Wells Fargo & Co.

Aaron Meckler, Senior Vice President
Corporate BCP Office
Wells Fargo & Co.
303-889-2928

DATE: October 23, 2002
TO: Board: Jennifer J. Johnson, Board of Governors of the Federal Reserve System, Docket No. R-1128

OCC: Office of the Comptroller of the Currency, Docket No. 02-13

SEC: Jonathan G. Katz, Securities and Exchange Commission, File No S7-32-02

FROM: Aaron Meckler, Rex Engstrand
SUBJECT: Comments on Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System

Summary

Wells Fargo & Company appreciates the opportunity to comment on "Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System" ("white paper") to the Federal Reserve Board of Governors, New York State Banking Department, Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

Background

The tragic events of September 11, 2001 and its aftermath underscore the importance of business continuity planning. Wells Fargo & Company has always taken security, reliability and business continuity planning issues seriously. We have a strong and robust business continuity planning program. Even so, given the risks and threats to the resilience of the financial services infrastructure, Wells Fargo & Company applauds the regulators for developing this white paper.

General Comments

Following are comments on major topics in the white paper. Wells Fargo & Company's responses to questions within the white paper are included in yellow.

Scope of application.

Have the agencies excluded any critical markets?

  • Other areas that should be considered include International clearing (Euroclear), ACH, and Check processing (electronic check presentment).

Have the agencies sufficiently defined the term "core clearing and settlement organizations" for such organizations to identify themselves?

  • Wells Fargo does not consider itself as a "core clearing and settlement organization" for securities processing. However, many of Wells Fargo's business lines are dependent upon core clearing organizations, and the financial institutions that settle payments on their behalf. Institutions such as DTCC, FED, BONY, JP Morgan Chase, NSCC, OMGEO, MBSCC should be included in the Sound Practices.

Have the agencies provided sufficient guidance for firms to determine whether they play "significant roles in critical financial markets?" Are there other measures or additional facts or circumstances that should be used to determine whether a firm plays a significant role or acts as a core clearing organization? Should the agencies establish an average daily dollar volume (e.g., $20 billion, $50 billion, $150 billion or some larger amount) or a market share test (e.g., 3, 5, 7, 10 percent market share or some larger amount) as a benchmark for either or both of these categories? Should such benchmarks differ by market or activity?

  • The White Paper needs to provide additional guidance to differentiate between critical market players verses market participants. More clarification is needed to ascertain additional level of participants. Clarification is needed to determine applicability based not only on size or market share, but also on the ability of other market players to act as a substitute. We believe the guidance should include a combination of market share, transaction volume and dollar value of transactions. However, participants should be held to a higher standard where there are no other alternatives. Thus, benchmarks need to differ by market and activity.

In some market segments, there are geographic concentrations of primary and back-up facilities of firms with relatively small market shares. Should sound practices take into consideration the geographic concentration of the back-up sites of firms that as a group could play a significant role in critical markets?

  • The sound practices should take into account that geographic concentrations of backup facilities may result in unintended infrastructure interdependencies that may impact all firms collectively.

One of the reasons core clearing organizations are expected to recover and resume is that there are no effective substitutes that can assume their critical activities; is this also true for some or all firms that play significant roles in critical markets?

  • The standards should not be as stringent in markets where other firms can quickly step in and substitute for a missing participant. In markets where there are no other alternatives, or where a few large firms control the majority of transactions, participants should be held to a higher standard.

Should any firms that play significant roles in critical markets be required to meet an intra-day standard for recovery and resumption because of the size of their market share or volume, or the significance of the services they perform for other firms (e.g. as a correspondent bank or clearing broker) in clearing and settling material amounts of transactions and large-value payments?

  • An intraday standard should be applicable if the clearing and settling activities are material, substitutes for clearing and settling transactions are not readily available, and the participant meets the criteria for a critical market player.

Does the paper's definition of a "wide-scale, regional disruption" provide sufficient guidance for planning for wide-scale, regional disruptions? Is there a need to provide some sense of duration of a wide-scale, regional disruption? If so, what should it be?

  • We agree with the paper's definition of a "wide scale, regional disruption".

Recovery and Resumption of Critical Activities.

Have the agencies identified the critical activities needed to recover and resume operation in critical markets? Is there a need to define the term "material" in this context? If so, what should be used?

  • It appears that critical activities have been identified. However, the term "material" still needs more definition. Additional guidelines need to be established to determine how much settlement risk would make up a material amount for critical players in a similar circumstance.

Sound practice seems to require firms that play significant roles in critical markets to establish recovery targets of four hours after an event for their critical activities. Is this a realistic and achievable recovery-time objective for firms that play significant roles in critical markets? If not, what would be?

  • Yes, with a focus on intraday recovery and coordination between financial markets and regulatory agencies to extend processing deadlines.

Similarly, sound practice seems to require core clearing and settlement organizations to establish recovery and resumption targets of two hours for critical activities. Is this a realistic and achievable resumption-time objective for core clearing and settlement organizations? Should recovery- and resumption-time objectives differ according to critical markets?

  • Wells Fargo does not consider itself as a "core clearing and settlement organization" for securities processing. However, many of Wells Fargo's business lines are dependent upon core clearing organizations, and the financial institutions that settle payments on their behalf. Institutions such as DTCC, FED, BONY, JP Morgan Chase, NSCC, OMGEO, MBSCC should be included and held to a higher standard indicated in the Sound Practices.

Sound practices.

Have the agencies sufficiently described expectations regarding out-of-region back-up resources? Should some minimum distance from primary sites be specified for back-up facilities for core clearing and settlement organizations and firms that play significant roles in critical markets (e.g., 200 - 300 miles between primary and back-up sites)? What factors should be used to identify such a minimum distance? Should the agencies specify other requirements (e.g., back-up sites not be dependent on the same labor pools or infrastructure components, including power grid, water supply and transportation systems)? Are there alternative arrangements (i.e., within a region) that would provide sufficient resilience in a wide-scale, regional disruption? What are they?

  • A set of qualifying criteria should be established for backup facilities. We believe there are other factors that contribute to the risk, as well as the soundness of a recovery solution. Other factors to consider should include natural and manmade risk, logistics of your people (commuting), power grids, central offices (Telco), and traffic corridors.

Are there other arrangements that core clearing and settlement organizations should consider, such as common communication protocols, that would provide greater assurance that critical activities will be recovered and resumed?

  • Yes. Some examples include:

  • Working with DTCC on utilizing their IP platform so as to implement a standard protocol for all participants

  • Participation in cross-industry initiatives such as IFX Forum and joint ventures for payment aggregation and settlement such as SVPco and Spectrum.

Timetable for Implementation.

To ensure that enhanced business continuity plans are sufficiently coordinated among participants in critical markets, should specific implementation timeframes be considered? Is it reasonable to expect firms that play significant roles in critical financial markets to achieve sound practices within the next few years? Should the agencies specify an outside date (e.g. 2007) for achieving sound practices to accommodate those firms that may require more time to adopt sound practices in a cost-effective manner? Would such distant dates communicate a sufficient sense of urgency for addressing the risk of a wide-scale, regional disruption?

  • Critical market participants should be required to initiate plans and review them with regulatory agencies, but completion may not be possible within the amount of time specified. Further guidance is needed to determine whether implementation is needed within 180 days or a plan for implementation is needed within 180 days. Wells Fargo feels that a 2 - 3 year timeframe for implementation is adequate while still maintaining a sense of urgency within the industry.

Conclusion

Thank you for considering the views of Wells Fargo & Company on these important issues. If you have any further questions or comments, please do not hesitate to contact either Aaron Meckler, Senior Vice President at 303-889-2928 or Rex Engstrand, Vice President at 515-213-5395.