Lehman Brothers Holdings Inc.
Jennifer J. Johnson
Office of the Comptroller of the Currency
Jonathan G. Katz
Position Paper in Response to Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System
Lehman Brothers Holdings Inc. (hereinafter "Lehman") is pleased to respond to the Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System (hereinafter the "White Paper"), published by The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission (hereinafter collectively referred to as the "Agencies").
Lehman welcomes the efforts of the Agencies to suggest improvements to the financial system infrastructure that would enable the United States to weather future catastrophic events.
This paper will serve as a discussion document, and is, to some degree an extension of the strategy outlined in the White Paper and is intended to be read in conjunction with the joint response prepared and submitted to the Agencies by Citigroup, Credit Suisse First Boston, Deutsche Bank, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Goldman Sachs, and Lehman Brothers, dated October 21st, 2002. Executive Summary
Lehman is a diversified financial services organization that participates in fixed income, equities, investment banking, and asset management businesses. Lehman maintains offices worldwide, however the bulk of its domestic transactions are executed from offices within the New York Metropolitan area. Lehman maintains redundant technology infrastructure between sites in the area, and makes every effort to ensure that it can participate in all major markets in the event of a localized disruption.
However, Lehman recognizes the potential need to extend its ability to recover core settlement and risk management functions outside of its current geographic concentration. The White Paper describes the need to "Maintain sufficient out-of-region resources to meet recovery and resumption objectives."1 Therefore, Lehman would like to consider the use of overseas locations, specifically its London site, to meet the requirement for recovery of core settlement and risk management functions.
A recovery of this nature would be the result of an event described in Section I of the White Paper as a "wide-scale, regional disruption."2
Lehman would consider this strategy based upon the following assumptions. Should these assumptions be changed or clarified materially, Lehman may choose to alter its strategy to more closely align with its current business, technology, and continuity models.
III. Scope of Recovery
1. Functions Recovered
Recovery at the London site would be limited to only those functions that would allow Lehman to conclude the day's business and continue to participate in markets that it is a major participant in, as outlined in Section II(A) of the White Paper.
2. Duration of Recovery
Recovery from an overseas location would be used only for as long as necessary to rebuild and/or recover Lehman's domestic capabilities. September 11th demonstrated the rapidity with which Lehman was able to recover critical systems and processes. Lehman would seek to minimize the length of time during which it would be dependent upon the capabilities of its overseas operation.
3. Recovery Time Objective (RTO)
Lehman would seek to enable the overseas office to meet an RTO that is consistent with existing technological and operational capabilities, and which is in alignment with those of similar firms in the industry. It should be noted that the ability to meet any RTO is dependent upon exigencies outside Lehman's purview, including amongst others, communications systems failures and, external market recovery problems.
4. Recovery Point Objective (RPO)
Given the critical nature of the transactions and functions covered by the White Paper, Lehman would, ideally, seek to implement a point-of-failure recovery objective, ensuring that no "in-flight" transactions were lost. However, this level of recovery is dependent upon synchronous data replication, which at present is not feasible at a distance exceeding roughly twenty-five miles.
Therefore, given present technology constraints, Lehman would only be able to implement an asynchronous data replication scheme, thereby risking loss of in-flight transactions.
5. Recovery Staff
While in most cases staff overseas have expertise in local market products, Lehman feels it would be able to muster sufficient capabilities, supplemented through cross-training, to effect the recovery of critical, core systems. This meets the guideline described in White Paper Section II(B)3.
6. Time to Implementation
Many of the capabilities described in this recovery strategy will require additional systems, process re-design, training, testing, and the like. Lehman Brothers feels that adequate flexibility must be given to implement this solution, depending upon technological capabilities and other external factors.
IV. Restrictions on Use
Lehman recognizes the regulatory challenges presented by the notion of recovering domestic markets using overseas resources. Therefore, every reasonable step will be taken to prevent improper access to systems and markets that are restricted to officially recognized domestic sites. These steps could include:
V. Coordination with Local Authorities
Lehman will ensure that all necessary overseas authorities will be consulted and briefed on this recovery strategy. Conditional exemptions to all applicable regulations will be sought.
Lehman is aware of an effort by the Securities Industry Association and The Bond Market Association to catalog these regulations, and will use the results as a guide.
While the White Paper's focus is on domestic U.S. financial markets, it is reasonable to take similar steps to protect offices overseas. Firms having a major impact in financial markets tend to be global in nature, and there is increasing coordination between financial centers worldwide. Therefore major firms should respond globally to major market disruptions.
Such disruptions may occur outside of the U.S., but still have a profound impact on U.S. markets. Therefore, Lehman recommends that the Agencies view favorably any effort to allow firms with overseas presence to use domestic offices to recover their business.
Given the guidelines in the White Paper, Lehman's geographic footprint, and its major role in several critical markets, it concludes that the only reasonable and cost-effective way to respond to a wide-scale, regional disruption would be to use overseas facilities to complete critical clearance, settlement, funding, and risk management activities.
Lehman appreciates the opportunity to work with the Agencies in an effort to increase the resiliency of the U.S. financial system, and welcomes input and response to this document.