Document ID: SEC-2022-0916-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2022-07-14T04:00Z

[Federal Register Volume 87, Number 134 (Thursday, July 14, 2022)]
[Notices]
[Pages 42233-42235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15005]

[[Page 42233]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95237; File No. SR-NSCC-2022-004]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Require 
Applicants and Members To Maintain or Upgrade Their Network or 
Communications Technology

July 8, 2022.

I. Introduction

    On May 11, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2022-004 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published for comment in the Federal Register on May 31, 
2022.\3\ The Commission did not receive any comment letters on the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 94977 (May 24, 2022), 87 
FR 32485 (May 31, 2022) (SR-NSC-2022-004) (``Notice of Filing'').
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II. Description of the Proposed Rule Change

A. Background

    NSCC proposes to modify its Rules and Procedures (``Rules'') \4\ to 
require its Members, Limited Members, Sponsored Members, and applicants 
for membership (collectively, ``members'') to upgrade and maintain 
their network technology, and communications technology or protocols, 
to meet standards that NSCC would identify and publish via Important 
Notice on its website, as described more fully below.
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    \4\ NSCC's Rules are available at https://dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
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    NSCC provides clearance, settlement, risk management, central 
counterparty services, and a guarantee of completion for virtually all 
broker-to-broker trades involving equity securities, corporate and 
municipal debt securities, American depository receipts, exchange 
traded funds, and unit investment trusts.\5\ In light of its critical 
role in the marketplace, NSCC was designated a Systemically Important 
Financial Market Utility (``SIFMU'') under Title VIII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010.\6\ Due to 
NSCC's unique position in the marketplace, a failure or a disruption at 
NSCC could, among other things, increase the risk of significant 
liquidity problems spreading among financial institutions or markets, 
and thereby threaten the stability of the financial system in the 
United States.\7\
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    \5\ See Financial Stability Oversight Counsel 2012 Annual 
Report, Appendix A (``FSOC 2012 Report''), available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \6\ 12 U.S.C. 5465(e)(1). See FSOC 2012 Report, supra note 5.
    \7\ See FSOC 2012 Report, Appendix A, supra note 5.
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    NSCC's Rules currently do not require, either as part of an 
application for membership or as an ongoing membership requirement, any 
level or version for network technology, such as a web browser or other 
technology, or any level or version of communications technology or 
protocols, such as email encryption, secure messaging, or file 
transfers, that members may use to connect to or communicate with 
NSCC.\8\ Therefore, NSCC currently maintains multiple network and 
communications methods and protocols to interact with its members.\9\ 
This includes some outdated communication technologies in order to 
support members that continue to use such older technologies.\10\ NSCC 
believes that continuing to use such outdated technologies could render 
communications between NSCC and some of its members vulnerable to cyber 
risks.\11\ Additionally, members' use of outdated technology delays 
NSCC's implementation of its own internal system upgrades, which by 
doing so, risks losing connectivity between NSCC and a number of its 
members.\12\ Finally, NSCC states that it currently expends additional 
resources, both in personnel and equipment, to maintain outdated 
communications channels.\13\
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    \8\ Notice of Filing, supra note 3, at 32486.
    \9\ Id.
    \10\ Id.
    \11\ Id.
    \12\ Id.
    \13\ Id.
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    To mitigate the foregoing security concerns and resource 
inefficiencies, NSCC proposes to require its members to upgrade and 
maintain network technology, communication technology, and protocol 
standards, in accordance with applicable technology standards that NSCC 
would identify and publish via Important Notice on its website from 
time to time.\14\ NSCC would base these requirements on standards set 
forth by widely accepted organizations such as the National Institute 
of Standards and Technology (``NIST'') and the internet Engineer Task 
Force (``IETF'').\15\
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    \14\ Id.
    \15\ Id. NIST is part of the U.S. Department of Commerce. The 
IETF is an open standards organization that develops and promotes 
voluntary internet standards, in particular, the technical standards 
that comprise the internet protocol suite (TCP/IP). For example, 
NIST Special Publication 800-52 revision 2, specifies servers that 
support government-only applications shall be configured to use 
Transport Layer Security (``TLS'') 1.2 and should be configured to 
use TLS 1.3 as well. See https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-52r2.pdf. (TLS, the successor of the 
now-deprecated Secure Sockets Layer (``SSL''), is a cryptographic 
protocol designed to provide communications security over a computer 
network.) These servers should not be configured to use TLS 1.1 and 
shall not use TLS 1.0, SSL 3.0, or SSL 2.0. Additionally, the IETF 
formally deprecated TLS versions 1.0 and 1.1 in March of 2021, 
stating that ``[t]hese versions lack support for current and 
recommended cryptographic algorithms and mechanisms, and various 
government and industry profiles of applications using TLS now 
mandate avoiding these old TLS versions. . . . Removing support for 
older versions from implementations reduces the attack surface, 
reduces opportunity for misconfiguration, and streamlines library 
and product maintenance.'' See https://datatracker.ietf.org/doc/rfc8996/. NSCC would also require members to discontinue using File 
Transfer Protocol (``FTP''), which NSCC believes to be an insecure 
protocol because it transfers user authentication data (username and 
password) and file data as plain-text (not encrypted) over the 
network. Notice of Filing, supra note 3, at 32486.
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    To implement the proposed changes, NSCC would revise its Rules to 
require members to maintain or upgrade their network technology, 
communications technology, or protocols on the systems that connect to 
NSCC, to the version NSCC requires, within the time period NSCC 
requires.\16\ Consistent with the guidance from NIST and other 
standards organizations, NSCC would require the use of TLS 1.2, Secure 
FTP (``SFTP''), and other modern technology and communication standards 
and protocols, by its members for communication with NSCC.\17\ NSCC 
would publish such requirements via Important Notice on its 
website.\18\ NSCC also proposes to amend its Rules to provide that 
failure to perform a necessary technology upgrade within the required 
timeframe would subject members to a monetary fine.\19\
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    \16\ Notice of Filing, supra note 3, at 32486-87.
    \17\ Id.
    \18\ Id.
    \19\ Notice of Filing, supra note 3, at 32487.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After

[[Page 42234]]

careful consideration, the Commission finds that the Proposed Rule 
Change is consistent with the requirements of the Act and the rules and 
regulations applicable to NSCC. In particular, the Commission finds 
that the Proposed Rule Change is consistent with Sections 17A(b)(3)(F) 
\21\ and (b)(3)(G) \22\ of the Act and Rules 17Ad-22(e)(17) \23\ and 
(e)(21) \24\ thereunder.
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 15 U.S.C. 78q-1(b)(3)(G).
    \23\ 17 CFR 240.17Ad-22(e)(17)(i) and (ii).
    \24\ 17 CFR 240.17Ad-22(e)(21)(iv).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to, among other things, promote the prompt 
and accurate clearance and settlement of securities transactions and 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, NSCC proposes to require its members to upgrade 
and maintain network technology, and communication technology and 
protocol standards, that meet the standards identified by NSCC and 
published via Important Notice to NSCC's website from time to time. 
NSCC would use standards set forth by widely accepted organizations 
such as NIST and the IETF as the requirements. The proposed 
requirements would enable NSCC to avoid communicating with its members 
using outdated technologies that present security vulnerabilities to 
NSCC. Specifically, as an initial matter, the proposed requirements 
would enable NSCC to discontinue using communication technologies such 
as TLS 1.0, TLS 1.1, SSL 2.0, SSL 3.0, and FTP, which have been deemed 
not secure by organizations such as NIST and/or the IETF. Removing 
support for such outdated technologies would reduce NSCC's potential 
exposure to cyberattacks and other cyber vulnerabilities.
    If not adequately addressed, the risk of cyberattacks and other 
cyber vulnerabilities could affect NSCC's network and, in turn, NSCC's 
ability to clear and settle securities transactions, or to safeguard 
the securities and funds which are in NSCC's custody or control, or for 
which it is responsible. NSCC designed the proposed requirements for 
members to upgrade their communications technology to address those 
risks, as described above. Accordingly, the Commission finds the 
proposed technology requirements on NSCC's members would promote the 
prompt and accurate clearance and settlement of securities transactions 
and assure the safeguarding of securities and funds which are in the 
custody or control of NSCC or for which it is responsible, consistent 
with the requirements of Section 17A(b)(3)(F) of the Act.\26\
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    \26\ Id.
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B. Consistency With Section 17A(b)(3)(G) of the Act

    Section 17A(b)(3)(G) of the Act requires the rules of a clearing 
agency to provide that its participants shall be appropriately 
disciplined for violation of any provision of the rules of the clearing 
agency by fine or other fitting sanction.\27\ As noted above, NSCC 
proposes to require its members to upgrade and maintain network 
technology, communication technology, and protocol standards, in 
accordance with applicable technology standards that NSCC would 
identify and publish via Important Notice on its website. The proposed 
requirements would enable NSCC to avoid communicating with its members 
using outdated technologies that present security vulnerabilities to 
NSCC. If not adequately addressed, such vulnerabilities could affect 
NSCC's network and its ability to operate. NSCC also proposes to amend 
its Rules to provide that failure to perform a necessary technology 
upgrade within the required timeframe would subject members to a 
monetary fine. Because the proposed monetary fine should incentivize 
NSCC's members to upgrade and maintain secure communications 
technology, thereby reducing NSCC's operational risks, the Commission 
finds the proposed rule change is consistent with the requirements of 
Section 17A(b)(3)(G) of the Act.\28\
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    \27\ 15 U.S.C. 78q-1(b)(3)(G).
    \28\ Id. Additionally, by including the monetary fine provision 
in its Rules, NSCC would enable its members to better identify and 
evaluate the material costs they might incur by participating in 
NSCC, consistent with Rule 17Ad-22(e)(23)(ii). under the Act, which 
requires a covered clearing agency to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide sufficient information to enable participants to 
identify and evaluate the risks, fees, and other material costs they 
incur by participating in the covered clearing agency. See 17 CFR 
240.17Ad-22(e)(23)(ii).
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C. Consistency With Rule 17Ad-22(e)(17) Under the Act

    Rule 17Ad-22(e)(17)(i) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to manage the covered 
clearing agency's operational risks by identifying the plausible 
sources of operational risk, both internal and external, and mitigating 
their impact through the use of appropriate systems, policies, 
procedures, and controls.\29\ NSCC's operational risks include cyber 
risks to its electronic systems.
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    \29\ 17 CFR 240.17Ad-22(e)(17)(i).
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    As described above, NSCC and its members connect electronically to 
communicate with one another. However, NSCC's Rules currently do not 
require any level or version for network technology, such as a web 
browser or other technology, or any level or version of communications 
technology or protocols, such as email encryption, secure messaging, or 
file transfers, that members may use to connect to or communicate with 
NSCC. As a result, NSCC maintains some outdated communication 
technologies in order to support members that continue to use such 
older technologies. Continuing to use such outdated technologies could 
render communications between NSCC and some of its members vulnerable 
to cyber risks.
    To mitigate the foregoing cyber risks, NSCC proposes to require its 
members to upgrade and maintain network technology, and communication 
technology and protocol standards that meet the standards identified by 
NSCC from time to time. The proposed technology requirements should 
reduce NSCC's cyber risk by requiring members to upgrade and maintain 
communications technology based on standards set forth by widely 
accepted organizations such as NIST and the IETF, thereby decreasing 
the operational risks presented to NSCC. Because the proposed 
technology requirements would help NSCC mitigate plausible sources of 
external operational risk, the Commission finds the proposed changes 
are consistent with the requirements of Rule 17Ad-22(e)(17)(i) under 
the Act.\30\
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    \30\ Id.
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    Rule 17Ad-22(e)(17)(ii) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to manage the covered 
clearing agency's operational risks by ensuring, in part, that systems 
have a high degree of security, resiliency, and operational 
reliability.\31\ As noted above, NSCC's operational risks include cyber 
risks.
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    \31\ 17 CFR 240.17Ad-22(e)(17)(ii).
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    As described above, NSCC's Rules currently do not require any level 
or version for network technology, such as a web browser or other 
technology, or any level or version of communications

[[Page 42235]]

technology or protocols, such as email encryption, secure messaging, or 
file transfers, that members may use to connect to or communicate with 
NSCC. NSCC designed the proposed technology requirements to reduce 
cyber risks by requiring its members to upgrade and maintain 
communications technology based on standards set forth by widely 
accepted organizations such as NIST and the IETF. Requiring NSCC's 
members to use only secure communications technology would reduce 
NSCC's cyber risks and thereby strengthen the security, resiliency, and 
operational reliability of NSCC's network and other systems. Because 
the proposed technology requirements would enhance NSCC's ability to 
ensure that its systems have a high degree of security, resiliency, and 
operational reliability, the Commission finds the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(17)(ii) under 
the Act.\32\
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    \32\ Id.
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D. Consistency With Rule 17Ad-22(e)(21) Under the Act

    Rule 17Ad-22(e)(21)(iv) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to have the covered 
clearing agency's management regularly review the efficiency and 
effectiveness of its use of technology and communication 
procedures.\33\
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    \33\ 17 CFR 240.17Ad-22(e)(21)(iv).
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    As mentioned above, NSCC maintains multiple network and 
communication methods to interact with its members, including certain 
outdated communication technologies necessary to support members that 
continue to use such older technologies. NSCC believes that continuing 
to use such outdated technologies could render communications between 
NSCC and some of its members vulnerable to cyber risks. Additionally, 
members' use of outdated technology delays NSCC's implementation of its 
own internal system upgrades, which by doing so, risks losing 
connectivity between NSCC and a number of its members. Finally, NSCC 
states that it currently expends unnecessary resources to maintain 
outdated communications channels. In other words, NSCC has subjected 
its network communication methods to review for efficiency and 
effectiveness. As a result, to enhance the efficiency and effectiveness 
of its technology and communication procedures, NSCC proposes to 
require its members to upgrade and maintain network technology, 
communication technology, and protocol standards, in accordance with 
applicable technology standards that NSCC would identify and publish 
via Important Notice on its website. Because the Proposed Rule Change 
is an outgrowth of NSCC's review of the efficiency and effectiveness of 
its technology and communication procedures, the Commission finds the 
Proposed Rule Change is consistent with the requirements of Rule 17Ad-
22(e)(21)(iv) under the Act.\34\
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    \34\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \35\ and 
the rules and regulations promulgated thereunder.
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    \35\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\36\ that Proposed Rule Change SR-NSCC-2022-004, be, and hereby is, 
approved.\37\
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    \36\ 15 U.S.C. 78s(b)(2).
    \37\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15005 Filed 7-13-22; 8:45 am]
BILLING CODE 8011-01-P