[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Notices]
[Pages 56656-56658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24863]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48545; File No. S7-17-03]


Business Continuity Planning for Trading Markets

AGENCY: Securities and Exchange Commission.

ACTION: Policy statement; request for comment.

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SUMMARY: The Securities and Exchange Commission (Commission) is issuing 
a Policy Statement setting forth its view that self-regulatory 
organizations operating trading markets (SRO Markets) and electronic 
communications networks (ECNs) should apply certain basic principles in 
their business continuity planning within the specified implementation 
timeframe. The Commission also requests comments on the Policy 
Statement. After the comment period has closed, the Commission may re-
evaluate the Policy Statement in light of the comments received.

DATES: Effective Date: October 1, 2003. Comments must be received on or 
before October 31, 2003.

ADDRESSES: All comments concerning the Policy Statement should be 
submitted in triplicate to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0609. 
Comments can be submitted electronically at the following E-mail 
address: [email protected]. All comment letters should refer to 
File No. S7-17-03; this file number should be included on the subject 
line if E-mail is used. To help us process and review your comments 
more effectively, comments should be sent by one method--U.S. mail or 
electronic mail only. All comments received will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 5th Street, NW., Washington, DC 20549. Electronically 
submitted comment letters will be posted on the Commission's Internet 
Web site (http://www.sec.gov). The Commission does not edit personal 
identifying information, such as names

[[Page 56657]]

or e-mail addresses from electronic submissions. Submit only the 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Robert Colby, Deputy Director (202) 
942-0094; David Shillman, Associate Director, (202) 942-0072; or Peter 
Chepucavage, Attorney Fellow, (202) 942-0163, Division of Market 
Regulation, Securities and Exchange Commission, 450 5th Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

I. Background

    A critical ``lesson learned'' from the events of September 11, 2001 
is the need for more rigorous business continuity planning in the 
financial sector to address problems of wider geographic scope and 
longer duration than those previously addressed. These events made 
clear the possibility of a large-scale regional disaster, resulting in 
a broad consensus in the financial community that business continuity 
planning needs to adapt to plan for events of wider scope and, in 
general, become more robust and resilient. Since the September 11 
attacks, the U.S. securities markets and market participants have taken 
significant steps toward this goal by demonstrably improving the 
robustness of their business continuity plans.
    The Commission and other financial regulators also have been 
devoting substantial resources to efforts designed to strengthen the 
resilience of the financial sector. For example, the Commission, 
together with the Board of Governors of the Federal Reserve System and 
the Office of the Comptroller of the Currency, recently published an 
Interagency Paper on Sound Practices to Strengthen the Resilience of 
the U.S. Financial System (Interagency Paper),\1\ that identified 
``sound practices'' relating to business continuity planning for 
certain key market participants. The goal of this project was to 
minimize the immediate systemic effects of a wide-scale disruption by 
assuring that the key payment and settlement systems could resume 
operation promptly following a wide-scale disaster, and major 
participants in those systems could recover sufficiently to complete 
pending transactions. In this way, market participants unaffected by 
the disaster could continue to operate with minimal disruption and, 
when those impacted by the event were in a position to resume 
operations, the critical infrastructure would be available for them to 
do so. The sound practices identified by the Interagency Paper include: 
(1) Intraday resumption or recovery goals; (2) maintenance of 
sufficient geographically dispersed resources to meet those goals; and 
(3) routine testing of business continuity arrangements. The 
Interagency Paper, however, focuses only on the key payment and 
settlement systems, and does not address the resilience of the trading 
markets.
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    \1\ Interagency Paper on Sound Practices to Strengthen the 
Resilience of the U.S. Financial System, SEC Release No. 34-47638 
(April 7, 2003).
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    Separately, Commission staff has been reviewing, on an ongoing 
basis, the efforts of the organized securities markets--the exchanges, 
Nasdaq, and ECNs--to strengthen their resilience in the post-September 
11 environment. To date, these markets have taken a variety of steps to 
improve their physical security, information system protections, and 
business continuity capabilities. For example, the New York Stock 
Exchange (NYSE) has taken substantial measures to physically secure its 
Wall Street trading floor, and has established an off-site alternative 
trading floor that could be activated on a next-day basis if the NYSE's 
Wall Street trading floor was rendered inaccessible. Commission staff 
continues to work with the organized markets to further increase the 
robustness of their individual plans. In addition, Commission staff has 
been exploring with the markets the possibility of mutual back-up 
arrangements. For example, at the staff's urging, the NYSE and Nasdaq 
have agreed to serve as back-up trading platforms for each other's 
securities if a catastrophic event forced an extended closure of one 
market.
    Earlier this year, the Government Accounting Office (GAO) issued a 
Report \2\ recommending, among other things, that the Commission work 
with the securities industry to develop goals and strategies to resume 
trading in securities as rapidly as appropriate in the event of future 
disruptions, and determine sound business continuity practices that 
organizations would need to meet these goals. The Commission agreed 
with the GAO that more needs to be done to prepare the securities 
markets for the resumption of trading in the event of a crisis, and 
indicated an intent to consider identifying a time frame against which 
markets should plan to resume trading following a wide-scale regional 
disaster.\3\ By establishing a specific resumption goal, the Commission 
would provide the securities markets with a consistent benchmark to use 
in developing more resilient business continuity plans.
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    \2\ Report to Congressional Requesters of the United States 
General Accounting Office entitled Potential Terrorist Attacks: 
Additional Actions Would Better Prepare Critical Financial Market 
Participants (February 12, 2003).
    \3\ See Testimony of Robert L.D. Colby, Deputy Director, 
Division of Market Regulation, U.S. Securities and Exchange 
Commission, at Hearing Before the House Subcommittee on Capital 
Markets, Insurance, and Government Sponsored Enterprises, Committee 
on Financial Services, entitled Recovery and Renewal: Protecting the 
Capital Markets Against Terrorism Post 9/11 (February 12, 2003).
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II. Policy Statement

    In view of the importance of the trading markets to the U.S. 
financial system, the Commission believes it appropriate \4\ for the 
SRO Markets and ECNs to prepare for the resumption of trading in the 
event of a ``wide-scale disruption.''\5\ Among other things, the 
trading markets provide the means for financial institutions to adjust 
their cash and securities positions, and those of their customers, in 
order to effectively manage liquidity, market, and other risks. These 
markets also are critical to the capital raising process and for 
funding daily business operations. With over half of all U.S. 
households invested in the capital markets, the mechanisms for managing 
and valuing that wealth--the trading markets--must be highly-resilient.
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    \4\ Among other things, the Commission believes that the Policy 
Statement is consistent with and in furtherance of sections 2 and 
11A (a) (1) (B) and (C) of the Securities Exchange Act of 1934.
    \5\ The term ``wide-scale disruption'' has the same meaning here 
as in the Interagency Paper. Specifically, 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.
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    That said, while there is little doubt that the trading markets 
collectively are critical to the U.S. financial system, the Commission 
is of the view that, individually, the markets present a lesser degree 
of systemic vulnerability than the key clearance and settlement 
utilities. For one, trading activity is relatively fungible across 
markets. In today's diverse U.S. national market system, very few 
securities are traded only in one market. As a result, the Commission 
believes that, were any single securities market to become 
incapacitated, trading could be shifted to one or more of the remaining 
markets. Accordingly, the business continuity planning principles for 
individual trading markets, set forth below, are somewhat less 
stringent than the sound

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practices for the key payment and settlement systems outlined in the 
Interagency Paper.
    Specifically, the Commission expects each SRO Market and ECN to 
apply the following principles in its business continuity planning:
    [sbull] Each SRO Market and ECN should have a business continuity 
plan that anticipates the resumption of trading, in the securities 
traded by that market, no later than the next business day following a 
wide-scale disruption.\6\ The resilience of the SRO Market or ECN 
prescribed by such plans should reflect the extent of alternative 
trading venues for the securities traded by that market, including the 
number of sole listings on the market, the market share of the market, 
and the number of sole members or subscribers of the market. Business 
continuity plans may focus on strengthening the SRO Market's or ECN's 
own resilience, on backup arrangements with other markets, or both.
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    \6\ Consistent with the approach taken in the Interagency Paper, 
the next-day resumption objective should provide a concrete goal to 
plan for and test against. This should not be regarded as a hard and 
fast deadline that must be met in every emergency situation. Various 
external factors, such as time of day, scope of disruption, and 
status of critical infrastructure--particularly telecommunications--
can affect actual recovery times.
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    [sbull] Assuring resumption of trading activities by a market by 
the next business day generally requires geographic diversity between 
primary and backup sites.\7\ To be fully resilient, backup sites should 
not rely on the same infrastructure components (e.g., transportation, 
telecommunications, water supply, and electric power) used by the 
primary site, and 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.
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    \7\ As in the Interagency Paper, however, the Commission does 
not believe it is necessary or appropriate to prescribe specific 
mileage requirements for geographically-dispersed backup sites.
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    [sbull] The SRO Markets also should assure the full resilience of 
important shared information systems, such as the consolidated market 
data stream generated for the equity and options markets. The market 
data collection and dissemination systems, for example, are critical to 
the functioning of the trading markets because of their reliance on 
accurate and current pricing information.
    [sbull] The effectiveness of back-up arrangements in recovering 
from a wide-scale disruption should be confirmed through testing.
    [sbull] Each SRO Market and ECN should implement plans reflecting 
these principles as soon as practicable and strive to do so no later 
than the end of 2004.
    The Commission staff intends to engage in an ongoing and 
individualized dialogue with each SRO Market and ECN to discuss 
application of these principles in a manner most appropriate for the 
particular trading market.
    The Commission believes every reasonable effort should be made to 
assure the prompt and smooth resumption of trading following a wide-
scale disruption, and that application of the principles described 
above is a critical step in achieving that goal. Nevertheless, the 
Commission notes that, depending on the facts and circumstances of a 
given event, it may be prudent to defer the reopening of a particular 
market or markets even if, from a technical standpoint, the resumption 
of trading is possible. In the case of a disruption of the securities 
markets, the Commission has a fundamental regulatory interest in 
assuring the prompt--yet smooth--resumption of trading. Deciding when 
to reopen the markets will involve an assessment of the operational 
capabilities of the markets and major market participants, as well as 
the clearance and settlement system. In a given situation, difficult 
judgments may be required to strike the appropriate balance between the 
desire to resume trading as soon as possible, and the practical 
necessity of waiting long enough to minimize the risk that, when 
trading resumes, it will be of inferior quality or interrupted by 
further problems.
    Finally, the Commission believes that the establishment of a next-
business day resumption goal for the SRO Markets and ECNs should serve 
as a useful resumption benchmark for securities firms as well. The 
decision by a broker-dealer to risk capital or provide brokerage 
services on an ongoing basis is, in essence, a matter of business 
judgment. Given the competitive nature of the securities business, 
however, the Commission expects there to be incentives for broker-
dealers to be prepared to participate in the markets following a wide-
scale disruption as soon as the markets' trading facilities become 
available.

III. Conclusion

    The Commission believes it important for the SRO Markets and ECNs 
to take concrete steps to strengthen their resilience to address the 
continuing, serious risks to the U.S. financial system posed by the 
post-September 11 environment. To date, the trading markets have made 
significant progress in increasing the robustness of their business 
continuity plans. By applying the principles outlined in this Policy 
Statement, the Commission believes the SRO Markets and ECNs will better 
assure their own resilience and that of the U.S. financial system. In 
so doing, they will be promoting one of the paramount objectives of the 
U.S. securities laws--the maintenance of fair, stable, and orderly 
markets.

    Dated: September 25, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24863 Filed 9-30-03; 8:45 am]
BILLING CODE 8010-01-P