20 January 1999
Source: http://www.access.gpo.gov/su_docs/aces/aaces002.html
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[Federal Register: January 20, 1999 (Volume 64, Number 12)]
[Notices]
[Page 3109-3116]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ja99-74]
[[Page 3109]]
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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
Uniform Rating System for Information Technology
AGENCY: Federal Financial Institutions Examination Council.
ACTION: Notice.
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SUMMARY: The Federal Financial Institutions Examination Council (FFIEC)
revised the Uniform Interagency Rating System for Data Processing
Operations, commonly referred to as the Information Systems (IS) rating
system. The revision changed the name of the rating system to the
Uniform Rating System for Information Technology (URSIT) and reflects
changes that have occurred in the data processing services industry and
in supervisory policies and procedures since the rating system was
first adopted in 1978. The revised numerical ratings conform to the
language and tone of the Uniform Financial Institution Rating System
(UFIRS) rating definitions, commonly referred to as the CAMELS rating
system; reformatted and clarified the component rating descriptions;
emphasized the quality of risk management processes in each of the
rating components; added two new component categories, ``Development
and Acquisition'', and ``Support and Delivery'' as replacements for
``Systems Development and Programming'', and ``Operations''; and
explicitly identified the risk types that are considered in assigning
component ratings.
The term ``financial institution'' refers to those FDIC insured
depository institutions whose primary Federal supervisory agency is
represented on the FFIEC, Bank Holding Companies, Branches and Agencies
of Foreign Banking Organizations, and Thrifts. The term ``service
provider'' refers to organizations that provide data processing
services to financial institutions. Uninsured trust companies that are
chartered by the Office of the Comptroller of the Currency (OCC),
members of the Federal Reserve System, or subsidiaries of registered
bank holding companies or insured depository institutions are also
covered by this action.
FOR FURTHER INFORMATION CONTACT:
FRB: Charles Blaine Jones, Supervisory EDP Analyst, Specialized
Activities, (202) 452-3759, Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System, Mail Stop
175, 20th and C Streets, NW, Washington, D.C. 20551.
FDIC: Stephen A. White, Review Examiner (Information Systems),
(202) 898-6923, Division of Supervision, Federal Deposit Insurance
Corporation, Room F-6010, 550 17th Street, NW, Washington, D.C. 20429.
OCC: Robert J. Hemming, National Bank Examiner, (202) 874-4929,
Bank Technology Unit, Office of the Comptroller of the Currency, Mail
Stop 7-8, 250 E Street, SW, Washington, D.C. 20219.
OTS: Jennifer Dickerson, Program Manager, Information System
Examinations, Compliance Policy, (202) 906-5631, Office of Thrift
Supervision, 1700 G Street, NW, Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
Background Information
On June 9, 1998, the FFIEC published a notice in the Federal
Register (June Notice), 63 FR 31468-31475, requesting comment on
proposed revisions to the Uniform Interagency Rating System for Data
Processing Operations. This rating system is an internal supervisory
examination rating system used by federal and state regulators to
assess uniformly financial institution and service provider risks
introduced by information technology and for identifying those
institutions and service providers requiring special supervisory
attention. The current rating system was adopted in 1978 by the OCC,
OTS, FDIC and FRB, and is commonly referred to as the IS rating system.
Under the IS rating system, each financial institution or service
provider is assigned a composite rating based on an evaluation and
rating of four essential components of an institution's information
technology activities. These components address the following: the
adequacy of the information technology audit function; the capability
of information technology management; the adequacy of systems
development and programming; and the quality, reliability, availability
and integrity of information technology operations. The composite and
component ratings are assigned on a ``1'' to ``5'' numerical scale. A
rating of ``1'' indicates the strongest performance and management
practices and the least degree of supervisory concern, while a rating
of ``5'' indicates the weakest performance and management practices
and, therefore, the highest degree of supervisory concern.
The IS rating system has proven to be an effective means for the
federal and state supervisory agencies to assist examiners in
determining the condition of an institution's or service provider's
information technology function. A number of changes, however, have
occurred in information technology and in supervisory policies and
procedures since the rating system was first adopted. As a result the
FFIEC is renaming the rating system to the Uniform Rating System for
Information Technology (URSIT) and making certain enhancements to the
rating system, while retaining its basic framework. The URSIT
enhancements:
{time} Realign the URSIT rating definitions to bring them in line
with UFIRS.
{time} Replace the current ``Systems Development and Programming''
and ``Operations'' components with two new component categories,
``Development and Acquisition'' and ``Support and Delivery''.
{time} Reinforce the importance of risk management processes with
language in each of the rating components emphasizing the consideration
of processes to identify, measure, monitor, and control risks.
Comments Received and Changes Made
The FFIEC received eight comments regarding the proposed revisions
to the URSIT. Three of the comments were from banks and credit unions,
two from third party service providers, two from financial institution
trade associations, and one from a technology vendor.
Examiners field-tested the revised rating system during bank and
thrift information system examinations conducted between June and
August 1998. The examiners provided comments regarding the revised
rating system. Examiner responses were generally favorable, and no
significant problems or unanticipated rating differences were
encountered between the former and updated rating system.
The FFIEC carefully considered each comment and examiner response
and made certain changes. The following discussion describes the
comments received (both through public comment and agency field-
testing) and changes made to the URSIT in response to those comments.
The updated URSIT is included at the end of this Notice.
June Notice Specific Questions
In addition to requesting general comments regarding the proposed
system, the FFIEC invited comments on six specific questions:
1. Does the proposal capture the essential risk areas of
information technology?
The majority of the responses to this question were positive, and
no changes were made. One commenter expressed concerns that the
significance of contingency planning in maintaining
[[Page 3110]]
mission-critical applications in the event of a computer system failure
was not adequately addressed. This concern is addressed later in this
Notice under Contingency Planning.
2. Does the proposal adequately address distributed processing
environments, as well as centralized processing environments?
The majority of the responses to this question were positive. Two
commenters expressed concerns that the proposal did not adequately
address distributed processing environments. One commenter recommended
that specific language be used to emphasize network security issues,
electronic commerce, and Internet controls. The FFIEC has added
language to the Support and Delivery component to explicitly include
electronic commerce and the Internet. One commenter expressed concerns
that the proposal does not address the complexities and risks of
contingency planning and data recovery in a distributed processing
environment. This concern is addressed later in this Notice under Data
Processing Service Providers and Contingency Planning.
3. Does the proposal adequately address risks to financial
institutions that process their data in-house as well as to data
processing service providers?
The majority of responses to this question were positive. Three
commenters noted concerns regarding the proposal's adequacy to address
risks to data processing service providers. This concern is addressed
later in this Notice under Data Processing Service Providers.
4. Are the definitions for the individual components and the
composite numerical ratings in the proposal consistent with the
language and tone of the UFIRS definitions?
The majority of responses to this question were positive. Two
commenters recommended revisions in the language of the proposal to
make it more consistent with UFIRS. The FFIEC made additional changes
in the language of the URSIT to make it more consistent with UFIRS.
5. Are there any components which should be added to or deleted
from the proposal?
The majority of the responses to this question were negative. One
commenter recommended that a fifth component entitled ``Contingency
Planning'' be added to the URSIT. This recommendation is addressed
later in this Notice under Contingency Planning.
6. Given the trend toward the integration of safety and soundness
and information technology examination functions by the federal
supervisory agencies, does a separate rating system for information
technology continue to be useful?
The majority of the responses to this question were positive, and
no changes were made. One commenter suggested that the integration of
the examination functions deserve more study. This commenter expressed
a concern that the convergence of information technology applications
to the operation of the payments system is likely to result in
considerable duplication in the examination process and an inconsistent
evaluation of risk management procedures for information technology
activities and payments system risk. The FFIEC is working toward the
integration of the safety and soundness and information technology
examination functions. This concern is addressed later in this notice
under Risk Management.
Data Processing Service Providers
Two commenters expressed concerns that the URSIT provides little
guidance regarding the differentiation of data processing service
providers whose operations vary by size and complexity. The FFIEC
designed the rating system so that examiners could adapt its concepts
to entities of various size and complexity. Examination strategies and
objectives are written based on the guidelines in the FFIEC Information
Systems Examination Handbook 1 (IS Handbook). Specifically
for data processing service providers this guidance is contained in
Chapter 22 of the IS Handbook and generally for all entities in
Chapters 2 through 5. The FFIEC oversees the application of the URSIT
through its Information Systems Subcommittee. Future editions of the
FFIEC IS Handbook will be reviewed and edited to ensure it continues to
provide appropriate guidance for the application of the URSIT to all
data processing service providers.
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\1\ Federal Financial Institutions Examination Council,
Information Systems Examination Handbook, 1996.
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One commenter expressed a concern that the URSIT does not
adequately address what banks, who use data processing service
providers, should do in situations where their control is limited.
Guidance for banks who receive data processing services is available
from Chapter 22 of the FFIEC IS Handbook. This chapter specifically
addresses control and administration issues in contracting with and
monitoring service providers. The FFIEC designed the URSIT so that
examiners could apply the concepts of the rating system to institutions
who perform their data processing in-house as well as to those
institutions who outsource this function to a third-party. The
flexibility of the URSIT allows an examiner to include, within the
scope of examination, the appropriate requirements and exclude those
requirements that do not apply.
Risk Management
The revised rating system reflects an increased emphasis on risk
management processes. One commenter expressed concern about whether the
increased emphasis on risk management in the URSIT will be implemented
and applied in a manner that is consistent with risk management
principles articulated in other bank supervision initiatives,
particularly those dealing with payments system risk. The FFIEC is
working toward the integration of the safety and soundness and
information technology examination functions. The future implementation
of an integrated examination process by the FFIEC will need to address
the consistent application of risk management principles and oversight
of information technology activities and other operational areas.
Accordingly, the FFIEC will review the URSIT periodically to ensure its
compatibility with the evolving examination process. In the interim,
the assessment of information technology risk management is guided by
Chapter 2 of the FFIEC IS Handbook and other policy statements deemed
appropriate.
Contingency Planning
One commenter suggested that the URSIT should formally address
contingency planning guidelines under a separate rating to assess an
institution's ability to quickly recover from a major disruption
without risking a loss of its data. The commenter suggested the URSIT
should include ratings that reflect a more comprehensive assessment of
an institution's contingency plan and that they should define the time
needed for an institution to resume core applications.
The FFIEC agrees that contingency planning and business resumption
is important to the viability of any financial institution. To
supervise and assess these activities, the FFIEC's revised interagency
policy on Corporate Business Resumption and Contingency Planning (SP-5)
provides general policies for financial institutions. This policy
establishes goals and accountability for contingency planning and
defines a financial institution's responsibilities regarding
contingency
[[Page 3111]]
planning if they have outsourced information processing. The FFIEC IS
Handbook, which provides general control and verification procedures
for examiners, supplements this policy. The IS Handbook also provides
reference information that supports the contingency planning
procedures. The IS Handbook guidance is considered sufficient to assess
the adequacy of the financial institution's contingency planning
efforts.
The rating system includes contingency planning as part of the
assessment of the support and delivery component. The FFIEC considered
stratification of the rating system components based on functional
controls, e.g., contingency planning or security, and chose to use the
model created by the Information Systems Audit and Control Foundation,
COBIT.2 The FFIEC concluded that further breakdown was not
necessary or beneficial to the examiners or financial institutions.
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\2\ Information Systems Audit and Control Foundation, COBIT--
Governance, Control and Audit for Information and Related
Technology, Second Edition.
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Implementation Date
The FFIEC recommends that the Federal supervisory agencies
implement the updated URSIT no later than April 1, 1999.
Uniform Rating System for Information Technology
Introduction
The quality, reliability, and integrity of a financial institution
or service provider's information technology (IT) affects all aspects
of its performance. An assessment of the technology risk management
framework is necessary whether or not the institution or a third-party
service provider manages these operations. The Uniform Rating System
for Information Technology (URSIT) is an internal rating system used by
federal and state regulators to uniformly assess financial institution
and service provider risks introduced by IT. It also allows the
regulators to identify those insured institutions and service providers
whose information technology risk exposure or performance requires
special supervisory attention. The rating system includes component and
composite rating descriptions and the explicit identification of risks
and assessment factors that examiners consider in assigning component
ratings. Additionally, information technology can affect the risks
associated with financial institutions. The effect on credit,
operational, market, reputation, strategic, liquidity, interest rate,
and compliance risks should be considered for each IT rating component.
The primary purpose of the rating system is to identify those
entities whose condition or performance of information technology
functions requires special supervisory attention. This rating system
assists examiners in making an assessment of risk and compiling
examination findings. However, the rating system does not drive the
scope of an examination. Examiners should use the rating system to help
evaluate the entity's overall risk exposure and risk management
performance, and determine the degree of supervisory attention believed
necessary to ensure that weaknesses are addressed and that risk is
properly managed.
Overview
The URSIT is based on a risk evaluation of four critical
components: Audit, Management, Development and Acquisition, and Support
and Delivery (AMDS). These components are used to assess the overall
performance of IT within an organization. Examiners evaluate the
functions identified within each component to assess the institution's
ability to identify, measure, monitor and control information
technology risks. Each organization examined for IT is assigned a
summary or composite rating based on the overall results of the
evaluation. The IT composite rating and each component rating are based
on a scale of ``1'' through ``5'' in ascending order of supervisory
concern; ``1'' representing the highest rating and least degree of
concern, and ``5'' representing the lowest rating and highest degree of
concern.
The first step in developing an IT composite rating for an
organization is the assignment of a performance rating to the
individual AMDS components. The evaluation of each of these components,
their interrelationships, and relative importance is the basis for the
composite rating. The composite rating is derived by making a
qualitative summarization of all of the AMDS components. A direct
relationship exists between the composite rating and the individual
AMDS component performance ratings. However, the composite rating is
not an arithmetic average of the individual components. An arithmetic
approach does not reflect the actual condition of IT when using a risk-
focused approach. A poor rating in one component may heavily influence
the overall composite rating for an institution. For example, if the
audit function is viewed as inadequate, the overall integrity of the IT
systems is not readily verifiable. Thus, a composite rating of less
than satisfactory (``3''-``5'') would normally be appropriate.
A principal purpose of the composite rating is to identify those
financial institutions and service providers that pose an inordinate
amount of information technology risk and merit special supervisory
attention. Thus, individual risk exposures that more explicitly affect
the viability of the organization and/or its customers should be given
more weight in the composite rating.
The FFIEC recognizes that management practices, particularly as
they relate to risk management, vary considerably among financial
institutions and service bureaus depending on their size and
sophistication, the nature and complexity of their business activities
and their risk profile. Accordingly, the FFIEC also recognizes that for
less complex information systems environments, detailed or highly
formalized systems and controls are not required to receive the higher
composite and component ratings.
The following two sections contain the URSIT composite rating
definitions, the assessment factors, and definitions for the four
component ratings. These assessment factors and definitions outline
various IT functions and controls that may be evaluated as part of the
examination.
Composite Ratings 3
Composite 1
Financial institutions and service providers rated composite ``1''
exhibit strong performance in every respect and generally have
components rated 1 or 2. Weaknesses in IT are minor in nature and are
easily corrected during the normal course of business. Risk management
processes provide a comprehensive program to identify and monitor risk
relative to the size, complexity and risk profile of the entity.
Strategic plans are well defined and fully integrated throughout the
organization. This allows management to quickly adapt to changing
market, business and technology needs of the entity. Management
identifies weaknesses promptly and takes appropriate corrective action
to resolve audit and regulatory concerns. The
[[Page 3112]]
financial condition of the service provider is strong and overall
performance shows no cause for supervisory concern.
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\3\ The descriptive examples in the numeric composite rating
definitions are intended to provide guidance to examiners as they
evaluate the overall condition of Information Technology. Examiners
must use professional judgement when making this assessment and
assigning the numeric rating.
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Composite 2
Financial institutions and service providers rated composite ``2''
exhibit safe and sound performance but may demonstrate modest
weaknesses in operating performance, monitoring, management processes
or system development. Generally, senior management corrects weaknesses
in the normal course of business. Risk management processes adequately
identify and monitor risk relative to the size, complexity and risk
profile of the entity. Strategic plans are defined but may require
clarification, better coordination or improved communication throughout
the organization. As a result, management anticipates, but responds
less quickly to changes in market, business, and technological needs of
the entity. Management normally identifies weaknesses and takes
appropriate corrective action. However, greater reliance is placed on
audit and regulatory intervention to identify and resolve concerns. The
financial condition of the service provider is acceptable and while
internal control weaknesses may exist, there are no significant
supervisory concerns. As a result, supervisory action is informal and
limited.
Composite 3
Financial institutions and service providers rated composite ``3''
exhibit some degree of supervisory concern due to a combination of
weaknesses that may range from moderate to severe. If weaknesses
persist, further deterioration in the condition and performance of the
institution or service provider is likely. Risk management processes
may not effectively identify risks and may not be appropriate for the
size, complexity, or risk profile of the entity. Strategic plans are
vaguely defined and may not provide adequate direction for IT
initiatives. As a result, management often has difficulty responding to
changes in business, market, and technological needs of the entity.
Self-assessment practices are weak and are generally reactive to audit
and regulatory exceptions. Repeat concerns may exist, indicating that
management may lack the ability or willingness to resolve concerns. The
financial condition of the service provider may be weak and/or negative
trends may be evident. While financial or operational failure is
unlikely, increased supervision is necessary. Formal or informal
supervisory action may be necessary to secure corrective action.
Composite 4
Financial institutions and service providers rated composite ``4''
operate in an unsafe and unsound environment that may impair the future
viability of the entity. Operating weaknesses are indicative of serious
managerial deficiencies. Risk management processes inadequately
identify and monitor risk, and practices are not appropriate given the
size, complexity, and risk profile of the entity. Strategic plans are
poorly defined and not coordinated or communicated throughout the
organization. As a result, management and the board are not committed
to, or may be incapable of ensuring that technological needs are met.
Management does not perform self-assessments and demonstrates an
inability or unwillingness to correct audit and regulatory concerns.
The financial condition of the service provider is severely impaired
and/or deteriorating. Failure of the financial institution or service
provider may be likely unless IT problems are remedied. Close
supervisory attention is necessary and, in most cases, formal
enforcement action is warranted.
Composite 5
Financial institutions and service providers rated composite ``5''
exhibit critically deficient operating performance and are in need of
immediate remedial action. Operational problems and serious weaknesses
may exist throughout the organization. Risk management processes are
severely deficient and provide management little or no perception of
risk relative to the size, complexity, and risk profile of the entity.
Strategic plans do not exist or are ineffective, and management and the
board provide little or no direction for IT initiatives. As a result,
management is unaware of, or inattentive to technological needs of the
entity. Management is unwilling or incapable of correcting audit and
regulatory concerns. The financial condition of the service provider is
poor and failure is highly probable due to poor operating performance
or financial instability. Ongoing supervisory attention is necessary.
Component Ratings 4
Audit
Financial institutions and service providers are expected to
provide independent assessments of their exposure to risks and the
quality of internal controls associated with the acquisition,
implementation and use of information technology.5 Audit
practices should address the IT risk exposures throughout the
institution and its service provider(s) in the areas of user and data
center operations, client/server architecture, local and wide area
networks, telecommunications, information security, electronic data
interchange, systems development, and contingency planning. This rating
should reflect the adequacy of the organization's overall IT audit
program, including the internal and external auditor's abilities to
detect and report significant risks to management and the board of
directors on a timely basis. It should also reflect the internal and
external auditor's capability to promote a safe, sound, and effective
operation.
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\4\ The descriptive examples in the numeric component rating
definitions are intended to provide guidance to examiners as they
evaluate the individual components. Examiners must use professional
judgement when assessing a component area and assigning a numeric
rating value as it is likely that examiners will encounter
conditions that correspond to descriptive examples in two or more
numeric rating value definitions.
\5\ Financial institutions that outsource their data processing
operations should obtain copies of internal audit reports, SAS 70
reviews, and/or regulatory examination reports of their service
providers.
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The performance of audit is rated based upon an assessment of
factors such as:
{time} The level of independence maintained by audit and the
quality of the oversight and support provided by the board of directors
and management.
{time} The adequacy of audit's risk analysis methodology used to
prioritize the allocation of audit resources and to formulate the audit
schedule.
{time} The scope, frequency, accuracy, and timeliness of internal
and external audit reports.
{time} The extent of audit participation in application
development, acquisition, and testing, to ensure the effectiveness of
internal controls and audit trails.
{time} The adequacy of the overall audit plan in providing
appropriate coverage of IT risks.
{time} The auditor's adherence to codes of ethics and professional
audit standards.
{time} The qualifications of the auditor, staff succession, and
continued development through training.
{time} The existence of timely and formal follow-up and reporting
on management's resolution of identified problems or weaknesses.
{time} The quality and effectiveness of internal and external
audit activity as it relates to IT controls.
[[Page 3113]]
Ratings
1. A rating of ``1'' indicates strong audit performance. Audit
independently identifies and reports weaknesses and risks to the board
of directors or its audit committee in a thorough and timely manner.
Outstanding audit issues are monitored until resolved. Risk analysis
ensures that audit plans address all significant IT operations,
procurement, and development activities with appropriate scope and
frequency. Audit work is performed in accordance with professional
auditing standards and report content is timely, constructive,
accurate, and complete. Because audit is strong, examiners may place
substantial reliance on audit results.
2. A rating of ``2'' indicates satisfactory audit performance.
Audit independently identifies and reports weaknesses and risks to the
board of directors or audit committee, but reports may be less timely.
Significant outstanding audit issues are monitored until resolved. Risk
analysis ensures that audit plans address all significant IT
operations, procurement, and development activities; however, minor
concerns may be noted with the scope or frequency. Audit work is
performed in accordance with professional auditing standards; however,
minor or infrequent problems may arise with the timeliness,
completeness and accuracy of reports. Because audit is satisfactory,
examiners may rely on audit results but because minor concerns exist,
examiners may need to expand verification procedures in certain
situations.
3. A rating of ``3'' indicates less than satisfactory audit
performance. Audit identifies and reports weaknesses and risks;
however, independence may be compromised and reports presented to the
board or audit committee may be less than satisfactory in content and
timeliness. Outstanding audit issues may not be adequately monitored.
Risk analysis is less than satisfactory. As a result, the audit plan
may not provide sufficient audit scope or frequency for IT operations,
procurement, and development activities. Audit work is generally
performed in accordance with professional auditing standards; however,
occasional problems may be noted with the timeliness, completeness and/
or accuracy of reports. Because audit is less than satisfactory,
examiners must use caution if they rely on the audit results.
4. A rating of ``4'' indicates deficient audit performance. Audit
may identify weaknesses and risks but it may not independently report
to the board or audit committee and report content may be inadequate.
Outstanding audit issues may not be adequately monitored and resolved.
Risk analysis is deficient. As a result, the audit plan does not
provide adequate audit scope or frequency for IT operations,
procurement, and development activities. Audit work is often
inconsistent with professional auditing standards and the timeliness,
accuracy, and completeness of reports is unacceptable. Because audit is
deficient, examiners cannot rely on audit results.
5. A rating of ``5'' indicates critically deficient audit
performance. If an audit function exists, it lacks sufficient
independence and, as a result, does not identify and report weaknesses
or risks to the board or audit committee. Outstanding audit issues are
not tracked and no follow-up is performed to monitor their resolution.
Risk analysis is critically deficient. As a result, the audit plan is
ineffective and provides inappropriate audit scope and frequency for IT
operations, procurement and development activities. Audit work is not
performed in accordance with professional auditing standards and major
deficiencies are noted regarding the timeliness, accuracy, and
completeness of audit reports. Because audit is critically deficient
examiners cannot rely on audit results.
Management
This rating reflects the abilities of the board and management as
they apply to all aspects of IT acquisition, development, and
operations. Management practices may need to address some or all of the
following IT-related risks: strategic planning, quality assurance,
project management, risk assessment, infrastructure and architecture,
end-user computing, contract administration of third party service
providers, organization and human resources, regulatory and legal
compliance. Generally, directors need not be actively involved in day-
to-day operations; however, they must provide clear guidance regarding
acceptable risk exposure levels and ensure that appropriate policies,
procedures, and practices have been established. Sound management
practices are demonstrated through active oversight by the board of
directors and management, competent personnel, sound IT plans, adequate
policies and standards, an effective control environment, and risk
monitoring. This rating should reflect the board's and management's
ability as it applies to all aspects of IT operations.
The performance of management and the quality of risk management
are rated based upon an assessment of factors such as:
{time} The level and quality of oversight and support of the IT
activities by the board of directors and management.
{time} The ability of management to plan for and initiate new
activities or products in response to information needs and to address
risks that may arise from changing business conditions.
{time} The ability of management to provide information reports
necessary for informed planning and decision making in an effective and
efficient manner.
{time} The adequacy of, and conformance with, internal policies
and controls addressing the IT operations and risks of significant
business activities.
{time} The effectiveness of risk monitoring systems.
{time} The timeliness of corrective action for reported and known
problems.
{time} The level of awareness of and compliance with laws and
regulations.
{time} The level of planning for management succession.
{time} The ability of management to monitor the services delivered
and to measure the organization's progress toward identified goals in
an effective and efficient manner.
{time} The adequacy of contracts and management's ability to
monitor relationships with third-party servicers.
{time} The adequacy of strategic planning and risk management
practices to identify, measure, monitor, and control risks, including
management's ability to perform self-assessments.
{time} The ability of management to identify, measure, monitor,
and control risks and to address emerging information technology needs
and solutions.
In addition to the above, factors such as the following are
included in the assessment of management at service providers:
{time} The financial condition and ongoing viability of the
entity.
{time} The impact of external and internal trends and other
factors on the ability of the entity to support continued servicing of
client financial institutions.
{time} The propriety of contractual terms and plans.
Ratings
1. A rating of ``1'' indicates strong performance by management and
the board. Effective risk management practices are in place to guide IT
activities, and risks are consistently and effectively identified,
measured, controlled, and monitored. Management immediately resolves
audit and regulatory concerns to ensure sound operations. Written
technology plans, policies and procedures, and standards
[[Page 3114]]
are thorough and properly reflect the complexity of the IT environment.
They have been formally adopted, communicated, and enforced throughout
the organization. IT systems provide accurate, timely reports to
management. These reports serve as the basis of major decisions and as
an effective performance-monitoring tool. Outsourcing arrangements are
based on comprehensive planning; routine management supervision
sustains an appropriate level of control over vendor contracts,
performance, and services provided. Management and the board have
demonstrated the ability to promptly and successfully address existing
IT problems and potential risks.
2. A rating of ``2'' indicates satisfactory performance by
management and the board. Adequate risk management practices are in
place and guide IT activities. Significant IT risks are identified,
measured, monitored, and controlled; however, risk management processes
may be less structured or inconsistently applied and modest weaknesses
exist. Management routinely resolves audit and regulatory concerns to
ensure effective and sound operations, however, corrective actions may
not always be implemented in a timely manner. Technology plans,
policies and procedures, and standards are adequate and are formally
adopted. However, minor weaknesses may exist in management's ability to
communicate and enforce them throughout the organization. IT systems
provide quality reports to management which serve as a basis for major
decisions and a tool for performance planning and monitoring. Isolated
or temporary problems with timeliness, accuracy or consistency of
reports may exist. Outsourcing arrangements are adequately planned and
controlled by management, and provide for a general understanding of
vendor contracts, performance standards and services provided.
Management and the board have demonstrated the ability to address
existing IT problems and risks successfully.
3. A rating of ``3'' indicates less than satisfactory performance
by management and the board. Risk management practices may be weak and
offer limited guidance for IT activities. Most IT risks are generally
identified; however, processes to measure and monitor risk may be
flawed. As a result, management's ability to control risk is less than
satisfactory. Regulatory and audit concerns may be addressed, but time
frames are often excessive and the corrective action taken may be
inappropriate. Management may be unwilling or incapable of addressing
deficiencies. Technology plans, policies and procedures, and standards
exist, but may be incomplete. They may not be formally adopted,
effectively communicated, or enforced throughout the organization. IT
systems provide requested reports to management, but periodic problems
with accuracy, consistency and timeliness lessen the reliability and
usefulness of reports and may adversely affect decision making and
performance monitoring. Outsourcing arrangements may be entered into
without thorough planning. Management may provide only cursory
supervision that limits their understanding of vendor contracts,
performance standards, and services provided. Management and the board
may not be capable of addressing existing IT problems and risks,
evidenced by untimely corrective actions for outstanding IT problems.
4. A rating of ``4'' indicates deficient performance by management
and the board. Risk management practices are inadequate and do not
provide sufficient guidance for IT activities. Critical IT risk are not
properly identified, and processes to measure and monitor risks are
deficient. As a result, management may not be aware of and is unable to
control risks. Management may be unwilling and/or incapable of
addressing audit and regulatory deficiencies in an effective and timely
manner. Technology plans, policies and procedures, and standards are
inadequate, have not been formally adopted, or effectively communicated
throughout the organization, and management does not effectively
enforce them. IT systems do not routinely provide management with
accurate, consistent, and reliable reports, thus contributing to
ineffective performance monitoring and/or flawed decision making.
Outstanding arrangements may be entered into without planning or
analysis, and management may provide little or no supervision of vendor
contracts, performance standards, or services provided. Management and
the board are unable to address existing IT problems and risks, as
evidenced by ineffective actions and longstanding IT weaknesses.
Strengthening of management and its processes is necessary. The
financial condition of the service provider may threaten its viability.
5. A rating of ``5'' indicates critically deficient performance by
management and the board. Risk management practices are severely flawed
and provide inadequate guidance for IT activities. Critical IT risks
are not identified, and processes to measure and monitor risks do not
exist, or are not effective. Management's inability to control risk may
threaten the continued viability of the institution or service
provider. Management is unable and/or unwilling to correct audit and
regulatory identified deficiencies and immediate action by the board is
required to preserve the viability of the institution or service
provider. If they exist, technology plans, policies and procedures, and
standards are critically deficient. Because of systemic problems, IT
systems do not produce management reports which are accurate, timely,
or relevant. Outsourcing arrangements may have been entered into
without management planning or analysis, resulting in significant
losses to the financial institution or ineffective vendor services. The
financial condition of the service provider presents an imminent threat
to its viability.
Development and Acquisition
This rating reflects an organization's ability to identify,
acquire, install, and maintain appropriate information technology
solutions. Management practices may need to address all or parts of the
business process for implementing any kind of change to the hardware or
software used. These business processes include an institution's or
service provider's purchase of hardware or software, development and
programming performed by the institution or service provider, purchase
of services from independent vendors or affiliated data centers, or a
combination of these activities. The business process is defined as all
phases taken to implement a change including researching alternatives
available, choosing an appropriate option for the organization as a
whole, and converting to the new system, or integrating the new system
with existing systems. This rating reflects the adequacy of the
institution's systems development methodology and related risk
management practices for acquisition and deployment of information
technology. This rating also reflects the boards and management's
ability to enhance and replace information technology prudently in a
controlled environment,
The performance of systems development and acquisition and related
risk management practice is rated based upon an assessment of factors
such as:
{time} The level and quality of oversight and support of systems
development and acquisition activities by senior management and the
board of directors.
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{time} The adequacy of the organizational and management
structures to establish accountability and responsibility for IT
systems and technology initiatives.
{time} The volume, nature, and extent of risk exposure to the
financial institution in the area of systems development and
acquisition.
{time} The adequacy of the institution's Systems Development Life
Cycle (SDLC) and programming standards.
{time} The quality of project management programs and practices
which are followed by developers, operators, executive management/
owners, independent vendors or affiliated servicers, and end-users.
{time} The independence of the quality assurance function and the
adequacy of controls over program changes.
{time} The quality and thoroughness of system documentation.
{time} The integrity and security of the network, system, and
application software.
{time} The development of information technology solutions that
meet the needs of end users.
{time} The extent of end user involvement in the system
development process.
In addition to the above, factors such as the following are
included in the assessment of development and acquisition at service
providers:
{time} The quality of software releases and documentation.
{time} The adequacy of training provided to clients.
Ratings
1. A rating of ``1'' indicates strong systems development,
acquisition, implementation, and change management performance.
Management and the board routinely demonstrate successfully the ability
to identify and implement appropriate IT solutions while effectively
managing risk. Project management techniques and the SDLC are fully
effective and supported by written policies, procedures and project
controls that consistently result in timely and efficient project
completion. An independent quality assurance function provides strong
controls over testing and program change management. Technology
solutions consistently meet end user needs. No significant weaknesses
or problems exist.
2. A rating of ``2'' indicates satisfactory systems development,
acquisition, implementation, and change management performance.
Management and the board frequently demonstrate the ability to identify
and implement appropriate IT solutions while managing risk. Project
management and the SDLC are generally effective; however, weaknesses
may exist that result in minor project delays or cost overruns. An
independent quality assurance function provides adequate supervision of
testing and program change management, but minor weaknesses may exist.
Technology solutions meet end user needs. However, minor enhancements
may be necessary to meet original user expectations. Weaknesses may
exist; however, they are not significant and they are easily corrected
in the normal course of business.
3. A rating of ``3'' indicates less than satisfactory systems
development, acquisition, implementation, and change management
performance. Management and the board may often be unsuccessful in
identifying and implementing appropriate IT solutions; therefore,
unwarranted risk exposure may exist. Project management techniques and
the SDLC are weak and may result in frequent project delays, backlogs
or significant cost overruns. The quality assurance function may not be
independent of the programming function which may adversely impact the
integrity of testing and program change management. Technology
solutions generally meet end user needs, but often require an
inordinate level of change after implementation. Because of weaknesses,
significant problems may arise that could result in disruption to
operations or significant losses.
4. A rating of ``4'' indicates deficient systems development,
acquisition, implementation and change management performance.
Management and the board may be unable to identify and implement
appropriate IT solutions and do not effectively mange risk. Project
management techniques and the SDLC are ineffective and may result in
severe project delays and cost overruns. The quality assurance function
is not fully effective and may not provide independent or comprehensive
review of testing controls or program change management. Technology
solutions may not meet the critical needs of the organization. Problems
and significant risks exist that require immediate action by the board
and management to preserve the soundness of the institution.
5. A rating of ``5'' indicates critically deficient systems
development, acquisition, impelementation, and change management
performance. Management and the board appear to be incapable of
identifying, and implementing appropriate information technology
solutions. If they exist, project management techniques and the SDLC
are critically deficient and provide little or no direction for
development of systems or technology projects. The quality assurance
function is severely deficient or not present and unidentified problems
in testing and program change management have caused significant IT
risks. Technology solutions do not meet the needs of the organization.
Serious problems and significant risks exist which raise concern for
the financial institution's or service providers's ongoing viability.
Support and Delivery
This rating reflects an organization's ability to provide
technology services in a secure environment. It reflects not only the
condition of IT operations but also factors such as reliability,
security, and integrity, which may affect the quality of the
information delivery system. The factors include customer support and
training, and the ability to manage problems and incidents, operations,
system performance, capacity planning, and facility and data
management. Risk management practices should promote effective, safe
and sound IT operations that ensure the continuity of operations and
the reliability and availability of data. The scope of this component
rating includes operational risks throughout the organization and
service providers.
The rating of IT support and delivery is based on a review and
assessment of requirements such as:
{time} The ability to provide a level of service that meets the
requirements of the business.
{time} The adequacy of security policies, procedures, and
practices in all units and at all levels of the financial institution
and service providers.
{time} The adequacy of data controls over preparation, input,
processing, and output.
{time} The adequacy of corporate contingency planning and business
resumption for data centers, networks, service providers and business
units.
{time} The quality of processes or programs that monitor capacity
and performance.
{time} The adequacy of controls and the ability to monitor
controls at service providers.
{time} The quality of assistance provided to users, including the
ability to handle problems.
{time} The adequacy of operating policies, procedures, and
manuals.
{time} The quality of physical and logical security, including the
privacy of data.
{time} The adequacy of firewall architectures and the security of
connections with public networks.
In addition to the above, factors such as the following are
included in the
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assessment of support and delivery at service providers:
{time} The adequacy of customer service provided to clients.
{time} The ability of the entity to provide and maintain service
level performance that meets the requirements of the client.
1. A rating of ``1'' indicates strong IT support and delivery
performance. The organization provides technology services that are
reliable and consistent. Service levels adhere to well-defined service
level agreements and routinely meet or exceed business requirements. A
comprehensive corporate contingency and business resumption plan is in
place. Annual contingency plan testing and updating is performed; and,
critical systems and applications are recovered within acceptable time
frames. A formal written data security policy and awareness program is
communicated and enforced throughout the organization. The logical and
physical security for all IT platforms is closely monitored and
security incidents and weaknesses are identified and quickly corrected.
Relationships with third-party service providers are closely monitored.
IT operations are highly reliable, and risk exposure is successfully
identified and controlled.
2. A rating of ``2'' indicates satisfactory IT support and delivery
performance. The organization provides technology services that are
generally reliable and consistent, however, minor discrepancies in
service levels may occur. Service performance adheres to service
agreements and meets business requirements. A corporate contingency and
business resumption plan is in place, but minor enhancements may be
necessary. Annual plan testing and updating is performed and minor
problems may occur when recovering systems or applications. A written
data security policy is in place but may require improvement to ensure
its adequacy. The policy is generally enforced and communicated
throughout the organization, e.g. via a security awareness program. The
logical and physical security for critical IT platforms is
satisfactory. Systems are monitored, and security incidents and
weaknesses are identified and resolved within reasonable time frames.
Relationships with third-party service providers are monitored.
Critical IT operations are reliable and risk exposure is reasonably
identified and controlled.
3. A rating of ``3'' indicates that the performance of IT support
and delivery is less than satisfactory and needs improvement. The
organization provides technology services that may not be reliable or
consistent. As a result, service levels periodically do not adhere to
service level agreements or meet business requirements. A corporate
contingency and business resumption plan is in place but may not be
considered comprehensive. The plan is periodically tested; however, the
recovery of critical systems and applications is frequently
unsuccessful. A data security policy exists; however, it may not be
strictly enforced or communicated throughout the organization. The
logical and physical security for critical IT platforms is less than
satisfactory. Systems are monitored; however, security incidents and
weaknesses may not be resolved in a timely manner. Relationships with
third-party service providers may not be adequately monitored. IT
operations are not acceptable and unwarranted risk exposures exist. If
not corrected, weaknesses could cause performance degradation or
disruption to operations.
4. A rating of ``4'' indicates deficient IT support and delivery
performance. The organization provides technology services that are
unreliable and inconsistent. Service level agreements are poorly
defined and service performance usually fails to meet business
requirements. A corporate contingency and business resumption plan may
exist, but its content is critically deficient. If contingency testing
is performed, management is typically unable to recover critical
systems and applications. A data security policy may not exist. As a
result, serious supervisory concerns over security and the integrity of
data exist. The logical and physical security for critical IT platforms
is deficient. Systems may be monitored, but security incidents and
weaknesses are not successfully identified or resolved. Relationships
with third-party service providers are not monitored. IT operations are
not reliable and significant risk exposure exists. Degradation in
performance is evident and frequent disruption in operations has
occurred.
5. A rating of ``5'' indicates critically deficient IT support and
delivery performance. The organization provides technology services
that are not reliable or consistent. Service level agreements do not
exist and service performance does not meet business requirements. A
corporate contingency and business resumption plan does not exist.
Contingency testing is not performed and management has not
demonstrated the ability to recover critical systems and applications.
A data security policy does not exist, and a serious threat to the
organization's security and data integrity exists. The logical and
physical security for critical IT platforms is inadequate, and
management does not monitor systems for security incidents and
weaknesses. Relationships with third-party service providers are not
monitored, and the viability of a service provider may be in jeopardy.
IT operations are severely deficient, and the seriousness of weaknesses
could cause failure of the financial institution or service provider if
not addressed.
Dated: January 13, 1999.
Keith J. Todd,
Executive Secretary, Federal Financial Institutions Examination
Council.
[FR Doc. 99-1175 Filed 1-19-99; 8:45 am]
BILLING CODE 6210-01-P, 6720-01-P, 6714-01-P and 4810-33-P