Commercial Paper Issuers Working Group

October 23, 2002

Ms. Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Regs.comments@federalreserve.gov
Attention: Docket No. R-1128

Office of the Comptroller of the Currency
250 E Street, SW
Public Information Room
Mail Stop 1-5
Washington, D.C. 20549-0609
Regs.comments@occ.treas.gov
Attention: Docket No. 02-13

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Rule-comments@sec.gov
Attention: File No. S7-32-02

RE: Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System

Dear Ms. Johnson, Office of the Comptroller of the Currency, and Mr. Katz:

The Commercial Paper Issuers Working Group (the "CPIWG"1) appreciates the opportunity to comment on the White Paper entitled "Sound Practices to Strengthen the Resilience of the U.S. Financial System" (the "White Paper"), jointly issued by the Board of Governors of the Federal Reserve System (the "Board), the Office of the Comptroller of the Currency (the "Comptroller"), and the Securities and Exchange Commission (the "Commission"), (collectively the "Agencies"), on August 30, 2002. The CPIWG commends the Agencies effort to identify and implement sound practices to mitigate wide-scale, long-term disruptions in the U.S. financial system and, specifically, critical wholesale financial markets. The issues raised in the White Paper are of significant importance to the financial markets and its participants. As issuers in the commercial paper market (defined in the White Paper as a "critical market"), the CPIWG strongly supports the Agencies' efforts and is specifically interested in strengthening the resilience of core clearing and settlement organizations. In solidarity with our industry participants, the CPIWG believes that core clearing and settlement organizations represent the single greatest risk of failure in the financial system and, consequently, the CPIWG respectfully encourages the Agencies to give priority to issues related to services provided by core clearing and settlement organizations.

Having said that, we believe the disruption in the marketplace resulting from September 11th greatly demonstrated the necessity for regulatory oversight regarding certain elements of the broader money market and, specifically, the commercial paper market. We encourage the Agencies to identify a regulatory or oversight committee with the authority to:

  • Identify and establish "wide-scale, regional disruption"

  • Establish formal trading sessions (i.e., legal authority to close market during "wide-scale, regional disruption")

  • Centralize critical market information (i.e., operating status of critical markets, core clearing and settlement organizations, firms that play significant roles in critical financial markets)

  • Coordinate timely and efficient broadcast of material issues (i.e. commercial paper market closed at 1:15 EST due to wide-scale, regional disruption in New York City)

  • Establish administrative standards (i.e., compensation claims arising from "wide-scale, regional disruption")

In addition to our general suggestions summarized above, the CPIWG has responded to the specific questions presented in the White Paper. Our responses are posted below:

I. Scope of application

  • Have the agencies excluded any critical markets? Yes, asset-backed securities. The White Paper appropriately defines "critical markets" to include: federal funds, foreign exchange, commercial paper, government securities, corporate securities and mortgage-backed securities, but has overlooked asset-backed securities.

  • Have the agencies sufficiently defined the term "core clearing and settlement organizations" for such organizations to identify themselves? It is our belief "core clearing and settlement organizations" are the cornerstone of a fully-functional financial system and, therefore, we recommend the Agencies identify and publish qualified organizations or firms (e.g., Depository Trust and Clearing Corporation, Issuing & Paying Agents, Custodial banks, etc.) within six months of publishing the final White Paper.

  • Have the agencies provided sufficient guidance for firms to determine whether they play "significant roles in critical financial markets?" Additional guidance is necessary to enable firms to determine if they play a "significant role 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? Measuring a firm's role within critical financial markets is appropriately determined by dollar and/or transaction volume.

  • 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? We believe the best definition of "core clearing and settlement organizations" or "significant role in critical financial markets" is measured by average transaction volume and average dollar volume.

  • Should such benchmarks differ by market or activity? Unique benchmarks should be established for each market or activity. Global benchmarks should be established to identify firms that may not qualify on a market or activity basis, but the sum of a firm's markets or activities may raise such firm's status.

  • 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? It may be necessary to diversify geographical locations to prevent exposure to natural disasters.

  • 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? This may be true for some firms that play significant roles in critical markets.

  • 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? Firms identified as playing a "significant role in critical financial markets" should be required to fully-recover their role by close of the current business day, fully-resume their role by the open of the next business day, and capable of performing their role for a period of 30 days following a wide-scale, regional disruption. Additionally, firms should be required to submit recovery and resumption plans to the appropriate regulatory or oversight committee (must be identified) and tested periodically. Plans and test results should be readily available to all market participants.

  • Does the paper's definition of a "wide-scale, regional disruption" provide sufficient guidance for planning for wide-scale, regional disruptions? The White Paper's definition of a "wide-scale, regional disruption" sufficiently defines the qualifications of such event. However, the White Paper does not identify the agency or regulatory body that is responsible for classifying an event a "wide-scale, regional disruption" and, consequently, has the authority to initiate the recovery/resume process.

  • Is there a need to provide some sense of duration of a wide-scale, regional disruption? If so, what should it be? Firms classified as "core clearing and settlement organizations" should be prepared to permanently recover and resume their role at a secondary site or sites.

II. Recovery and Resumption of Critical Activities

  • Have the agencies identified the critical activities needed to recover and resume operation in critical markets? The agencies have properly identified pending and new 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? Consistent with the agencies effort to establish market standards, we recommend defining "material" as it applies to each critical market. The definition of "material" may be different in each critical market, but may be simplified by defining "material" as a percentage of transaction volume or dollar transaction volume.

  • 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? Acknowledging a wide-scale, regional disruption could occur at any time during the trading day, setting an hourly recovery goal may be unrealistic or unattainable. We recommend firms playing a significant role in critical markets be required to recover by close of business day.

  • 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? Core clearing and settlement organizations should be required to recover critical activities within two hours following the declaration of a critical event. However, core clearing and settlement organizations should not be expected to fully-resume critical activities until the start of the next official trading day. Our recommendation is largely based upon the belief that transaction volume will be significantly below normal during the immediate days following an event.

  • Should recovery- and resumption-time objectives differ according to critical markets? Acknowledging the interdependency of many critical markets, establishing universal recovery and resumption objectives will promote greater resilience of all identified critical markets and activities within the U.S. financial system.

III. Sound practices

  • Have the agencies sufficiently described expectations regarding out-of-region back-up resources? Out-of-region back-up resources are sufficiently defined. However, it's not clear how, or if, the agencies plan to regulate the establishment of alternative back-up facilities in "at-risk" geographical locations.

  • 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)? Back-up sites for core clearing and settlement organizations should be established in geographical locations that are not considered "at-risk" for simultaneous or similar "wide-scale, regional disruption."

  • What factors should be used to identify such a minimum distance? Minimum distance required to enable a core clearing and settlement organization or firms that play significant roles in critical financial markets to economically recover and/or resume identified critical activities within a specified time period. Back-up facilities should not be located in a geographical location with similar risk characteristics as the primary facility. For example: If the primary facility is located in a geographic region with hurricane risk, the back-up facility should not be located in a geographic region with similar hurricane risk or patterns.

  • 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)? At a minimum, back-up facilities should be located on separate power and telecommunication grids and located a reasonable distance (factoring in potentials for regional disruptions) from the primary facility. Additionally, back-up facilities should consider potential for natural disasters (i.e., earthquakes, hurricanes, etc.) when selecting an acceptable location.

  • Are there alternative arrangements (i.e., within a region) that would provide sufficient resilience in a wide-scale, regional disruption? What are they? We are not aware of suitable, alternative arrangements that would enable recovery and resumption of critical market activities that satisfy the guidelines recommended in the White Paper.

  • 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? The agencies or other governing body must establish a communication channel capable of broadcasting policy standards, operating instructions and participant status to financial community participants and regulators. An internet site with dynamic e-mail functionality would satisfy this purpose.

IV. Timetable for Implementation.

  • To ensure that enhanced business continuity plans are sufficiently coordinated among participants in critical markets, should specific implementation timeframes be considered? Acknowledging that the capacity of core clearing and settlement organizations to function represents the greatest risk of failure to the financial system, we encourage the agencies to establish ambitious implementation timeframes for core clearing and settlement organizations.

  • Is it reasonable to expect firms that play significant roles in critical financial markets to achieve sound practices within the next few years? We believe firms that play a significant role in critical financial markets should implement sound practices within three (3) years of core clearing and settlement organizations implementing sound practices.

  • 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? Excluding core clearing and settlement organizations, it may be necessary for the agency to accommodate certain firms that need more time to economically and effectively implement sound practices. Acknowledging there will be varying degrees of importance among firms identified as playing a significant role within critical financial markets, we recommend establishing a priority system before establishing outside dates for each firm.

  • Would such distant dates communicate a sufficient sense of urgency for addressing the risk of a wide-scale, regional disruption? We believe it is necessary to be accommodative in certain cases and, therefore, we recommend prioritizing those firms that must implement sound practices before other firms.

Conclusion

The CPIWG appreciates the opportunity to comment on issues of such critical importance to the commercial paper market and the overall U.S. financial system. Acknowledging the issues raised within the White Paper cannot be immediately resolved, we hope our responses assist the Agencies in their effort to strengthen the resilience of the commercial paper market and critical wholesale financial markets. The CPIWG is committed to assisting the Agencies and welcomes the opportunity to discuss this initiative in greater detail.

Please feel free to contact Marian Trano-Lepisto (212-692-3113), Matthew Murrin (877-424-3827) or Kevin Foley (800-525-5450) with any questions or comments regarding our response.

Sincerely,

Marian Trano-Lepisto, FVP & Treasurer
San Paolo IMI S.p.A.
Co-Chairman
Commercial Paper Issuers Working Group

Matthew Murrin, Manager - Money Markets
ChevronTexaco Corp.
Co-Chairman
Commercial Paper Issuers Working Group

Kevin P. Foley, Manager, Business Development
American Express Credit Corporation
Co-Chairman
Commercial Paper Issuers Working Group

Craig A. Dukes, President - Ford Financial Services, Inc.
Ford Motor Credit Co.
Interagency White Paper Response Committee
Commercial Paper Issuers Working Group

Attachment

____________________________
1 In August of 1995, direct commercial paper ("CP") issuers formed the CPIWG as an unaffiliated, industry working group committed to enhancing the interests of CP issuers in the marketplace. Today, the CPIWG consists of representatives of 21 major financial and non-financial corporations that market and issue debt (i.e., CP) directly to institutional investors without the exclusive services of a money market broker-dealer. Historically, direct issuers have been the larger CP issuers in the marketplace. During the second quarter 2002, CPIWG member issuers accounted for $214 billion outstanding CP or 16% of total CP outstanding. When measured by average daily trade volume or average daily dollar issuance, the CPIWG issuers account for 27% and 22%, respectively, of the total CP market. A list of the CPIWG issuers is provided in Appendix A.


Appendix A

CPIWG Active Members

As of September 2002

Abbey National North America LLC

American Express Credit Corporation

AIG Funding Inc.

ChevronTexaco Corp.

CIT Group Inc.

Citigroup Inc.

DaimlerChrysler NA

Deere & Company

Dow Chemical Co.

ExxonMobil Corp.

Ford Motor Credit Co.

GE Capital Corporation

General Motors Acceptance Corp.

Household Finance Corp.

IBM Corp.

Prudential Financial, Inc.

San Paolo IMI S.p.A.

SBC Communications

Sears Roebuck Acceptance Corp.

Toyota Motor Credit

Wells Fargo Financial