control \108\ that is audited and reviewed by an independent 
group within the CSP.
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    \107\ The HSM is analogous to a safe to which only the Clearing 
Agencies have the combination and the ability to access the keys to 
locks stored within.
    \108\ A quorum-based access mechanism requires multiple users to 
provide credentials over a fixed period in order to obtain access.
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(3) Security Configuration, Provisioning, Logging, and Monitoring
    Automated delivery of business and security capability via the use 
of ``Infrastructure as Code'' and continuous integration/continuous 
deployment pipeline methods would permit security controls to be 
consistently and transparently deployed on-demand. The Clearing 
Agencies would provision Cloud Infrastructure using pre-established 
system configurations that are deployed through Infrastructure as Code, 
then scanned for compliance to secure baseline configuration standards. 
The Clearing Agencies also would employ continuous configuration 
monitoring and periodic vulnerability scanning. The Clearing Agencies 
would perform regular reviews and testing of Clearing Agency systems 
running in Cloud while relying upon information provided by the CSP 
through the CSP's SOC2 and Audit Symposiums. Finally, configuration, 
security incident, and event monitoring would rely on a blend of CSP 
native and third-party solutions.
    The Clearing Agencies also plan to use tools offered by the CSP, 
developed by the Clearing Agencies, and third parties to monitor the 
Core C&S Systems running in Cloud. The Clearing Agencies would track 
metrics, monitor log files, set alarms, and have the ability to act on 
changes to Core C&S Systems and the environment in which they operate. 
The CSP would provide a dashboard to reflect-general health (e.g., up/
down status of a region and CSP provided services running in that 
region) but would not give additional insights into performance of 
services and applications which run on those services. The Clearing 
Agencies' centralized logging system would provide for a single frame 
of reference for log aggregation, access, and workflow management by 
ingesting the CSP's logs coming from native detective tools and the 
Clearing Agencies' instrumented controls for logging, monitoring, and 
vulnerability management. This instrumentation would give the Clearing 
Agencies a real-time view into the availability of Cloud services as 
well as the ability to track historical data. By using the enterprise 
monitoring tools that the Clearing Agencies have in place, the Clearing 
Agencies would be able to integrate the availability and capacity 
management of Cloud into the Clearing Agencies' existing processes, 
hosted in Cloud, to respond to issues in a timely manner.
    The Clearing Agencies also would use specialized third-party tools, 
as discussed just above, to programmatically configure Cloud services 
and securely deploy infrastructure. This automation of configuration 
and deployment would help ensure that Cloud services are repeatably and 
consistently configured securely and validated. Change

[[Page 72141]]

detection tools providing event logs into the incident management 
system also are vital for reacting to and investigating unexpected 
changes to the environment.
    The Clearing Agencies would implement tools for the Core C&S 
Systems and back-office environments that would be hosted on the Cloud 
Infrastructure, notably, IAM, monitoring and Security Information and 
Event Management systems, the workflow system of record for incident 
handling, KMS, and enterprise Data Loss Prevention.
    Finally, the CSP prioritizes assurance programs and certifications, 
underscoring its ability to comply with financial services regulations 
and standards and to provide the Clearing Agencies with a secure Cloud 
Infrastructure.\109\
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    \109\ The CSP has certifications for the following frameworks: 
NIST, Cloud Security Alliance, COBIT, ISO, and FISMA.
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(4) Security Testing and Verification
    Security testing is integrated into business-as-usual processes as 
outlined in relevant policy and procedures.\110\ These documents define 
how testing is initiated, executed, and tracked.
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    \110\ Supra note 46.
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    For new assets and application (or code) releases, Technology Risk 
Management determines whether and what type of security testing is 
required through a risk-based analysis.\111\ If required, testing would 
be conducted prior to implementation. The different testing techniques 
are outlined below:
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    \111\ Supra note 30.
---------------------------------------------------------------------------

     Automated Security Testing. Using industry standard 
security testing tools and/or other security engineering techniques 
specifically configured for each test, the Clearing Agencies would test 
to identify vulnerabilities and deliver payloads with the intent to 
break, change, or gain access to unauthorized areas within an 
application, data, or system.
     Manual Penetration Testing. Using information gathered 
from automated testing and/or other information sources, the Clearing 
Agencies would manually test to identify vulnerabilities and deliver 
payloads with the intent to break, change, or gain access to the 
unauthorized area within an application or system.
     Blue Team Testing. The Blue Team identifies security 
threats and risks in the operating environment and analyzes the 
network, system, and SaaS environments and their current state of 
security readiness. Blue Team assessment results guide risk mitigation 
and remediation, validate the effectiveness of controls, and provide 
evidence to support authorization or approval decisions. Blue Team 
testing ensures that the Clearing Agencies' networks, systems, and SaaS 
solutions are as secure as possible before deploying to a production 
environment.
    The results of the Clearing Agencies' security controls testing are 
risk-rated and managed to remediation via two separate control 
standards.\112\
---------------------------------------------------------------------------

    \112\ Supra notes 46-47.
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(c) Change Management: Software Development and Release Process
    Consistent with FFIEC Guidance, the Clearing Agencies' use of Cloud 
would have sufficient change management controls in place to 
effectively transition systems and information assets to Cloud and 
would help ensure the security and reliability of applications in 
Cloud.\113\ The Clearing Agencies' enterprise software development 
lifecycle processes \114\ would help ensure the same control 
environment for all Clearing Agency resources. The Clearing Agencies 
would establish baselines for design inputs and control requirements 
and enforce workload isolation and segregation through Cloud using 
existing Cloud native technical controls and added new tools. The 
Clearing Agencies also would plan to use other specialized platform 
monitoring tools for logging, scanning of configuration, and systems 
process scanning. The Clearing Agencies also would have oversight as 
the code owner and would have final review and approval for related 
changes and code merges before deployment into production. Finally, the 
Clearing Agencies would periodically conduct static code scanning and 
perform vulnerability scanning for external dependencies prior to 
deployment in production, along with manual penetration testing of the 
provided application code. In addition, the Clearing Agencies would 
perform routine scans of Compute resources with the existing enterprise 
scanning tools. Any identified vulnerabilities would be reviewed for 
severity, prioritized, and logged for remediation tracking in upcoming 
development releases.
---------------------------------------------------------------------------

    \113\ Supra note 30.
    \114\ Id.
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    The Clearing Agencies would create a ``user acceptance plan'' prior 
to promoting code to Cloud production. This user acceptance plan would 
include tests of all major functions, processes, and interfacing 
systems, as well as security tests. Through acceptance tests, the 
Clearing Agencies' users would be able to simulate complete application 
functionality of the live environment. The change would move to the 
next stage of the Clearing Agencies' delivery model only after 
satisfying the criteria for this phase.\115\
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    \115\ The ``user acceptance plan'' represents only one aspect of 
the overall change management program at the Clearing Agencies.
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    The Clearing Agencies would have internal projects that would 
address change management of the various applications and services. In 
particular, the Clearing Agencies would run a suite of supporting 
services that enable building, running, scaling, and monitoring of the 
Clearing Agencies' business applications in Cloud, in an automated, 
resilient, and secure manner.\116\ The application platform relies on 
various CSP and third-party tools for different components, including 
IaaS, Infrastructure as Code, CI/CD, Container as a Service, Continuous 
Delivery, and Platform Monitoring.
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    \116\ Supra note 30.
---------------------------------------------------------------------------

    With respect to software development in Cloud, the Clearing 
Agencies would establish a closed, non-production Cloud environment 
that would enable the Clearing Agencies to develop, test, and integrate 
new capabilities, including those related to security capabilities. 
This non-production Cloud environment would focus on the foundational 
security, operations, and infrastructure requirements with the intent 
to take lessons learned to implement into future production. The 
Clearing Agencies would maintain a Cloud Reference Architecture that 
defines necessary capabilities and controls required to securely host 
Core C&S Systems. The minimum foundational security requirements would 
be based on the NIST-CSF and CIS benchmarks and include the design and 
implementation requirements of a secure Cloud account structure within 
a multi-region Cloud environment. The Clearing Agencies would maintain 
enterprise security requirements that provide structure for current and 
future development. As the Cloud environment is further developed and 
expanded, there would be a comprehensive process to identify any 
incremental risks and develop and implement controls to manage and 
mitigate those risks.
(d) Resilience and Recovery
    As noted earlier, given the Clearing Agencies' roles as 
systemically important financial market utilities, it is vital that 
operations moved to the Cloud have appropriately robust resilience and 
recovery capabilities. As discussed in

[[Page 72142]]

Section II.B.ii.2, above, the Cloud Infrastructure would be architected 
to include (i) two autonomous and geographically diverse regions; (ii) 
three availability zones per region, with each availability zone 
comprised of multiple data centers; (iii) multi-node, high availability 
clusters across each availability zone; (iv) static stability and 
static capacity models; and (v) regional isolation, all to help ensure 
the persistent availability of Compute, Storage, and Network 
capabilities in Cloud.
    Additionally, the CSP's practice in deploying service updates to 
Cloud would help ensure that the consequences of any incidents would be 
limited to the fullest extent possible.\117\ The CSP achieves this by 
(i) fully automating the build and deployment process and (ii) 
deploying services to production in a phased manner.
---------------------------------------------------------------------------

    \117\ The Clearing Agencies would continue to retain 
responsibility for patching, configuration, and monitoring of the 
operating systems and applications in Cloud.
---------------------------------------------------------------------------

    CSP service updates are first deployed to cells, which minimizes 
the chance that a disruption from a service update in one cell would 
disrupt other cells. Following a successful cell-based deployment, 
service updates are next deployed to a specific availability zone, 
which limits any potential disruption to that zone. Following a 
successful availability zone deployment, service updates are then 
deployed in a staged manner to other availability zones, starting with 
the same region and later within other regions until the process is 
complete.
    The Clearing Agencies would meet regularly with the CSP, in 
addition to formal quarterly briefing meetings with the CSP, as 
described in the Reg. SCI Addendum.\118\ The informal discussions and 
quarterly briefing meetings would permit the Clearing Agencies to 
gather information in advance of the quarterly systems change report. 
Most reportable systems changes would continue to occur based on 
changes to Compute, Storage, Network, or applications controlled by the 
Clearing Agencies.
---------------------------------------------------------------------------

    \118\ See Reg. SCI Addendum, Section 4 Briefing Meetings. The 
Clearing Agencies have provided this document in confidential 
Exhibit 3 to this advance notice filing.
---------------------------------------------------------------------------

(e) Audit Controls and Assessment
    The Clearing Agencies would regularly test security controls and 
configurations, including by monitoring the CSP's technical, 
administrative, and physical security controls that support the 
Clearing Agencies' systems in the Cloud Infrastructure.
(1) Internal Risk Assessments
    As part of their existing third-party vendor risk activities, the 
Clearing Agencies' Third-Party Risk department (``TPR'') would assess 
the operational risks of the CSP as a critical vendor 
annually.119 120 121 Additionally, as a critical vendor, the 
CSP is subject to heightened risk management requirements, as defined 
in the DTCC Third Party Risk CriticalPlus Program Procedures,\122\ 
which include an executive sponsor that must be at the Managing 
Director level or higher, documented annual meetings, quarterly 
reporting, and monthly notifications. Issues rated moderate or above, 
negative news, performance concerns or remediations are directly 
escalated to the Management Risk Committee monthly.\123\
---------------------------------------------------------------------------

    \119\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Third Party Risk Governance & Monitoring Procedures, which describes 
the minimum requirements for practices and standards to be used by 
business owners to monitor and manage third party relationships for 
DTCC and its subsidiaries. The Clearing Agencies have provided this 
document in confidential Exhibit 3 to this advance notice filing.
    \120\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Third Party Risk Policy and the DTCC Third Party Risk Procedures, 
which establish the standards and practices to be used by certain 
business line departments and/or functional units to manage the 
potential risks associated with engaging with an external service 
provider. The Clearing Agencies have provided these documents in 
confidential Exhibit 3 to this advance notice filing.
    \121\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the Third 
Party Risk--Technology and Resilience Procedure, which supplements 
the ``DTCC Third Party Risk Policy'', ``DTCC Third Party Risk 
Procedures'', and ``DTCC Third Party Risk Governance and Monitoring 
Procedures'' and covers the following: standard technology risk 
assessments (e.g., due diligence), fourth party reviews, NYDFS cyber 
security assessments, and onsite assessments. The Clearing Agencies 
have provided this document in confidential Exhibit 3 to this 
advance notice filing.
    \122\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the DTCC 
Third Party Risk CriticalPlus Program Procedures. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
    \123\ Supra note 62.
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(2) Internal Audit Department
    As mentioned in Section II.B.ii.4.(a), above, the Clearing 
Agencies' IAD, as the third line of defense, is independent from the 
Clearing Agencies' business lines, support areas, and controls 
functions, and promotes resiliency and security through the assessment 
of risk management and control frameworks to raise awareness of control 
risks and changes for improving controls and governance processes.
    IAD assesses the risks of the Clearing Agencies, at least annually, 
as part of the development of the risk-based audit plan, which is 
reviewed and refreshed, as needed, on a quarterly basis.\124\ The 
development of the audit plan includes the consideration of IADs risk 
assessment results, which informs cycle coverage requirements for 
Cloud. Additional considerations include, but are not limited to, 
regulatory requirements and expectations, initiatives, and 
institutional and industry risk trends, including risks associated with 
technology and cloud-based processes.
---------------------------------------------------------------------------

    \124\ Supra note 81.
---------------------------------------------------------------------------

    IAD's specific reviews of Cloud Infrastructure have not identified 
any material deficiencies and the scope of the reviews have included, 
but are not limited to, consideration of governance and oversight, 
contagion risk and logical separation, access management, security 
configuration and monitoring, concentration risk, exit strategy, 
business continuity and disaster recovery. IAD also has assessed the 
design of controls for a cloud platform scheduled for use in 2024 and 
is proposing a Cloud Security audit for 2024.\125\
---------------------------------------------------------------------------

    \125\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the Clearing 
Agencies' Cloud Platform Internal Audit Report. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
---------------------------------------------------------------------------

(3) Key Risk and Key Performance Indicators \126\
---------------------------------------------------------------------------

    \126\ Supra note 62.
---------------------------------------------------------------------------

    The Clearing Agencies have established processes to evaluate the 
Clearing Agencies' management of CSPs. Cloud vendors are rated through 
a quarterly TPR survey. If a survey results in a poor rating, then it 
is reported to the Management Risk Committee (``MRC'').\127\ TPR is 
responsible for the timely reporting and escalation of third-party 
risks. On a regular basis, TPR will review all active assessments to 
identify any high risks or potential issues that may require further 
discussion or escalation to senior management, Corporate Procurement 
Services (``CPS''), or internal stakeholders. The DTCC Third Party Risk 
Procedures provide a list of events that must be presented to the 
MRC.\128\
---------------------------------------------------------------------------

    \127\ Supra note 119.
    \128\ Supra note 78.
---------------------------------------------------------------------------

    The Clearing Agencies have developed key performance indicators 
(``KPIs'') for Cloud and socialized these KPIs internally. The KRIs 
already exist for Core C&S Systems and are aligned to overall systems 
availability, capacity,

[[Page 72143]]

data integrity, and security.\129\ The CSP KPIs would feed into 
existing KRIs and would be used to evaluate the CSP's performance after 
Cloud implementation. KPIs would be added to monitor the performance 
and risks of the CSP services for which the Clearing Agencies have 
contracted. These post-Cloud implementation KRIs and KPIs would allow 
the Clearing Agencies to assess their ongoing use of the CSP against 
their operational and security requirements and would help demonstrate 
the effectiveness of risk controls and the CSP's performance against 
commitments in the SLAs, and will be reported on a regular basis to the 
Clearing Agencies' Management Committee, Board of Directors, and 
Technology and Risk Committees of the Board of Directors.
---------------------------------------------------------------------------

    \129\ The Clearing Agencies have separately submitted a request 
for confidential treatment to the Commission regarding the IT-Q4 
2023 Risk Tolerance. The Clearing Agencies have provided this 
document in confidential Exhibit 3 to this advance notice filing.
---------------------------------------------------------------------------

(4) Auditing the CSP and Access Rights \130\
---------------------------------------------------------------------------

    \130\ Supra note 62.
---------------------------------------------------------------------------

    The CSP hosts an annual Audit Symposium. The Cloud Agreement gives 
the Clearing Agencies the right to attend the symposium so that the 
Clearing Agencies may inspect and verify evidence of the design and 
effectiveness of the CSP's control environment.\131\ The CSP also hosts 
an annual Cloud security conference focused on security, governance, 
risk and compliance, which the Clearing Agencies would attend. Through 
preparation for and attendance at these events, the Clearing Agencies 
could provide feedback and make requests of the CSP for future 
modifications of its control environment.
---------------------------------------------------------------------------

    \131\ See Reg. SCI Addendum, Section 3 Customer Right of Access 
and Audit. The Clearing Agencies have provided this document in 
confidential Exhibit 3 to this advance notice filing.
---------------------------------------------------------------------------

    The Clearing Agencies' Information Technology staff currently meets 
with CSP representatives weekly to focus on technical issues related to 
the Clearing Agencies' proposed Cloud environment. As required under 
the Cloud Agreement, the Clearing Agencies hold quarterly compliance 
briefings with the CSP, wherein the Clearing Agencies receive 
information, including any necessary documentation, from the CSP to 
help assure the Clearing Agencies that the CSP is meeting its 
obligations.\132\ The information provided includes updates to services 
and SLAs, CSP performance, and details that help the Clearing Agencies 
meet their reporting obligations under Section 1003(a)(1) of Reg. SCI. 
The Clearing Agencies' management, including Security, Information 
Technology, TPR, and the Internal Audit Department, coordinate to 
ensure appropriate representation during such briefings. The CSP is 
required under Cloud Agreement to maintain records showing its 
compliance with the agreements for a period of five years.\133\
---------------------------------------------------------------------------

    \132\ Supra note 117.
    \133\ See Reg. SCI Addendum, Section 7.3 CSP Records. The 
Clearing Agencies have provided this document in confidential 
Exhibit 3 to this advance notice filing.
---------------------------------------------------------------------------

    The CSP would be required to maintain an information security 
program, including controls and certifications, that is as protective 
as the program evidenced by the CSP's SOC-2 report. The CSP must make 
available on demand to the Clearing Agencies its SOC-2 report as well 
as the CSP's other certifications from accreditation bodies and 
information on its alignment with various frameworks, including NIST-
CSF, and ISO.\134\
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    \134\ The FFIEC Guidance provides that the Clearing Agencies may 
obtain SOC reports, other independent audits, or ISO certification 
reports to gain assurance that the CSP's controls are operating 
effectively. See FFIEC, Security in a Cloud Computing Environment, 
at 7. The Clearing Agencies review the CSP's SOC-2 on an annual 
basis. See Reg. SCI Addendum, Section 2 CSP Information Security 
Program. The SOC reports, along with other artifacts showing 
compliance with these sections, are available to the Clearing 
Agencies on demand. In addition, during each Briefing Meeting (See 
Reg. SCI Addendum Section 4 Briefing Meetings), updates are provided 
on any material changes to certification standards, policies, 
procedures, controls or security standards at the CSP. The Clearing 
Agencies have provided this document in confidential Exhibit 3 to 
this advance notice filing.
---------------------------------------------------------------------------

    As part of the annual risk assessment of the CSP, TPR collects risk 
and control related assurance documents from the CSP and coordinates 
review with the Clearing Agencies' respective subject matters 
specialists. TPR, Security, and Business Continuity would determine the 
adequacy and reasonableness of the documentation received to complete 
the Third-Party Risk Assessment. Finally, the Cloud Agreement provides 
that the Clearing Agencies' and their regulators may visit the 
facilities of the CSP under specified conditions. TPR would help 
coordinate bi-annual visits of the data centers.\135\
---------------------------------------------------------------------------

    \135\ See Reg. SCI Addendum, Sections 3 Customer Right of Access 
and Audit and 9 Regulatory Supervision. The Clearing Agencies have 
provided this document in confidential Exhibit 3 to this advance 
notice filing.
---------------------------------------------------------------------------

    The Clearing Agencies plan to use the CSP's services combined with 
additional third-party tools to monitor systems deployed by ingesting 
logs into a security incident and event monitoring tool to provide a 
``single pane of glass'' view into the Cloud Infrastructure. When 
incidents are detected, the Clearing Agencies would follow their 
existing incident response governance to identify, detect, contain, 
eradicate, and recover from incidents.

III. Consistency With the Clearing Supervision Act

    The stated purpose of the Clearing Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\136\ 
Section 805(a)(2) of the Clearing Supervision Act \137\ also authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like the Clearing Agencies, for which the Commission is the supervisory 
agency. Section 805(b) of the Clearing Supervision Act \138\ states 
that the objectives and principles for risk management standards 
prescribed under Section 805(a) shall be to:
---------------------------------------------------------------------------

    \136\ 12 U.S.C. 5461(b).
    \137\ 12 U.S.C. 5464(a)(2).
    \138\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission adopted Rule 17ad-22 under Section 805(a)(2) of the 
Clearing Supervision Act and the Exchange Act in furtherance of these 
objectives and principles.\139\ Rule 17ad-22 under the Exchange 
requires covered clearing agencies, like the Clearing Agencies, to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for their operations and risk management practices on an 
ongoing basis.\140\
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    \139\ 17 CFR 240.17ad-22. Exchange Act Release Nos. 68080 
(October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11) 
(Clearing Agency Standards); 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14) (Standards for Covered Clearing 
Agencies).
    \140\ 17 CFR 240.17ad-22.
---------------------------------------------------------------------------

    The Clearing Agencies believe that the Cloud Proposal is consistent 
with Section 805(b)(1) of the Clearing Supervision Act \141\ and the 
requirements of Rules 17ad-22(e)(17)(ii) under the Exchange Act.\142\
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    \141\ 12 U.S.C. 5464(b)(1).
    \142\ 17 CFR 240.17ad-22(e)(17)(ii).

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[[Page 72144]]

A. Consistency With Section 805(b)(1) of the Clearing Supervision Act
    Promote Robust Risk Management. As described above, the Clearing 
Agencies believe that the Cloud Proposal promotes robust risk 
management, specifically operational risk management, by providing 
scalable and secure infrastructure for hosting Core C&S Systems. The 
Cloud Proposal would add additional security capabilities, allow for 
regular updates and maintenance of applications, and reduce the risk of 
data breaches while also ensuring compliance with industry standards. 
Additionally, transitioning to Cloud would offer flexibility in scaling 
resources, which can enable the Clearing Agencies to adapt quickly to 
changing security needs and allocate resources more efficiently.
    Today, the Clearing Agencies' ability to risk manage extreme market 
events is directly tied to their ability to scale their on-premises 
resource during such events, which is directly tied to the Clearing 
Agencies having previously expended enough capital to build enough 
capacity based on earlier performance testing of their applications to 
withstand such extreme market events. Although the Clearing Agencies 
would continue to performance test their applications regardless of 
where the applications are hosted, by hosting the applications in 
Cloud, the number of scalable resources is already available, when 
needed, without the Clearing Agencies having to pre-purchase it or 
build it. This level of nearly unbounded, on-demand scalability 
provides a much-welcomed risk-management feature for extreme events, 
such as a global pandemic as noted above.
    Overall, risk management is inherently strengthened by hosting in 
Cloud through advanced security features, real-time monitoring, on-
demand scalability, and compliance standards implemented by the CSP. By 
leveraging these capabilities, the Clearing Agencies can better 
proactively identify and address risks, ensuring data integrity and 
regulatory compliance.
    Promote Safety and Soundness. The Clearing Agencies also believe 
that the Cloud Proposal promotes safety and soundness. As discussed 
above, transitioning to Cloud provides centralized management and 
improved scalability. The CSP provides cloud-specific security 
capabilities, including encryption, access controls, and regular 
updates, reducing the risk of security breaches. Centralized monitoring 
allows for better visibility into potential threats, enabling quick 
response and mitigation. The agility afforded by Cloud would allow the 
Clearing Agencies to respond to performance challenges more efficiently 
and effectively. For instance, as noted above, in the face of 
unexpected surges in demand, Cloud scalability would allow the Clearing 
Agencies to seamlessly adjust resources, helping to prevent service 
disruptions and loss of operations. Such agility not only enhances the 
effectiveness of operations but also mitigates the risks associated 
with unexpected fluctuations in workload performance. These benefits 
improve the Clearing Agencies abilities to maintain operational 
continuity and resilience, which help promote safety and soundness.
    Reduce Systemic Risk. The Clearing Agencies also believe that the 
Cloud Proposal would reduce systemic risk by improving overall 
resilience and security. As described above, hosting Core C&S Systems 
in Cloud would provide distributed infrastructure and data redundancy 
(i.e., multiple availability zones, supported by many data centers, 
across two regions), making the systems less susceptible to single 
points of failure. Moreover, disaster recovery would be streamlined, 
minimizing the effect of potential disruptions, while automatic backup 
systems, geographic redundancy, and faster data recovery mechanisms 
would all contribute to a more resilient infrastructure. In the event 
of a localized issue, the distributed nature of Cloud would help 
prevent widespread disruptions.
    Production resiliency also is greatly improved in Cloud compared to 
the Clearing Agencies' on-premises capabilities, where a single 
location hosts an application, on a single copy of primary storage. 
Instead, Cloud would host an application across three primary 
availability zones, made of up of many data centers, each of which 
contain actively running instances and synchronous copies of the data. 
If the Clearing Agencies' primary, on-premises data center fails, an 
out of region recovery will be necessary and will likely result in 
approximately two hours of downtime. By comparison, in Cloud, even if 
an entire availability zone fails (meaning the failure of multiple data 
centers), Core C&S Systems would continue to operate within the region, 
thus avoiding an out of region recovery and any downtime.
    The Clearing Agencies would employ meaningful security capabilities 
and measures provided by the CSP and third-party tools to further 
enhance the security of the Clearing Agencies' Core C&S Systems. This 
approach to security would help reduce systemic risks associated with 
operational outages and significantly reduce the risk associated with 
data loss or downtime. Additionally, the Cloud environment facilitates 
regular updates and patch management, ensuring that security measures 
stay current. This proactive maintenance helps mitigate vulnerabilities 
that could otherwise contribute to systemic risk. Overall, the adoption 
of Cloud enhances the stability and security of IT infrastructure, 
contributing to a reduction in systemic risks.
    Altogether, the Clearing Agencies believe that the benefits afford 
from operating in a Cloud Infrastructure would help the Clearing 
Agencies reduce systemic risk.
    Support the Stability of the Broader Financial System. The Clearing 
Agencies believe that the Cloud Proposal supports the stability of the 
broader financial system by enhancing efficiency, resilience, and 
security of the Clearing Agencies' Core C&S Systems. Cloud services 
would provide the Clearing Agencies with scalable and flexible 
infrastructure, allowing for more efficient resource allocation and 
cost management, which supports operational resiliency and stability. 
With the ability to rapidly deploy new applications and services, the 
Clearing Agencies would become more agile in adapting to market trends 
and participant and customer needs.
    In terms of resilience, the Cloud Infrastructure offers distributed 
data storage and failover solutions, reducing the impact of localized 
disruptions and improving recovery capabilities. This resilience is 
crucial for the Clearing Agencies' Core C&S Systems to continue 
functioning even in the face of unforeseen events. Moreover, the CSP's 
strengthened security capabilities help protect sensitive data, 
mitigating the risk of cyberattack or data breaches that could 
undermine the stability of the financial system. Overall, the 
transition to Cloud fosters improved operational efficiency, 
resilience, and robust security practices, contributing to the 
stability of the broader financial system.
    Accordingly, the proposed changes provided in this Cloud Proposal 
are consistent with (i) promoting robust risk management; (ii) 
promoting safety and soundness; (iii) reducing systemic risks; and (iv) 
promoting the stability of the broader financial system, all in support 
of the objectives and principles of Section 805(b) of the Clearing 
Supervision Act.\143\
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    \143\ 12 U.S.C. 5464(b).

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[[Page 72145]]

B. Consistency With Rule 17ad-22(e)(17)(ii) Under the Exchange Act
    Rule 17ad-22(e)(17)(ii) requires the Clearing Agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to manage the Clearing Agencies' 
operational risk by ``ensuring that systems have a high degree of 
security, resiliency, operational reliability, and adequate, scalable 
capacity.'' \144\
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    \144\ 17 CFR 240.17ad-22(e)(17)(ii). The Clearing Agencies 
maintain several policies specifically designed to manage the risks 
associated with maintaining adequate levels of system functionality, 
confidentiality, integrity, availability, capacity, and resiliency 
for systems that support core clearing, risk management, and data 
management services.
---------------------------------------------------------------------------

    Security. As described above and in policies and procedures 
confidentially filed, the Clearing Agencies have established a robust 
Cloud security program to manage the security of the Core C&S Systems 
that would be running in Cloud and to monitor the CSP's management of 
security of the Cloud Infrastructure that it operates. Processes are 
formally defined, automated to the fullest extent, repeatable with 
minimal variation, accessible, adhered to, and timely. The enterprise 
security program encompasses all of the Clearing Agencies' assets 
existing in the Clearing Agencies' offices, data centers, and within 
the Cloud Infrastructure, and IAM controls ensure least-privileged user 
access to applications in Cloud. The Clearing Agencies have appropriate 
controls in place to help ensure the security of confidential 
information in-transit between the Clearing Agencies' data centers and 
the Cloud Infrastructure, between systems within the Cloud 
Infrastructure, and at-rest. All network communications between the 
Clearing Agencies and Cloud would rely on industry standard encryption 
for traffic while in transit, and data at rest would be safeguarded 
through pervasive encryption. Finally, automated delivery of business 
and security capability via the use of the Infrastructure as Code, 
Cloud agnostic tools, and continuous integration/continuous deployment 
pipeline methods help ensure security controls are consistently and 
transparently deployed.
    Resiliency and Operational Reliability. As stated above, resiliency 
and operational reliability of the Cloud Infrastructure is built into 
the system with functionality for the Clearing Agencies' Core C&S 
Systems to run in multiple availability zones within multiple regions. 
Regions are segregated from one another and are designed to minimize 
the possibility of a multi-region outage. The Clearing Agencies have 
designed their Cloud Infrastructure to have primary (hot)/secondary 
(warm) regions, at all times, ensuring Compute, Storage, and Network 
resources would be available in a new redundant region in the event of 
a primary region failure. As a result, the Cloud Infrastructure offers 
the Clearing Agencies multiple redundancies within which to run Core 
C&S Systems, while simultaneously restricting the effect of an incident 
at the CSP to the smallest footprint possible.
    Scalability. As described above, since additional computing power 
can be launched on demand, the scalability in a Cloud computing 
environment is considerable and instantaneous. The Clearing Agencies 
could provision or de-provision Compute, Storage, and Network resources 
to meet demand at any given point in time. In the current on-premises 
environment, immediate scalability is limited by the capacity of the 
on-premises hardware. Additional physical servers and network equipment 
would be needed to scale beyond the limits of the on-premises hardware, 
potentially affecting the ability to quickly adapt to evolving market 
conditions, including spikes in trading volume.
    For these reasons, the Clearing Agencies believe that the Cloud 
Proposal would help ensure that the Clearing Agencies' systems have a 
high degree of security, resiliency, operational reliability, and 
adequate, scalable capacity, consistent with Rule 17ad-22(e)(17)(ii) 
under the Exchange Act.\145\
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    \145\ 17 CFR 240.17ad-22(e)(17)(ii).
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III. Date of Effectiveness of the Advance Notice

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date the proposed change was filed with the Commission or (ii) the date 
any additional information requested by the Commission is 
received.\146\ The clearing agency shall not implement the proposed 
change if the Commission has any objection to the proposed change.\147\
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    \146\ 12 U.S.C. 5465(e)(1)(G).
    \147\ 12 U.S.C. 5465(e)(1)(F).
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    The clearing agency shall post notice on its website of proposed 
changes that are implemented. The proposal shall not take effect until 
all regulatory actions required with respect to the proposal are 
completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the advance 
notice is consistent with the Clearing Supervision Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number FICC-2024-803 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-FICC-2024-803. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
Copies of the filing also will be available for inspection and copying 
at the principal office of FICC and on DTCC's website (dtcc.com/legal/sec-rule-filings). Do not include personal identifiable information in 
submissions; you should submit only information that you wish to make 
available publicly. We may redact in part or withhold entirely from 
publication submitted material that is obscene or subject to copyright 
protection. All submissions should refer to File Number SR-FICC-2024-
803 and should be submitted on or before September 25, 2024.

V. Date of Timing for Commission Action

    Section 806(e)(1)(G) of the Clearing Supervision Act provides that 
FICC may implement the changes if it has not received an objection to 
the proposed changes within 60 days of the later of (i)

[[Page 72146]]

the date that the Commission receives the Advance Notice or (ii) the 
date that any additional information requested by the Commission is 
received,\148\ unless extended as described below.
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    \148\ 12 U.S.C. 5465(e)(1)(G).
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    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act, 
the Commission may extend the review period of an advance notice for an 
additional 60 days, if the changes proposed in the advance notice raise 
novel or complex issues, subject to the Commission providing the 
clearing agency with prompt written notice of the extension.\149\
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    \149\ 12 U.S.C. 5465(e)(1)(H).
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    Here, as the Commission has not requested any additional 
information, the date that is 60 days after FICC filed the Advance 
Notice with the Commission is October 13, 2024. However, the Commission 
believes that the changes proposed in the Advance Notice raise novel 
and complex issues. The Commission finds the issues novel because FICC 
proposes a gradual migration of a specified set of Core C&S Systems to 
a public cloud infrastructure hosted by a single, third-party service 
provider. The Commission also finds the issues raised by the Advance 
Notice complex because the selection of the subset of applications 
proposed for migration involves a detailed governance review process 
that would require careful scrutiny and consideration of its associated 
risks. Therefore, the Commission finds it appropriate to extend the 
review period of the Advance Notice for an additional 60 days under 
Section 806(e)(1)(H) of the Clearing Supervision Act.\150\
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    \150\ Id.
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    Accordingly, the Commission, pursuant to Section 806(e)(1)(H) of 
the Clearing Supervision Act,\151\ extends the review period for an 
additional 60 days so that the Commission shall have until December 12, 
2024 to issue an objection or non-objection to advance notice SR-FICC-
2024-803.
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    \151\ Id.
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    All submissions should refer to File Number SR-FICC-2024-803 and 
should be submitted on or before September 25, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\152\
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    \152\ 17 CFR 200.30-3(a)(91).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19762 Filed 9-3-24; 8:45 am]
BILLING CODE 8011-01-P