HKMA Supply Chain Risk

Our Ref.
: B1/15C
B9/29C
21 December 2023
The Chief Executive

All Authorized Institutions
Dear Sir/Madam,
Managing cyber risk associated with third-party service providers
I am writing to share with the industry a set of sound practices for managing cyber risk
associated with the use of third-party service providers.
As digitalisation of banking services advances, authorized institutions (AIs) are

increasingly leveraging technology and third-party services to drive business growth
and enhance operational efficiency. Meanwhile, greater reliance on third-party
services has heightened AIs’ exposure to cyber risk as threat actors target the weakest
link in the supply chain of digital banking services. In fact, there was a rise in both
the number and sophistication of supply chain attacks that impacted a multitude of
global institutions over the past year. Against this backdrop, the HKMA has
undertaken a round of thematic examinations focused on AIs’ management of cyber risk
associated with the use of third party services, and would like to share with the industry
the sound practices observed.
Sound practices
As stated in various Supervisory Policy Manual modules of the HKMA (including

“TM-G-1 General Principles for Technology Risk Management” and “OR-2
Operational Resilience”), AIs are required to put in place effective cyber defence
covering their own operations as well as linkages with third-party service providers.
The below sound practices, identified from the thematic examinations, provide
guidance on how AIs may comply with this requirement.
• Ensure sufficient emphasis on cyber risk associated with third-parties in risk

governance framework – The board of directors and senior management of AIs
should ensure that their institution’s governance framework for third-party risk
management and cybersecurity place sufficient emphasis on cyber risk associated
with the use of third-party services and products. The governance framework
should enable the AI to effectively identify, assess and manage cyber risk associated
with different types of third-party relationships under a range of possible scenarios
(e.g. data breaches or operational disruptions at the service providers, or security
compromise of third-party services or products).
-2-
• Holistically identify, assess and mitigate cyber risk throughout the third-party
management lifecycle – As part of their third-party risk management processes,
AIs should holistically identify, assess and mitigate cyber risk associated with third-
parties before onboarding, and conduct regular reviews thereafter. This should
include identifying cyber risk resulting from the actual operational set-up (e.g. third-
parties’ access to AIs’ internal systems, data exchange and network connection with
AIs), assessing the cyber resilience of third-parties and ensuring adequate security
measures are in place to mitigate the relevant risks. These security measures
should be supported by proper contractual agreements, with effectiveness evaluated
periodically throughout the third-party management lifecycle.
• Assess supply chain risks associated with third-parties supporting critical

operations – In light of the emerging threat of supply chain attacks, AIs should
critically assess the supply chain risks arising from third-parties supporting critical
operations by conducting additional due diligence in areas such as dependencies on
fourth-parties and end-to-end data processing. AIs are advised to understand the
service providers’ secure software development practices and consider conducting
additional security assurance reviews for higher-risk software acquisitions.
• Expand cyber threat intelligence monitoring to cover key third-parties and

actively share intelligence with peer institutions – In addition to monitoring cyber
threats intelligence related to their own environment, AIs should stay vigilant to
cyber threats that target key technologies and third-party services used by them to
enable timely impact assessment and the taking of containment actions. AIs
should also actively exchange intelligence via the Cyber Intelligence Sharing
Platform (CISP) with peer institutions in a bid to strengthen the industry’s collective
preparedness against supply chain attacks.
• Strengthen the preparedness for supply chain attacks with scenario-based

response strategies and regular drills – Since supply chain attacks are difficult to
prevent in advance, AIs should formulate scenario-based incident response
strategies taking into account common risk scenarios and lessons learnt from
previous supply chain incidents. AIs should also establish effective response
protocols with third-parties supporting critical operations and conduct regular drills
to validate and refine the established protocols.
• Continuously enhance cyber defence capabilities through adopting the latest

international standards, practices and technologies – In light of the growing
complexity of third-party relationships and evolving cyber threat landscape, AIs
should regularly review and enhance their layers of cyber defence with reference to
latest international standards and sound practices. In particular, AIs are
encouraged to adopt regulatory technologies to refine, automate and streamline
third-party risk management controls and uplift their cyber defence capabilities.
Reference may be made to the HKMA’s Regtech adoption guidance.
-3-
More details of the above best practices can be found in the Annex. AIs are expected
to review their existing controls to manage cyber risk associated with third-parties
against the above guidance. Where gaps are identified, AIs should seriously consider
applying the sound practices in a manner commensurate with their cyber risk exposures
and the level of reliance on third-parties. The HKMA will continue to keep abreast of
the international and industry developments in third-party cyber risk management, and
provide further guidance to the industry as appropriate.
Should your institution have any questions about this circular, please feel free to contact
Mr Edmund To on 2878 1105 or Ms Angel Tse on 2597 0433.
Yours faithfully,
Raymond Chan
Executive Director (Banking Supervision)
Encl.

HKMA Supply Chain Risk

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Our Ref.

The Chief Executive

Managing cyber risk associated with third-party service providers

As digitalisation of banking services advances, authorized institutions (AIs) are

As stated in various Supervisory Policy Manual modules of the HKMA (including

• Ensure sufficient emphasis on cyber risk associated with third-parties in risk

• Assess supply chain risks associated with third-parties supporting critical

• Expand cyber threat intelligence monitoring to cover key third-parties and

• Strengthen the preparedness for supply chain attacks with scenario-based

• Continuously enhance cyber defence capabilities through adopting the latest

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