1

FEDERAL RESERVE SYSTEM 

[Docket No. R-1128] 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

[Docket No. 03-05] 

SECURITIES AND EXCHANGE COMMISSION 

[Release No. 34-47638; File No. S7-32-02] 

Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial 

System 

AGENCIES: Board of Governors of the Federal Reserve System; Office of the 

Comptroller of the Currency; and Securities and Exchange Commission. 

ACTION: Issuance of Interagency Paper. 

SUMMARY: The Federal Reserve Board (Board), the Office of the Comptroller of the 

Currency (OCC) and the Securities and Exchange Commission (SEC) are publishing an 

Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial 

System. The Federal Reserve Bank of New York also participated in drafting the paper.

The paper identifies three new business continuity objectives that have special 

importance in the post-September 11 risk environment for all financial firms. The paper 

also identifies four sound practices to ensure the resilience of the U.S. financial system, 

which focus on minimizing the immediate systemic effects of a wide-scale disruption on 

critical financial markets. The agencies expect organizations that fall within the scope of 

this paper to adopt the sound practices within the specified implementation timeframes, 

as described in more detail in the paper.

FOR FURTHER INFORMATION CONTACT: 

Board: Jeffrey Marquardt, Associate Director, Division of Reserve Bank 

Operations and Payment Systems (202) 452-2360; or Angela Desmond, Assistant 

Director, Division of Banking Supervision and Regulation (202) 452-3497. 

OCC: Ralph Sharpe, Deputy Comptroller for Bank Technology (202) 874-4572; 

or Aida Plaza Carter, Director, Bank Information Technology Operations (202) 874-

4740.

 SEC: Robert Colby, Deputy Director, Division of Market Regulation (202) 942-

0094; David Shillman, Counsel to the Director, Division of Market Regulation (202) 942-

0072; or Peter Chepucavage, Attorney Fellow, Division of Market Regulation (202) 942-

0163.

SUPPLEMENTARY INFORMATION: On September 5, 2002, the Board of 

Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and 

the Securities and Exchange Commission published for comment a Draft Interagency 
2

White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial 

System.

1 The draft white paper emphasized the criticality of protecting the financial 

system from serious new risks posed in the post-September 11 environment and 

described a series of sound practices that were identified by industry participants during a 

series of interviews and meetings with the agencies. Approximately 90 comment letters 

were submitted to one or more of the agencies by clearing and settlement system 

operators; banking organizations; investment banking firms; industry associations; 

technology companies; federal, state and local officials; and other interested parties and 

are summarized below. After reviewing the comments and continuing their dialogue 

with interested persons, the agencies are issuing this revised final interagency paper. 

The sound practices identified in the paper are intended to supplement the 

agencies’ respective policies and other guidance on business continuity planning by 

financial institutions. The sound practices focus on establishing robust back-up facilities 

for those back-office activities necessary to recover clearance and settlement activities for 

the wholesale financial system in times of serious disruption and therefore do not address 

issues relating to trading operations or to retail financial services. The agencies are not 

recommending that firms move their primary offices, primary operating sites, or primary 

data centers out of metropolitan locations. The agencies expect organizations that fall 

within the scope of this paper to adopt the sound practices within the specified 

implementation timeframes, as described in more detail in the paper. 

 

Summary of Comments 

The commenters generally support the agencies’ efforts to improve the resilience 

of the financial markets and agree with the goals outlined in the draft white paper. Most 

commenters agree with the sound practices in principle, but propose a number of 

modifications and clarifying changes to the document. In general, the commenters prefer 

that the agencies retain a “sound practices paper format” rather than adopt a regulatory 

approach that could be susceptible to a “one size fits all” application. They also ask that 

the agencies coordinate supervisory expectations with each other and with other 

regulatory authorities as necessary to assure a consistent approach. 

There was broad consensus with the goal of ensuring that key organizations in 

critical financial markets are able to recover clearing and settlement activities in the event 

of a wide-scale disruption as rapidly as possible. Commenters agree with the definitions 

of critical financial markets and critical activities, but ask that the agencies make clear 

that the sound practices apply to back-office operations and not to trading activities or 

retail products. They also believe that the description of core clearing and settlement 

organizations is sufficient. Commenters ask for additional guidance to assist in 

identifying firms that play significant roles in critical financial markets and generally 

agree that a market share benchmark should be established; a few commenters 

recommend adopting a dollar volume benchmark. A few commenters suggest that 

benchmarks should vary by market based on the amount of concentration of key 

 

1

 67 FR 56835, September 5, 2002. 
3

participants in the critical financial markets. Some commenters note the importance of 

firms being able to self-determine whether they fall into a particular category for a critical 

financial market, while others ask that the agencies contact organizations that appear to 

meet the definition for core clearing and settlement organizations or firms that play 

significant roles in critical markets. Several commenters acknowledge that the sound 

practices would effectively raise market expectations with respect to the resilience of all 

financial firms. 

A number of commenters state that the description of a wide-scale, regional 

disruption should include parameters for a range of probable events (e.g., power 

disruption, natural disaster) and include the expected duration of the outage (e.g., 5, 10, 

or 30 days). Other commenters note that such specification is unnecessary. 

The commenters agree that a within-the-business-day recovery and resumption 

objective for core clearing and settlement organizations is appropriate and acknowledge 

that a two-hour recovery time objective is an achievable goal, although somewhat 

aggressive for some because of the volume and complexity of transaction data involved. 

There is general consensus that the end-of-business-day recovery objective is achievable 

for firms that play significant roles in critical markets, although many state that this is 

possible only if firms are able to utilize synchronous data storage technologies, which can 

limit the extent of geographic separation between primary and back-up sites. A number 

of commenters note that a recovery time objective of four hours is unrealistic unless core 

clearing and settlement organizations and the telecommunications infrastructure are 

operating. 2 Some commenters suggest that recovery and resumption time objectives 

should vary by type of market. Other commenters note that further guidance on the 

definitions of an “event” and “end-of-business day” is needed to help ensure meaningful 

recovery and resumption time objectives. 

A number of commenters support the concept of establishing back-up sites for 

operations and data centers that do not rely on the same infrastructure and other risk 

elements as primary sites and note that such diversification of risk is a long-standing 

principle of business continuity planning for financial firms. Most commenters oppose 

establishing any minimum distance requirement between primary and back-up facilities, 

citing the need for sufficient flexibility to manage costs effectively and allow for 

technological improvements. A few commenters believe that establishing minimum 

separation is appropriate and achievable. A number of commenters express concern that 

out-of-region back-up sites, including those of third-party service providers, often are 

geographically concentrated, creating additional risk in the event of a targeted attack or 

wide-scale disruption affecting those areas. Some commenters ask for additional 

 

2

 Many commenters state that the recovery of financial systems can only be achieved if the 

telecommunications infrastructure is up and running across the nation. Firms identify a number of industry 

efforts to explore common infrastructure issues and possible solutions to ensure diversity of circuit routing 

and other reliability issues. Commenters raising this issue ask the agencies to continue to raise the issue of 

telecommunications infrastructure resilience with federal and state agencies, including the Federal 

Communications Commission, the National Security Telecommunications Advisory Committee and the 

Department of Homeland Security. The agencies are taking numerous actions to help direct attention to 

improving the resilience of the telecommunications infrastructure. 
4

guidance on how to address various infrastructure components, such as water supply 

sources. A few commenters indicate that they are exploring overseas locations as part of 

their recovery and resumption solutions and ask for some assurances that domestic and 

foreign financial authorities will permit such arrangements. 

Commenters note that firms should be permitted to address critical staffing needs 

sufficient to recover from a wide-scale disruption, but should not be required to maintain 

a separate redundant staff at their back-up locations, which would be costly and 

inefficient. Others advocate maintaining a back-up site with staff able to perform critical 

clearing and settlement activities routinely (through two or more active production sites) 

or on an emergency basis (e.g., through cross-training staff). Commenters state that 

permitting firms to adopt a risk-based approach to planning geographically dispersed 

back-up arrangements would allow institutions to focus on those scenarios that pose the 

greatest threat and manage labor needs more effectively. 

Most commenters agree that routine use or testing of back-up facilities is 

necessary and beneficial to ensure financial system viability. They also suggest that 

testing should be “end-to-end” involving telecommunication firms, third-party service 

providers, and securities exchanges. 

A majority of commenters state that plans to meet sound practices could be 

developed within a year after the agencies issue their final views. There is general 

consensus that sound practices can be implemented over a relatively short (two to three 

year) time period, if the agencies provide sufficient flexibility to accommodate the unique 

risk profile and planning and investment cycles of each institution. Commenters note that 

extending implementation schedules would help to mitigate the costs of building greater 

resilience into business continuity arrangements, although there was also recognition that 

the post-September 11 risk environment requires that achievement of the sound practices 

needs to be accomplished within a reasonably short time frame by peer firms. Some 

commenters warn that strict application of the sound practices or establishment of 

minimum distance and staffing requirements could require firms to bear excessive costs 

with the result that some might exit particular markets, leading to further concentration, 

decreased liquidity, and higher overall costs for participants in those markets. Several 

commenters expressed concern that the sound practices might result in significant 

employment losses and other negative impacts on the economy and tax base of the New 

York City metropolitan area. Virtually all commenters state that the core clearing and 

settlement organizations should establish more aggressive implementation timetables 

than other firms. Commenters also recognize that firms should set implementation 

benchmarks in their plans to assess progress. Some commenters assert that the 

incremental cost of achieving the sound practices should be subsidized, all or in part, by 

the government. 

 The agencies have incorporated many of the suggestions that were made by the 

commenters. The revised paper is more succinct, and generally provides more flexibility 

to firms in managing geographic diversity of back-up facilities, staffing arrangements, 

and cost-benefit considerations. It also provides more specificity as to the scope of 
5

application of the sound practices as well as the implementation guidelines. No specific 

mileage requirements or technology solutions are mandated. Accordingly, the agencies 

are issuing this final version of the interagency paper on sound practices to strengthen the 

resilience of the U.S. financial system. 

Interagency Paper on Sound Practices to 

Strengthen the Resilience of the U. S. Financial System 

Introduction and Background 

 The Federal Reserve, the Office of the Comptroller of the Currency, and the 

Securities and Exchange Commission (the agencies) are issuing this Interagency Paper

on Sound Practices to Strengthen the Resilience of the U. S. Financial System to advise 

financial institutions on steps necessary to protect the financial system in light of the new 

risks posed by the post-September 11 environment. The sound practices build upon longstanding principles of business continuity planning and reflect actions identified by 

industry members that will strengthen the overall resilience of the U.S. financial system 

in the event of a wide-scale disruption. 

The agencies have identified broad industry consensus on three business 

continuity objectives that have special importance after September 11 for all financial 

firms. The agencies also have identified sound practices that focus on minimizing the 

immediate systemic effects of a wide-scale disruption on critical financial markets. The 

sound practices focus on the appropriate back-up capacity necessary for recovery and 

resumption of clearance and settlement activities for material open transactions in 

wholesale financial markets. They do not address the recovery or resumption of trading 

operations or retail financial services. The agencies are not recommending that firms 

move their primary offices, primary operating sites, or primary data centers out of 

metropolitan locations, and understand that there are important business and internal 

control reasons for financial firms to maintain processing sites near financial markets and 

their own headquarters. The agencies also recognize that achieving the sound practices 

could be a multi-year endeavor for some firms and that it is not necessary or appropriate 

to prescribe any specific technology solution or limit a firm’s flexibility to implement the 

sound practices in a manner that reflects its own risk profile. The sound practices 

discussed in this paper supplement the agencies’ respective policies and other guidance 

on business continuity planning. 

Post-September 11 Business Continuity Objectives 

During discussions about the lessons learned from September 11, industry 

participants and others agreed that three business continuity objectives have special 

importance for all financial firms and the U.S. financial system as a whole: 

• Rapid recovery and timely resumption of critical operations following a widescale disruption; 

• Rapid recovery and timely resumption of critical operations following the loss 

or inaccessibility of staff in at least one major operating location; and 
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• A high level of confidence, through ongoing use or robust testing, that critical 

internal and external continuity arrangements are effective and compatible. 

 The events of September 11 underscored the fact that the financial system 

operates as a network of interrelated markets and participants. The ability of an 

individual participant to function can have wide-ranging effects beyond its immediate 

counterparties. Because of the interdependent nature of the U.S. financial markets, all 

financial firms have a role in improving the overall resilience of the financial system. It 

therefore is appropriate for all financial firms to review their business continuity plans 

and incorporate these three broad business continuity objectives to the fullest extent 

practicable. In striking an appropriate balance between the new set of risks posed in the 

post-September 11 environment and the costs involved in planning for wide-scale 

disruptions, financial firms should incorporate these new and continuing risks into their 

assessment of their unique characteristics and risk profiles. Firms also should continue to 

improve upon short-term measures that have been instituted since September 11 and 

develop longer-term business recovery plans where gaps are identified. 

Definitions 

The resilience of the U.S. financial system in the event of a “wide-scale 

disruption” rests on the rapid “recovery” and “resumption” of the “clearing and 

settlement activities” that support “critical financial markets.” Some organizations, 

namely “core clearing and settlement organizations” and “firms that play a significant 

role in critical financial markets,” present a type of “systemic risk” to the U.S. financial 

system should they be unable to recover or, in some instances, resume clearing and 

settlement activities that support those markets. These terms and organizations are 

defined below. 

Wide-Scale Disruption. A wide-scale disruption is an event that causes a severe 

disruption or destruction of transportation, telecommunications, power, or other critical 

infrastructure components across a metropolitan or other geographic area and the 

adjacent communities that are economically integrated with it; or that results in a widescale evacuation or inaccessibility of the population within normal commuting range of 

the disruption’s origin. 

 Systemic Risk. Systemic risk includes the risk that the failure of one participant 

in a transfer system or financial market to meet its required obligations will cause other 

participants to be unable to meet their obligations when due, causing significant liquidity 

or credit problems or threatening the stability of financial markets.3

 Given the complex 

interdependencies of markets and among participants, thorough preparations by key 

market participants will reduce the potential that a sudden disruption experienced by one 

 

3

 The use of the term “systemic risk” in this paper is based on the international definition of systemic risk in 

payments and settlement systems contained in “A glossary of terms in payment and settlement systems,” 

Committee on Payment and Settlement Systems, Bank for International Settlements (2001). 
7

or a few firms will cascade into market-wide liquidity dislocations, solvency problems, 

and severe operational inefficiencies.4 

Critical Financial Markets. Critical financial markets provide the means for 

banks, securities firms, and other financial institutions to adjust their cash and securities 

positions and those of their customers in order to manage liquidity, market, and other 

risks to their organizations. Critical financial markets also provide support for the 

provision of a wide range of financial services to businesses and consumers in the United 

States. Certain markets, such as the federal funds and government securities markets, 

also support the implementation of monetary policy. For purposes of this paper, “critical 

financial markets” are defined as the markets for: 

• Federal funds, foreign exchange, and commercial paper 

• U.S. Government and agency securities

• Corporate debt and equity securities 

Core Clearing and Settlement Organizations. Core clearing and settlement 

organizations consist of two groups of organizations that provide clearing and settlement 

services for critical financial markets or act as large-value payment system operators and 

present systemic risk should they be unable to perform. The first group consists of 

market utilities (government-sponsored services or industry-owned organizations) whose 

primary purpose is to clear and settle transactions for critical markets or transfer largevalue wholesale payments. The second group of core clearing and settlement 

organizations consists of those private-sector firms that provide clearing and settlement 

services that are integral to a critical market (i.e. their aggregate market share is 

significant enough to present systemic risk in the event of their sudden failure to carry on 

those activities because there are no viable immediate substitutes). 

Firms that Play Significant Roles in Critical Financial Markets. Firms that 

play significant roles in critical financial markets are those that participate (on behalf of 

themselves or their customers) with sufficient market share in one or more critical 

financial markets such that their failure to settle their own or their customers’ material 

pending transactions by the end of the business day could present systemic risk. While 

there are different ways to gauge the significance of such firms in critical markets, as a 

guideline, the agencies consider a firm significant in a particular critical market if it 

consistently clears or settles at least five percent of the value of transactions in that 

critical market. 

 Recovery and Resumption of Clearing and Settlement Activities. The rapid 

recovery and resumption of critical financial markets, and the avoidance of potential 

systemic risk, requires the rapid recovery of clearing and settlement activities for the 

purpose of completing material pending transactions on their scheduled settlement dates. 

These clearing and settlement activities include 

 

4

 Under adverse market conditions or in the event of credit concerns about institutions, liquidity 

dislocations of the type experienced immediately after September 11 could be seriously compounded. 
8

a) Completing pending large-value payments; 

b) Clearing and settling material pending transactions; 5

c) Meeting material end-of-day funding and collateral obligations necessary to 

ensure the performance of items a) and b) above; 

d) Managing material open firm and customer risk positions, as appropriate and 

necessary to ensure the performance of items a) through c) above; 

e) Communicating firm and customer positions and reconciling the day’s 

records, and safeguarding firm and customer assets as necessary to ensure the 

performance of items a) through d) above; and 

f) Carrying out all support and related functions that are integral to performing 

the above critical activities. 

For purposes of this paper, the terms recovery (or recover) refers to the restoration of 

clearing and settlement activities after a wide-scale disruption; 6 resumption (or resume) 

refers to the capacity to accept and process new transactions and payments after a widescale disruption. 

Sound Practices 

The agencies have identified four broad sound practices for core clearing and 

settlement organizations and firms that play significant roles in critical financial markets. 

The sound practices are based on long-standing principles of business continuity planning 

in which critical activities are identified, a business impact analysis is conducted, and 

plans are developed, implemented, and tested. Adoption of the sound practices will help 

protect the financial system from the risks of a wide-scale disruption and reduce the 

potential that key market participants will present systemic risk to one or more critical 

markets because primary and back-up processing facilities and staffs are located within 

the same geographic region. 

1. Identify clearing and settlement activities in support of critical financial 

markets. An organization should identify all clearing and settlement activities in each 

critical financial market in which it is a core clearing and settlement organization or plays 

a significant role. This assessment should include identification of activities or systems 

that support or are integrally related to the performance of clearing and settlement 

activities in those markets. 

2. Determine appropriate recovery and resumption objectives for clearing 

and settlement activities in support of critical markets. For purposes of the sound 

practices, a recovery-time objective is the amount of time in which a firm aims to recover 

 

5

 Transactions in government securities include the purchase and sale of U.S. government bills, notes, 

bonds and agency securities (including mortgage-backed securities issued by Government Sponsored 

Enterprises), as well as repurchase and reverse repurchase agreements and triparty repurchase agreements 

involving U.S. government and agency securities. 

6

 The goal of business recovery plans is the recovery of a particular activity or function and not the 

recovery of a disabled facility or system. 
9

clearing and settlement activities after a wide-scale disruption with the overall goal of 

completing material pending transactions on the scheduled settlement date. Recoverytime objectives for clearing and settlement activities should be relatively consistent 

across critical financial markets. This promotes the compatibility of recovery plans and 

helps ensure that core clearing and settlement organizations and firms that play 

significant roles in critical financial markets will be able to participate in the financial 

system in times of wide-scale disruptions. Recovery-time objectives provide concrete 

goals to plan for and test against. They should not be regarded as hard and fast deadlines 

that must be met in every emergency situation. Indeed, the agencies recognize that 

various external factors surrounding a disruption such as time of day, scope of disruption, 

and status of critical infrastructure -- particularly telecommunications -- can affect actual 

recovery times. 7 Furthermore, recovery time objectives might not be achievable 

following a late-day disruption without an extension of normal business hours. 

Market participants agree that core clearing and settlement organizations must 

meet more aggressive recovery-time objectives than firms that play significant roles in 

critical financial markets. This is because core clearing and settlement organizations are 

necessary to the completion of most transactions in critical markets; accordingly, they 

must recover and resume their critical functions in order for other market participants to 

process pending transactions and complete large-value payments. It also is reasonable to 

assume that there will be firms that play significant roles and other market participants in 

locations not affected by a particular disruption that will need to clear and settle pending 

transactions in critical markets. Therefore, core clearing and settlement organizations 

should plan both to recover and resume their processing and other activities that support 

critical markets. In light of the large volume and value of transactions/payments that are 

cleared and settled on a daily basis, failure to complete the clearing and settlement of 

pending transactions within the business day could create systemic liquidity dislocations, 

as well as exacerbate credit and market risk for critical markets. Therefore, core clearing 

and settlement organizations should develop the capacity to recover and resume clearing 

and settlement activities within the business day on which the disruption occurs with the 

overall goal of achieving recovery and resumption within two hours after an event.8

 Core 

clearing and settlement organizations also should develop plans for communicating with 

participants during a disruption to facilitate their rapid recovery. 

 

7

 A number of firms have expressed concerns about the resilience of telecommunications and other critical 

infrastructure, and the current limitations on an individual firm’s ability to obtain verifiable redundancy of 

service from such carriers. Firms that establish geographically dispersed facilities can achieve additional 

diversity in their telecommunications and other infrastructure services, which will provide additional 

resilience in ensuring recovery of critical operations. A number of financial firms are sponsoring industrywide efforts to explore common infrastructure issues and approaches. 

8

 This includes recovery of clearance and settlement activities that would normally be performed by core 

clearing and settlement organizations and significant firms within a particular market’s business hours on 

the day of the disruption. These activities include inputting material transaction data or payment 

instructions, and performing all steps necessary to clear and complete material transactions on their regular 

value or settlement dates. 
10

The ability of firms that play significant roles in critical financial markets to 

recover clearing and settlement activities depends on the timing of the recovery of core 

clearing and settlement organizations for those markets. For planning purposes, firms 

should assume that core clearing and settlement organizations will recover and resume 

clearance and settlement activities within the business day of the disruption. 

Accordingly, firms that play significant roles in critical financial markets should plan to 

recover clearing and settlement activities for those markets as soon as possible after the 

core clearing and settlement organizations have recovered and resumed their operations 

and within the business day on which a disruption occurs. In some markets, such as 

wholesale payments, the banking industry has had long-established recovery benchmarks 

of four hours and the largest participants in the wholesale payments market have actively 

discussed the need for a two-hour recovery standard by such organizations. Firms that 

play significant roles in the other critical financial markets should strive to achieve a 

four-hour recovery time capability for clearing and settlement activities in order to ensure 

that they will be able to meet a within the business day recovery target.9

3. Maintain sufficient geographically dispersed resources to meet recovery 

and resumption objectives. Recovery of clearing and settlement activities within target 

times during a wide-scale disruption generally requires an appropriate level of geographic 

diversity between primary and back-up sites for back-office operations and data centers. 

The agencies do not believe it is necessary or appropriate to prescribe specific mileage 

requirements for geographically dispersed back-up sites. It is important for firms to 

retain flexibility in considering various approaches to establishing back-up arrangements 

that could be effective given a firm’s particular risk profile. However, long-standing 

principles of business continuity planning suggest that back-up arrangements should be 

as far away from the primary site as necessary to avoid being subject to the same set of 

risks as the primary location. Back-up sites should not rely on the same infrastructure 

components (e.g., transportation, telecommunications, water supply, and electric power) 

used by the primary site. Moreover, the operation of such sites should not be impaired by 

a wide-scale evacuation at or the inaccessibility of staff that service the primary site. The 

effectiveness of back-up arrangements in recovering from a wide-scale disruption should 

be confirmed through testing. 

Core clearing and settlement organizations have the highest responsibility to 

develop resources that permit the recovery and resumption of clearing and settlement 

activities within the business day. Accordingly, these organizations should establish 

back-up facilities a significant distance away from their primary sites. Core clearing and 

settlement organizations that use synchronous back-up facilities or whose back-up sites 

depend primarily on the same labor pool as the primary site should address the risk that a 

wide-scale disruption could impact either or both of the sites and their labor pool. Such 

organizations should establish even more distant back-up arrangements that can recover 

and resume critical operations within the business day on which the disruption occurs. 

 

9

 As markets and clearance and settlement systems move toward longer operating hours, there may be less 

flexibility to extend processing hours. This underscores the importance of achieving recovery time 

objectives within the business day’s normal processing periods to the fullest extent possible. It also 

underscores the importance of ensuring that internal processes can be performed in the event that business 

hours are extended beyond midnight. 
11

Firms that play significant roles in critical financial markets should maintain 

sufficient geographically dispersed resources, including staff, equipment and data to 

recover clearing and settlement activities within the business day on which a disruption 

occurs. Firms may consider the costs and benefits of a variety of approaches that ensure 

rapid recovery from a wide-scale disruption.10 However, if a back-up site relies largely 

on staff from the primary site, it is critical for the firm to determine how staffing needs at 

the back-up site would be met if a disruption results in loss or inaccessibility of staff at 

the primary site. Moreover, firms that use synchronous back-up facilities or whose backup sites depend primarily on the same labor pool as the primary site should address the 

risk that a wide-scale disruption could impact either or both of the sites and their labor 

pools. As part of their ongoing planning process, firms with such back-up arrangements 

should strive to develop even more distant data back-up and operational resources that 

prove sufficient to recover clearing and settlement activities within the business day on 

which the disruption occurs. The business continuity planning process should take into 

consideration improvements in technology and business processes supporting back-up 

arrangements and the need to ensure greater resilience in the event of a wide-scale 

disruption. Interim steps a firm may take should be compatible with the objective of 

establishing even more distant back-up arrangements. The agencies expect that, as 

technology and business processes supporting back-up arrangements continue to improve 

and become increasingly cost effective, firms will take advantage of these developments 

to increase the geographic diversification of their back-up sites. 

4. Routinely use or test recovery and resumption arrangements. One of the 

lessons learned from September 11 is that testing of business recovery arrangements 

should be expanded. It is critical for firms to test back-up facilities with the primary and 

back-up facilities of markets, core clearing and settlement organizations, and third-party 

service providers to ensure connectivity, capacity, and the integrity of data transmission. 

It also is important to test back-up arrangements with major counterparties and 

customers, as appropriate. Such testing ensures that recovery objectives are achievable 

and that staff and necessary external parties are sufficiently informed. 

Core clearing and settlement organizations should periodically test recovery and 

resumption plans at all of their back-up sites. Test scenarios should include wide-scale 

disruptions that affect the accessibility of key staff; demonstrate the ability to recover and 

resume within the business day; and aim for a two-hour recovery time. Core clearing and 

settlement organizations should require participants to test connectivity between their 

primary and back-up sites and those of the core clearing and settlement organizations. 

 

10 Examples of such arrangements range from maintaining a fully operational geographically dispersed 

back-up facility for data and operations to utilizing outsourced facilities in which equipment, software, and 

data are stored for staff to activate. Firms are addressing critical staffing issues in various ways, such as 

cross training, utilizing staff at underused systems to share or shift loads, rotating employees off-site, and 

establishing work shifts. A number of firms use outsourced back-up solutions for recovering clearing and 

settlement activities and data storage. However, numerous commenters expressed concern about the small 

number of recovery facilities, their lack of geographic diversity and the cost of ensuring availability of 

facilities during a wide-scale disruption. Firms that use outsourced back-up solutions should take into 

consideration any heightened risks that could affect access to those facilities during a wide-scale disruption. 
12

They also may wish to consider organizing a broader industry stress test to ensure that 

recovery systems are consistently robust across critical market participants. 

Firms that play significant roles in critical financial markets should routinely use 

or test their individual internal recovery and resumption arrangements for connectivity, 

functionality, and volume capacity. Firms that establish back-up sites within the current 

perimeter of synchronous back-up technology or that rely primarily on staff at the 

primary site should confirm that their plans would be effective if a wide-scale disaster 

affects both sites. Firms also are encouraged to take advantage of testing opportunities 

offered by markets, core clearing and settlement organizations and third-party service 

providers to ensure connectivity, capacity and the integrity of data transmission. Firms 

are encouraged to continue to work cooperatively with their core clearing and settlement 

organizations and trade associations to design and schedule appropriate industry tests to 

ensure the compatibility of individual recovery and resumption strategies across critical 

markets. 

Implementation of Sound Practices 

Cost-Benefit Considerations. The agencies recognize the importance of costeffective business continuity planning. The costs associated with implementing the 

sound practices can vary substantially depending on the extent to which incremental 

improvements may be needed to address the risks of a wide-scale disruption. Some firms 

that play significant roles in critical markets may find that they need to implement only 

relatively minor improvements to their back-up arrangements. Other firms may find it 

necessary to adopt a more robust technology or upgrade software applications in order to 

achieve recovery objectives identified by the sound practices. To mitigate the costs of 

these enhancements, firms may wish to integrate them into the strategic planning process 

(e.g., coordinate with planned enhancements to facilities, information system components 

and architecture, and business processes). 

 Firms should recognize that adoption of the sound practices will help to reassure 

their counterparties and customers that they can rapidly regain their ability to clear and 

settle transactions in critical markets. Similarly, firms participating in the financial 

system would enjoy greater assurance that critical market participants will be able to 

withstand a wide-scale disruption and meet their payment and settlement obligations, 

thereby minimizing the potential for cascading fails and resulting systemic risk. Firms 

report that market forces clearly recognize the interdependent nature of the financial 

system, and customers and counterparties increasingly expect firms to demonstrate their 

ability to continue operations should a wide-scale disruption occur. 

Implementation by core clearing and settlement organizations. Core clearing 

and settlement organizations should continue their accelerated efforts to develop, 

approve, and implement plans that substantially achieve the sound practices by the end of 

2004. Plans should provide for back-up facilities that are well outside of the current 

synchronous range that can meet within-the-business-day recovery targets. On a case-bycase basis, core clearing and settlement organizations can be given additional time to 
13

complete implementation of back-up facilities that are well outside the current 

synchronous range, so long as they take concrete, near-term steps that result in 

substantially improved resilience by the end of 2004. The amount of flexibility will be 

measured against factors such as board of directors and senior management’s 

commitment to approved budgets, and adherence to aggressive timetables and interim 

milestones. Plans should include measurable milestones to assess progress in achieving 

the sound practices. 

Implementation by firms that play significant roles in critical markets. 

Firms that play significant roles in critical financial markets should develop, approve and 

implement plans that call for substantial achievement of the sound practices as soon as 

practicable, but generally within three years of publication of this paper.11 In some cases, 

a firm may find it in necessary to provide for a longer implementation period in light of 

its respective risk profile, level of resilience, and unique business circumstances. All 

plans should incorporate interim milestones against which progress can be measured and 

should provide for ongoing consideration of the costs and benefits of achieving greater 

geographic diversification of back-up facilities. 

Role of Senior Management and Boards of Directors. The agencies believe, 

and industry participants confirm, that incorporation of the post-September 11 business 

continuity objectives and sound practices discussed in this paper raises numerous shortand long-term strategic issues that require continuing leadership and involvement by the 

most senior levels of management. These issues must be considered in light of a firm’s 

dependencies on other market participants and the need to achieve a consistent level of 

resilience across firms. Boards of directors should review business continuity strategies 

to ensure that plans are consistent with the firm’s overall business objectives, risk 

management strategies, and financial resources. Decisions about overall business 

continuity objectives should not be left to the discretion of individual business units. 

Conclusion 

After September 11, financial industry participants initiated a significant review 

of lessons learned with a view towards strengthening their business continuity plans. The 

agencies believe that it is important for financial firms to improve recovery capabilities to 

address the continuing, serious risks to the U.S. financial system posed by the postSeptember 11 environment. Financial industry participants have demonstrated a keen 

commitment to ensuring the continued viability of the U.S. financial system by 

strengthening their own business continuity plans to address the risk of a wide-scale 

disruption. Over the past year, significant short- and longer-term improvements have 

been made to business recovery plans. Financial industry participants recognize the 

importance of continuing senior management involvement in achieving the sound 

practices discussed in this paper. Firms also are participating in industry initiatives aimed 

 

11 The agencies will contact each firm that appears to meet the market share thresholds and, if they 

conclude that the firm plays a significant role in one or more critical markets, will review the firm’s plans 

for implementing the sound practices. The agencies also will monitor implementation of those plans. 
14

at improving private-sector coordination and ensuring that business recovery plans are 

compatible and that an appropriate level of robustness is achieved among peers. 

The agencies recognize that achievement of the sound practices could be a multiyear endeavor for some organizations and that it is not necessary or appropriate to 

prescribe any specific technology solution for implementing the sound practices. The 

agencies urge all financial system participants to continue efforts over the long term to 

ensure that critical U.S. financial markets have appropriately robust recovery capabilities 

and can respond to a wide-scale disruption by adopting the sound practices to the fullest 

extent practicable. Finally, the agencies encourage financial firms that are not deemed to 

be a core clearing and settlement organization or a firm that plays a significant role in 

critical markets to review and consider implementation of the sound practices, 

particularly if a firm’s transactions levels approach those deemed to be significant. 

By order of the Board of Governors of the Federal Reserve System, April 7, 2003. 

 

Jennifer J. Johnson (signed) 

_________________________________________ 

Jennifer J. Johnson 

Secretary of the Board 

 

Dated: April 7, 2003 

 

John D. Hawke, Jr. (signed) 

_______________________ 

John D. Hawke, Jr., 

Comptroller of the Currency 

 

By the Securities and Exchange Commission. 

Margaret H. McFarland (signed) 

___________________________________________ 

Margaret H. McFarland 

Deputy Secretary 

Date: April 7, 2003