Risk Management

Financial Firms Prep for Another 9/11

Major market institutions had to show that their remote data sites could resume operations within two hours after a "wide-scale disruption" at thei...
David KatzApril 28, 2006

Responding to government pressure in the wake of 9/11, the Manhattan-based organizations that clear and settle the bulk of financial transactions now have data and operations centers far from their main sites, according to a report just issued by the Federal Reserve, the Comptroller of the Currency, and the Securities and Exchange Commission.

Among other best practices, the three agencies had asked the organizations to show by the end of 2005 that they could recover from a major disaster and resume key clearing and settlement tasks “from a geographically remote backup site” within two hours, the agencies’ report on efforts to strengthen the resilience of the U.S. financial system said. All but one of the key organizations had to set up completely new data and operations sites to meet the geographic-diversity strictures.

Not named in the report, the organizations are those that provide clearing and settlement services for “critical financial markets” or act as major payment-system operators “and present systemic risk should they be unable to operate.” The group, which includes government or industry-owned market utilities and private-sector firms big enough to trigger a threat to the entire system should they go down, had until the end of 2005 to comply with new business-continuity guidelines.

Another group, banks or broker-dealers that have a 5 percent share in one or more critical financial markets, has until the end of this year to set up a number of risk-management practices. “Implementation of the sound practices has led covered firms to make significant investments in backup facilities, technology, and staff,” according to the report. “As a result, covered firms have increased their resilience to wide-scale disruption, and the U.S. financial system is considerably more likely to recover rapidly from such an event.”

While the Fed, the SEC, and the comptroller didn’t specify the number of miles the backup sites had to be from core operations, they have said the sites shouldn’t rely on the same transportation, telecommunications, water-supply, and electric-power systems.

Besides the timing and geographic-diversity dictates, the agencies called on key financial players to routinely use or test their arrangements for recovering and resuming operations after a “wide-scale disruption.”

The original requirements, published in April 2003, focused on “establishing robust back-up facilities for those back-office activities necessary to recover clearance and settlement activities for the wholesale financial system in times of serious disruption,” according to the agencies. Thus, they don’t apply to trading operations or retail financial services.