The Federal Reserve Board, U.S. Securities and Exchange Commission, and Office of the Comptroller of the Currency have published the attached Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System. The white paper is part of the interagency effort to improve the resilience of the private-sector clearing and settlement infrastructure after September 11 and ensure the smooth operation of the financial system in the event of a wide-scale disruption. As discussed below, the sound practices apply most directly to organizations that are deemed to present a type of systemic risk to U.S. financial markets should they not be able to complete open transactions. Nevertheless, all banking organizations and other financial market participants are encouraged to review and consider implementation of the sound practices, particularly if a firm's transaction levels approach those deemed to be significant.
The following is an overview of the paper.
Scope. The sound practices articulated in the attached paper expressly apply to "core clearing and settlement organizations" and "financial institutions that play significant roles in critical financial markets." These two groups pose a type of systemic risk should they be unable to recover or resume critical activities that support critical markets.1 Core clearing and settlement organizations are defined as large-value payment system operators and market utilities that provide critical clearing and settlement services for critical financial markets. The term also includes firms that provide clearing and settlement services that are integral to a critical financial market (i.e., their 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 are those that consistently clear or settle at least five percent of the value of transactions in a critical market. To allay any confusion, the agencies are contacting each firm that appears to meet the market share thresholds. If they conclude that the firm plays a significant role in one or more critical markets, the aforementioned agencies will review the firm's plans for implementing the sound practices.
Sound Practices. The paper describes four sound practices that pertain to appropriate back-up capacity for operations sites and data centers for the recovery and resumption of clearance and settlement activities in critical (wholesale) financial markets. The paper does not apply to recovery or resumption of retail financial services or require firms to enter into new transactions. The critical financial markets are defined as the markets for federal funds, foreign exchange, commercial paper, corporate equities and bonds, and government, agency and mortgage-backed securities. The four sound practices are:
Implementation of Sound Practices. The paper calls for substantial implementation of the sound practices as soon as practicable and establishes implementation time frames. Core clearing and settlement organizations are expected to achieve substantially the sound practices by the end of 2004. The paper recognizes that some core clearing organizations can be given additional flexibility in establishing back-up facilities that are well outside of the current synchronous data storage range if they take near-term steps that result in substantially improved resilience. Firms that play significant roles in critical financial markets are expected to achieve substantially the sound practices within three years of publication of the paper. The paper recognizes that, in some cases, a firm may find it necessary to provide for a longer implementation period in light of its respective risk profile, level of resilience, and unique business circumstances. Plans are expected to include measurable milestones to assess progress in achieving the sound practices.
Reserve Banks are asked to send a copy of this SR letter and interagency paper to senior management at domestic and foreign banking organizations supervised by the Federal Reserve. Reserve Banks also are asked to encourage all financial firms, even those 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.
If you have any questions, please contact Angela Desmond, Assistant Director, at 202/ 452-3497.