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No Surprises: Cyber and Data Privacy Threats Remain Top Risk for Financial Services Industry

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No Surprises: Cyber and Data Privacy Threats Remain Top Risk for Financial Services Industry

By Cheryl Davis and Jim Rives, FTI Consulting

No surprises here: increasing operational risk introduced by cybersecurity threats and vulnerabilities will continue to be of primary concern for banks and other financial institutions, as well as institutions that are integral to financial intermediation. These include credit bureaus, brokers and dealers, money service businesses and the regulatory organizations that oversee these institutions.

In its annual report for the last five years, the Financial Stability Oversight Council has identified cybersecurity as a major threat to companies and governments around the world. Data and cybersecurity breach occurrences in the financial industry have been and are expected to remain amongst the most frequent when compared to other industries. Given the continued and fast-paced development of financial products and services that are heavily reliant on internet-based systems, the increased reliance on third-party providers, and the growing interconnectedness of disparate platforms, the operational risks associated with cybersecurity will require significant resources and oversight in 2018 and beyond.

International standard setting organizations, regulatory organizations, industry associations and legislators/policymakers as well as private sector participants provide tools and resources to consider in strengthening cybersecurity defenses. The following are top considerations.

International standard setting frameworks

  • The new European Union General Data Protection Regulation, more commonly referred to as GDPR, harmonizes existing data privacy laws across Europe and becomes effective in May 2018. GDPR requires entities to implement an appropriate level of oversight, security and notification protocols in the event of data breaches and corrective actions thereafter (see GDPR Regulation).
  • The Bank for International Settlements (BIS) recently published a paper analyzing the regulatory and supervisory frameworks for banks’ addressing cyber threats in certain jurisdictions. The paper provides a wealth of information relevant to recent supervisory efforts and regulations over cybersecurity. One of our favorite observations is:

Views differ on the need to specifically regulate cyber-risk. One view is that the evolving nature of cyber-risk is not amenable to specific regulation and that cyber issues can be handled with existing regulation relating to technology and/or operational risk. The other view is that regulatory structure is needed to deal with the unique nature of cyber-risk, and given the growing threats resulting from an increasingly digitized financial sector.

The paper further notes that only a handful of jurisdictions currently have specific regulatory and supervisory initiatives that address cyber risk; however, some common regulatory requirements and supervisory approaches to assessing banks’ cyber-risk vulnerability and resilience seem to be converging towards a “threat-informed” or “intelligence-led” framework (see FSI Insights-Cybersecurity).

  • The BIS Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions issued guidance on cyber resilience for financial market infrastructures (FMIs) in June 2016 which are highly relevant today (see BIS FMI Cyber Resilience Guidance).

Regulatory organizations

Financial services regulators continue to prioritize cybersecurity requirements for their regulated entities, which are often adopted by industry organizations and even private sector participants.Regulatory organizations’ focus in 2018 will likely include:

  • Large banks and financial service providers will be subject to examinations on an interagency basis with participation by the Office of the Comptroller of the Currency (OCC), Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC). Examinations will focus on cybersecurity and resilience which includes:
    • Assessing specific cybersecurity controls relative to information security, cybersecurity risk management, control structures, and level of cyber resilience.
    • Evaluation of service providers’ completion of the Federal Financial Institutions Examination Council’s Technology Service Provider Cybersecurity Assessment Tool which may include reviews of cloud computing, skimming technology, chip technology, and threats from other non-product/service systems (see FFIEC Cyber Assessment Tool).
  • For financial service companies subject to the New York State Department of Financial Services (NYDFS), comprehensive cybersecurity regulations became effective in 2017 with other provisions being phased in 2018 and 2019. These regulations will require highly prescriptive measures including access controls, encryption to data disposal, employee training, identification of a Chief Information Security Officer, annual reporting, and attestations/certifications (see NYDFS Cyber Reg FAQs).
  • The Securities and Exchange Commission (SEC), recognizing the grave threats that cybersecurity risks pose and the increasing significance of cybersecurity incidents, approved a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risk and incidents. They expand on the 2011 guidance by incorporating the importance of cybersecurity policies and procedures, and making clear the applicability of insider trading prohibitions as information about a company’s cybersecurity risks and incidents may be material nonpublic information. The SEC established a “Cyber Unit” within its existing Enforcement Division to address cyber-based threats and target cyber-related misconduct in the securities markets (see SEC Cybersecurity).

What do you do with this now?

To assist your organizations’ cybersecurity practices, procedures and controls, and to identify and assess areas for potential improvement, consider a recurring evaluation focusing on: cybersecurity network defense and internal controls, vulnerability assessments, cybersecurity incident response and preparedness planning and training.

Consider conducting such a review to gain a better understanding of your organization’s cybersecurity resilience in the face of the multitude of cybersecurity threats and vulnerabilities. It will also provide insight into staff perception of cyber risks and their awareness of their important role in the organization’s cybersecurity.Based on the findings of this review, you can then modify your policies, processes, and technological solutions to enhance preparedness against cybersecurity threats and vulnerabilities.

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 1

By Ahmad Ghaddar

LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.

Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.

“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.

Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.

While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.

(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies 2

By Douglas Busvine and Christoph Steitz

BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.

Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.

The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.

“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”

Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.

In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.

That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.

“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.

“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”

LOW-TECH CUSTOMER

The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.

Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.

“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.

Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.

No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.

Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.

“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.

“What they didn’t understand is that we have been running a night shift since the beginning.”

NO QUICK FIX

While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.

Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.

Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.

But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.

That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.

Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.

The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.

“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.

(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)

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Aussie and sterling hit multi-year highs on recovery bets

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Aussie and sterling hit multi-year highs on recovery bets 3

By Tommy Wilkes

LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.

The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.

On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.

The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.

The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.

Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.

Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.

The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.

Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.

“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.

ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.

They see the greenback index trading down to the 90.10 to 91.05 range.

U.S. dollar

Aussie and sterling hit multi-year highs on recovery bets 4

The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.

The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.

(Editing by Hugh Lawson and Pravin Char)

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