[Federal Register Volume 68, Number 70 (Friday, April 11, 2003)]
[Notices]
[Pages 17809-17814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8896]



[[Page 17809]]

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FEDERAL RESERVE SYSTEM

[Docket No. R-1128]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 03-05]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47638; File No. S7-32-02]


Interagency Paper on Sound Practices To Strengthen the Resilience 
of the U.S. Financial System

AGENCIES: Board of Governors of the Federal Reserve System; Office of 
the Comptroller of the Currency; and Securities and Exchange 
Commission.

ACTION: Issuance of interagency paper.

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SUMMARY: The Federal Reserve Board (Board), the Office of the 
Comptroller of the Currency (OCC) and the Securities and Exchange 
Commission (SEC) are publishing an Interagency Paper on Sound Practices 
to Strengthen the Resilience of the U.S. Financial System. The Federal 
Reserve Bank of New York also participated in drafting the paper. The 
paper identifies three new business continuity objectives that have 
special importance in the post-September 11 risk environment for all 
financial firms. The paper also identifies four sound practices to 
ensure the resilience of the U.S. financial system, which focus on 
minimizing the immediate systemic effects of a wide-scale disruption on 
critical financial markets. The agencies expect organizations that fall 
within the scope of this paper to adopt the sound practices within the 
specified implementation timeframes, as described in more detail in the 
paper.

FOR FURTHER INFORMATION CONTACT: Board: Jeffrey Marquardt, Associate 
Director, Division of Reserve Bank Operations and Payment Systems (202) 
452-2360; or Angela Desmond, Assistant Director, Division of Banking 
Supervision and Regulation (202) 452-3497.
    OCC: Ralph Sharpe, Deputy Comptroller for Bank Technology (202) 
874-4572; or Aida Plaza Carter, Director, Bank Information Technology 
Operations (202) 874-4740.
    SEC: Robert Colby, Deputy Director, Division of Market Regulation 
(202) 942-0094; David Shillman, Counsel to the Director, Division of 
Market Regulation (202) 942-0072; or Peter Chepucavage, Attorney 
Fellow, Division of Market Regulation (202) 942-0163.

SUPPLEMENTARY INFORMATION: On September 5, 2002, the Board of Governors 
of the Federal Reserve System, Office of the Comptroller of the 
Currency, and the Securities and Exchange Commission published for 
comment a Draft Interagency White Paper on Sound Practices to 
Strengthen the Resilience of the U.S. Financial System.\1\ The draft 
white paper emphasized the criticality of protecting the financial 
system from serious new risks posed in the post-September 11 
environment and described a series of sound practices that were 
identified by industry participants during a series of interviews and 
meetings with the agencies. Approximately 90 comment letters were 
submitted to one or more of the agencies by clearing and settlement 
system operators; banking organizations; investment banking firms; 
industry associations; technology companies; Federal, State and local 
officials; and other interested parties and are summarized below. After 
reviewing the comments and continuing their dialogue with interested 
persons, the agencies are issuing this revised final interagency paper.
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    \1\ 67 FR 56835, September 5, 2002.
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    The sound practices identified in the paper are intended to 
supplement the agencies' respective policies and other guidance on 
business continuity planning by financial institutions. The sound 
practices focus 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 and therefore do not address issues relating to trading 
operations or to retail financial services. The agencies are not 
recommending that firms move their primary offices, primary operating 
sites, or primary data centers out of metropolitan locations. The 
agencies expect organizations that fall within the scope of this paper 
to adopt the sound practices within the specified implementation 
timeframes, as described in more detail in the paper.

Summary of Comments

    The commenters generally support the agencies' efforts to improve 
the resilience of the financial markets and agree with the goals 
outlined in the draft white paper. Most commenters agree with the sound 
practices in principle, but propose a number of modifications and 
clarifying changes to the document. In general, the commenters prefer 
that the agencies retain a ``sound practices paper format'' rather than 
adopt a regulatory approach that could be susceptible to a ``one size 
fits all'' application. They also ask that the agencies coordinate 
supervisory expectations with each other and with other regulatory 
authorities as necessary to assure a consistent approach.
    There was broad consensus with the goal of ensuring that key 
organizations in critical financial markets are able to recover 
clearing and settlement activities in the event of a wide-scale 
disruption as rapidly as possible. Commenters agree with the 
definitions of critical financial markets and critical activities, but 
ask that the agencies make clear that the sound practices apply to 
back-office operations and not to trading activities or retail 
products. They also believe that the description of core clearing and 
settlement organizations is sufficient. Commenters ask for additional 
guidance to assist in identifying firms that play significant roles in 
critical financial markets and generally agree that a market share 
benchmark should be established; a few commenters recommend adopting a 
dollar volume benchmark. A few commenters suggest that benchmarks 
should vary by market based on the amount of concentration of key 
participants in the critical financial markets. Some commenters note 
the importance of firms being able to self-determine whether they fall 
into a particular category for a critical financial market, while 
others ask that the agencies contact organizations that appear to meet 
the definition for core clearing and settlement organizations or firms 
that play significant roles in critical markets. Several commenters 
acknowledge that the sound practices would effectively raise market 
expectations with respect to the resilience of all financial firms.
    A number of commenters state that the description of a wide-scale, 
regional disruption should include parameters for a range of probable 
events (e.g., power disruption, natural disaster) and include the 
expected duration of the outage (e.g., 5, 10, or 30 days). Other 
commenters note that such specification is unnecessary.
    The commenters agree that a within-the-business-day recovery and 
resumption objective for core clearing and settlement organizations is 
appropriate and acknowledge that a two-hour recovery time objective is 
an achievable goal, although somewhat aggressive for some because of 
the volume and complexity of transaction data involved. There is 
general consensus that the end-of-business-day recovery objective is 
achievable for firms that play significant roles in critical markets, 
although many state that this is possible only if firms are able

[[Page 17810]]

to utilize synchronous data storage technologies, which can limit the 
extent of geographic separation between primary and back-up sites. A 
number of commenters note that a recovery time objective of four hours 
is unrealistic unless core clearing and settlement organizations and 
the telecommunications infrastructure are operating. \2\ Some 
commenters suggest that recovery and resumption time objectives should 
vary by type of market. Other commenters note that further guidance on 
the definitions of an ``event'' and ``end-of-business day'' is needed 
to help ensure meaningful recovery and resumption time objectives.
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    \2\ Many commenters state that the recovery of financial systems 
can only be achieved if the telecommunications infrastructure is up 
and running across the nation. Firms identify a number of industry 
efforts to explore common infrastructure issues and possible 
solutions to ensure diversity of circuit routing and other 
reliability issues. Commenters raising this issue ask the agencies 
to continue to raise the issue of telecommunications infrastructure 
resilience with federal and state agencies, including the Federal 
Communications Commission, the National Security Telecommunications 
Advisory Committee and the Department of Homeland Security. The 
agencies are taking numerous actions to help direct attention to 
improving the resilience of the telecommunications infrastructure.
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    A number of commenters support the concept of establishing back-up 
sites for operations and data centers that do not rely on the same 
infrastructure and other risk elements as primary sites and note that 
such diversification of risk is a long-standing principle of business 
continuity planning for financial firms. Most commenters oppose 
establishing any minimum distance requirement between primary and back-
up facilities, citing the need for sufficient flexibility to manage 
costs effectively and allow for technological improvements. A few 
commenters believe that establishing minimum separation is appropriate 
and achievable. A number of commenters express concern that out-of-
region back-up sites, including those of third-party service providers, 
often are geographically concentrated, creating additional risk in the 
event of a targeted attack or wide-scale disruption affecting those 
areas. Some commenters ask for additional guidance on how to address 
various infrastructure components, such as water supply sources. A few 
commenters indicate that they are exploring overseas locations as part 
of their recovery and resumption solutions and ask for some assurances 
that domestic and foreign financial authorities will permit such 
arrangements.
    Commenters note that firms should be permitted to address critical 
staffing needs sufficient to recover from a wide-scale disruption, but 
should not be required to maintain a separate redundant staff at their 
back-up locations, which would be costly and inefficient. Others 
advocate maintaining a back-up site with staff able to perform critical 
clearing and settlement activities routinely (through two or more 
active production sites) or on an emergency basis (e.g., through cross-
training staff). Commenters state that permitting firms to adopt a 
risk-based approach to planning geographically dispersed back-up 
arrangements would allow institutions to focus on those scenarios that 
pose the greatest threat and manage labor needs more effectively.
    Most commenters agree that routine use or testing of back-up 
facilities is necessary and beneficial to ensure financial system 
viability. They also suggest that testing should be ``end-to-end'' 
involving telecommunication firms, third-party service providers, and 
securities exchanges.
    A majority of commenters state that plans to meet sound practices 
could be developed within a year after the agencies issue their final 
views. There is general consensus that sound practices can be 
implemented over a relatively short (two to three year) time period, if 
the agencies provide sufficient flexibility to accommodate the unique 
risk profile and planning and investment cycles of each institution. 
Commenters note that extending implementation schedules would help to 
mitigate the costs of building greater resilience into business 
continuity arrangements, although there was also recognition that the 
post-September 11 risk environment requires that achievement of the 
sound practices needs to be accomplished within a reasonably short time 
frame by peer firms. Some commenters warn that strict application of 
the sound practices or establishment of minimum distance and staffing 
requirements could require firms to bear excessive costs with the 
result that some might exit particular markets, leading to further 
concentration, decreased liquidity, and higher overall costs for 
participants in those markets. Several commenters expressed concern 
that the sound practices might result in significant employment losses 
and other negative impacts on the economy and tax base of the New York 
City metropolitan area. Virtually all commenters state that the core 
clearing and settlement organizations should establish more aggressive 
implementation timetables than other firms. Commenters also recognize 
that firms should set implementation benchmarks in their plans to 
assess progress. Some commenters assert that the incremental cost of 
achieving the sound practices should be subsidized, all or in part, by 
the government.
    The agencies have incorporated many of the suggestions that were 
made by the commenters. The revised paper is more succinct, and 
generally provides more flexibility to firms in managing geographic 
diversity of back-up facilities, staffing arrangements, and cost-
benefit considerations. It also provides more specificity as to the 
scope of application of the sound practices as well as the 
implementation guidelines. No specific mileage requirements or 
technology solutions are mandated. Accordingly, the agencies are 
issuing this final version of the interagency paper on sound practices 
to strengthen the resilience of the U.S. financial system.

Interagency Paper on Sound Practices To Strengthen the Resilience of 
the U.S. Financial System

Introduction and Background

    The Federal Reserve, the Office of the Comptroller of the Currency, 
and the Securities and Exchange Commission (the agencies) are issuing 
this Interagency Paper on Sound Practices to Strengthen the Resilience 
of the U.S. Financial System to advise financial institutions on steps 
necessary to protect the financial system in light of the new risks 
posed by the post-September 11 environment. The sound practices build 
upon long-standing principles of business continuity planning and 
reflect actions identified by industry members that will strengthen the 
overall resilience of the U.S. financial system in the event of a wide-
scale disruption.
    The agencies have identified broad industry consensus on three 
business continuity objectives that have special importance after 
September 11 for all financial firms. The agencies also have identified 
sound practices that focus on minimizing the immediate systemic effects 
of a wide-scale disruption on critical financial markets. The sound 
practices focus on the appropriate back-up capacity necessary for 
recovery and resumption of clearance and settlement activities for 
material open transactions in wholesale financial markets. They do not 
address the recovery or resumption of trading operations or retail 
financial services. The agencies are not recommending that firms move 
their primary offices, primary operating sites, or primary data centers 
out of metropolitan locations, and understand that there are important 
business and

[[Page 17811]]

internal control reasons for financial firms to maintain processing 
sites near financial markets and their own headquarters. The agencies 
also recognize that achieving the sound practices could be a multi-year 
endeavor for some firms and that it is not necessary or appropriate to 
prescribe any specific technology solution or limit a firm's 
flexibility to implement the sound practices in a manner that reflects 
its own risk profile. The sound practices discussed in this paper 
supplement the agencies' respective policies and other guidance on 
business continuity planning.

Post-September 11 Business Continuity Objectives

    During discussions about the lessons learned from September 11, 
industry participants and others agreed that three business continuity 
objectives have special importance for all financial firms and the U.S. 
financial system as a whole:
    [sbull] Rapid recovery and timely resumption of critical operations 
following a wide-scale disruption;
    [sbull] Rapid recovery and timely resumption of critical operations 
following the loss or inaccessibility of staff in at least one major 
operating location; and
    [sbull] A high level of confidence, through ongoing use or robust 
testing, that critical internal and external continuity arrangements 
are effective and compatible.
    The events of September 11 underscored the fact that the financial 
system operates as a network of interrelated markets and participants. 
The ability of an individual participant to function can have wide-
ranging effects beyond its immediate counterparties. Because of the 
interdependent nature of the U.S. financial markets, all financial 
firms have a role in improving the overall resilience of the financial 
system. It therefore is appropriate for all financial firms to review 
their business continuity plans and incorporate these three broad 
business continuity objectives to the fullest extent practicable. In 
striking an appropriate balance between the new set of risks posed in 
the post-September 11 environment and the costs involved in planning 
for wide-scale disruptions, financial firms should incorporate these 
new and continuing risks into their assessment of their unique 
characteristics and risk profiles. Firms also should continue to 
improve upon short-term measures that have been instituted since 
September 11 and develop longer-term business recovery plans where gaps 
are identified.

Definitions

    The resilience of the U.S. financial system in the event of a 
``wide-scale disruption'' rests on the rapid ``recovery'' and 
``resumption'' of the ``clearing and settlement activities'' that 
support ``critical financial markets.'' Some organizations, namely 
``core clearing and settlement organizations'' and ``firms that play a 
significant role in critical financial markets,'' present a type of 
``systemic risk'' to the U.S. financial system should they be unable to 
recover or, in some instances, resume clearing and settlement 
activities that support those markets. These terms and organizations 
are defined below.
    Wide-Scale Disruption. A wide-scale disruption is an event that 
causes a severe disruption or destruction of transportation, 
telecommunications, power, or other critical infrastructure components 
across a metropolitan or other geographic area and the adjacent 
communities that are economically integrated with it; or that results 
in a wide-scale evacuation or inaccessibility of the population within 
normal commuting range of the disruption's origin.
    Systemic Risk. Systemic risk includes the risk that the failure of 
one participant in a transfer system or financial market to meet its 
required obligations will cause other participants to be unable to meet 
their obligations when due, causing significant liquidity or credit 
problems or threatening the stability of financial markets.\3\ Given 
the complex interdependencies of markets and among participants, 
thorough preparations by key market participants will reduce the 
potential that a sudden disruption experienced by one or a few firms 
will cascade into market-wide liquidity dislocations, solvency 
problems, and severe operational inefficiencies.\4\
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    \3\ The use of the term ``systemic risk'' in this paper is based 
on the international definition of systemic risk in payments and 
settlement systems contained in ``A glossary of terms in payment and 
settlement systems,'' Committee on Payment and Settlement Systems, 
Bank for International Settlements (2001).
    \4\ Under adverse market conditions or in the event of credit 
concerns about institutions, liquidity dislocations of the type 
experienced immediately after September 11 could be seriously 
compounded.
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    Critical Financial Markets. Critical financial markets provide the 
means for banks, securities firms, and other financial institutions to 
adjust their cash and securities positions and those of their customers 
in order to manage liquidity, market, and other risks to their 
organizations. Critical financial markets also provide support for the 
provision of a wide range of financial services to businesses and 
consumers in the United States. Certain markets, such as the federal 
funds and government securities markets, also support the 
implementation of monetary policy. For purposes of this paper, 
``critical financial markets'' are defined as the markets for:
    [sbull] Federal funds, foreign exchange, and commercial paper;
    [sbull] U.S. Government and agency securities;
    [sbull] Corporate debt and equity securities.
    Core Clearing and Settlement Organizations. Core clearing and 
settlement organizations consist of two groups of organizations that 
provide clearing and settlement services for critical financial markets 
or act as large-value payment system operators and present systemic 
risk should they be unable to perform. The first group consists of 
market utilities (government-sponsored services or industry-owned 
organizations) whose primary purpose is to clear and settle 
transactions for critical markets or transfer large-value wholesale 
payments. The second group of core clearing and settlement 
organizations consists of those private-sector firms that provide 
clearing and settlement services that are integral to a critical market 
(i.e., their aggregate market share is significant enough to present 
systemic risk in the event of their sudden failure to carry on those 
activities because there are no viable immediate substitutes).
    Firms that Play Significant Roles in Critical Financial Markets. 
Firms that play significant roles in critical financial markets are 
those that participate (on behalf of themselves or their customers) 
with sufficient market share in one or more critical financial markets 
such that their failure to settle their own or their customers' 
material pending transactions by the end of the business day could 
present systemic risk. While there are different ways to gauge the 
significance of such firms in critical markets, as a guideline, the 
agencies consider a firm significant in a particular critical market if 
it consistently clears or settles at least five percent of the value of 
transactions in that critical market.
    Recovery and Resumption of Clearing and Settlement Activities. The 
rapid recovery and resumption of critical financial markets, and the 
avoidance of potential systemic risk, requires the rapid recovery of 
clearing and settlement activities for the purpose of completing 
material pending transactions on their scheduled settlement dates. 
These clearing and settlement activities include:

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    (a) Completing pending large-value payments;
    (b) Clearing and settling material pending transactions; \5\
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    \5\ Transactions in government securities include the purchase 
and sale of U.S. government bills, notes, bonds and agency 
securities (including mortgage-backed securities issued by 
Government Sponsored Enterprises), as well as repurchase and reverse 
repurchase agreements and triparty repurchase agreements involving 
U.S. government and agency securities.
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    (c) Meeting material end-of-day funding and collateral obligations 
necessary to ensure the performance of items (a) and (b) above;
    (d) Managing material open firm and customer risk positions, as 
appropriate and necessary to ensure the performance of items (a) 
through (c) above;
    (e) Communicating firm and customer positions and reconciling the 
day's records, and safeguarding firm and customer assets as necessary 
to ensure the performance of items (a) through (d) above; and
    (f) Carrying out all support and related functions that are 
integral to performing the above critical activities.
    For purposes of this paper, the terms recovery (or recover) refers 
to the restoration of clearing and settlement activities after a wide-
scale disruption; \6\ resumption (or resume) refers to the capacity to 
accept and process new transactions and payments after a wide-scale 
disruption.
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    \6\ The goal of business recovery plans is the recovery of a 
particular activity or function and not the recovery of a disabled 
facility or system.
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Sound Practices

    The agencies have identified four broad sound practices for core 
clearing and settlement organizations and firms that play significant 
roles in critical financial markets. The sound practices are based on 
long-standing principles of business continuity planning in which 
critical activities are identified, a business impact analysis is 
conducted, and plans are developed, implemented, and tested. Adoption 
of the sound practices will help protect the financial system from the 
risks of a wide-scale disruption and reduce the potential that key 
market participants will present systemic risk to one or more critical 
markets because primary and back-up processing facilities and staffs 
are located within the same geographic region.
    1. Identify clearing and settlement activities in support of 
critical financial markets. An organization should identify all 
clearing and settlement activities in each critical financial market in 
which it is a core clearing and settlement organization or plays a 
significant role. This assessment should include identification of 
activities or systems that support or are integrally related to the 
performance of clearing and settlement activities in those markets.
    2. Determine appropriate recovery and resumption objectives for 
clearing and settlement activities in support of critical markets. For 
purposes of the sound practices, a recovery-time objective is the 
amount of time in which a firm aims to recover clearing and settlement 
activities after a wide-scale disruption with the overall goal of 
completing material pending transactions on the scheduled settlement 
date. Recovery-time objectives for clearing and settlement activities 
should be relatively consistent across critical financial markets. This 
promotes the compatibility of recovery plans and helps ensure that core 
clearing and settlement organizations and firms that play significant 
roles in critical financial markets will be able to participate in the 
financial system in times of wide-scale disruptions. Recovery-time 
objectives provide concrete goals to plan for and test against. They 
should not be regarded as hard and fast deadlines that must be met in 
every emergency situation. Indeed, the agencies recognize that various 
external factors surrounding a disruption such as time of day, scope of 
disruption, and status of critical infrastructure--particularly 
telecommunications--can affect actual recovery times.\7\ Furthermore, 
recovery time objectives might not be achievable following a late-day 
disruption without an extension of normal business hours.
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    \7\ A number of firms have expressed concerns about the 
resilience of telecommunications and other critical infrastructure, 
and the current limitations on an individual firm's ability to 
obtain verifiable redundancy of service from such carriers. Firms 
that establish geographically dispersed facilities can achieve 
additional diversity in their telecommunications and other 
infrastructure services, which will provide additional resilience in 
ensuring recovery of critical operations. A number of financial 
firms are sponsoring industry-wide efforts to explore common 
infrastructure issues and approaches.
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    Market participants agree that core clearing and settlement 
organizations must meet more aggressive recovery-time objectives than 
firms that play significant roles in critical financial markets. This 
is because core clearing and settlement organizations are necessary to 
the completion of most transactions in critical markets; accordingly, 
they must recover and resume their critical functions in order for 
other market participants to process pending transactions and complete 
large-value payments. It also is reasonable to assume that there will 
be firms that play significant roles and other market participants in 
locations not affected by a particular disruption that will need to 
clear and settle pending transactions in critical markets. Therefore, 
core clearing and settlement organizations should plan both to recover 
and resume their processing and other activities that support critical 
markets. In light of the large volume and value of transactions/
payments that are cleared and settled on a daily basis, failure to 
complete the clearing and settlement of pending transactions within the 
business day could create systemic liquidity dislocations, as well as 
exacerbate credit and market risk for critical markets. Therefore, core 
clearing and settlement organizations should develop the capacity to 
recover and resume clearing and settlement activities within the 
business day on which the disruption occurs with the overall goal of 
achieving recovery and resumption within two hours after an event.\8\ 
Core clearing and settlement organizations also should develop plans 
for communicating with participants during a disruption to facilitate 
their rapid recovery.
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    \8\ This includes recovery of clearance and settlement 
activities that would normally be performed by core clearing and 
settlement organizations and significant firms within a particular 
market's business hours on the day of the disruption. These 
activities include inputting material transaction data or payment 
instructions, and performing all steps necessary to clear and 
complete material transactions on their regular value or settlement 
dates.
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    The ability of firms that play significant roles in critical 
financial markets to recover clearing and settlement activities depends 
on the timing of the recovery of core clearing and settlement 
organizations for those markets. For planning purposes, firms should 
assume that core clearing and settlement organizations will recover and 
resume clearance and settlement activities within the business day of 
the disruption. Accordingly, firms that play significant roles in 
critical financial markets should plan to recover clearing and 
settlement activities for those markets as soon as possible after the 
core clearing and settlement organizations have recovered and resumed 
their operations and within the business day on which a disruption 
occurs. In some markets, such as wholesale payments, the banking 
industry has had long-established recovery benchmarks of four hours and 
the largest participants in the wholesale payments market have actively 
discussed the need for a two-hour recovery standard by such

[[Page 17813]]

organizations. Firms that play significant roles in the other critical 
financial markets should strive to achieve a four-hour recovery time 
capability for clearing and settlement activities in order to ensure 
that they will be able to meet a within the business day recovery 
target.\9\
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    \9\ As markets and clearance and settlement systems move toward 
longer operating hours, there may be less flexibility to extend 
processing hours. This underscores the importance of achieving 
recovery time objectives within the business day's normal processing 
periods to the fullest extent possible. It also underscores the 
importance of ensuring that internal processes can be performed in 
the event that business hours are extended beyond midnight.
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    3. Maintain sufficient geographically dispersed resources to meet 
recovery and resumption objectives. Recovery of clearing and settlement 
activities within target times during a wide-scale disruption generally 
requires an appropriate level of geographic diversity between primary 
and back-up sites for back-office operations and data centers. The 
agencies do not believe it is necessary or appropriate to prescribe 
specific mileage requirements for geographically dispersed back-up 
sites. It is important for firms to retain flexibility in considering 
various approaches to establishing back-up arrangements that could be 
effective given a firm's particular risk profile. However, long-
standing principles of business continuity planning suggest that back-
up arrangements should be as far away from the primary site as 
necessary to avoid being subject to the same set of risks as the 
primary location. Back-up sites should not rely on the same 
infrastructure components (e.g., transportation, telecommunications, 
water supply, and electric power) used by the primary site. Moreover, 
the operation of such sites should not be impaired by a wide-scale 
evacuation at or the inaccessibility of staff that service the primary 
site. The effectiveness of back-up arrangements in recovering from a 
wide-scale disruption should be confirmed through testing.
    Core clearing and settlement organizations have the highest 
responsibility to develop resources that permit the recovery and 
resumption of clearing and settlement activities within the business 
day. Accordingly, these organizations should establish back-up 
facilities a significant distance away from their primary sites. Core 
clearing and settlement organizations that use synchronous back-up 
facilities or whose back-up sites depend primarily on the same labor 
pool as the primary site should address the risk that a wide-scale 
disruption could impact either or both of the sites and their labor 
pool. Such organizations should establish even more distant back-up 
arrangements that can recover and resume critical operations within the 
business day on which the disruption occurs.
    Firms that play significant roles in critical financial markets 
should maintain sufficient geographically dispersed resources, 
including staff, equipment and data to recover clearing and settlement 
activities within the business day on which a disruption occurs. Firms 
may consider the costs and benefits of a variety of approaches that 
ensure rapid recovery from a wide-scale disruption.\10\ However, if a 
back-up site relies largely on staff from the primary site, it is 
critical for the firm to determine how staffing needs at the back-up 
site would be met if a disruption results in loss or inaccessibility of 
staff at the primary site. Moreover, firms that use synchronous back-up 
facilities or whose back-up sites depend primarily on the same labor 
pool as the primary site should address the risk that a wide-scale 
disruption could impact either or both of the sites and their labor 
pools. As part of their ongoing planning process, firms with such back-
up arrangements should strive to develop even more distant data back-up 
and operational resources that prove sufficient to recover clearing and 
settlement activities within the business day on which the disruption 
occurs. The business continuity planning process should take into 
consideration improvements in technology and business processes 
supporting back-up arrangements and the need to ensure greater 
resilience in the event of a wide-scale disruption. Interim steps a 
firm may take should be compatible with the objective of establishing 
even more distant back-up arrangements. The agencies expect that, as 
technology and business processes supporting back-up arrangements 
continue to improve and become increasingly cost effective, firms will 
take advantage of these developments to increase the geographic 
diversification of their back-up sites.
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    \10\ Examples of such arrangements range from maintaining a 
fully operational geographically dispersed back-up facility for data 
and operations to utilizing outsourced facilities in which 
equipment, software, and data are stored for staff to activate. 
Firms are addressing critical staffing issues in various ways, such 
as cross training, utilizing staff at underused systems to share or 
shift loads, rotating employees off-site, and establishing work 
shifts. A number of firms use outsourced back-up solutions for 
recovering clearing and settlement activities and data storage. 
However, numerous commenters expressed concern about the small 
number of recovery facilities, their lack of geographic diversity 
and the cost of ensuring availability of facilities during a wide-
scale disruption. Firms that use outsourced back-up solutions should 
take into consideration any heightened risks that could affect 
access to those facilities during a wide-scale disruption.
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    4. Routinely use or test recovery and resumption arrangements. One 
of the lessons learned from September 11 is that testing of business 
recovery arrangements should be expanded. It is critical for firms to 
test back-up facilities with the primary and back-up facilities of 
markets, core clearing and settlement organizations, and third-party 
service providers to ensure connectivity, capacity, and the integrity 
of data transmission. It also is important to test back-up arrangements 
with major counterparties and customers, as appropriate. Such testing 
ensures that recovery objectives are achievable and that staff and 
necessary external parties are sufficiently informed.
    Core clearing and settlement organizations should periodically test 
recovery and resumption plans at all of their back-up sites. Test 
scenarios should include wide-scale disruptions that affect the 
accessibility of key staff; demonstrate the ability to recover and 
resume within the business day; and aim for a two-hour recovery time. 
Core clearing and settlement organizations should require participants 
to test connectivity between their primary and back-up sites and those 
of the core clearing and settlement organizations. They also may wish 
to consider organizing a broader industry stress test to ensure that 
recovery systems are consistently robust across critical market 
participants.
    Firms that play significant roles in critical financial markets 
should routinely use or test their individual internal recovery and 
resumption arrangements for connectivity, functionality, and volume 
capacity. Firms that establish back-up sites within the current 
perimeter of synchronous back-up technology or that rely primarily on 
staff at the primary site should confirm that their plans would be 
effective if a wide-scale disaster affects both sites. Firms also are 
encouraged to take advantage of testing opportunities offered by 
markets, core clearing and settlement organizations and third-party 
service providers to ensure connectivity, capacity and the integrity of 
data transmission. Firms are encouraged to continue to work 
cooperatively with their core clearing and settlement organizations and 
trade associations to design and schedule appropriate industry tests to 
ensure the compatibility of individual recovery and resumption 
strategies across critical markets.

[[Page 17814]]

Implementation of Sound Practices

    Cost-Benefit Considerations. The agencies recognize the importance 
of cost-effective business continuity planning. The costs associated 
with implementing the sound practices can vary substantially depending 
on the extent to which incremental improvements may be needed to 
address the risks of a wide-scale disruption. Some firms that play 
significant roles in critical markets may find that they need to 
implement only relatively minor improvements to their back-up 
arrangements. Other firms may find it necessary to adopt a more robust 
technology or upgrade software applications in order to achieve 
recovery objectives identified by the sound practices. To mitigate the 
costs of these enhancements, firms may wish to integrate them into the 
strategic planning process (e.g., coordinate with planned enhancements 
to facilities, information system components and architecture, and 
business processes).
    Firms should recognize that adoption of the sound practices will 
help to reassure their counterparties and customers that they can 
rapidly regain their ability to clear and settle transactions in 
critical markets. Similarly, firms participating in the financial 
system would enjoy greater assurance that critical market participants 
will be able to withstand a wide-scale disruption and meet their 
payment and settlement obligations, thereby minimizing the potential 
for cascading fails and resulting systemic risk. Firms report that 
market forces clearly recognize the interdependent nature of the 
financial system, and customers and counterparties increasingly expect 
firms to demonstrate their ability to continue operations should a 
wide-scale disruption occur.
    Implementation by core clearing and settlement organizations. Core 
clearing and settlement organizations should continue their accelerated 
efforts to develop, approve, and implement plans that substantially 
achieve the sound practices by the end of 2004. Plans should provide 
for back-up facilities that are well outside of the current synchronous 
range that can meet within-the-business-day recovery targets. On a 
case-by-case basis, core clearing and settlement organizations can be 
given additional time to complete implementation of back-up facilities 
that are well outside the current synchronous range, so long as they 
take concrete, near-term steps that result in substantially improved 
resilience by the end of 2004. The amount of flexibility will be 
measured against factors such as board of directors and senior 
management's commitment to approved budgets, and adherence to 
aggressive timetables and interim milestones. Plans should include 
measurable milestones to assess progress in achieving the sound 
practices.
    Implementation by firms that play significant roles in critical 
markets. Firms that play significant roles in critical financial 
markets should develop, approve and implement plans that call for 
substantial achievement of the sound practices as soon as practicable, 
but generally within three years of publication of this paper.\11\ In 
some cases, a firm may find it in necessary to provide for a longer 
implementation period in light of its respective risk profile, level of 
resilience, and unique business circumstances. All plans should 
incorporate interim milestones against which progress can be measured 
and should provide for ongoing consideration of the costs and benefits 
of achieving greater geographic diversification of back-up facilities.
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    \11\ The agencies will contact each firm that appears to meet 
the market share thresholds and, if they conclude that the firm 
plays a significant role in one or more critical markets, will 
review the firm's plans for implementing the sound practices. The 
agencies also will monitor implementation of those plans.
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    Role of Senior Management and Boards of Directors. The agencies 
believe, and industry participants confirm, that incorporation of the 
post-September 11 business continuity objectives and sound practices 
discussed in this paper raises numerous short- and long-term strategic 
issues that require continuing leadership and involvement by the most 
senior levels of management. These issues must be considered in light 
of a firm's dependencies on other market participants and the need to 
achieve a consistent level of resilience across firms. Boards of 
directors should review business continuity strategies to ensure that 
plans are consistent with the firm's overall business objectives, risk 
management strategies, and financial resources. Decisions about overall 
business continuity objectives should not be left to the discretion of 
individual business units.

Conclusion

    After September 11, financial industry participants initiated a 
significant review of lessons learned with a view towards strengthening 
their business continuity plans. The agencies believe that it is 
important for financial firms to improve recovery capabilities to 
address the continuing, serious risks to the U.S. financial system 
posed by the post-September 11 environment. Financial industry 
participants have demonstrated a keen commitment to ensuring the 
continued viability of the U.S. financial system by strengthening their 
own business continuity plans to address the risk of a wide-scale 
disruption. Over the past year, significant short- and longer-term 
improvements have been made to business recovery plans. Financial 
industry participants recognize the importance of continuing senior 
management involvement in achieving the sound practices discussed in 
this paper. Firms also are participating in industry initiatives aimed 
at improving private-sector coordination and ensuring that business 
recovery plans are compatible and that an appropriate level of 
robustness is achieved among peers.
    The agencies recognize that achievement of the sound practices 
could be a multi-year endeavor for some organizations and that it is 
not necessary or appropriate to prescribe any specific technology 
solution for implementing the sound practices. The agencies urge all 
financial system participants to continue efforts over the long term to 
ensure that critical U.S. financial markets have appropriately robust 
recovery capabilities and can respond to a wide-scale disruption by 
adopting the sound practices to the fullest extent practicable. 
Finally, the agencies encourage financial firms that are not deemed to 
be a core clearing and settlement organization or a firm that plays a 
significant role in critical markets to review and consider 
implementation of the sound practices, particularly if a firm's 
transactions levels approach those deemed to be significant.

    By order of the Board of Governors of the Federal Reserve 
System, April 7, 2003.
Jennifer J. Johnson,
Secretary of the Board.
    Dated: April 7, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.
    By the Securities and Exchange Commission.

    Dated: April 7, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8896 Filed 4-10-03; 8:45 am]
BILLING CODE 6210-01-P; 4810-33-P; 8010-01-P