ESMA consults on guidelines on outsourcing to cloud service providers

The European Securities and Markets Authority (ESMA) today published a consultation paper on guidelines on outsourcing to cloud service providers.

The document provides guidance on the outsourcing requirements applicable to financial market participants, such as investment firms and data reporting services providers, when they outsource to cloud service providers. In particular, the guidelines aim to help firms and competent authorities identify, address and monitor the risks and challenges that arise from cloud outsourcing arrangements.

Under the guidelines, a firm should have a defined and up to date cloud outsourcing strategy that is consistent with the firm’s relevant strategies, such as information and communication technology strategy, information security strategy, operational risk management strategy, and internal policies and processes. A firm is expected to clearly assign the responsibilities for the documentation, management and control of cloud outsourcing arrangements within its organisation and to establish an outsourcing oversight function or designate a senior staff member who is directly accountable to the management body and responsible for managing and overseeing the risks of cloud outsourcing arrangements.

Also, a firm should maintain an updated register of information on all its cloud outsourcing arrangements, distinguishing between the outsourcing of critical or important functions and other outsourcing arrangements.

For the cloud outsourcing arrangements concerning critical or important functions, the register should include information, such as the reference number for each cloud outsourcing arrangement, its start date and, as applicable, the next contract renewal date, the end date and/or notice periods for the CSP and for the firm, as well as a brief description of the outsourced function, including the data that is outsourced and whether this data includes personal data.

Before entering into any cloud outsourcing arrangement, a firm should assess if the cloud outsourcing arrangement concerns a critical or important function, and to assess all relevant risks of the cloud outsourcing arrangement. A firm will have to undertake appropriate due diligence on the prospective CSP and identify any conflict of interest that the outsourcing may cause.

A written agreement with a CSP should expressly allow the possibility for the firm to terminate it, where necessary.

Moreover, a firm should set information security requirements in its internal policies and procedures and within the cloud outsourcing written agreement and monitor compliance with these requirements on an ongoing basis, including to protect confidential, personal or otherwise sensitive data.

In case of outsourcing of critical or important functions, a firm should ensure that it is able to exit cloud outsourcing arrangements without undue disruption to its business activities and services to its clients, and without any detriment to its compliance with the applicable legal requirements, as well as the confidentiality, integrity and availability of its data.

A firm should ensure that the cloud outsourcing written agreement does not limit the firm’s effective exercise of the access and audit rights as well as its oversight options on the CSP.

Finally, if sub-outsourcing of critical or important functions (or a part thereof) is permitted, the cloud outsourcing written agreement between the firm and the CSP should specify certain information, such as any part or aspect of the outsourced function that are excluded from potential sub-outsourcing.

These guidelines will apply from June 30, 2021 to all cloud outsourcing arrangements entered into, renewed or amended on or after this date. ESMA instructs firms to review and amend accordingly existing cloud outsourcing arrangements with a view to ensuring that they take into account these guidelines by December 31, 2022.

The consultation is open until September 1, 2020.