Commodity Futures Trading Commission
October 23, 2002
Ms. Jonathan G. Katz
RE: File No. S7-32-02
Dear Mr. Katz:
The Commodity Futures Trading Commission applauds the efforts of the Board of Governors of the Federal Reserve System (Board), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC) in developing a draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System. The commodity futures and options markets also serve a vital function in the U.S. economy by providing crucial risk management capabilities to participants in many of the markets mentioned in the draft white paper, as well as markets for key agricultural and energy commodities. The Commission is well underway with its own efforts to encourage and monitor improvements in the disaster preparedness of exchanges and clearinghouses within its jurisdiction.
Given the importance of these markets, Congress has charged the Commission with monitoring the preparedness of these exchanges and the clearinghouses that serve them. Three years ago, the Commission was active in the analysis of transition and contingency plans for the Year 2000 date change. Last year, following the terrorist attacks, the Commission reviewed the disaster recovery and business continuity plans of exchanges, clearinghouses, and key intermediaries. At both its November 2001 and April 2002 meetings, the Commission's Technology Advisory Committee discussed preparedness issues, including industry experiences, the effectiveness of existing disaster recovery and business continuity plans, and private and public sector responses to vulnerabilities and threats to electronic infrastructures of future markets. Since September 11th, the work of this Advisory Committee has taken on even greater importance.
The Commission's review of plans submitted last year and its analysis of the actual responses of futures market participants on and after September 11th contributed to the March 2002 "Report of the Commodity Futures Trading Commission on the Futures Industry Response to September 11th." 1 Since issuing this report, the Commission has continued to work with markets and their participants to encourage improvement in disaster preparedness, disaster recovery, and business continuity planning and capabilities. The Commission recently received and began reviewing the latest updated preparedness plans to monitor progress in this area.
As it pursues these efforts, the Commission must be flexible and receptive to new and innovative preparedness solutions, consistent with the approach advocated by Congress through passage of the Commodity Futures Modernization Act. The Act brought about a principles-based approach to regulatory oversight that provides flexibility yet retains appropriate protections. For example, among the core principles set forth in the Act for derivatives clearing organizations is the requirement to establish and maintain emergency procedures and disaster recovery plans, and to periodically test backup facilities sufficient to ensure daily processing, clearing, and settlement of transactions. However, the Act does not direct the Commission to establish rigid standards. The Commission believes that the innovation and resourcefulness which futures markets have demonstrated in developing new risk management tools and trading platforms can continue to meet the challenge of enhancing disaster preparedness and that a flexible approach to monitoring compliance with this core principle is most appropriate.
The Commission has been working with federal and state financial regulators -- including the Board, OCC, and SEC -- as part of the Financial and Banking Information Infrastructure Committee, to coordinate regulatory efforts to improve the reliability and security of financial information infrastructure. The Commission would be pleased to share information and insights with other financial regulators as it develops an oversight approach in this area best suited to the needs and roles of futures and options markets.
Jean A. Webb
cc: Office of the Comptroller of the Currency