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26–505 PDF 2006

FINANCIAL SERVICES SECTOR PREPAREDNESS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 26, 2005

Serial No. 109–124

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on September 26, 2005 ..................................................................... 1

Statement of:

Allen, Catherine, chief executive officer, BITS, the Financial Services

Roundtable; Donald Donahue, chairman, Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland

Security; Samuel Gaer, chief information officer, New York Mercantile

Exchange, Inc., chief executive officer, NYMEX Europe Limited; and

Steve Randich, executive vice president of operations and technology

and chief information officer, the NASDAQ Stock Market, Inc. ............... 60

Allen, Catherine ........................................................................................ 60

Donahue, Donald ....................................................................................... 88

Gaer, Samuel ............................................................................................. 101

Randich, Steve ........................................................................................... 114

Kelly, Raymond, police commissioner, city of New York .............................. 6

Parsons, D. Scott, Deputy Assistant Secretary, Critical Infrastructure

Protection and Compliance Policy, Department of the Treasury; R.

James Caverly, Director, Infrastructure Coordination Division, Department of Homeland Security; and Daniel Muccia, first deputy superintendent of banks, State of New York Banking Department .................. 22

Caverly, R. James ...................................................................................... 30

Muccia, Daniel ........................................................................................... 41

Parsons, D. Scott ....................................................................................... 22

Letters, statements, etc., submitted for the record by:

Allen, Catherine, chief executive officer, BITS, the Financial Services

Roundtable, prepared statement of ............................................................. 65

Caverly, R. James, Director, Infrastructure Coordination Division, Department of Homeland Security, prepared statement of ........................... 33

Donahue, Donald, chairman, Financial Services Sector Coordinating

Council for Critical Infrastructure Protection and Homeland Security,

prepared statement of ................................................................................... 90

Gaer, Samuel, chief information officer, New York Mercantile Exchange,

Inc., chief executive officer, NYMEX Europe Limited, prepared statement of ........................................................................................................... 105

Kelly, Raymond, police commissioner, city of New York, prepared statement of ........................................................................................................... 9

Muccia, Daniel, first deputy superintendent of banks, State of New York

Banking Department, prepared statement of ............................................. 42

Parsons, D. Scott, Deputy Assistant Secretary, Critical Infrastructure

Protection and Compliance Policy, Department of the Treasury, prepared statement of ........................................................................................ 24

Platts, Hon. Todd Russell, a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 3

Randich, Steve, executive vice president of operations and technology

and chief information officer, the NASDAQ Stock Market, Inc., prepared statement of ........................................................................................ 116

(1)

FINANCIAL SERVICES SECTOR

PREPAREDNESS

SEPTEMBER 26, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY, COMMITTEE ON GOVERNMENT REFORM, Brooklyn, NY.

The subcommittee met, pursuant to notice, at 10:07 a.m., at the

Brooklyn Law School, 250 Joralemon Street, Brooklyn, NY, Hon.

Todd Russell Platts (chairman of the subcommittee) presiding.

Present: Representatives Platts and Towns.

Staff present: Michael Hettinger, staff director; Tabetha Mueller,

professional staff member; Daniel Daly, counsel; and Adam Bordes,

minority professional staff member.

Mr. PLATTS. A quorum being present, this hearing of the Committee on Government Reform Subcommittee on Government Management, Finance, and Accountability will come to order.

I’d like to thank first the Brooklyn School of Law and my esteemed colleague and ranking member of our subcommittee, Mr.

Towns, for hosting this field hearing here in Brooklyn. We’re here

in New York because this is the heart of our Nation’s financial sector. On September 11, 2001, terrorists destroyed the World Trade

Center in an attempt not just to murder and maim, but to dismantle our economy. With the backdrop of two destructive hurricanes,

we see that any disaster, whether natural or man made, requires

us to be well prepared. This hearing is about the preparedness of

the financial sector in particular.

The rapid recovery of the financial infrastructure after September 11th inspired confidence throughout America. The U.S. Treasury securities market opened just 2 days later and the equities

market was in full operation by September 17th. Still, Congress,

the executive branch and industry realized that financial firms

would need new contingency plans. The Federal Government in

partnership with local governments and the private sector responded with a variety of initiatives. Many of these post September

11th improvements were tested during the massive power blackout

on August 14, 2003. All indications after the blackout were that improvements put in place after September 11th helped mitigate the

damage that could have resulted from the infrastructure shutdown

and panic the blackout caused. These results are encouraging.

The purpose of this hearing is to examine the present status of

financial market preparedness for wide scale disasters or disruptions, including efforts aimed at prevention, detection and reVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
2

sponse. This hearing will provide local, State and Federal Government officials and representatives from the private sector a chance

to discuss accomplishments and identify areas where improvements

and resources are still needed.

[The prepared statement of Hon. Todd Russell Platts follows:]

3

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Mr. PLATTS. We have a very distinguished group of witnesses, beginning with Mr. Raymond W. Kelly, police commissioner for the

city of New York. Commissioner Kelly, thanks for being with us.

Mr. KELLY. Thank you, sir.

Mr. PLATTS. Commissioner Kelly will be followed by Mr. D. Scott

Parsons, Deputy Assistant Secretary for Critical Infrastructure

Protection and Compliance Policy from the U.S. Department of

Treasury; Mr. R. James Caverly, Director of the Infrastructure Coordination Division at the U.S. Department of Homeland Security

and Mr. Daniel A. Muccia, first deputy superintendent of banks

from the State of New York Banking Department.

On our third panel will be Ms. Katherine Allen, chief executive

officer of BITS, the Financial Services Roundtable and Mr. Donald

Donahue, chairman of the Financial Services Sector Coordinating

Council for Critical Infrastructure Protection and Homeland Security; Mr. Samuel Gaer, chief information officer for the New York

Mercantile Exchange; Mr. Steve Randich, executive vice president

of operations and technology and chief information officer for the

NASDAQ stock market.

Thank you again all for being here today and we look forward

to your testimony.

I’m pleased now to yield to our ranking member, the gentleman

from New York, Mr. Towns, for purposes of an opening statement.

Mr. TOWNS. Thank you very much, Mr. Chairman. Thank you for

holding this hearing today in Brooklyn. I’d also like to thank our

police commissioner, Mr. Kelly, which I’d say is the finest commissioner this city has ever known or seen. He’s done a fantastic job

over the years. Always a pleasure to see you here.

Mr. KELLY. Thank you, sir.

Mr. TOWNS. I’m pleased to welcome our Government Management Subcommittee to our home town, Brooklyn, NY, New York

and look forward to our distinguished panel from both the public

and private sectors. The financial capital of the world, New York

remains a vital component of economic growth, both domestically

and abroad. Although political and economic alterations have

shaped and changed the marketplace in recent years, banks, brokers, government lenders and Wall Street have remained the backbone of our capital and currency markets from Brooklyn to Beijing.

The New York Stock Exchange alone accounts for approximately

2,800 companies with a combined market capitalization of nearly

$20 trillion. On an average day the New York Stock Exchange

trades nearly 11⁄2 billion shares for an average daily dollar volume

of roughly $50 billion. Stock and equity instruments, however, are

not the only source of economic reliability for our markets. Future

commodities and options trading at places such as the New York

Mercantile Exchange serve as a major investment vehicle among

institutional investors, pension funds and economic forecasters for

domestic and foreign companies. Imagine the crisis our domestic

manufacturers or agricultural sectors would be faced with if they

did not have access to a viable commodities trading platform for

energy products.

Recent events, however, beginning with the tragedy of September

11, 2001 have forced both government and industry at all levels to

reevaluate how well we are prepared to maintain stability and conVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
5

tinuity in the marketplace should another disaster occur. Such

events are not only fiscal in nature, as electronic attacks on our

electricity and telecommunication grids can prove as consequential

and costly as a physical attack.

The government and private sector have appropriately embraced

the need for stronger planning and coordination of activity since

September 11th and have successfully begun to incorporate riskbased activities in their plans to reduce the threats facing industry

and the physical infrastructure, human capital and personnel and

information sharing capabilities. Backup systems and fiscal entities

separate from current operations are now common among brokerage houses and trading platforms. Nevertheless, the various types

of threats facing our financial services sector require planning at

not only the Federal level, but at the State and local levels of government as well.

While the Department of Homeland Security may coordinate information sharing activities and threat level analysis, it would require the Metropolitan Transportation Authority, the New York PD

and the Office of Emergency Management to execute a broad-based

evacuation of Wall Street or southern Manhattan in the event of

a physical attack within the surrounding area. These activities

would require State authorities to reconfigure travel patterns on

interstate highways and area bridges to insure safety and orderly

evacuation activities. Furthermore, the functionality and reliability

of our telecommunication electricity and pipeline grids will require

both Federal and State coordination of activities in order to remedy

and preserve the security of our energy resources in the wake of

a disaster.

From this perspective, I hope our witnesses can demonstrate for

us a clear delineation of responsibilities among both government

and regulators and private sector participants. An underlying tenet

of our market-based model is the level of trust and transparency

investors both large and small can place in our institutions. It is

our responsibility for planning and executing an adequate level of

security and reliability for market activities that is shared at all

levels of government in concert with private sector participants.

Thus, I hope our witnesses will speak to this blueprint of coordination, execution and transparency to insure that our market remains the bedrock of economic growth for centuries to come.

Again, I’d like to thank all the witnesses for appearing today,

and on that note, Mr. Chairman, I yield back.

Mr. PLATTS. Thank you, Mr. Towns. We’ll commence with the

testimony of Commissioner Kelly. If you don’t mind, would you

please stand and be sworn in?

[Witness sworn.]

Mr. PLATTS. We’ll note that the Commissioner affirmed the oath

in the positive. We’ll proceed, we have a general guideline of about

5 minutes, but, Commissioner, we’re delighted to have you here

and the expertise you have, he may be giving you some guidance

on time, but we really would like to you take whatever time you

need to share your insights with us.

6

STATEMENT OF RAYMOND KELLY, POLICE COMMISSIONER,

CITY OF NEW YORK

Mr. KELLY. Thank you very much, Mr. Chairman and Congressman Towns. Good morning and thank you for inviting me today.

Defending this city, the financial capital of the world, from a terrorist attack is the No. 1 priority of the New York City Police Department. Accordingly, I’d like to focus my remarks today on the

preventive measures the department is taking against this threat.

As you know, one of the stated aims of Osama Bin Ladin and alQaeda is to target America’s economy. Shortly after the September

11th attacks, bin Laden himself exulted in the massive blows suffered by the U.S. economy, offering in an interview his own estimation of over $1 trillion in losses. We have no doubt that he seeks

to replicate that strike if possible.

Since then, we learned of another plan to target financial institutions in New York. This after authorities discovered detailed surveillance of the Stock Exchange and the Citigroup Center in the

laptop computer of an al-Qaeda operative captured in Pakistan last

year. This followed two additional al-Qaeda plots to target the city

in 2003; the first to bring down the Brooklyn Bridge and the second

to smuggle weapons through a garment district business into the

heart of Manhattan. These plots were foiled by increased police visibility and good intelligence sharing.

I cite them as evidence that New York City remains squarely in

the cross hairs. Consequently, nowhere else is the effort to prevent

another attack being undertaken with greater urgency. In addition

to the dollar cost, this has required that we divert 1,000 police officers to counter-terrorism duties every day, and engage in extensive

training and preparation. We’ve also undertaken a range of defensive measures to protect and harden the downtown financial district and enlist the support of the private sector.

Beginning in January 2002, we created a new bureau of counterterrorism and we restructured our intelligence division. We’ve recruited outstanding individuals with extensive Federal intelligence

and counter-terrorism experience to run them. We expanded our

presence on the Joint Terrorist Task Force with the FBI and we

posted detectives to seven other countries to enhance the flow of information we receive about any threats relevant to New York City.

We established one of the premier counter-terrorism training

centers in the Nation right here in Brooklyn. In addition to our

own core of 37,000 police officers, we have delivered training

through that center to the members of the New York City Fire Department, the Metropolitan Transportation Authority Police Department, New York State Police; Nassau, Suffolk, Westchester,

Rockland County Police and other agencies. We have also brought

in dozens of private security professionals from hotels, banks and

other institutions and trained them to better protect their facilities.

Through our Nexus program we are reaching out to businesses that

terrorists might seek to exploit. We want businesses to report any

unusual order or anomalies that might suggest terrorist involvement. Detectives have paid thousands of visits to businesses

throughout the city to increase their counter-terrorism awareness.

In July we launched a new initiative with the private security industry in New York called NYPD Shield. We are establishing a seVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
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cure Web site with training materials and threat information updates and we have offered detailed briefings on topics such as the

London bombing and the attacks on the Egyptian resorts at Sharm

el Sheikh. We also exchange threat information daily with the

city’s corporate and institutional security directors through an instant messaging system.

We have expanded the protection of critical infrastructure

throughout the region. We have created the threat reduction and

infrastructure protection program [TRIPS]. We’ve also divided critical infrastructure into five categories and assigned a team of detectives to cover each one. These investigators visit facilities throughout the city, identifying vulnerabilities and developing comprehensive protection plans with site managers to prevent attacks.

In 2003, at the beginning of the war in Iraq, we implemented a

comprehensive security plan known as Operation Atlas. Given the

ongoing terrorist threat Atlas remains in effect today. Broadly

speaking, Operation Atlas has tightened the protective net around

the city by increasing vigilance at entry points into New York and

by placing mass transit and other potential targets under much

greater scrutiny.

Turning to the financial district itself, beginning in 2002, the Police Department engaged in extensive collaboration with the New

York Stock Exchange and downtown business leaders to harden the

financial district. The area around the Exchange is the subject of

24-hour police presence under Operation Atlas, which includes visits by our heavily armed Hercules teams. We also established vehicle checkpoints at seven major intersections leading into the Exchange. Each is monitored by Stock Exchange security officers

trained by the NYPD. Each checkpoint is outfitted with Police Department recommended equipment, including Delta barriers and

sallyports to deter truck bombs; explosives screening points and

bomb-resistant guard booths. Further protection is offered by dozens of retractable bollards and heavy planters that restrict pedestrian and vehicle blow.

I want to note that as lower Manhattan continues to recover, and

continues its rebuilding process, we plan to dedicate significant resources and personnel to keep pace with the growth of business.

That includes the establishment of a coordination center where all

relevant law enforcement agencies and the private sector will be

represented. We look forward to Federal support of such an initiative.

Mr. Chairman, any viable counter-terrorism program must stress

prevention and response equally. And if, God forbid, New York City

is struck again by terrorists or any other disaster, the Police Department will be prepared to respond immediately. We have

trained approximately 12,000 of our officers in more advanced

chemical, biological and radiological response to an attack involving

weapons of mass destruction. We have also provided training to

nearly all of our uniformed personnel in the New Citywide Incident

Management System or SIMS, adopted last year by New York City.

The system provides a unified command structure that allows the

Police Department to work seamlessly with other first responders,

including the Fire Department, for any disaster.

8

We conduct daily exercises throughout the city in responding to

a terrorist attack. This constant training and drilling paid off during the blackout of 2003, when the Police Department was mobilized to protect the city from looting and potential disorder. There

were few arrests and disruptions were kept to a minimum.

As you know, while overall evacuation planning is the responsibility of the city’s Office of Emergency Management, the Police

Department would play a major role in such an event. One of our

most important responsibilities would be to secure key sites and

protect life and property during and after a major incident. We’re

fully prepared to do that.

On that note, I want to mention that last week we welcomed

back the second half of the 300-plus police officer contingent we

sent to Mississippi and New Orleans after Hurricane Katrina.

These officers took part in search and rescue operations and patrolled against looters. Along with the pride and satisfaction from

a job well done, the Police Department will undoubtedly learn from

that experience and we dispatched another joint New York City Police Department and Fire Department team to Texas to assist there

with Hurricane Rita.

Finally, Mr. Chairman, I want to emphasize that all of our preparations come at a steep price; about 180 million per year to maintain our daily counter-terrorism and intelligence activity. These are

ongoing operational costs to defend the city. While the Federal Government provides vital assistance for training, equipment and overtime, we still have huge expenses to cover. Regrettably, the influx

of Federal support one would expect to flow to New York as a result of living in the cross hairs has not been sufficient.

The Police Department is defending New York’s people, its infrastructure and the Nation’s financial assets from another terrorist

attack, yet a large proportion of the Federal homeland security

grant funding still is not targeted to threat. The Federal Government must invest realistically in protecting those areas the terrorists are likely to target again. Along with a few other major cities,

New York tops that list. Everything we know about al-Qaeda tells

us that this is true. It’s a lesson from our history that we simply

cannot afford to ignore.

Thank you for inviting me today, Mr. Chairman.

[The prepared statement of Mr. Kelly follows:]

9

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Mr. PLATTS. Thank you, Mr. Kelly, we appreciate your testimony

and glad to have an exchange with you. Just this past week we

saw with Mayor Bloomberg announcing the $6 million grant from

the Department of Justice regarding the interoperations of communications, through the city and the surrounding counties and boroughs of New York and New Jersey and that certainly goes to part

of your message about coordination and the ability to be on the

same page.

Can you expand a little bit on that effort and how that’s building

on the interoperable communications already in place since September 11th?

Mr. KELLY. We actually had interoperability capability before

September 11th and since September 11th it’s been reinforced and

practiced indeed. We emphasize and check our interoperability

channels every day. What this gives us is the ability to communicate with the surrounding areas; particularly Essex County in

New Jersey and Bergen County and Westchester County. So in the

event that our resources from those counties need to come into

New York City or we respond to their purposes, we can communicate more effectively.

So it’s certainly moving in the right direction. With support it

will take perhaps about a year to get that function.

We do have now interoperability with Nassau County, which is

contiguous to New York City, on our eastern border. So it’s, again,

part of the continuum to continuing to improve our ability to communicate.

Mr. PLATTS. The provision of the $6 million certainly is not perfect, and I know it’s a challenge to acquire sufficient funds. You’ve

touched in your testimony on the not-unlimited national funds,

that we do it in a smarter way.

Are there specific examples of where the things that are currently you’d like to see done that stand before Department of

Homeland Security or Justice to help fund some of the efforts here

that are most critical to your efforts regarding a possible terrorist

attack in general or specific to the financial sector?

Mr. KELLY. We incurred significant operational expenses to have

our counter-terrorism program in place, that is, in essence, overtime expenses. I mention it in my prepared remarks, we spend

about $180 million a year, Police Department, that is, to carry out

our counter-terrorism functions. That’s on top of other overtime expenses that we have in the normal course of protecting this city.

What we would like to see is in a general sense more money

made available for those operational expenses. Much of the money

that we have received is targeted for equipment and we certainly

appreciate that and we need it, but we’d like to see if at all possible

a broadening of the authority where we would get reimbursement

that enables us to pay for operational expenses, particularly overtime expense.

Mr. PLATTS. Your testimony talked about 1,000 officers a day.

That’s year round you have 1,000 officers involved in training related to counter-terrorism?

Mr. KELLY. Yes, sir. Either officers or full time equivalent officers. We’ve created a counter-terrorism bureau, we expanded our

intelligence division. We also have our preparedness program,

15

where we have responses, everyday drills where we take them off

of normal patrol duties, have them come to locations—it can be

throughout the city, but most of the locations, quite frankly, are in

Manhattan, so we mobilize twice a day, we’ll bring in as many as

100 radio cars, so two officers will come together twice a day to do

that.

We then take them, mobilize, and then go to sensitive locations

that we’re concerned about. They don’t go necessarily to the same

location every day. We make certain we change the face of what

we do, because we are concerned about reconnoissance going on. So

that’s part of our resource tactic, to make certain we constantly

change what we do. But in doing that, and in training, as you say,

it requires about 1,000 officers a day. So it’s a significant commitment on the part of the city at a time when, right now as we speak,

we are 4,500 officers below where we were in October 2000.

So not only have we reduced the head count because of budgetary reasons, we are supplying 1,000 officers for counter-terrorism

forces. We’re happy and it’s a credit to the great job that the police

officers of the city that crime is continuing to come down. As a result of their hard work, crime is down about 20 percent in the last

31⁄2 years in New York City. It still takes a lot of hard work, a lot

of effort, but we’re juggling a few of balls in the air, as you can see.

Mr. PLATTS. I think across the country, I’m not a veteran myself

of the military or a member of the law enforcement community and

both communities have my great respect and admiration and our

law enforcement here at home and the first responders are really

the heroes of this war on terror, certainly in New York and the

New York City Police Department.

In your coordination in trying to be prepared, whether it be communication or manpower, you talked about one, protecting infrastructure, and again, in the financial sector, or people in the—evacuation people if the financial sector was again targeted.

How is your coordination with National Guard? One of the challenges we saw in Katrina was how that coordination, Federal,

State and local occurred. How often do you train with, interact with

National Guard if they were trained to assist with either evacuation or control in New York City?

Mr. KELLY. There are actually National Guard troops in New

York City now, certainly at Grand Central Station, Penn Station.

When we have major events, we activate what we call an emergency operation center in Police Headquarters and we will have

representatives from many city agencies, State agencies, Federal,

including the National Guard, so they’re physically located with us.

I must also say private sector security also comes to our emergency

operations center. So we’re in the business of communicating and

coordinating with them, at least the ones—for instance, last, well,

it’s now, the U.N. General Assembly is ongoing, but a week and a

half ago we had the plenary session where we had more world

leaders that have ever come to one spot in one building before, it

was the 60th anniversary of the United Nations, so we activated

that and within that center was National Guard, military, so we

do it on a regular basis.

Mr. PLATTS. You mentioned the private sector in your NYPD

Shield program, trying to have that communication. How can you

16

describe the buy-in or the involvement of the private sector communities with NYPD?

Mr. KELLY. They very much want to be working with us and certainly we want that as well, so there’s a very collaborative, cooperative environment that exists in this city. We have had a program,

the APL program, it stands for Area Police Liaison Program, it’s

been in existence since the 1980’s, but we’ve strengthened that. We

communicate with the people in that group virtually every day, by

Blackberry, e-mail, letting them know what’s going on on a daily

basis. That program has been ongoing, as I say, and has been

strengthened.

Now, NYPD Shield is sort of an umbrella program that incorporates that and other programs that we have. It is a proactive attempt on our part to do training, to bring them even closer to us,

and it’s been very well received. We have a Web site and we keep

them informed of an ongoing situation. I said in my prepared remarks, we had a detailed briefing for them on the London bombings, we very much appreciate it. Just recently we had a briefing

on the Sharm el Sheikh bombings in Egypt. We had an officer assigned to Israel, he was able to go there, came back with specific

information. Showed him pictures, and as I said, we’re communicating on e-mail all the time. So that organization has about

1,000 members.

But these are security directors. I mean, they’re representative

of the major corporations in New York City. These are the security

people who really are protecting the financial services industry and

other industries as well. So I’m very encouraged about Shield and

I can only characterize our relationship with the private security

and private sector as being a very strong and collaborative one.

Mr. PLATTS. I have some additional questions, but I want to

yield. Before I do, I want to note that we’re joined by Dean Wexler

and I thank her for letting us be here today. As a law school graduate, I’m always hesitant to being in a moot court, I’m used to

being out there and being judged, but I guess we’re being judged

differently today, but I appreciate your hosting us. Mr. Towns.

Mr. TOWNS. I’d like to echo the chairman’s thanks, Dean, for allowing us to come in and also like to thank you, Commissioner, for

coming.

In terms of funding for first response, from the Federal Government, can you describe for us the flaws or barriers that may be inherent with the current process? What are some of the problems

that you see in the present process?

Mr. KELLY. As Mayor Bloomberg has stated many times and I’ve

gone to Washington and testified that we would certainly support

a funding allocation that would base totally on threat. To us it’s

logical. We see ourselves threatened and we would be the recipient

of more funding, with some formula based on threat or at least

more heavily based on threat than the existing formulas that were

put in place.

Having said that, I mean, we need the money, but having said

that, the Mayor has made certain that the department is getting

everything that it needs, that we need, and he said that on many

occasions. This strains the city’s budget, though, no question about

it. Money, we have to have a balanced budget every year, so the

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money that’s going to the Police Department, the Fire Department,

other first responders is being taken from somewhere else in the

city’s budget. So we believe that a threat-based formula, a total

threat-based formula makes sense in the post September 11th

world that we live in.

Mr. TOWNS. You mentioned in your comments earlier about communications and of course information sharing. Have the industry

stakeholders coordinated their certainly internal efforts with your

department? Do you feel that industry has made adequate progress

in developing comprehensive security practices that are appropriately based on risk and level of exposure? Do you feel comfortable?

Mr. KELLY. I think we can all do more. I think the private sector

can do more, but I think efforts are being made, some industries,

some companies do more than others. But, generally speaking, the

message is out there, and as far as our relationship with them, you

know, as I stated before, it’s a very cooperative and close relationship. However, I think private, the private sector has gotten the

message, but we could all do more.

Mr. TOWNS. Can you describe for us what lessons have been

learned from New York PD and the city since 2001 as to the value

of having industry and government as partners in informationsharing activities? Are there barriers to adequate information sharing that remain problematic for industry or Government participants? I’m concerned about this flow of information and communications.

Mr. KELLY. I believe it’s better than it’s ever been. As I said, our

Shield, NYPD Shield program is all about information sharing. It’s

very well received by the private sector. We want to get information out, the Federal Government wants to get information out.

There’s a whole, there’s an environment that supports information

sharing now as never before in government, so nobody is holding

on to information. Nobody wants to be caught holding on to information, quite frankly, so there’s a lot of sharing going on.

As I said, we had, in the London bombings, it was all public information, but we really got in the weeds with our private security

partners, giving them a lot more detailed information than most of

them had. And it’s our belief that the better informed they are, the

better able they are to protect themselves and thereby protect the

city. We can’t do it alone, that’s our message to them. We need

your eyes and ears, we need your active support, your active involvement.

So I think prior to 2001, sure, I mean, we just didn’t see the

threat as we should have, but since 2001, it’s gotten increasingly

better as far as the sharing of information at all levels of government and government with the private sector.

Mr. TOWNS. I yield back, Mr. Chairman. Thank you.

Mr. PLATTS. Thank you, Mr. Towns. On the threat-based allocation, I was just reading your testimony in preparation for the hearing. It gave me as a member from South Central Pennsylvania a

better idea of the challenges you face in allocation resources. In my

District we have Gettysburg and some national sites of significance

and certainly Philadelphia, but given how New York has been targeted not just in 2001, but in some of the intelligence since you refVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
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erenced, back to 1995, the allocation, it certainly helps me to better

understand the importance of that threat-based allocation approach.

When we were here for the convention last year and had a

chance to visit the Police Museum, times have changed from some

of what was shared in that museum to today. The fact that there

are seven officers deployed in other countries, being out there,

proactive in your intelligence efforts is quite a difference from 100

or so years ago.

One of the issues touched on about intelligence gathering and

sharing intelligence, certainly within New York City and all your

efforts, Federal, State and local, private sector. In Washington, one

of the changes we made from September 11th was the Patriot Act,

which was to allow information to be shared between those communities; intelligence gathering and law enforcement.

Are you able to share specific examples of how the changes we

made at the Federal level helped you at the local level here in New

York regarding intelligence gathering because of those statutory

changes of the Patriot Act?

Mr. KELLY. Well, the Patriot Act helps the Federal Government,

helps the FBI gather information, also exchange information or use

information internally. It eliminated or greatly reduced the wall

that existed in the FBI, for instance, between intelligence gathering and criminal investigation. So I know it’s helped.

I can’t give you specific examples where it applied to New York

City, but I can only assume like in certain cases, for instance, well,

the Peracca case which I mentioned in my prepared remarks, I can

only hope that helped in the investigation itself. It eases the flow

of information, to me that’s a good thing, inside the Federal Government.

Mr. PLATTS. Thank you. The private sector and the various efforts that you have ongoing, reaching out to them, is there any financial contributions by the private sector to the city of New York

or to the NYPD specific to acknowledge that there’s a benefit to

those private sector partners as well, maybe in a greater sense in

some of your efforts, because it’s really targeted, say, specifically to

the financial sector, are there any resources that are allocated by

them to your efforts?

Mr. KELLY. Of course, they would argue that their taxes are their

contribution.

Mr. PLATTS. I would readily agree with them, but it’s always

good to ask if they want to give more.

Mr. KELLY. I can give you one example, though, that there was

a contribution. That’s with the protection of the New York Stock

Exchange. I mentioned again in my prepared remarks how certain

intersections are protected by individuals trained by the NYPD.

Well, they’re paid for by the New York Stock Exchange. They also

pay for some paid detail police officers that we have assigned there,

but we have active duty on-duty police officers working there as

well. We have significant resources devoted down there, but they’re

paying for that heightened level of security there, and of course you

could argue that as we bring together security folks throughout industry and the financial services industry and we sort of task them

in an implicit way to do things for us, that they’re contributing.

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But that’s the only hard example that I can give you of contributions where the New York Stock Exchange had paid significant

amount of money for protecting the area around the Stock Exchange.

Mr. PLATTS. And I think a good example of that partnership,

public and private.

I want to conclude in your testimony, you talked about continuing to adapt, especially with the business community here in the

city with the coordination center between law enforcement and private sector and the need for Federal support for that initiative, and

I assume that means funding support.

I want to give you the opportunity to expand with Treasury and

Homeland Security who is here, and the two Members that are

here, maybe a little bit about what that is and the importance of

it.

Mr. KELLY. Yes, sir. The Freedom Tower is going forward at the

16-acre site of the World Trade Center. There will be other structures put in place there. Goldman Sachs has agreed to build onsite

26, which is right across from the Freedom Tower, so there’s going

to be a significant increase of people in the area and development,

of course the financial services sector is going to be well represented.

As that development goes forward, we are committed, the city is

committed to putting in additional resources in the area that will

involve both personnel, but also technology, and we’re studying

that now and moving forward with it.

One of the plans that we have as that goes forward is to put in

place, as I said, a coordination center, where we would have not

only appropriate law enforcement agencies there, for instance, Metropolitan Transportation Authority, Port Authority, our own police

personnel, Fire Department, but representatives from the stakeholders that will be there; the private sector security, and we envision that would be a 24-hour coordination center, and we’ve talked

to industry leaders, they’re enthusiastic about all this. But that’s

kind of our overall plan.

It’s going to be expensive. We think it’s important for us to provide additional protection in that area. Now, it will not only be limited to that area let’s say, below Chambers Street. It will also be

somewhat north. Some of the things we’re doing now are under our

Operation Atlas, as I said, we mobilize twice a day and send our

units out to sensitive locations. We use some of these resources to

do that, so it will be—it will help us in doing some of the coverage

that now we’re taking directly out of patrol resources and other

parts of the city.

So that’s kind of the overall plan. Yes, we certainly would like

to have Federal resources to help whenever it could.

Mr. PLATTS. Thank you. Mr. Towns, do you have other questions?

Mr. TOWNS. Yes, I do. Thank you very much, Mr. Chairman.

The recent disaster in the Gulf Coast region demonstrates for us

that major events do not have to be terrorist-related to have significant consequences. Have there been any significant efforts made by

the New York City Department of Police or the city itself to establish evacuation plans for, say, Wall Street or lower Manhattan in

the event of a major physical disaster? Have State and regional

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stakeholders, such as Port Authority or MTA, been proactive in developing a comprehensive plan to move large volumes of people

away from the disaster area in a safe and timely fashion? I guess

the last part would be how can the Federal Government assist you

in that process.

Mr. KELLY. We do have very comprehensive evacuation plans.

Evacuation plans are coordinated by the Office of Emergency Management, but the Police Department plays a significant role in carrying out those plans. We provide assistance in evacuations, going

to areas that may be evacuated. Search and rescue would be part

of the functions we would provide. We have a coastal storm contingency plan and we have an evacuation plan for the entire city. The

city is divided into 150 sectors, and there are elaborate plans for

that. As a matter of fact, Commissioner Bruno, the head of the Office of Emergency Management is testifying right now at the City

Council on those plans.

As far as the other stakeholders are concerned, yes, the Office of

Emergency Management works with the Port Authority, MTA. Obviously MTA would provide a significant amount of the transportation used to evacuate areas of the city. We have, as you well

know, Congressman, a very large public transportation system in

the city; subway and buses. The MTA would be an integral part of

any evacuation plan. Port Authority as well.

As far as Federal Government assistance, I can’t think of anything specific. I’m sure Commissioner Bruno can think of it, but I

can’t think of anything that comes to mind for me other than any

resources that could supplement what we’re doing, anything that

could help in the movement of people in a major evacuation, but

we are, we have plans to evacuate every sector of the city, not just

the financial district in lower Manhattan, but I must say that area

is in one of the flood plans.

If you look at our coastal storm contingency plan, you’ll see it’s

prefaced on certain assumptions; Category 1, 2, 3 and 4 storms. It

does not go up to 5, but it does go up to 4, and there are flood areas

in, say, lower Manhattan, that would be impacted by even a Category 1 storm. So there are plans to have an evacuation and also

plans to provide services in that area, if something like a large

storm hits us.

Mr. TOWNS. Let me say, Commissioner, we really appreciate your

involvement in the kind of information that you shared with us in

Washington, you know, but we need to sort of do a little bit more

to make certain they fully understand. Because when I say to my

colleagues in Washington that you have 1,000 police officers involved in counter-terrorism and they, knowing the Police Department is not even 2 percent the size of that, it’s hard to communicate with them what this really means, the impact of it. Do you

have any ideas or suggestions of what you might say to us or give

to us that we may further take back to our colleagues to try to convince them that New York is unique in so many ways, and that

this is the financial capital of the world and that New York is a

place that we need to make certain that is protected in every way.

So do you have anything that you might want to share with us further that we might be able to convey to our colleagues?

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Mr. KELLY. I think every part of America, indeed, significant

parts of the world would be adversely affected by another attack

in New York. We know that al-Qaeda’s goal is something bigger

and better than September 11th. They’re not looking at small bar

events in this city, they’re looking for something larger, and it’s

been stated in a lot of different ways. So anybody who thinks that

it just affects New York City or New York State is mistaken.

We’re protecting, as I said in my remarks, national assets. We’re

protecting assets that if they’re attacked, will have an adverse impact across the world. You look at the things I mentioned. Look at

New York Stock Exchange, you look at American Stock Exchange,

NASDAQ. You look at the financial services industry headquarters

that we have here. We have an attack here against any of those

institutions, it will reverberate throughout the world, and certainly

throughout America.

So I think that’s the message that has to go back to Washington.

We understand that people are concerned about their districts,

that’s what they’re in Washington for. But you also have to look

at the bigger picture. Because if we’re struck here, it’s going to hit

in some way, shape and form, every congressional district in America and it’s going to hit in a very hard way. The next event, God

forbid, if there is one, is going to be, unfortunately, at least in their

planning cycle, their planning minds, much larger than the last

one.

Mr. TOWNS. Thank you. I yield back.

Mr. PLATTS. Thank you, Mr. Towns. Thank you, Commissioner

for your insights. I appreciate certainly your current service here

in New York, but I also mark your great service as a combat veteran in Vietnam and your 30 years in the reserves. As a fellow citizen, I’m personally grateful for your dedication to all of us citizens.

Mr. KELLY. Thank you very much. Thank you, Mr. Chairman.

Mr. PLATTS. We’ll take about a 2-minute recess here while we get

our second panel: Mr. Parsons, Caverly and Muccia. Thank you.

[Recess.]

Mr. PLATTS. We’ll reconvene here and again we’re delighted to

have our second panel here: Mr. Scott Parsons, Deputy Assistant

Secretary, Critical Infrastructure Protection and Compliance Policy, Department of the Treasury. Glad to have you with us. Mr.

James Caverly, Director of the Infrastructure Coordination Division, Department of Homeland Security and Mr. James Muccia,

first deputy superintendent of banks.

Now that you’re all seated, if I could ask you all to rise, we’ll

swear you in and proceed with your testimonies.

[Witnesses sworn.]

Mr. PLATTS. You may be seated. The clerk will note all three witnesses affirmed the oath. We’ll proceed first with Mr. Parsons. If

you’d like to begin, and again we’ll use roughly a 5-minute guideline, but we’re glad to hear your testimony in full.

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STATEMENTS OF D. SCOTT PARSONS, DEPUTY ASSISTANT SECRETARY, CRITICAL INFRASTRUCTURE PROTECTION AND

COMPLIANCE POLICY, DEPARTMENT OF THE TREASURY; R.

JAMES CAVERLY, DIRECTOR, INFRASTRUCTURE COORDINATION DIVISION, DEPARTMENT OF HOMELAND SECURITY;

AND DANIEL MUCCIA, FIRST DEPUTY SUPERINTENDENT OF

BANKS, STATE OF NEW YORK BANKING DEPARTMENT

STATEMENT OF D. SCOTT PARSONS

Mr. PARSONS. Thank you very much. Chairman Platts, Ranking

Member Towns, thank you very much. We really appreciate the opportunity to be here today to testify on the financial services sector

preparedness to handle a wide scale disruption.

Mr. PLATTS. Mr. Parsons, do you mind holding that a little closer? I can hear you, but I’m not sure if everyone can. Thank you.

Mr. PARSONS. I am pleased to tell you that the financial sector

has made tremendous progress to insure its resiliency to withstand

both man-made and natural disasters. President Bush has led the

development and implementation of an effective program to defend

our country’s critical infrastructure. The financial services sector

plays an indispensable role in the Nation’s economic system, providing individuals, businesses and the government with credit and

liquidity, short and long term investments, risk transfer products,

various payment systems and depository services. It enables people

to save for their education, their retirement, to purchase their

homes and to invest in their dreams.

The financial services system is essential to America’s overall

economic well-being. I note that we have experienced a number of

events in recent years that test the resilience of the sector. The attacks of September 11, 2001, the power outage of August 15–16,

2003 and the elevated threat level for the financial sector of August

2004 have all tested the preparedness and resolve of the financial

services sector. Most recently, Hurricane Katrina caused unprecedented devastation in multiple States. Yet the financial system has

survived each of these events and through hard work and investment becomes stronger and better able to withstand such disruptions.

The President has mandated that the Federal Government work

closely with the private sector to protect the Nation’s critical assets

and infrastructure from major disruption. An important and unique

insight that guides this strategy is that nearly all of the financial

infrastructure is owned by the private sector, and, therefore, the

success of our protective efforts depends on close cooperation between the Government and the private sector. On December 17,

2003, the President issued Homeland Security Presidential Directive No. 7 which establishes a national policy for Federal departments and agencies to identify and prioritize U.S. infrastructure

and key resources and protect them from terrorist attacks. HSPD7,

as it’s known, recognized that various departments and agencies

have specific knowledge, expertise and experience in working with

certain sectors. Therefore, this directive provided for sector specific

agencies or lead agencies for given sectors and the Department of

Treasury has been designated as a sector specific agency for the

banking and finance sector.

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It is under this designation that Treasury collaborates with appropriate private sector entities and other governmental agencies

to encourage the development of information sharing and analysis

mechanisms and to support sector coordinating mechanisms with

the purpose of, No. 1, identifying, prioritizing and coordinating the

protection of critical infrastructure, and, No. 2, to facilitate the

sharing of information about physical and cyber threats,

vulnerabilities, incidents, potential protective measures and best

practices.

Secretary Snow has a very strong commitment to insuring that

the financial system continues to serve all Americans. The Nation’s

economy has been a constant target of terrorists who wish to do us

harm. A consistent part of the rhetoric from Osama bin Ladin and

others is the overall ideology to attack our Nation’s economy, to attack the financial system to support it and to try to do us harm

in this manner.

Secretary Snow has tasked the Treasury Department’s Office of

Critical Infrastructure Protection and Compliance Policy to be responsible for developing and executing policies affecting both the

physical and the cyber security of the U.S. financial system. The

majority of these efforts require close cooperation and partnership

with the public and private sector, and there are a number of important groups that we work with to achieve this end. One is the

Financial and Banking Information Infrastructure Committee. This

is a body of all of the Federal and State financial regulators and

the Treasury Department is the Chair of this committee.

The second is a private sector body, the Financial Services Sector

Coordinating Council. You’ll be hearing from the Chair of the

FSSCC, as it’s known, later on this morning.

We also utilize an important information sharing mechanism

called the Financial Services Information Sharing and Analysis

Center or the FS–ISAC. That is a body that is run by the private

sector with the sole purpose of disseminating critical physical and

cyber threat information to the financial services sector members.

And last, I would mention an important development, something

that we think holds great promise and that is the creation of regional coalitions. I note specifically, Ranking Member Towns mentioned the futures industry. The first coalition of this nature is

called ChicagoFIRST. It was based in Chicago with the recognition

that the futures industry plays a prominent role in that city, and

its goal by its members was to advance homeland security protective measures, specifically with local emphasis on it.

We believe that this was a great model and we were able to partner with several other entities, including BITS, to document the

steps that went into creating this and we’ve since published that

document. I’m pleased to tell you that there is considerable focus

on this initiative within the Department of Treasury and we are

close to seeing some new announcements for new regional coalitions that will involve not only those on the east coast, but hopefully the west coast as well.

With that, Mr. Chairman, I conclude my opening comments.

[The prepared statement of Mr. Parsons follows:]

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Mr. PLATTS. Thank you, Mr. Parsons. Mr. Caverly.

STATEMENT OF R. JAMES CAVERLY

Mr. CAVERLY. Mr. Chairman, Mr. Towns thank you for having us

here today. What I’d like to do is summarize my comments and

enter my statement into the record.

As we’re all aware, protecting the Nation’s critical infrastructure

is really a partnership and it’s a new kind of partnership between

the owners and operators of that sector. Most of them being in the

private sector and then State government, local government and

Federal Government. Your panel of witnesses today I think does a

great job of exemplifying exactly what kind of partnership needs to

be there to insure that the Nation’s critical infrastructure is protected the way we need to protect it.

Clearly, the events of September 11th, the power outage of 2003,

then the casing reports heightened financial alerts in 2004 identifies the impacts that terrorism or threats of terrorism can have to

the financial communities of this country and as Police Commissioner Kelly said, those impacts will reverberate across the country.

The Department of Homeland Security really has three principal

objectives when dealing with critical infrastructure. One is to provide the resources and training to State and local government and

law enforcement training for security enhancements. The other is

to provide information to those various levels, whether they’re the

owners and operators of the individual components of the Nation’s

infrastructure, to local level law enforcement, State law enforcement and then across the Federal partnership of the kind of information that is necessary for each of those people to create risk assessments and react appropriately within the environment in

which they’re responsible for. And then underneath that is the creation of a fluid and viable information-sharing mechanism that will

allow us to get the information quickly out to the points of decision

and bring back information into the analytical framework that allows to us look at this as a total picture.

As Mr. Parsons identified, the President’s directive to his cabinet

contained in HSPD7, Homeland Security President’s Directive 7, a

key component of that is asking members of the private sector to

create a framework in which we can deal with the sector as an entity. The financial services sector was the first sector to come

across and create a single entity called the Sector Coordinating

Council, and you’ll be hearing from Mr. Donahue the head of the

FSSCC later. Looking at that and looking at what was done in

Treasury with some activities of our own, we implemented the National Infrastructure Protection Plan a framework across all of the

sectors to create a set of sector coordinating councils and government coordinating counsels that will allow us to act on this partnership. We believe the financial services has shown us a great

way in which to build this framework.

The other thing that HSPD7 directs the department to do is develop a National Infrastructure Protection Plan that is looking at

setting security goals, identifying assets and assessing new risks.

The NIPP plan was put out in a base plan in February of this past

year. The next version will be coming out shortly. Once we get the

base plan out in the next short timeframe, we’ll begin working with

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each of the critical infrastructure sectors to develop a sector specific

plan that focuses on each of the sectors and the activities the various players have to do both at Federal, State, local and also private sector level.

A key component of one of the things that the department is

working on is a risk assessment methodology. Secretary Chertoff

has made risk assessment a key component of his program to enhance the Nation’s critical security infrastructure. We developed a

Risk Assessment Methodology for Critical Asset Protection

[RAMCAP]. As we implement and develop the data inside, it will

allow us to assess the risk across the infrastructures and do it comparatively. Because of the connected nature of the infrastructure,

this is very, very important.

As I said earlier today, the panel here reflects a good level of the

coordination and integration that needs to take place. We believe

that the activities of August 2004, which led us to heighten the

Homeland Security alert level in New York and Washington in the

financial services sector is a very good example. As the intelligence

was developed, we began working very closely with NYPD and the

owners and operators and security directors in specific facilities

that have been surveilled. We were able to take very quick and appropriate action across not only the responsibility of what local law

enforcement and Chief Kelly were able to do, but also the owners

and operators were able to do and share information. We think

that is an example of exactly how this partnership should work because each of us has certain responsibilities in the framework.

One of the things about the financial services sector is the redundancy that is built into the system. Because of things that happened in the financial services sector in the 1980’s and 1990’s,

when in fact it lost power in lower Manhattan and when it lost

telecommunications at certain times, it built resiliency into its system. It has a very, very robust, resilient system to allow it, as the

chairman pointed out, to resume its financial operations quite soon

after taking a serious blow. We think that’s important.

The national communication system is part of Department

Homeland Security and we’re working closely with the financial

services sector to insure the telecommunication backbone for their

information flows has the kind of resiliency and redundancy necessary to insure that no matter what happens the transactional

part of that connectivity can continue.

One of the most important parts is a program we call ‘‘route diversity methodology.’’ It insures as you look at the networks of the

telecommunications that in fact all transactions are moving across

a very diverse network, as opposed to being funneled into single

hubs and therefore building a resiliency outside of that.

The last thing I’d like to make a brief comment about is Homeland Security Information Network. It is a framework the Department of Homeland Security is deploying that will allow us to connect to the various groups, whether regional groups or things such

as the Financial Services ISAC. It is a cohesive network that allows a sharing of information not only inside the sector, but across

sector lines and also across jurisdictional lines to insure that the

information part that flows either to or from the Department of

Homeland Security is accessible, whether it’s law enforcement inVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
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formation, first responder information or information that we receive from the private sector.

With that, Mr. Chairman, I’ll take your questions.

[The prepared statement of Mr. Caverly follows:]

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Mr. PLATTS. Thank you, Mr. Caverly. Mr. Muccia.

STATEMENT OF DANIEL MUCCIA

Mr. MUCCIA. Thank you, Mr. Chairman, and Congressman

Towns for allowing me to submit this testimony to you today on the

current status of financial market preparedness for wide scale disasters or disruptions.

I will briefly summarize the key points contained in the department’s written testimony. First, I do not believe that the financial

regulatory community or the banking industry have become complacent. The stakes are too high, and the reminders too frequent.

Certainly, if there was a threat of complacency setting in, the recent catastrophe in the Gulf Coast and New Orleans has served as

a powerful reminder that we can never be too prepared.

Second, effective communication and coordination between State

and Federal banking agencies is essential to rapid recovery. From

our perspective, the protocols set in place by the Financial and

Banking Infrastructure Information Committee, which Mr. Parsons

chairs, or FBIIC, have proved to be effective in improving communication and coordination. We understand from our fellow State

regulators in Louisiana that coordination with their Federal counterparts in response to Katrina have been excellent. We at the New

York State Banking Department know how valuable that communication and coordination is, as it was tested both during September 11th and the August 2003 power blackout. Third, our assessment of the readiness of the New York State banking institutions

we directly supervise is based on our ongoing supervision and onsite examination programs. Overall, our examiners are giving good

grades to our institutions. The small number of institutions that

are considered critical to the system are being held to a high standard of business resumption capability and are expected to meet current supervisory standards and targets. The vast majority of noncritical institutions have adequate plans and those missing the

mark are in the process of correcting deficiencies.

One area that we will be focusing on in the near term is testing.

More testing of business continuity plans is needed. Test results

need to be more carefully and vigorously audited and the scope of

testing needs to be widened. We are discussing how to achieve this

with the Federal banking agencies that share our supervisory responsibility over our institutions, and I expect formal guidance will

be issued in 2006.

Finally, we recognize that business continuity planning is a continuous process that requires our constant vigilance and attention.

We are committed to insuring our institutions are as prepared as

possible and thank Congress and this subcommittee for your continued support and attention to this critical challenge. Thank you.

[The prepared statement of Mr. Muccia follows:]

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Mr. PLATTS. Thank you, Mr. Muccia. I appreciate each of your

testimonies. Each of you I believe in your written testimony and

here today referenced an August 2003 blackout. It was in a sense

the first major test after September 11th here in the New York

area. The blackout was also a test especially throughout the northeast of how our new coordination was going to work. I’m interested

if each of you would want to share your perspective of how your

organization responded. Also, what will be especially informative is

the things that didn’t go as you expected 2 years after September

11th.

Mr. PARSONS. Sure. Our observation is, as you noted, Mr. Chairman, the power outage was indeed the first real test of the mechanisms that we put in place after September 11th. We felt they

worked very, very well for a couple of reasons. One is it was critical

to get information out to the sector as quickly as possible, and it

had to be an exchange of information. We knew there was a blackout, but we also wanted to find out what was happening in New

York City.

Those mechanisms worked very well. The communications that

we had built in were very effective in ascertaining the situation

and within 15 minutes or so we had a good understanding of what

exactly was going on. I would also note that they were instrumental in being able to help spread the word as quickly as possible.

This was in fact not a terrorist incident, which I think was very,

very important for everybody at that time to understand.

Additionally, it enabled us to convene, for example, all of the financial regulators to look for any problems that we may have had.

If there were any imbalances created due to the time of the incident, thankfully it came after the closing of most of the major markets. Were there any things or actions that we needed to do to immediately from a regulatory standpoint, and then also in working

with our private sector coordinating body, the FSSCC, we were

able to identify any needs that they may have had very quickly.

I think it’s important to note that the financial sector is extremely resilient and most of the firms here have well-drilled, wellthought-out backup emergency plans.

Nonetheless, we used this mechanism to find a couple of examples where we needed to intervene. One example of that is at the

American Stock Exchange. It needed a new generator so they could

cool its training floor. While working with the New York Office of

Emergency Management, we were able to coordinate the delivery

of that to help the AMEX get back on line quickly.

Very briefly, I would say there were some lessons learned for us.

One of them is the interdependency that we have on other sectors.

You heard Mr. Caverly talk about telecommunications. That’s a

very big concern for us in financial, but we also learned, for example, the need to resupply generators to—if we were going to have

a sustained outage, and we have subsequently through the FSSCC

convened meetings with other government agencies like the Department of Energy and the Department of Transportation to discuss these and other lessons that we learned not only from that

event, but from other pieces of our thinking on this as well.

Mr. PLATTS. Thank you.

48

Mr. CAVERLY. One of the things that it did was reinforced the

critical role that information sharing plays. There were existing

mechanisms prior to the creation of the department; relationships

between telecommunications and electricity specifically because of

their interdependency nature. Based on the activity that came out

of that, DHS has set up the National Infrastructure Coordinating

Center, to provide transparency. The lesson that moved us in that

direction was that on Friday morning after the blackout, as we

were talking to the telecommunications and electricity people, the

electricity people pointed out that power would not come on in Detroit until Sunday. The telecommunications people identified that

presented a significant program for their wireless nets, because

most of them depended on batteries, some on generators. They recognized they needed to bring more generators in as well as resupply the fuel to the generators that were there, but they didn’t have

existing relationships with suppliers.

We were able to take them and connect them up with the Michigan State Energy Office who knew all the suppliers and could

quickly make sure they had the supply they needed until the power

came back on.

It’s that kind of transparency and sharing of information that’s

critical to a situation like that. The media gives us some heads up,

but there are things that come from the operating parts that the

owners and operators know and we need to create a better more

fluid forum. The NICC is the process, and as we built the

connectivity it provides the capability for those extraordinary communications that have to take place in a crisis.

Mr. MUCCIA. I would agree with Mr. Parsons in terms of the

overall connectedness of communication. I think one of the things

that happened was some of the protocols we put in place that we

learned sort of ad hoc on September 11th we got to use in the

blackout event. It was a more formal structured way of communicating that helped get the word around more quickly. Our institutions did very well.

So overall in our department we exercised our plan and had representatives at the Federal Reserve in New York. We were in contact with SEMO and New York OEM. So overall, it worked very

well.

Mr. PLATTS. The lessons learned in that coordination, for example, the fuel to the generators to control and identify quickly what

the problem was, how did working with utilities, what was the

cause for that? I think you’re right to get the word out quickly to

the public that this is not a terrorist attack. It was a infrastructure

breakdown basically. I didn’t learn it as quickly as the rest of the

country, because I was tent camping in the Northwest at the time.

I learned about it a day late I think, behind everybody else. I was

removed from civilization with my wife and kids.

But in getting a handle of what did happen and how quickly

word did get out, given that the utilities are private sector, how did

that happen? You needed to learn here’s what happened, why it

happened and then share that publicly.

Mr. PARSONS. The first thing we determined very quickly is that

this is not an act of terrorism and that was simply done by—I

49

guess it would be a collection of information that flowed in all at

once.

Mr. PLATTS. Was it the private sector coming forward too?

Mr. CAVERLY. It was.

Mr. PARSONS. Both.

Mr. CAVERLY. To some degree you can understand the structure—the North American Electrical Reliability Council, which sets

the reliability standards for the electric industry is a central point

for information. They were on the phone by 3:30 that afternoon

identifying the cause of it, which was a rolling blackout caused—

they didn’t know initially what caused the system to start tripping

out, but they were able through their reliability coordinators in the

reliability region to identify that’s how it happened. Then you went

back to the operating center. So they built the picture quickly of

what the cause was, being able to talk.

So the information comes out of them very, very quickly into the

system. Remember, it is a regulated industry, so the reporting requirements are a little more structured than some other parts of

the private sector. In that case the information came out of it, as

well as the reporting you were getting in the media—there was no

report of explosions or other such things.

Mr. PARSONS. Mr. Chairman, it was also useful again to hear

from people in the affected city who were saying, ‘‘we don’t see any

explosions, we just see the lights have gone out. There’s no smoke,

there’s no fire.’’ I guess I would answer that it was kind of information flow both ways, to and from.

Mr. PLATTS. Mr. Muccia, you mentioned that you worked with

SEMO here in New York. Would that have been the case prior to

September 11th, your involvement, the Banking Department, immediately, being part of that Statewide effort in responding? Did

that change because of September 11th or would that involvement

of the Banking Department be there already?

Mr. MUCCIA. It really changed I think to a significant degree

with preparations for Y2K, where we really—we always had it

there, but I think in terms of taking it more seriously and being

more prepared, it started with Y2K and certainly September 11th

really brought it home.

Mr. PLATTS. Obviously, there’s an endless list of efforts we could

engage in and you’ve each highlighted some very important ones

that your organizations are now pursuing. There’s not an endless

sum of money out there, and so you need to be smart.

Last, we had a hearing on managerial cost accounting in trying

to make that cost benefit analysis on the Federal level in that case

in two or more departments; Veterans Affairs and Labor. In what

way does that go on with your respective organizations that you’re

trying to do that kind of cost to benefit? It kind of relates to the

Commissioner, the threat-based provision of funds, but internally

in your organization, how do you go about that?

Mr. PARSONS. That’s a very good question. We do have a limited

sum of money and as you noted, we could spend freely, but we can’t

do that. So what we try to do is we try to take a risk-based approach to our efforts at the Department of Treasury. What we’ve

first done is working with the other financial regulators, we’ve

identified the wholesale clearing payment system, which is really,

50

if you really think about it, it is the series of mechanisms and institutions that really make the financial system work, and we’ve chosen to direct our efforts to those entities, believing that we will get

a huge return that will in fact create a cascading effect and that

other firms will benefit from this knowledge and our efforts there.

We’ve embarked on a testing regime which is not focused on simply doing a test, it’s really focused on doing a plan, and that plan

involves the State and local officials and the affected institution,

the institution that we’ve all collectively identified or the series of

institutions. So it’s very targeted and at the end of the day we have

a plan that not only involves one center, but involves many of the

operating capacities within these given institutions.

So I guess I’d summarize by saying you really have to take a

risk-based approach in thinking about where will we get the best

return for our dollars, and we do think about it before we accentuate programs.

I would also add through our partnerships with the regulators

and with the Financial Services Coordinating Council we get a tremendous scale to our investment and it reaches a vast majority of

the financial sector.

Mr. CAVERLY. Secretary Chertoff is devoted to a risk-based approached in vulnerability and consequences related to the infrastructure. As you can imagine, the department has to look across

all 17 critical infrastructure sectors. The RAMCAP methodology

that I mentioned earlier allows us to look at the risks associated

across the sectors and ultimately prioritize and allocate across the

sectors the limited resources that are available.

It doesn’t do us particularly good if you have the best and most

resilient systems in the financial services sector and you haven’t

accounted for the risk to transportation or telecommunication risk

or cyber risk. So we have to look across all those components of a

very intertwined infrastructure and prioritize our assets on a risk

basis, so in fact we make the system resilient.

Mr. MUCCIA. We also use a risk-based approach in terms of our

supervision and examination and key to that is really our program

of CPC’s or resident examiners at critical institutions that we share

responsibility with the Federal Reserve or the FDIC, depending on

the institution. So we leverage off each other in terms of sharing

resources, responsibilities with the Federal banking agencies and

we use resident examiners on those key institutions to stay in

touch and in focus and we leverage off work. We can’t do it all ourselves, even the Federal banking regulators can’t. We leverage off

the work done by the businesses themselves, utilizing their internal audit reports and their external audit reports and their internal policies and procedures.

Mr. PLATTS. You mentioned in your answer about RAMCAP.

Where do we stand in that development deployment of that?

Mr. CAVERLY. The framework for the methodology has been developed across the spectrum. We are now doing modules across

each of the sectors. Obviously, that methodology is important as we

develop the NIPP plans for each sector-specific agency. So those are

scheduled to be completed later this fall for each of the sectors.

Mr. PLATTS. Thank you. Mr. Towns.

51

Mr. TOWNS. Thank you very much, Mr. Chairman. Let me begin

with you, Mr. Parsons. You talked about a regional coalition and

of course you talked about ChicagoFIRST. Many people are saying

that methodology should go further than Chicago, because there’s

extra cost involved.

My question is, ChicagoFIRST, I thought it should be New York

First, but that not being the case, could you tell us in terms of the

makeup of that and what it’s all about and is it true that the reason you’re having difficulty moving it forward is because of the additional resources that would have to be allocated in order for it to

be a reality.

Mr. PARSONS. Congressman Towns, I can tell you, ChicagoFIRST

is an interesting story. It started out with two participants for

large firms there who said, hey, we feel like we’re not getting adequate representation to the local level, at the local level for what

the financial services sector really needs. And that conversation led

to an idea which in turn led to collaboration and the result of this

over a period of time, including with the encouragement of the Department of the Treasury was the establishment of ChicagoFIRST.

I can comment on a couple of things related to funding. One is,

it is a self-funding organization. That is, its members have agreed

to pay dues to fund its effort. They have appointed an executive director who is a full time employee and who coordinates all of their

activity. They also have a president and they have a board of directors that oversees their operation. So I don’t believe that in the

case for ChicagoFIRST that funding has become a tremendous

issue at this moment in time.

What I would add, though, is we’ve been working actively to encourage the creation of other organizations like ChicagoFIRST in

other areas of the country, and we believe they’re extremely useful.

I would note it would have been very helpful, for example, to have

sort of a single point of contact that represented the financial services sector in New Orleans as we worked for the recovery of

Katrina. I think our mechanisms are working well. This would

have simply augmented and made our flow of information and our

exchange of needs and ideas more effective.

So we are hopeful that we’re going to have, in fact, we plan on

having an announcement on October 13th about the formation of

a new organization in Miami. We hope to have additional organizations as well.

Mr. TOWNS. Let me ask you, will you provide additional money

or resources to move this forward? I know you said there’s the different companies, agencies put money in, but are you willing to

also put additional resources in in order to make it a reality?

Mr. PARSONS. That’s a great question. We at this time, we have

not planned for specific investments toward the establishment of

these organizations, other than our work to go down and share

with them the documents I referenced in my opening remarks and

written testimony that we partnered with BITS on, a how-to model,

a how-to cookbook, if you will, to establish these organizations.

What we have done, though, and we’ve done this twice with the

case of ChicagoFIRST, is we have funded an exercise with

ChicagoFIRST as the point to test various aspects of response, recovery and generally trying to identify needs within the commuVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
52

nity, and I would tell you that we would plan on doing that for the

other regional coalitions as well.

Mr. TOWNS. There seems to be a lot of excitement around

ChicagoFIRST. I just want to share that with you. I think that’s

important.

Mr. Caverly, as the department moves forward with its reorganization under Secretary Chertoff, can you describe for us how the

new structure of DHS will improve the agency’s efforts to strengthen critical infrastructure protection activities? Will these new government structures have adequate authority and attention from

the Secretary? How do you anticipate the new Office of Intelligence

and Analysis improving upon the sharing of information between

public and private sector participants, such as the financial markets?

And also, I guess in terms of the issue of privacy, has that

popped up?

Mr. CAVERLY. Let me answer the question somewhat in a bit of

reverse order. On the privacy issue, privacy always remains a critical concern of the department, because as you look for the information that will help you do—identify the strengths, identify indications and warnings, we always run into the risk of having information on U.S. citizens that cause problems with existing privacy

laws. So we’re working very, very hard to insure that we get a robust information analysis system that doesn’t violate the rights and

privileges of the American citizens for the privacy of their personal

information.

So we work at it. It does present certain problems that each of

the units within the department have to work with based on the

kinds of information they need to build the picture that allows

them to assess risk, identify threat.

Relative to the Secretary’s reorganization, I think if you look at

it, the new rules proposed under the Secretary for preparedness if

you think about it, protection is a seamless framework that goes

from preparedness through protection to response and recovery. Because if you can respond and recover as quickly and efficiently as

possible, you reduce the impact, reduce the consequences of an

event, whether a natural event or man-made event, terrorist event.

So what the secretary has done in that case is combined into one

unit the responsibility for the preparedness which the administration recognizes in HSPD8 the responsibility for protection or prevention, if you want, in HSPD7 and the response and recovery

which is in HSPD5. So he brings together a framework that has

both the preparedness planning, the infrastructure protection planning and, obviously, the national response plan all into one framework.

The other thing I think that the Secretary’s reorganization recognizes is there’s a vast span of responsibilities in agencies of the department, and what he’s really set up is a framework that allows

the coordination and the sharing of information and the transparency necessary so that those various responsibilities resting

with individual agencies and organizations can complement each

other and not duplicate.

Mr. TOWNS. Right. Thank you very much.

53

Mr. Muccia, let me ask you, sharing information about potential

threats is viewed as a critical step in helping to insure the financial

institutions are better prepared to protect their operations from

disruptions. How is your organization assisting in providing such

information to financial institutions? I would assume that an electronic attack could easily be targeted on a small institution just as

it could a larger one. Are there additional barriers you can identify

for us in regards to effective information sharing practices that are

the potential solutions to this problem?

Mr. MUCCIA. Thank you, Congressman. You mentioned cyber attacks and New York has a cyber security office that concentrates

on those threats and gives advice to the industry, and one of the

mechanisms we actually have set up is a collection of those types

of events that gets centralized at the New York office and then

scrubbed of identifying information and then put out to the industry so they’re aware of what types of attacks are going on.

In terms of information sharing, in terms of a crisis, we have a

number of points of contact, where we will establish communications. One of them I already mentioned before, that is indeed our

resident examiners at individual critical institutions. For all institutions, including the small ones you talked about, we have numerous contacts available to them. Obviously, they kind of depend on

the telecommunication system working, but we have obviously contacts through cell phones, Blackberry, we have some satellite

phones available to the department, so in terms of the infrastructure we have as many different varieties; Internet, available.

If our offices in New York City—and we will reach out, part of

our plan is we like to be proactive and reach out to institutions to

find out what’s happening—if we’re disabled in our offices downtown, we switch to our offices in Albany. If we need to reactivate

our hot site within 24 hours, if we have to do that, we have numerous points of contact. We also have examiners who have given their

contact information, their home phones and so forth to various institutions, so we have a number of ways of doing it and then with

our programs of having representatives at the State Emergency

Management Office at their operations center, at the New York

City OEM office and at the Federal Reserve Bank of New York, we

therefore have numerous points of getting into contact.

Mr. TOWNS. Thank you very much. Let me just ask all of you

down the line, starting with I guess you, Mr. Parsons. You always

hear about communications, sharing of information, coordination,

you always hear this. Is there anything that Members of Congress

can do to improve or facilitate that in any way? I know you guys

hate for you us to stick our nose under the tent, I understand that.

Mr. PARSONS. Congressman, that is truly an excellent question.

You know, we’ve put a lot of effort, as you noted, to informationsharing mechanisms. I would note here today that Director Caverly

is working very hard on the further creation of the Homeland Security Information Network, which we wholeheartedly support and

we think that’s going to be an excellent mechanism. It will complement other things that we have currently in place.

Honestly, I think at this point I don’t have a good answer for

you, other than to say nothing comes to mind.

Mr. TOWNS. Right, OK, thank you.

54

Mr. CAVERLY. Congressman, I think there are two things. One is

something, not something Congress can fix, but is just getting the

two institutions, government and the private sector to understand

the information needs on both sides and be able to transfer them

into something that’s useful to them. The intelligence community

presents information in a certain way that is understandable to

professionals that have dealt with them for a long time, but not potentially understandable to a security director who has not been

engaged with them for a long time. Our job is to find ways to do

that and we’re working very much on.

I think the other issue, I think this is one where the legislative

entities across the country, whether they’re local, State or Federal,

need to continue to search for the right balance between the need

to have sensitive information protected so that it’s not in the public

domain versus the public’s right to have the information it needs

to form judgments. There’s a delicate balance, but we’re moving

into an area where the information needs to be shared between the

owners and operators, the infrastructure and the government, that

doesn’t need to be in the public domain, whether it’s vulnerability

information or intelligence, and we need to strive to find a balance

in those two very pressing needs.

Mr. MUCCIA. Congressman, nothing comes to mind right away. I

think in my limited world of banking supervision we’ve had a long

history of cooperating with the Federal banking regulators, State

and Federal, through our joint examination programs our joint supervision programs, so we’re very used to having this close coordination and communication.

Mr. TOWNS. Thank you very much.

Mr. PARSONS. Congressman, I just might add, Congress has already acted in a very beneficial way, that’s the Intelligence Reform

Act; working to bring down barriers between agencies that will

help us to share information both among ourselves and with the

private sector as well.

Mr. TOWNS. Thank you. I yield back to the chairman.

Mr. PLATTS. Thank you, Mr. Towns. Mr. Parsons made specific

reference to the Patriot Act, intelligence reform. We’re obviously

dealing with the reauthorization of that and trying to strengthen

some of the civil rights protections, but as I referenced to Commissioner Kelly, that information sharing, obviously, is critical to what

you do within the Federal department or in sharing information

with local entities like NYPD.

Mr. PARSONS. Yes.

Mr. PLATTS. I want to ask Mr. Caverly, you in talking about the

Infrastructure Protection Plan, that implementation going forward,

how often is that coordinated plan reviewed for—in response now

to Katrina and Rita, how would that process go forward? Is it a

weekly review, monthly review? Is there a set approach to it or is

it more just as we learn you go back and revise?

Mr. CAVERLY. I think there are several pieces of that. There is

a preparedness plan, which we’ve begun to work on with the department relative to the scenarios to be prepared to deal with and

that’s an iterative process that the Office of Preparedness will be

doing.

55

The National Infrastructure Protection Plan is still under development. We have a base plan framework that we put out an interim plan last February. The base plan will come back out for

comment to the American public shortly. Then there will be individual sector plans after that.

Currently the plan is for the Director to look at that annually.

We may look at that cycle and say maybe a biannual review, it

might be longer than that. Then ultimately the response down to

Katrina and Rita were all carried out under the National Response

Plan, which was an effort by the department based on congressional direction to combine a large set of Federal response plans

that were not connected in a single framework. So the National Response Plan put out a year and a half ago does that and that will

be a process to come back and see how well those integrated pieces

work down in the southern part of the country.

Mr. PLATTS. In developing the plans and getting feedback on how

to protect the infrastructure, and today we’re focused mostly on the

financial sector, but another part of infrastructure is chemical facilities, chemical plants. How much outreach—I’ll give you an example. I had a constituent came to me and my staff, then followed

up with the department in terms of how this was being addressed.

A driver for a company that does a lot of transportation of chemical, very volatile chemicals and his concern that when presented

with some of these plans, the identification, confirming that he is

who he’s supposed to be and entitled to pick up this very volatile

supply order, that it was very lax.

Do you reach out within the department where actually you go

to those drivers and randomly pick some; say, how do you see it?

Or, how do you get feedback?

Mr. CAVERLY. It’s a couple of things. There’s obviously security

protection advisers located around the country going out to facilities, visiting the supply chain part of those facilities to pick up that

kind of information.

Across something like the chemical sector, there’s a range of activities they do from something like the American Chemistry Council for the largest manufacturers that have a responsible care program for their security program, which is best practices for them.

Some of the other groups do. We created a Chemical Sector Coordinating Council along the lines that we’ve seen in financial services

for the intent of making sure that those kind of best practices,

those kind of knowledges, those protected activities can be translated across a wide range of different kinds of facilities, different

kinds of concerns and operational realities.

I think it’s a mix of the two things you identified.

Mr. PLATTS. I would encourage that outreach in that example

that the driver, his—as we’re doing more background checks on the

drivers so they can get their license and be approved. Say it doesn’t

mean a whole lot if someone bumps me off enroute, takes my spot

and pulls in and they don’t check to see he’s not me. That type of

outreach. Sometimes we look at that big picture and forget that the

guys are in the front lines, get their insights which are

sometimes——

56

Mr. CAVERLY. That highlights the interdependence of all of the

components. It’s not just a single component. It’s a system of systems.

Mr. PLATTS. It is. You have to look at the plan itself with the

transportation network that’s involved in distributing what that

plant is manufacturing.

Mr. Parsons, on the interagency capability sound practices to

strengthen the resilience of the financial system 2006 timeframe

we’re looking at for those protocols or those practices being put in

place, what’s your assessment of where this industry is as being

able to comply with that timeframe?

Mr. PARSONS. I believe the industry is well along, and I believe

they will comply with deadlines that have been set.

Mr. PLATTS. Is there any possible problems that may need to be

revisited or just that are not realistic or overall, are you optimistic?

Mr. PARSONS. Congressman, at this point I’ve heard of no problems, I’m not aware of any. So we remain optimistic the goals will

be met. I will take the opportunity to commend the sector because

they have been extraordinary in their response to this document

and they’ve made extraordinary investments and extraordinary

progress.

Mr. PLATTS. Great. The coordination. And Mr. Caverly this may

be specific to you, the coordination, again, of information being

shared here, it seems that we’ve seen tremendous success in the

private sector and public entity in sharing information, what’s happening and how we need to respond. We had a blackout in York—

old York, PA, not New York—a while back and one of the issues

that came to my office was there wasn’t a preestablished ability of

businesses to have direct access to utilities. Where all of us as residents want our refrigerators working, our lights on and air conditioners individually, but there are entities that affect a much greater population base because of the service they provide to the private sector, and so they ended up coming to me, because I had a

contact through my State House days in dealing with this utility

and we kind of became the conduit for information from the utility,

the private sector provider and timeframe to these businesses, especially food warehouses and things, so we could decide how are we

going to manage this problem long term.

We became that conduit. Obviously, it would have been better if

it was preestablished. What do you hear on that direct access specifically to the energy, to utilities with the financial sector in New

York?

Mr. CAVERLY. I think in New York, again, based on the history

that the financial sector has had with New York, it has very good

connectivity both in telecommunications and electricity. Again, unfortunately it’s because they had problems in lower Manhattan historically that did in fact move this up on the many things that

somebody has to consider in assigning their resources to.

I think what you highlight is the need to say one size doesn’t fit

all here; that we need things that operate on a local level, could

operate on a regional level and could operate on a national level

to insure that the kinds of information that you need to continue

your operation, the continuity of operations, is accessible to you.

57

The utilities are doing a much better job in putting information

now up on the web and having it accessible, but, again, if you’re

not used to looking for it there, it might take you some time to find

that information. They understand the benefit to them of having

that transparency out there and being able to get the information

out, particularly in a day of 7 by 24 news coverage where, clearly,

misinformation causes far more trouble frequently than not. So

there is a incentive for them to provide that kind of connectivity.

If you look at groups like ChicagoFIRST, if you look at the program that Commissioner Kelly talked about Apple in New York,

those local activities that provide that connectivity and dedicate the

time to be connected to understand where to get that information

is a thing that has to happen. So I think we all have a role to play

in getting to what you’re suggesting, which is the ability to have

the information needed to make the decisions when something happens.

Mr. PLATTS. And that’s great for a followup. When it’s information from your organizations to the private sector, some of that information is very sensitive intelligence information. How do you

handle or prepare for the transfer of sensitive intelligence with

those receiving entities? Do they go through a certain level of personnel background checks and things that they’re entitled to be

privy to to what you’re sharing?

Mr. CAVERLY. Unfortunately, the system that we have for protecting that national security information never envisioned what

we have now, which is part of the private sector, we have been able

to through a system of security clearances, etc., create a framework

in which we can get information to them. It’s not as efficient as

we’d like. Homeland Security Information Network, as we develop

the capability and adjust the flow of information, ultimately I think

will allow us to get information to the owner operators in their

place of decisionmaking. Right now it’s pretty awkward, because

we have to bring them into a classified facility, assure they have

a clearance, but one of the things we’re looking at is how can I be

sure I can give you quickly timely the information you need to

make that decision at the place where you need to make it, because

if you don’t, we can’t be as efficient as we want.

Clearly, with the financial institutions in New York, their leadership all have security clearance. We were able to work very closely

with them in sharing some of the most sensitive information last

August, because we knew the need of being able to share it with

them. But we were able to do that on an ad hoc basis and I think

we need to move to a much more systematic capability. But it requires changing our whole framework for protecting sensitive national security information that’s been in place for a long time and

that takes a lot of time.

Mr. PLATTS. In that review, that’s something the department is

engaged in, how it’s going to try to streamline that?

Mr. CAVERLY. How to streamline that, how to make sure the information can go to someone who has to act on it in a protected

way without it becoming cumbersome for them to have to receive

the information.

Mr. PLATTS. Thank you.

58

One final question, Mr. Muccia, that in your testimony you

talked about the review of the Institution Business Continuity Plan

and the importance of the board of directors’ senior management

being engaged in understanding and appreciating the importance

of this issue.

In those reviews, what is the norm? Is it the norm that the senior board members and executives understand that continuity disaster recovery is critical in today’s time that we now live in? Is that

the norm, or are there some that still don’t get it?

Mr. MUCCIA. Mr. Chairman, that is the norm today. I once had

a mentor who told me the key to success in business was if your

boss was interested in a topic, then all of a sudden you become extremely interested in that topic, and I think now the events that

we’ve had in the past and the examination programs that we’ve

have that really lie responsibility at the very top with the board

of directors. They know that we’ll be taking enforcement actions

against them if they’re not paying attention. They have paid attention and have pushed down that message to senior management

and have held them accountable. That’s where we see success.

When the board is active, when the board knows the plans, when

the board is monitoring the status of those plans; that’s when we’ve

had success with the institutions. We’ve had some smaller institutions that still have some work to do, but we are working with the

institutions to make sure they get the message.

Mr. PLATTS. I would share the message with your mentor. Those

are some wise words. I learned from my mom and dad. If my mom

or dad was focused on something, it was important for me to get

that done.

Mr. Towns, do you have any comments?

Mr. TOWNS. I just hope my staff is listening. I do have one more

question. I’d like to direct this to Mr. Scott Parsons.

Treasury released a report that essentially called for the ending

of the terrorism insurance backstop for insurance to provide terrorism insurance products to the marketplace. Many industry participants, including some of those before us today, have called for extending the authorization of such programs.

Can you describe for us the economic incentives or barriers that

are present in today’s market to justify such a decision? Won’t the

loss of the TRIA backstop provide less incentives for insurers to

private such coverage?

Mr. PARSONS. Congressman, I appreciate the question; appreciate

the spirit of the question. My response to you is the department did

issue a report and Secretary Snow has signed it and would I let

that report speak for the position of the department at this point.

Mr. TOWNS. No further comment?

Mr. PARSONS. No, sir.

Mr. TOWNS. Well, I can understand the sensitivity about it, but

you also need to understand our concerns.

Mr. PARSONS. Certainly.

Mr. TOWNS. We’ll drop it at that.

Mr. Chairman, I’ll close on that note, hoping, though, we could

get some kind of written response from the Treasury Department,

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ciate that, recognizing you might not be prepared to do that this

morning. We look forward to getting that. Mr. Chairman.

Mr. PLATTS. Exactly, Mr. Towns. I would suggest if the department will followup to the committee in writing, we’ll keep the

record open for about 2 weeks for that submission.

I want to thank each of you. I did have one final question in a

broad sense, because we certainly as fellow Americans are watching the devastation of the Gulf in recent weeks now with Katrina

and now Rita. We also appreciate in trying to help those citizens

and businesses recover the tremendous demands on the Federal,

State and local private sector. You read on how that’s going to impact your department and ability to continue all the other efforts

that are underway in Homeland Security, at Treasury and to have

your arms around the needs of the Gulf Coast, is there anything

you want to make sure we’re aware of that’s going to be challenging for your departments?

Mr. PARSONS. I would just make a general comment, Mr. Chairman, which is—it has been a very taxing month, and we have

worked very hard to make sure that the people who have been affected by these storms have financial services that they need to

conduct their lives, and I have to tell you I have seen some extraordinary work done at all levels; at the State level, at the local level,

at the Federal level, and especially the citizens and business owners who are down there.

What I would just tell you is that it has opened a new set of

thinking for us in terms of lessons learned, in terms of things that

we think we need to be doing as a next step in preparing the financial sector, so we anticipate a real effort to get some good lessons

learned out of this, but not just to have lessons learned, but to actually act on them and make sure. It’s our philosophy that we need

to make sure we understand what is happening and be better prepared for the next one.

Mr. CAVERLY. I think two things. The Secretary’s reorganization

saw the need to insure that we had a better balance between the

preparedness activities and the prevention activities and I think

this highlights that and his reorganization does it.

Second, I think it highlighted the changed nature of the expectation of the private sector and the government in restoring, particularly for those assets that have significant natural impacts such as

the pipelines, refineries, etc. and it increases our need for information sharing, for something simple as working to make sure the

aerial photography that we take very quickly after it gets to the

owners and operators who don’t have access to the sites they can

begin their response. We can share things that historically we did

not connect the two together so I think it will have that kind of

practical impact.

Mr. PLATTS. Thank you, again to each of you. We appreciate your

written testimonies, your testimonies here today and each of your

respective organization’s work of you and your colleagues on behalf

of our fellow citizens. Thank you.

We’ll take again a brief 2 minute recess where we’ll get our third

and final panel set up and reconvene shortly.

[Recess.]

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Mr. PLATTS. This hearing stands back in session. We’re delighted

to have on our third panel some members from the private sector

to share their insights. We have Katherine Allen, chief executive

officer of BITS Financial Services Roundtable; Mr. Donald

Donahue, chairman, Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland Security;

Mr. Samuel Gaer, chief information officer, New York Mercantile

Exchange, chief executive officer NYMEX Europe Limited; and Mr.

Steve Randich, executive vice president of operations and technology and chief information officer of NASDAQ Stock Market.

We appreciate each of you being here and we’ll ask if you could

stand and be sworn in and we’ll take your testimony.

[Witnesses sworn.]

Mr. PLATTS. Thank you. The clerk will note that all witnesses affirmed the oath in the affirmative. We would again appreciate your

written testimony. I call it my homework. When we were in school

on a regular basis, and we had that homework. They’re not the

only ones to get it and the written testimony gave Congressman

Towns and myself some great insights in preparation for this hearing. Again, we look forward to your oral testimony.

If you could try to keep it to 5 minutes each, which will enable

us to get into a Q and A with you. Mr. Towns has a time crunch,

having to leave shortly before 1. Ms. Allen, if you would like to

begin.

STATEMENTS OF CATHERINE ALLEN, CHIEF EXECUTIVE OFFICER, BITS, THE FINANCIAL SERVICES ROUNDTABLE; DONALD DONAHUE, CHAIRMAN, FINANCIAL SERVICES SECTOR

COORDINATING COUNCIL FOR CRITICAL INFRASTRUCTURE

PROTECTION AND HOMELAND SECURITY; SAMUEL GAER,

CHIEF INFORMATION OFFICER, NEW YORK MERCANTILE EXCHANGE, INC., CHIEF EXECUTIVE OFFICER, NYMEX EUROPE

LIMITED; AND STEVE RANDICH, EXECUTIVE VICE PRESIDENT OF OPERATIONS AND TECHNOLOGY AND CHIEF INFORMATION OFFICER, THE NASDAQ STOCK MARKET, INC.

STATEMENT OF CATHERINE ALLEN

Ms. ALLEN. Thank you, Chairman Platts and Mr. Towns for the

opportunity to testify today. A full version of my testimony has

been submitted for the record and is here today.

I’m Catherine Allen, CEO of BITS. BITS is a nonprofit industry

consortium of the 100 largest financial institutions in the United

States. We’re a non-lobbying group, sort of a think tank for technology and operations for the CEOs of these 100 largest organizations. We serve the industry needs at the interface between commerce, technology and financial services. We’re probably most well

known for the best practices and guidelines that we create on behalf of the members for the industry and we share that much more

broadly through the FSSCC, through other groups, to the smallest

institutions to make sure that they are aware of the issues and address some of those issues.

BITS and Roundtable member companies direct about $40.7 trillion in managed assets, $960 billion in revenue and 2.3 million

jobs. Our activities are driven by the CEOs and the CIOs or the

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heads of security of these organizations. The risk managers and

leaders who care for the financial services sector critical infrastructure.

We also work closely with government agencies such as the Department of Homeland Security, Treasury, the Federal Reserve, the

FBI and many financial regulators, technology and trade associations and vendors in achieving what we try to do. The financial

services industry has always taken significant steps to prepare for

and respond to major events. In fact, the financial sector is often

viewed as the poster child for what needs to happen in the critical

infrastructure arena, primarily because of our focus on operational,

fiduciary, financial and reputational risk.

Events in the past few years from September 11th to Katrina

have escalated our efforts. While I believe our industry overall is

better prepared than ever, there are significant risks that can only

be addressed by working in partnership with others and that partnership is what I’ll talk about mostly in my testimony.

Financial institutions weathered Hurricane Katrina well and

now Hurricane Rita and responded to customer needs quickly.

They also responded well during the August 2003 power outage

and the terrorist attacks on September 11th.

Our sector is a favorite in terms of a target by cyber criminals

as well as terrorists. Over the past 4 years the financial services

sector has taken major strides to respond to the risks we face today

and prepare to address future threats and vulnerabilities.

Financial institutions have business continuity plans which they

constantly update, refine and test. This is a regulatory requirement

and part of the risk management process that all financial institutions have embraced. As financial institutions identify risks, they

work to mitigate them and BITS has made coordinating financial

services industry crisis management efforts a top priority. Some examples of what we’ve done: There have been numerous conferences

and meetings to bring together leaders and experts. We developed

a crisis communicator for our CEOs and crisis management coordination and security executives to get them on the phone as quickly

as possible. We’ve helped create and drive membership in the FS–

ISAC, the Information Sharing and Analysis Center; we conducted

worst case scenario exercises, we’ve engaged in partnerships with

the telecommunications sector and key software providers such as

Microsoft to address our industry’s business requirements. We’ve

compiled lessons learned from September 11th and from the August 2003 blackout and Hurricane Katrina and have shared those

with the industry.

Most well known are our development of best practices and voluntary guidelines in everything from how you manage outsourcers

to the alert levels at the Department of Homeland Security to the

cross industry telecom business requirements. We’re currently

working on best practices with the energy industry, energy and

power industries. We created a model for regional coalitions,

ChicagoFIRST, and we developed liaisons and pilots with the telecommunications industry to develop the appropriate levels of diversity and redundancy. There is no true diversity and redundancy in

the telecommunications system today and that was one of the

things that is critical and on the top of our list.

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Most recently in response to Hurricane Katrina and now Hurricane Rita, BITS stepped in to help in coordinating and disseminating critical information and, again, in my longer testimony, there

are examples of that.

As you know, the financial institutions are heavily regulated and

actively supervised by State and Federal agencies. Both have

stepped up their oversight of business continuity, information security, third party service providers and critical infrastructure protection. And also the financial exchanges have added requirements in

this area.

Regardless of how well financial institutions respond to regulations, we simply cannot address these problems alone. Our partners in other critical industry sectors, in particular telecommunications, energy and software, must all do their fair share. In fact,

we call it conducting a ‘‘higher duty of care’’ because they respond

to the critical infrastructures.

During the past 4 years, the FSSCC, the Financial Services Sector Coordinating Council for Critical Information Protection, has

been created. BITS helped to establish that and continues to play

a major role in its efforts. You’ll hear more about that from Don

Donahue in a few minutes. We work closely with the FSSCC under

the Department of U.S. Treasury and with other departments at

other government agencies.

There are specific examples of cooperative efforts that BITS funded and put together and share with the industry. First of all, with

the Securities Industry Association, we put together best practices

and what you do at different levels of security from the Department of Homeland Security’s alert levels, what you do at the various orange, red and yellow levels, we shared those throughout the

critical infrastructure industries.

Second, working with the U.S. Treasury, we funded or

underwrote the costs for developing ChicagoFIRST so we would

have a regional model and then could share that model with other

member companies in other regions of the Nation. ChicagoFIRST

was created to foster preparedness and recoverability of financial

services in specific regions and again serves as the model for other

regions.

As part of BITS’ work to strengthen our critical infrastructure,

we also focused on the need for more diverse and resilient telecommunications services. BITS engaged with the telecommunications companies, and worked very closely with the National Communications System, an excellent group, which is now under the

Department of Homeland Security and worked with them to develop the BITS Guide to Business Critical Telecommunications

Services. It’s a resource for outlining what financial institutions

need to ask of their telecommunications partners and in my role

sitting on the NRIC, which is a group of telecommunications CEOs

that respond to the—that advise the Federal Communications

Commission, we also provided that information into those work

groups so we could exchange the dialog with the telecommunications industry about best practices.

In dealing with Katrina’s aftermath, you can see how important

telecommunications resiliency and redundancy is.

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Attached to my testimony is a comprehensive overview of the

contributions that BITS has made in the last 2 years and, again,

shared with the entire industry. They tend to focus around a few

key elements: One, improving communications during crisis; two,

enhancing the resiliency of the telecommunications infrastructure;

third, enhancing the reliability of the electric grid, because telecom

and financial services are all dependent on that; improving the security of software, hardware and the Internet; addressing forms of

online fraud and identity theft and improving oversight of third

party providers.

There are numerous lessons we can learn from September 11th

and August 2003 and that is to be prepared and share information

and view preparation from a strategic and holistic manner.

Last, some of the key things I think that the Federal Government can do is focus on this need for diversity and resiliency in the

telecommunications infrastructure. There may be incentives such

as using the telecommunications excise tax that could be used to

incent telecommunication infrastructure changes, certainly to make

available more satellite and alternative channels of communication;

R&D dollars allocated to telecommunications resiliency is critically

important, and again I commend the National Communications

System under the Department of Homeland Security and make

sure that maintains its critical role.

Second is the power grid must be considered among the vital critical infrastructures to make sure it works across the Nation. Here

incentive dollars are needed and, as I said, BITS is working on best

practices for this industry. The alternative power generation area

is critically important for not just financial services, but all critical

infrastructures.

Third, recognize the interdependence of all critical infrastructures. You cannot make requirements of the financial sector without realizing how dependent we are on telecom and power, and in

some ways on the transportation industry. BITS has worked very

closely with the chemical, the telecom, the power, energy and other

critical industries to share what we’re doing and to share best practices with them, but again, making sure that what’s of vital importance is how this interdependency is addressed from the Government level.

Last, and I would say probably most importantly, all of us at

BITS worry about a combined physical and cyber attack. We have

not had that, but I will tell you that all of the Nation’s data systems; the first responder systems, the hospital systems, the police

systems, the financial systems, rely on pretty much one operating

system. The need for us to make sure that our operating systems

and software, our hardware and our networks are secure and that

there are alternatives if they are not available is critically important and that’s what we mean by the ‘‘higher duty of care’’ for providers of those services.

I’ve attached to my testimony a document we call ‘‘PREPARE,’’

which are seven things that we believe the government can do with

regard to cyber security issues and again they include everything

from promoting the issues and educating the consumers and the industry to providing R&D dollars to strengthening law enforcement

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sponse, Congressman Towns, to your question about TRIA. We

think it’s critically important. It’s a tool that provides liquidity in

the property and casualty insurance markets. Thus far, it has not

cost taxpayers any money, but has resulted in the placement of a

significant amount of terrorism coverage. We encourage you to reauthorize TRIA and continue with that, because it’s a piece of this

holistic look at terrorism.

Finally, Hurricane Katrina has made poignantly clear we need to

improve coordination procedures across all infrastructures and with

Federal, State and local government when events occur.

On behalf of both BITS and the Financial Services Roundtable,

thank you for this opportunity to testify.

[The prepared statement of Ms. Allen follows:]

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Mr. PLATTS. Thank you, Ms. Allen. Mr. Donahue.

STATEMENT OF DONALD DONAHUE

Mr. DONAHUE. Chairman Platts, Ranking Member Towns, thank

you for inviting me today. As you know, I currently serve as chairman of the Financial Services Secretary for Coordinating Council

for Critical Infrastructure Protection and Homeland Security.

Which you’ve already heard referred to as the FSSCC, an industry

group dedicated to infrastructure protection efforts. I’m also chief

information officer of the Depository Trust and Clearing Corp., one

of the key industry infrastructures. Through its subsidiaries, DTTC

processes most U.S. trades and a broad range of financial assets,

for example, last year clearing and settling 1.1 quadrillion worth

of financial transactions.

FBIIC was established by the sector in 2002. It currently has 33

members consisting of many of the key industry infrastructure organizations and trading markets and a broad array of industry

trade associations representing an estimated 8,000 financial institutions. The FBIIC’s mission statement states that it seeks to foster and facilitate the coordination of financial services sector-wide

voluntary activities and initiatives designed to improve critical infrastructure protection and Homeland Security. As I will discuss

later, FSSCC has very real achievements in realizing this mission.

The foundation for FBIIC’s achievements is a very effective partnership with our key Federal counterparts, most particularly our

strong relationship with the Department of the Treasury. Our sector-specific agency under HSPD7, has been the essential foundation

for many of the sector’s accomplishments in promoting infrastructure protection. The leadership of the Treasury’s Office of Critical

Infrastructure Protection has been invaluable in these achievements. The sector also is forming an effective relationship with the

Department of Homeland Security and will continue to work with

DHS in coordination with the Treasury to support its infrastructure initiatives. We also have effectively worked with the financial

regulatory bodies to help them formulate and implement appropriate regulatory standards in this area.

Earlier this year FSSCC published its report, ‘‘Protecting the

U.S. Critical Financial Infrastructure: 2004 In Review,’’ a copy of

which was made available to your staff. Let me mention a few examples of the sector’s accomplishments identified in that report.

Prominent among them is promoting broad participation, broader

participation in the Financial Services Information Sharing and

Analysis Center, the sector’s mechanism for sharing critical information about physical and cyber security threats and vulnerability.

The FS ISAC reports it now has 1,749 participants plus an expanded reach through the sector’s trade associations representing

nearly 10,000 firms.

Sector members have implemented several capabilities promoting

more effective disaster recovery coordination in regions critical to

financial services. You’ve already heard much about the example of

ChicagoFIRST. Other regions have implemented similar coalitions

and FBIIC and its members are working with Treasury to promote

this model in other areas across the country.

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Third, coordinating the creation of a unified structure of emergency calls so that calls can be timed in a way to reduce conflicts

and feed information into decisionmaking processes in an effective

way. One of the key learnings that came out of the August 2003

blackout experience. These are a few examples of the accomplishments that the report highlights. FBIIC’s own initiatives build on

the very strong record of the sector generally in responding to these

new infrastructure protection challenges.

My own company, DTCC, for example, has put in place a far

more resilient infrastructure supporting the financial markets,

even though we continued to operate without interruption during

the week of September 11th, completing more than $1.8 trillion

worth of financial transactions that week. The industry’s other core

clearing and settlement organizations and the trading markets

have implemented a variety of steps since September 11th to reinforce the resilience of their operations. In addition, key trading

markets have thought through reciprocal arrangements to trade in

other markets’ financial instruments in an extreme emergency.

Sector trade associations, the Financial Services Roundtable, BITS,

the Futures Industry Association, the Securities Industry Association and many others have organized their members’ efforts to improve resilience practices and to test those improved practices.

Much detail regarding these initiatives is set forth in the 2004 annual report. Thanks to these efforts, the sector is to the point

where I am very confident of our ability to operate with minimal

disruption even under very severe circumstances.

As successful as these programs have been, we also need to rehearse these practices to insure that they will work when needed.

The sector’s commitment to doing this as well has been exemplary.

A notable example is the test plan for October 15th, in approximately 3 weeks, sponsored by the Futures Industry Association,

the Securities Industry Association and the bond market Association. In this test more than 200 participants in the futures and securities industries will operate from their backup centers and test

interaction with key markets and market infrastructures. FSSCC

also is sponsoring a comparable test or considering sponsoring a

comparable test on the payment systems side in 2006 and we expect to be making a decision about that reasonably soon.

The financial services industry has responded strongly to the

new challenge of business continuity in the post September 11th

world. We have done this because of our very clear understanding

that we are responsible for the financial assets of 270 million

Americans and for their ability to continue to conduct their financial affairs. The people of our industry take this responsibility very

seriously. This committee and the Congress can rest assured that

the financial services sector is and will continue to be resilient and

strongly prepared for future emergency situations.

Thank you very much.

[The prepared statement of Mr. Donahue follows:]

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Mr. PLATTS. Thank you, Mr. Donahue. Mr. Gaer.

STATEMENT OF SAMUEL GAER

Mr. GAER. Good afternoon. Thank you, Chairman Platts, and

Representative Towns for inviting me to participate in today’s

hearing. The subject matter of this hearing is of an ongoing concern and engaging these issues head-on is an important tool in a

set of responsible business practices for both private industry and

government alike. I sincerely welcome the opportunity to express

what the New York Mercantile Exchange or NYMEX has accomplished to date. The exchange is the world’s largest physical commodity futures exchange and has been an example of market integrity and price transparency throughout it’s 133-year history. The

Exchange also plays a vital role in the commercial, civic and cultural life in New York. It provides thousands of jobs in financial

services and allied industries and through its charitable foundation

supports cultural and service programs in the downtown community of New York, throughout the Tri-state area where our traders

and staff live, in Washington, DC, and Houston.

The business continuity planning process requires commitment

from management and the ability to foresee various contingencies.

Our leading role in the energy and metals markets demands we

take steps to insure that our price discovery and formation mechanisms will continue to be available in the event of an emergency

affecting our operations. NYMEX has a proven track record that

demonstrates a dedication to insuring that we can provide our

services even in the face of extreme adversity.

We are not satisfied, however, to rest on successes of past performance. As such, we continually analyze and improve our business continuity plans. The Exchange’s emergency preparedness

may be broken down into several distinct but integrated categories.

Business continuity planning, the more narrowly focused practice

of recovery planning, the education of critical staff responsible for

emergency preparedness and finally the Exchange’s external efforts, including coordinated industry-wide testing and provide valuable feedback to government industry agencies.

The Exchange’s business is comprised of many different process

groupings, each of which requires a particular expertise. These

business units are each assigned a staff member who acts as a

business continuity coordinator [BCC], whose responsibilities include assessing the critical processes and creating a workable recovery plan. The BCC is an individual with experience in the procedures of their specific business unit. Tactical decisions rest with

the Emergency Operations Team, the OOT, which is comprised of

BCC’s and business continuity leaders. The BCL’s role is to coordinate the Exchange’s continuity and disaster recovery efforts, lead

the EOT and report to the crisis management team. During an

emergency, the high level strategic decisionmaking authority rests

with the CMT, the Crisis Management Team, which is comprised

of members of NYMEX board of directors, executive committee and

critical senior executives. Their role is to assess the threat and if

necessary provide an official declaration of disaster, communicate

with members of the Exchange and coordinate with regulatory and

industry agencies. The CMT is empowered by the board of directors

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to make critical decisions necessary in any emergency recovery effort.

NYMEX’s core business is commodity futures trading clearing. In

order to insure the continuity of this business we have developed

several alternative continuity plans. The Exchange headquarters,

for instance, were designed to be as redundant as possible, including the availability of a backup generator fueled by, of all things,

diesel fuel, which was critical during the September 11th terrorist

attack and the blackout of August 2003.

One of the first priorities for the Exchange after recovering from

September 11th was to build a completely redundant replica trading facility. This facility, which was completed in January 2003 is

located outside of the city and is a reasonable commute for our

staff and traders. It contains fully operational trading ring, telephone work stations and space and administrative space. More importantly, it also has the ability to disseminate price data worldwide and is a completely redundant data center, housing all critical

Exchange IT systems. All of our traders and key employees have

been provided with directions to the site and many of our traders

have participated in a mock trading simulation actually bringing

them out to the site and going through an actual trading session

where they exchange trades and we ran through the clearing cycle.

In a situation where access to the trading facility in lower Manhattan or the backup site would not be immediately available, the

Exchange also has two electronic trading systems, NYMEX Access

and NYMEX ClearPort, both of which have 24-hour trading capability. In fact, we were the first Exchange in New York to open following September 11th. Although it was preferred that the trading

would resume by open outcry, a preferred venue of trading, it was

apparent that the quickest way to reopen markets would be

through NYMEX access, despite the destruction of the proprietary

communication circuits in the collapsed Twin Towers. The Exchange was the first New York financial market to reopen when

the new system went live on Friday, September 14th. The initial

energy and metals trading session was just 2 hours long, but the

pent up demand for trading services resulted in then-record electronic volume of nearly 70,000 contracts. This volume was nearly

eight times the average daily volume of regular 16-hour electronic

trading session at that time.

In the event of an emergency, it is necessary to have a safe and

secure place for teams to assemble and manage recovery efforts

and coordinate services. The Exchange maintains emergency operations centers at both primary and backup sites. Should an emergency affect the primary site only, an additional temporary location

has been made available through a local community relationship.

Maintaining communication is the single most important aspect of

any emergency recovery effort. All aspects of our emergency operations center are choreographed by multiple communication links

between resources and Exchange responders. Continuity planners

must envision and plan for emergencies that disable telecommunications, utilities, transportation, other infrastructure service vendors and customers.

Disaster recovery planning also specifically refers to restoring

the information technologies that run our business and provide

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services to staff and customers. Every critical Exchange system is

duplicated and can provide services in the event the main facility

or system is unavailable. Data moves across redundant fiberoptic

links, linking our backup site to the primary site. In addition to

wide area network or WAN created between the two hot sites the

exchange maintains multiple hot links to Internet service providers. The Exchange information technology systems form the

underpinnings of our ability to recover the services we provide to

the marketplace in a timely fashion.

As new systems are developed and deployed at NYMEX fault tolerant distributive-active active and advance replication technologies are used to help insure we provide these services in the

most adverse environments.

In September 2004, on behalf of NYMEX, I testified before the

House Financial Services Committee hearing on the emergency

preparedness of the financial services sector. We have since participated in the TopOff 3 exercise sponsored by the U.S. Department

of Homeland Security, which was designed to test the readiness of

first responders; Federal, State and local emergency managers

along with key infrastructure components such as hospitals and

transportation networks. The securities industry component of the

TopOff 3 exercise involved the SEC, U.S. Treasury Department, exchanges and trade associations such as the Securities Industry Association, Bond Market Association and the Futures Industry Association. In addition, in October 2004 NYMEX the MIA other leading futures exchanges and clearing firms successfully completed the

first industry-wide disaster recovery test. The test scope has expanded in 2005 to include market data vendors. This industry-wide

disaster recovery test has become an annual event and is scheduled

for October 15th.

The Exchange is among the leaders in an industry-wide initiative

to standardized the protocols governing the way companies send

and receive data. This will help many companies develop systems

based on standardized specifications, making it easier to deploy

and maintain data communications internally and externally under

challenging circumstances.

Another area we have taken advantage of is sharing alliances.

The Financial Services Information Sharing Analysis Center, FSISAC, is a source of critical information ranging from information

security alerts to Homeland Security threat analysis. The New

York City Office of Emergency Management is another source of information for New York-based companies. This information is critical for the constant monitoring of potential disruptive events.

NYMEX has a global presence. The Exchange’s energy and metals futures markets provide benchmark pricing information that is

used worldwide. NYMEX recently opened up an exchange in London and signed a joint venture agreement with the Dubai Development Investment Authority [DBIA]. The exchange must be cognizant of world events. NYMEX views continuity planning as an

ongoing project that is necessary to meet critical business needs

and it incorporated this planning into its day-to-day operations.

Every project system or business process deployed incorporates

some form of continuity planning. Risk and impact analysis, training, disaster recovering, testing and regular meetings with critical

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staff create a sense of awareness throughout the company. Business continuity planning has become part of NYMEX business fabric.

We strive to learn from past experience. The September 11th terrorist attack, the 2003 blackout, our mock disaster testing and

planning for the 2004 Republican National Convention, as well as

the recent bombings in London which I was personally about two

blocks away from, have helped us prepare for the future. This year

as we were finalizing preparations for the launch of the London

trading facility and during the July 7th and July 21st bombings,

we activated our emergency teams as a response to that event. We

are currently following important developments in the Gulf Coast

region as our Nation struggles with the catastrophic damage

caused by Hurricanes Katrina and Rita. As you know, there are

critical delivery points for both gasoline and natural gas in that

area.

Government agencies are of critical importance of preparing for

and providing critical support during an emergency. The relationship the Exchange has developed with government leaders has enabled us to overcome many difficult recovery challenges. In the immediate aftermath of September 11th, we received significant assistance from the Federal, State and city governments.

The Exchange appreciates being invited to participate in these

important discussions. Further efforts to improve communication

between government and industry will only strengthen the ability

of the Nation and financial markets to respond to the changes that

lay at head. Large scale emergencies similar to those that have occurred in the past are inevitable. Continuity planning is not an individual task, but must be faced by all involved participants in the

services sector.

I would like to thank the chairman and Ranking Member Towns

for holding this hearing and inviting NYMEX to discuss this extremely important topic. Thank you.

[The prepared statement of Mr. Gaer follows:]

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Mr. PLATTS. Thank you, Mr. Gaer.

Mr. Randich.

STATEMENT OF STEVE RANDICH

Mr. RANDICH. Thank you for allowing me to testify today. I’m

Steve Randich. I oversee operations and technology at the

NASDAQ stock market, which is the largest equities market in the

world. It’s always been a priority at NASDAQ to maintain a hardened resilient operation that can withstand catastrophic events. A

few principles I want to communicate today is that NASDAQ for

a very long time has viewed business continuity and disaster recovery as a top priority. We’ve had a backup data center in a remote

geographic location for 20 years.

Second, exchanges in the United States are evolving toward an

electronic trading model and this will naturally enhance the capital

markets’ ability to withstand catastrophic events. Last, business

continuity planning is a collective effort. A stock market alone does

not represent our capital markets. Instead, it is only as good as its

weakest link.

Our operating model provides a natural business continuity advantage. Historically, an exchange operated at a central physical

location where buyers and sellers would meet face-to-face to trade.

A single central location without a practical and tested capability

of backup puts our Nation’s capital markets at risk. Trading at

NASDAQ is executed through our sophisticated computer and telecommunications network. Unlike physical floor-based exchanges

which employ a specialist to direct buying and selling of a stock,

NASDAQ’s open architecture structure utilizes hundreds of geographically diverse and competing market makers who simultaneously provide trading liquidity for stocks listed on the market.

This insures not only healthy competition for investors, but, more

importantly, prevents a single point of failure given the geographic

diversity of these market makers.

NASDAQ was prepared for and fully resilient operationally to

September 11th and the blackout of August 2003. Geography is

critical to our operation resiliency. We have two data centers that

are more than 300 miles apart. They are located in different geologic and climactic zones and are in different regional power grids

outside of metropolitan areas. We store enough fuel onsite to allow

us to run our data center for a full week during an extended power

outage without a refill. We also maintain 185 tons of batteries for

additional backup. We test each of our generators weekly and perform a utility failure test across the entire infrastructure every

quarter.

In addition to geographic diversity, we also use locally situated

systems and networks to achieve resiliency. Several network providers are utilized, each with network diversity conductivity into

our two data centers. Market participants are insured maximum

protection by employing diverse access to both our primary and

backup data center at all times. At no time during the week of September 11th were NASDAQ systems inoperative. When the attacks

occurred, trading was suspended, but NASDAQ’s systems and network continued to operate. We focused on insuring connectivity to

our market participants who provide liquidity to our marketplace.

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Although actual stock trading was suspended, our systems operated continuously throughout the week.

Notwithstanding the success after September 11th NASDAQ implemented improvements to our backup system. We added more

frequent testing to our backup site and began regularly testing full

market-wide disaster recovery tests that are open to all market

participants. In collaboration with State and Federal authorities,

we evaluated and increased our physical security.

Although large portions of the northeastern United States were

out of business during the blackout of August 2003, NASDAQ

maintained full operations throughout that 2-day period. Our alternative power systems automatically provided immediate continuity

so that there was no impact. However, the blackout revealed some

areas of weakness in the financial sector that required vigilant attention. There’s a need for more backup facilities outside of high

risk metro areas like New York. Although most large market participants and telecommunications providers had backup systems

and procedures in place, they didn’t all work as expected. There

were several examples of backup generators that failed within 12

hours of the blackout, largely because of either poor fuel quality or

machine maintenance.

Looking forward, and since September 11th, NASDAQ has

worked closely in participation with the Federal Government and

private sector to strengthen the resiliency of our infrastructure. We

now have a contingency plan that provides NASDAQ the ability to

trade all New York Stock Exchange stocks if its trading floor becomes inoperative for an extended period of time. Nearly 18 percent of the daily NYSE volume already trades electronically on the

NASDAQ network, so this contingency trading plan is in effect

tested daily.

In conclusion, NASDAQ is continually anticipating, evaluating,

preparing for what may occur 1 day. Our preparedness will never

be 100 percent perfect as we’re limited by our human imagination

of what might occur. Our increasingly decentralized, geographically

diverse operating model continues to provide us with a high degree

of confidence that we will be prepared for the next event. As I said

earlier, the industry is rapidly moving toward electronically trading, which is very good news for resiliency. With electronic trading,

an exchange no longer needs to be tied to a single location. Effective backup and redundancy is the key to security against any form

of accident or attack and essential for our financial national security. For financial markets we believe this is the core lesson of September 11th and the blackout. For the committee and all concerned

branches of government, we believe it is a crucial lesson as well.

Thank you for the opportunity to testify today.

[The prepared statement of Mr. Randich follows:]

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Mr. PLATTS. Thank you, Mr. Randich. Again, to all of you, appreciate your testimonies.

Maybe a broad question to each of you, just in dealing with the

Federal Government in your respective organizations and members; infrastructure, critical infrastructure protection, what do you

see as the greatest hurdle in dealing with preparedness and is

there any specific statutory changes you believe need to be made

to allow better cooperation, interaction with the Federal Government? If anyone would like to——

Mr. DONAHUE. I’ll start. Mr. Chairman, I certainly could not recommend any statutory changes, although some of my co-panelists

may have ideas. I think we, as you unquestionably heard this

morning in the testimony, the financial sector is very, very proud

of what they have accomplished in this space and I think rightfully

so. There has been a lot of energy devoted to this.

You asked earlier about the state of compliance with respect to

the sound practices paper. All of our organizations have met their

deliverables by this time. The significant firms in the paper are all

well on track to meeting the deliverables by 2006. I think our interaction with Government in support of those objectives has been

very positive. I think a question that looms on the horizon is,

speaking personally, how much is too much and how much do you

achieve agreement in the public and private sectors about the degree to which resource investments yet need to be made in financial services to achieve levels of resilience beyond where we’re at

at this point, and making sure that we all have a very reasonable

sort of judgment. If we can arrive at a reasonable judgment on that

question is going to be a key issue as we go forward.

Mr. PLATTS. Cost benefit analysis——

Mr. DONAHUE. Very, very much so. Again, you heard from all the

remarks people were making, that there have been a significant investments by a number of the industry infrastructure members and

a number of individual firms, and making sure any additional adjustments we’re asked to make by the benefits we’re going to derive

from them is a critical issue going forward.

Mr. PLATTS. Ms. Allen.

Ms. ALLEN. I would say the two areas I would like to see the government spend much more time focusing on is the interdependency

area to understand how dependent we are on these other critical

sectors, and how much our regulators can require us to do something. We cannot do it if the telecom, power industry and IT industries are not there, and we must place the focus on cyber security.

Second, I don’t know if there are statutory changes needed, but

an example would be antitrust exemption. BITS has a product certification program. It’s a voluntary testing program by vendors,

software vendors, to meet minimum security requirements. They

overwhelmingly tell us, ‘‘We really aren’t going to do it unless we’re

mandated to do it.’’ BITS cannot mandate because of antitrust concerns. So, look at how do we as an industry or even critical infrastructure industries set standards for cyber security.

Another thing is, again, incentives for the telecommunications infrastructure to have alternative telecommunications systems, but

also to provide this diversity of redundancy that we need.

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Then last, I think the concept of funding regionals was brought

up. If there were some kind of seed money that would help, we

would—let’s put it this way, it would happen much faster, if there

were some seed money for the critical areas. We could all sit here

and name who were the 10 to 15 critical geographic areas and

there were some seed money. There’s a model, there’s some support, but it does take money, it takes some coordination to implement.

Mr. GAER. I would actually echo some of the statements made regarding to—our experience regarding government involvement with

disaster recovery business continuity has been a very positive one,

in the fact that we’re regulated by CFTC is our primary regulator.

I took this job beginning in March 2003 and we were planning for

a lot of these industry-wide events that were going to occur because

the exchanges all got together, at least in the futures industry the

exchanges all got together and said what do we have to do to make

this work a little bit better. It was very refreshing to see representatives from the CFTC attend these meetings and say, listen, we’re

going to let industry drive this process, we’re going to let industry

drive the process, we’re going to stand back and watch and see how

you’re doing it. We don’t want to have to step in, so please manage

this correctly.

From all accounts, from everything you’ve heard today, I think

the financial services industry as a whole has been managing it

very well. Interaction with government has been on a very open

basis, our access to things like GETS cards for critical personnel

to use, Government Employee Telecommunication Service, I think

it’s called? Government Emergency Telecommunication Services.

NYNEX’s interaction with the OEM for events such as Hurricane

Isabelle of last year, where we’re invited to come and join in government and to work together in partnership with government, but

it’s very clear from our experience, our industry-wide test, the

blackout of 2003 that industry is going to drive the acceptance and

industry is going to drive basically the ultimate result of any disaster recovery model.

Mr. RANDICH. Briefly, having worked in a number of industries,

I find it amazing how this particular industry is so self reliant and

motivated in this regard, which is a good thing. So in that area,

I really don’t see any need for any specific legislation, only facilitation of policymaking that encourages technological innovation and

solution in the area of business continuity and disaster recovery.

Mr. PLATTS. Thank you, and I think this industry has gotten the

American way of what do we need to do and how do we need to

do it and let’s get it done. I think that’s been reflected in all our

accounts today, the aggressive nature.

That being said, I think one of the challenges for the industry,

I think everybody has touched on it in some way today, is the

interdependence of your industry with these other critical infrastructures; telecommunications, power, transportation, you name

it. What would be your read on your interactions with these other

sectors, if you want to pick power specifically, communication, and

how they’re responding and I think it was, Mr. Randich, in your

testimony, about how they have onsite generators for a week’s

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leans, where not only it’s going to be well over a week before power

will be restored, it’s going to be months to some of those areas, and

even inability to get transportation in because of the amount of

damage that was done, how is the energy industry responding to

having an ability to be redundant in their provision of services as

best possible to your needs, again, not just energy, any of the infrastructure industry that we depend on.

Mr. RANDICH. In all cases, the answer is never going to be perfectly. However, we all have choices that we make in the marketplace. We decided where we want to put our data centers. We decide who we’re going to buy fuel from. We decide who is going to

be our network provider and our power provider and we make

those choices, so there’s some vendor diversity, as well as we pick

partners that have proven to be reliable over time. So I very much

believe that the free enterprise economics and decisionmaking over

time converge on the best solution for the markets that eventually

prevail.

Mr. PLATTS. As much as possible, again, market-driven solutions.

Mr. RANDICH. Market-driven solutions.

Mr. PLATTS. Ms. Allen.

Ms. ALLEN. I would add that the telecommunications industry

has been very helpful. Much of that from the work of Duane Ackerman, who chairs the NSTAC, the President’s Advisory Council. In

the private sector, CEOs and CIOs from the telecommunication sector work closely with us on that. It has come less from the government other than the NCC.

The telecommunications, the best practices we’re working on

there, includes how many days of backup fuel you need to have,

what are the transportation sources for that. That is, again, a private sector-led effort. It’s not to say that the Department of Energy

and others aren’t doing things in this critical infrastructure area,

but it tends to be more focused just on the industry, less on the

interdependency issues.

Mr. PLATTS. OK. How about in the sharing of information

through the ISAC process and how that’s working and specifically

with financial sector, you’re read on where we are and where we

could go to insure that’s effective in its intent?

Mr. DONAHUE. I think the sharing of information for the ISAC

has been very successful to the extent it’s reached. We’re building

the interstate highway at this point, and we are building a communications infrastructure that can get information out to members of

the sector. We, obviously, have some distance to go in terms of adding end points to that network, but I believe that has been very

successful and I think the ISAC membership is finding it very useful to get the alerts and the information that comes to them

through that channel.

I think Jim Caverly in the earlier panel put his finger on where

this needs to evolve, which is the development of more formal procedures for information coming from the private sector to DHS, to

Treasury in its role as sector specific agency about where we believe vulnerabilities continue to exist.

Involving the private sector picture, conversely, of opening channels information from government in terms of threat information,

in terms of more sensitive information of where clearance is posVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
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sibly going to have to be obtained in order to be able to do that.

That’s the area that needs work and experimentation.

Mr. PLATTS. That was actually one of my specific questions, because in your testimony you talk about the importance of communications and information, but what’s your read on that access to

sensitive information, whether security clearance is being required?

Sounds like we have a ways to go in allowing that to be a more

seamless automatic process.

Mr. DONAHUE. I don’t think anyone is comfortable with the state

that has reached. DHS and Treasury both working together did

sponsor members of the FSSCC for clearances at the secret level,

which has been very helpful. I think there have been instances

where information could be discussed on conference calls where we

knew everyone on the call had a particular clearance and therefore

they were somewhat more free to discuss matters, but it’s clear

that we don’t understand who all needs to have access to the information, how do you sanitize information so that you can be conveying it to people who aren’t necessarily cleared. I mean, all of those

issues still have to be explored.

DHS approached the FSSCC in I would say late spring and

asked for our agreement to work with them on the development of

an information sharing pilot that would sort of go to the next generation of an information sharing methodology between the government and the private sector. We have agreed with them to go forward with that and I think Katrina and Rita have intervened to

sort of put that on the back burner for the moment, but I’m sure

that will be something they return to in the fall.

Mr. PLATTS. The interaction I guess between the private sector

and the government, what is specifically in New York, if there is

a major incident, what’s the process of structures in place for yourself, your organization or members as far as being in touch with

the New York City emergency response office, the NYPD? Is that

a very formalized structure that you have a contact, people that

you go to, and if one of the things that’s down is communications,

how do you make that contact, even if you have the right person

to be in touch with?

Mr. GAER. For us, our proximity is probably one of our biggest

assets in that situation. We have both formal and informal ways

that we communicate with government here in the city as well as

regional and national government. We’re briefed on an ad hoc basis

as far as threats and threat levels, especially ones that are germane to the financial services area. I think it was about a year or

so ago when there were threats against Merrill Lynch and I think

it was Prudential in Newark, where we were advised of these

threats ahead of time and we were able to harden beforehand. We

interact with local law enforcement, the Joint Terrorism Task

Force, very well, as a matter of fact, sometimes to almost the shock

of visitors who come to our facility in the rigorous amount of security that’s around the building and how they have to get into the

building, they’re very, very shocked and then later impressed at

how secure we keep the building.

But the communication between ourselves and between government, again, it’s formal and’s informal on an as-needed basis. I

have a list of contacts, our president, our chairman, the crisis manVerDate 11-MAY-2000 12:54 May 13, 2006 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6633 D:\DOCS\26505.TXT HGOVREF1 PsN: HGOVREF1
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agement team can get in touch with people at their homes on their

cell phones or what have you, so it’s been a very post September

11th, it’s been a very kind of open cooperative environment.

Mr. DONAHUE. A number of the infrastructures in New York, you

mentioned that you have a seat at the OEM, others do as well. In

the event of an emergency in this city, we know that our people

are supposed to go to OEM. Security Industries Association has a

seat, my organization has a seat, the Exchange’s technology arm

has a seat. People know they’re supposed to immediately go there

so they can be part of that centralized communication.

You mentioned GETS cards earlier, there has been a fairly wide

distribution of GETS card within the financial infrastructure in the

country, certainly in New York, so people have the ability to communicate if any telecommunications are available they get priority.

The city has implemented a corporate emergency access system

where we have cards that will give us access to no-go zones, for example, as I’m sure you know. Post September 11th, south of Canal

Street people were not allowed to come for the first few days. This

program would allow us to get people into our facilities and get

things working, even though it might be in an area ruled not open

to the public. So there are a number of steps the city has taken

to improve communication and coordination that way.

Mr. RANDICH. That privileged physical access is a huge improvement since September 11th.

Mr. PLATTS. Is it fair to say with the physical access or the seat

at the table with OEM, that this is since September 11th, this is

lessons learned and then since the blackout to keep kind of honing

each incident and get a little better?

Mr. GAER. Yes.

Mr. DONAHUE. Absolutely.

Ms. Allen. Those are lessons that have gone to the original coalition, ChicagoFIRST and other models as well.

Mr. PLATTS. Your work with the creation of ChicagoFIRST really

was a lot of that was derived from New York, we were talking

earlier——

Ms. ALLEN. Right, the lessons learned from September 11th and

we spent time with the OEM of New York because New York was

actually ahead of all other regions and we used their model and

shared back with them what we had developed on the regional

model.

Mr. PLATTS. Thank you.

Mr. Donahue, in your testimony you talked about participating

in the TopOff 3 drill. I’m sorry, Mr. Gaer, sorry. And you referenced that and all the different participants. What I was curious,

your read on how successful the exercise was from the standpoint

of, again, lessons learned and what would work or not, and how

you responded to the exercise in implementing the lessons learned.

Mr. GAER. I think you can only judge how successful an exercise

is by its objectives and I think for these particular tests the objectives being that you had so many participants from diverse areas,

you couldn’t really go through every permutation of everything, so

to speak, that’s going to happen. We actually judged it from our

point of view to be very encouraging, to have been very successful.

Where we are right now is honing in on our industry-wide disaster

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recovery test, although it’s not going to include the telecom sector

per se or the power sector per se. We’re really working in our industry to get it right in our industry first and our first test last

year was a very kind of bland, basic test which was very successful

and it actually exceeded people’s expectations and there was a lot

of discussion prior where you get everybody on board as to when

you can do it and what are we going to do and what are we going

to run through and it turned out that people were more prepared

than we thought they were going to be.

For the TopOff, the interaction between ourselves and the various other industries and agencies I thought went very well. Certainly in every exercise there are areas where you need improvement and again I would probably highlight, as other members of

the panel have, the improvements between the telecom sector and

financial services sector would probably be something we should

concentrate on.

Mr. PLATTS. A followup to that, Mr. Donahue, was the coming exercise October 15th that you reference in your testimony. Could

you walk me through what’s going to happen there and what involvement, because you reference sponsors and the various institutions that are going to participate, the involvement of any Federal

agencies that will be participating or just kind of watching, taking

in that exercise?

Mr. DONAHUE. I think, first of all, what will happen on the 15th

is 200-plus firms are going to, there are essentially two tests occurring that day concurrently, the Futures Industry Association is

doing its second iteration of its industry-wide test. The securities

industry and Bond Market Association are coordinating a test for

their members on the cash side, which is the first time that piece

of the securities industry has conducted such a test and essentially,

what will happen is that each of the participants in the test will

go to their backup data center locations and their back up business

process center locations and seek to establish connectivity with key

industry infrastructures, DTTC being one, the New York Stock Exchange being another. Steve, I don’t know if NASDAQ is participating, but NASDAQ would be another infrastructure that they are,

I’m assuming you are, and that would be another infrastructure

that they connect to. Establish connectivity and run a few transactions through.

We’re not going to try to simulate a day’s activity or anything

like that, but run transactions through so make sure you can get

transactions to the trading facility, for example, and then you can

get feedback from the trading facility acknowledging receipt of the

order, acknowledging execution of the order, whatever it may be,

so you can function on your backup if you need to in the light of

an emergency take place.

Mr. PLATTS. Is FCC or Treasury going to be in any way participating or watching how it goes?

Mr. DONAHUE. They will be getting a report on the test results

after the fact. At this point it is essentially, this is the model the

industry followed in preparation for Y2K. We conducted tests that

we had organized and we implemented. We were reporting to our

regulatory agencies, to Treasury as well in this instance, how that

it proceeded, because it’s clearly of interest to them, but it’s not

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something they would have direct involvement in on the actual day

of the event.

Mr. PLATTS. I think another good example of the private sector

not waiting for government to say, hey, do this, but responding appropriately to being well prepared.

Mr. Randich, in your testimony you went through in detail some

of your security preparations from buffer zones around the data

center, fingerprinting policy for employees and contractors. A pretty extensive range of security measures. What would be your assessment on how common that is in the financial sector, whether

it be specifically here in New York or a broader sense nationally.

Mr. RANDICH. Significantly more so than it was in September

11th, just being in the business and having to go visit our customers and peers. It’s like going through the airport several times

a day, so that’s very good news.

The one area I think is important to note kind of where it’s limited and where it would be important to improve, one of the advantages we have is that our two data centers are located in corporate

parks, remote areas in one case, even beyond the suburbs. That basically allows us to, where the single owner tenant of the facility

gives us 100 percent control over the security and the infrastructure and sometimes I feel that organizations that have their critical

assets in a multi-tenant high-rise in the metro area don’t have the

level of control that they might need.

Mr. PLATTS. Again, in any urban setting your ability to have

that, proximity of other buildings, even if it’s your own building is

a lot more challenging in an urban setting.

Mr. RANDICH. Very much.

Mr. PLATTS. Would any of you like to comment on that issue of

the breadth or depth of security in the private sector?

Mr. GAER. I actually could and I’d like to put a little bit of a

twist on it in that yes, security, at least from the Exchange level,

we have as members virtually every investment bank, large trading house, etc., they’re members of ours and we’re kind of this hub,

or a utility for liquidity and price formation, so we need to take

extra steps to be as secure with our—in our physical as well as our

virtual presence. But what I’m seeing, what I’ve seen personally

from being in Europe and being in London in particular, London

has definitely tightened up security post what they call 7/7, but I

will tell you that the security that you find, especially here in the

New York metro area is light years ahead of what is happening

outside the United States and that’s important to us for reasons of

cyber security, which I believe is probably going to be one of the

next great frontiers that we are all going to have to tackle as an

industry in our DR testing.

Mr. PLATTS. I think that interdependence with cyber security, because you can harden a facility, but you could be on the other side

of the world and depending on the cyber security protections out

there, they can still do great harm, and that’s come to light in some

of the recent reports on China and some of their—at least what appears to be concerted Government efforts on an incredible scale to

break into sensitive data bases in the United States, not just government offices. So that challenge is one that is global and what

happens elsewhere is going to impact us.

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Is there an interaction with those European markets and what

we are doing here in New York? We talked a lot about sharing of

best practices here, how much of that is occurring international?

Mr. GAER. I can only speak from our industry and I would have

to say very little as far as an international effort, I would say very

little.

Mr. DONAHUE. Depends on the level that you’re talking about. At

the infrastructure level, it’s quite a bit. Swift is the international

payments messaging network, our counterparts in Europe,

Euroclear and Clear Stream are the two securities depositories

over there. There are very definitely interactions in those core organizations and what’s the best practices we participate in Swift

committee, we meet with Euroclear and exchange business continuity standards very regularly.

Once you go beyond the infrastructure, I would agree completely

that different firms are not necessarily coordinating the way that

we’re seeing here in the States.

Ms. ALLEN. We have some BITS members at the Canadian Bankers Association and APACS, which is the payment system in the

UK. We’ve shared best practices with the Japanese, with the Australians with the OECD countries, but it’s nothing formal.

Mr. RANDICH. We’ve hosted walk-throughs of our data center

many, many times. We’re continually doing it, and it’s interesting,

not much European interest, but we’ve had the South Americans,

the Asians and even the Middle Eastern and Indian markets come

take a look.

Mr. PLATTS. The hope certainly is that as we are in a global

economy, that is everywhere and that the lessons being learned

here and especially as I’ve heard loud and clear, the efforts in the

Greater New York area really setting a great high standard, high

bar for the rest of the country and the world, and the lessons

learned now being in Chicago and looking to regionalize elsewhere

around the country and ultimately around the world is going to be

so important.

Mr. Towns apparently wanted, and he had to leave for another

engagement and apologizes that he couldn’t stay through your

whole participation, but on technology, as technology continues to

advance every day, the ability to insure the security of those technological advances, and do you think our technology sector is doing

enough to provide security day one when these new products are

hitting the market, software and hardware as well, or do we need

to take a closer look at what they’re putting on the market from

a security standpoint?

Ms. ALLEN. I would say there’s improvement, and certainly we

are working very closely with the largest provider of operating systems and software. We have a set of business requirements and a

work plan with them to meet some of the business requirements

we have, but it’s a longer term process, because you have to change

the culture of the United States, actually all of the software industry, in how it’s developed, which has been to get it out there fast

and let us be the Beta tests for them.

Today we’ve got to look at those same providers of technology,

whether it’s the software, the infrastructure, the systems, to really

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ously, to do the testing and to have the safeguards before they

bring a product to market. That’s that ‘‘higher duty of care’’—in

particular, if it’s a provider where they have a dominant share of

the market for the infrastructure industries. So I think there does

need to be more attention from not only the private sector, but also

the government on this area and I think your question is correct.

We have to look at this globally, because these players are global

players, they’re global players and it’s going to be—Microsoft tells

us that the time between a vulnerability and exploitation of that

vulnerability is getting down to seconds now. There’s no way you

can physically patch all the problems there so it means you’ve got

to change the way you look at technology.

Mr. RANDICH. I think they’re coming along slowly. It used to be

a product would differentiate itself from the market with function,

price, ease of use. Security has clearly been elevated as a measure

of decisionmaking factor in the choice. But by no means should any

of us believe you could buy security off the shelf. At the end of the

day we have to take responsibility for it by choosing the best, most

progressive solution members and tying the loose ends ourselves.

Mr. PLATTS. Again, kind of where we started with questions in

that American way of partners between public private sector and

individual responsibility and in the end doing what you can.

I want to thank each of you and I wanted to give each of you,

if there’s anything you think you didn’t get to highlight or want to

touch on to reaffirm, to give you the opportunity before we close.

Ms. ALLEN. I want to thank you for holding this hearing. We feel

the more that Members of Congress understand the issues from the

private sector perspective, the better it is. We would be happy to

educate others in any way we can.

Mr. PLATTS. We’ve been happy to have the hearings and have

your participation as well as the other panelists earlier and it is

a great educational process for Mr. Towns, myself and our committee staff and then having that as a resource beyond just our committee, to do a full committee with the other Members.

We’re on the same team. We are all part of a functioning economy in coordination, and the financial sector in New York especially, and ultimately receive quality for it.

Please, each of you, don’t hesitate to call on us for things you

want to share as we move forward in a month or year or whatever

that you think we should be aware of. We’re always glad to have

that feedback so we can partner well with the private sector in

what we’re doing in Washington.

We will keep the hearing record open for 2 weeks if there’s anything from this panel or previous panels to submit for the record.

Again, we thank each of you and wish you and your organization

and members great success in your efforts, and this hearing stands

adjourned.

[Whereupon, at 1:19 p.m., the subcommittee was adjourned.]

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