Robert B. Mills
Chief Financial Officer - Americas
1285 Avenue of the Americas
New York, NY 10019
Telephone 212 713-2256
Fax 212 713-2282
677 Washington Boulevard
Stamford, CT 06901
Telephone 203 719-7789
Fax 203 719-0340
October 21, 2002
Office of the Comptroller of the Currency
250 E Streets, SW
Public Information Room, Mail Drop 1-5
Washington, D.C. 20219
RE: Docket No. 02-13
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street NW
Washington, D.C. 20549-0609
RE: File No. S7-32-02
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, D.C. 20551
RE: Docket R-1 128
Draft Interagency White Paper on Sound Practices to Strengthen the
Resilience of the U.S. Financial System - COMMENTS
UBS AG Stamford Branch, together with UBS Warburg LLC, subsidiaries of UBS AG ("UBS") are pleased to provide comments as per your request on proposed rule R-1128, File No. S7-32-02; Docket No.02-13. UBS recognizes the need to have actionable Business Continuity Plans for the significant participants in the market place. More rigid regulatory oversight will provide a level of consistency and assurance that the US Financial Markets can withstand major disruptions by requiring firms to meet similar recovery requirements.
The Americas Business Continuity Steering Committee has reviewed the Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System ("White Paper") and provides the following comments for your review.
On Scope of Application
"Core Clearing and Settling and Significant Players"
UBS is comfortable that the significant markets are covered within the White Paper. UBS understands the importance of identifying significant roles within each of the defined markets. However, UBS does not feel that the Agencies have provided sufficient guidance for firms to make that determination. UBS requests further clarity regarding the classification of firms who for example function as both issuer and paying agent. In the case of Commercial Paper, where UBS is both issuer and paying agent, UBS would not consider themselves a "core clearing & settlement organization" in this product. UBS would like to see clear delineations between "core clearing & settlement organizations" and "significant players."
UBS believes that market share percentage should be used as a guideline/benchmark within each specific product/business line in order to accurately determine whether a firm plays a "significant role". No additional measures/facts/circumstances would be required. Benchmarks should differ by market or activity based on the number of participants and average daily volume within each market and its significance to the overall soundness of the US Financial Markets. A market that has only three participants must be judged differently than a market that has one hundred participants. This will hold true with regards to market share; 3% of the Governments Market may not be the same as 3% of the FX Market.
"Wide-scale Regional Disruption"
UBS does not believe that the definition of "wide-scale regional disruption" provides sufficient guidance for planning, and would prefer the region be based on Risk Profile rather than physical distance. UBS would define "Risk Profile" to mean where primary and secondary locations are not likely to be similarly impacted by the same natural disaster (e.g. hurricane, earthquake, etc.); or not likely to be subject to the same regional man made catastrophe (e.g., dam burst, terrorist incident, transit strike, bridge demolition, etc.). A weighted risk analysis can then be accomplished for determining probability of disaster occurrences. Modern networking technology makes traditional definitions based on physical distance less significant. Rather than try to specify scale and type of disruption, the policy should specify resumption requirements only and then let each firm consider the scale and type of disruption and plan on its own accord how to meet the resumption requirements, subject to regulatory review.
UBS recognizes the importance of a viable backup site and planning for the availability of qualified personnel. However, UBS disagrees with the concept of a separate labor pool for the purposes of business recovery. UBS is concerned that creating a backup site with a separate labor pool for the purposes of business recovery is, to a large extent, trading day-today operational risk to minimize business recovery risk.
A "one-size fits all" approach does not necessarily work for the diverse infrastructures supporting the "significant participants" in the various markets. In addition, the requirements should include the duration required to maintain the recovery site(s). As we understand the requirements, "significant participant" firms would only be required to meet their outstanding obligations at the time of the disaster. Firms need the flexibility to leverage their existing infrastructures to meet the regulatory requirement in a cost efficient manner and enact their recovery strategies as they see fit based on the situation.
On Recovery/Resumption of Critical Activities
UBS believes it may not be possible for firms to recover critical activities in four hours as core infrastructure such as telecommunication utilities may not be available. It would be more realistic and achievable to set an end-of-day recovery time objective for firms that play significant roles. Notwithstanding the above, the time of the disruption, the availability of core infrastructure, and other similar factors may affect whether a particular recovery timetable is realistic and achievable.
Similarly, a two-hour time frame may not be possible for recovery of critical functions by core clearing/settlement organizations. It would be more realistic and achievable to establish an end-of-day recovery time objective for those organizations; with a reasonable assumption that core infrastructure elements, including utilities, are available. However, as set forth above, the time of the disruption, the availability of core infrastructure, and other similar factors may affect whether a particular recovery timetable is realistic and achievable.
UBS believes that certain core and critical activities must recover in order to ensure efficient closings of the financial markets. For example, the overnight federal funds market must be able to recover in a shorter time frame than the equities settlement market. However, the expectation should be to ensure recovery by market and within such a catastrophic event, identification of market "discontinuance", and a controlled orderly close by the regulators.
On Sound practices
"Out of Region Back-up Resources"
UBS believes that the Agencies have sufficiently described expectations regarding out of region back-up resources. However, UBS suggests that a distinction be made between data center sites and operational sites as there is a strong case for keeping operational sites close to financial centers.
The White Paper describes the out of region resource issue but overall UBS requests further discussion on this topic, including issues raised with respect to separate labor pools as defined in the section "wide-scale regional disruption".
Minimum Distance from Primary Sites to Back-up Sites
The definition of geographic region is not clear. UBS would also argue that no single distance makes sense but rather subjectively depends on the location of a firm's primary site as well as any technology-based restrictions on separation distance. Natural barriers, concentration risk and the proximity to central utility hubs not utilized by the primary sites should be considered as part of the determination of back-up facility locations. UBS believes the factors differ depending on recovery of data center sites and operational sites. An `operational site' could include people recovering remotely from their homes.
UBS is comfortable with the requirements of back-up sites outlined in the White Paper. UBS believes that it would be helpful to have specific requirements for testing the back-up facilities including the front to back technology and business processes on a periodic basis.
Other Alternative Arrangements
UBS would ask that the regulators consider provisions for recovery capabilities for financial organizations within each agency's own location(s). Such capabilities would offer firms the ability to settle their external obligations and the continued efficient operations of the financial markets. UBS recognizes the deficiency of such a plan for internal record keeping and risk control deterioration, but believes such alternatives are worth reviewing and exploring with a mindset towards marketplace stability. UBS also suggests that agencies might consider steps to diversify and enlarge the number of participants performing critical
activities in critical markets where such activities are performed by a very small number of participants
Other Arrangements - Core Clearing and Settlement Organizations
Clearly, common communications protocols and contact databases would provide a greater level of assurance that critical activities will be recovered and resumed. The ability to leverage the infrastructures/utilities in other countries/continents to provide back-up capabilities in a truly catastrophic situation would prove useful. This would also prove useful if common communications protocols were established between the major participants in the market to facilitate dealing with a disaster.
On Implementation timetable
UBS believes that a reasonable implementation timeframe would help to ensure consistency of operation and help manage expectations across the industry. Consideration in establishing that time frame must be given based on the specific requirements imposed. UBS believes that it should be reasonable for firms that play a "significant role" in critical markets to achieve "sound practices" within the next few years provided they are in line with the general guidelines set forth in the White Paper. Depending on the final version of the sound practices the end of December 2005 might be reasonable as an outside date for full implementation.
UBS believes that setting a date puts a "stake in the ground" and forces companies to build and budget projects around a goal. However, both the financial industry and the regulators must set realistic goals (and dates) to ensure recovery capabilities for the global market place. UBS recognizes and appreciates the work done thus far by the regulators, and also wishes to ensure that the partnership between firms during the days after the tragic events of September 11, 2001, continues in tandem with the regulators' mandate for efficient resumption of the market in case of a significant disruption.
Robert B. Mills,
Regional Operating Officer, UBS Warburg
UBS AG Stamford Branch