UBS PaineWebber Inc.
October 21, 2002
Jonathan G. Katz, Secretary
Ms. Jennifer J. Johnson, Secretary
Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System - COMMENTS
UBS PaineWebber Inc. ("UBS PaineWebber") is pleased to provide comments as per your request on proposed rule R-1128, File No. S7-32-02; Docket No.02-13. UBS PaineWebber 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.
UBS PaineWebber's Business Continuity Steering Committee has reviewed the Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System and provides the following comments for your review.
On Scope of Application
1. Are there other "critical markets" which should be included in guidelines?
UBS PaineWebber is comfortable that the significant markets are covered within the paper.
2. Have agencies sufficiently defined the term "core clearing & settlement organizations" - so that all organizations can identify themselves?
The definition is, for the most part, clear. However, UBS PaineWebber requests further clarity between "core clearing & settlement organizations" and "significant players."
3. Have agencies provided sufficient guidance for firms to determine whether they play "significant roles" in critical financial markets?
UBS PaineWebber understands the importance of identifying significant roles within each of the defined markets. However, UBS PaineWebber does not feel that the Agencies have provided sufficient guidance for firms to make that determination on their own. Guidelines that take into account factors such as dollar amount, volume requirements or market share percentage on a rolling average could assist a firm to determine whether it plays a "significant role" within a particular market. Furthermore, UBS PaineWebber believes that the Agencies should provide some form of confirmation of these determinations. .
4. Are there other measures/facts/circumstances that should be used to determine whether a firm plays a significant role or acts as a core clearing organization?
UBS PaineWebber believes that if the guidance as described in the answer to question 3 were to be provided, no additional measures/facts/circumstances would be required to determine whether a firm plays a "significant role".
5. Should the agencies establish an average daily dollar volume or a market share test as a benchmark for either or both of these categories?
UBS PaineWebber believes that while either of those benchmarks would be a proper benchmark (as indicated in the response to question 3), the market share of a firm should be used to determine a firm's importance in each of the specific products/business lines identified.
6. Should such benchmarks differ by market or activity
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 is not the same as 3% of the FX Market, for example.
7. Should sound practices recommendations 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?
Geographic concentration of both the primary and back-up sites must be considered when developing sound business continuity policy. UBS PaineWebber requests that the sound practices provide further guidance on the definition of "geographic concentration." Firms should, as part of their due diligence process in selecting a back-up site, ensure that they fall within these guidelines and minimize geographic concentration risk.
However, information (including location) about other firms' back-up sites is generally not available because of competitive and confidentiality issues.
8. Should any firms that play significant roles in critical markets be required to meet an intra-day standard for recovery/resumption because of the size of their market share or volume, or the significance of the services they perform for other firms in clearing and settling material amounts of transactions and large-value payments?
UBS PaineWebber believes that firms that play significant roles in critical markets optimally should be able to recover "Intra-day" for core activities and should at a minimum be able to recover by the end of the day, assuming that core infrastructure such as telecommunication utilities are available
9. Is the definition of a "wide-scale, regional disruption" providing sufficient guidance for planning for that type of disruption? Should the definition include duration? If so what should it be?
UBS PaineWebber recognizes the importance of a viable backup site and planning for the availability of qualified personnel. However, the Firm disagrees with the concept of a separate labor pool for the purposes of business recovery. Having a separate labor pool fully duplicating the work performed at the production site creates an unnecessary level of redundancy when other less burdensome procedures (e.g. cross-training employees at different sites) could provide similar protection from 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
10. Have the agencies included and identified all critical activities needed to recover and resume operation in critical markets? Is there a need to define the term "material" in this context? What should be used?
UBS PaineWebber believes that the paper correctly identifies the critical activities that require recovery. The term "material" should be more fully defined and this might be best done in terms of dollar amounts and timeframe.
11. Is the guideline to establish recovery of critical activities in 4 hours after an event realistic and achievable recovery-time objective for firms that play significant roles?
UBS PaineWebber believes it may be possible for firms to recover critical activities in 4 hours with a reasonable assumption that core infrastructure such as telecommunication utilities are available. However, 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.
12. Is the guideline for core clearing/settlement organizations to establish recovery in 2 hours of critical activities after an event a realistic and achievable recovery-time objective for core clearing/settlement organizations?
UBS PaineWebber believes that, although a 2-hour time frame may 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 such as telecommunication 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.
13. Should recovery and resumption time objectives differ according to critical markets?
UBS PaineWebber believes that certain core & critical activities must recover in order to ensure operation 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
14. Have the agencies sufficiently described expectations regarding out of region back-up resources?
UBS PaineWebber believes that the agencies have sufficiently described expectations regarding out of region back-up resources. However, the Firm believes that a distinction should be made between data center sites and operational sites, as there is a strong case for keeping operational sites close to financial centers.
The Firm believes there should additional discussion and consideration of the "out of region" resource issues, including consideration of the issues raised with respect to separate labor pools as described in the response to question 9.
15. Should some minimum distance from primary sites be specified for back-up facilities for core clearing and settlement organizations and firms that play significant role in critical markets?
Because there may be factors affecting separation that are specific to a Firm's technology infrastructure, the Firm does not believe that a 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.
16. What factors should be used to identify such minimum distance of back-up facilities?
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 PaineWebber 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.
17. Should the agencies specify other requirements of back-up sites (other than those outlined)?
UBS PaineWebber is comfortable with the requirements of back-up sites outlined in the paper.
18. Should agencies consider other alternative arrangements that would provide sufficient resilience in a wide-scale, regional disruption? What are they?
UBS PaineWebber 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.
19. 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 Firm believes that 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 also 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. Notwithstanding the above, the Firm does not believe that common communication protocols should include shared infrastructure among firms, which the Firm believes could be counter-productive to increasing the resiliency of the financial markets.
On Implementation timetable
20. Should there be more specific implementation timeframes considered?
UBS PaineWebber 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.
21. Is it reasonable to expect firms that play significant roles in critical financial markets to achieve sound practices with the next few years?
UBS PaineWebber 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 the practices are in line with the general guidelines set forth in the white paper with modifications as we have suggested.
22. Should the agencies specify an outside date for achieving sound practices to accommodate those firms that may require more time to adopt sound practices in a cost-effective manner?
UBS PaineWebber believes that it may be appropriate to specify an outside date for achieving sound practices by those firms that may require more time. However, even with respect to the firms that play a significant role, consideration should be given to the potential complexity, planning and implementation of the practices and there should be some flexibility built into any prescribed timetables.
23. Would such distant dates communicate a sufficient sense of urgency for addressing the risk of wide-scale, regional disruption?
Please see the response to question 22.
UBS PaineWebber recognizes and appreciates the work done thus far by the regulators, and also wishes to ensure that the partnership between firms experienced on the succeeding 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.