"While no one likes to see a stirred up SEC," says Tabb, "given the findings outlined in the new report on business continuity and the financial markets, it seems all but inevitable."
In a follow up to its February 2003 report, "Potential Terrorist Attacks: Additional Actions Needed to Better Prepare Critical Financial Market Participants," the Government Accountability Office (GAO) details efforts by leading members of the financial community to better prepare themselves in the event of a significant market interruption, and outlines shortcomings within the SEC to validate these efforts.
In its September 2004 report, "Financial Markets Preparedness, Improvements Made, but More Action Needed to Prepare for Wide Scale Disasters," the GAO reviewed the most recent effort by major securities institutions in the New York area. It described how firms were preparing for a major disruption to the financial markets and found that the key clearing and settlement houses, as well as the broker-dealers, made progress in improving the overall resilience and reduced the levels of risk associated with the telecommunications infrastructure, physical security and business continuity planning.
However, Tabb says, the report indicates that more must be done to ensure that in the event of another major market interruption similar or worse than what occurred on September 11th, the markets are not disrupted for an extended period.
Adds Tabb, the GAO, which generally praises many of the efforts put forth by institutions it reviewed, is clearly still concerned about the resilience of the financial markets in the face of a major disruption. "In particular, the GAO is concerned about the limited business continuity capabilities of some of the organizations reviewed."
Specifically, the GAO focused on the limitations on geographic diversity, for example, the relative proximity of primary and back up sites, and the concentration of key employees within a limited geographic area.
While the report generally took a positive tone concerning efforts undertaken by key clearing and settlement organizations, Tabb says it was decidedly less so about the SEC.
The GAO also noted a number of concerns about the SEC's ability to monitor the business continuity capabilities of major market makers. "In particular, the GAO called on the SEC to bolster its information oversight program, a.k.a. the Automation Review Policy, or ARP," said Tabb. The GAO also voiced concerns over ARP's limited effectiveness, funding and staffing levels. Further, says Tabb, the GAO remains concerned over the SEC's limited ability to analyze fully the capabilities of firms within the financial sector to respond to a significant market interruption.
According to Tabb, "the question remains: what impact will the new GAO study have on the markets and their ability to respond to a significant market interruption?" While it is too early to tell, given the GAO's track record of prodding the SEC with its reports, the GAO's criticism of the SEC is likely to strike a nerve.
SEC chairman William Donaldson agreed in principal with the GAO findings and stated that he has already directed his staff to begin assessments of key broker-dealers' trading staff arrangements and their ability to respond to a disaster.
In today's unforgiving political and financial climate, the GAO report will most likely result in a certain amount of pressuring being placed upon the SEC to ensure that it actively monitor's the business continuity capabilities of various 'movers and shakers' within the financial markets. This in turn will most likely result in a more proactive stance by the SEC and its efforts to validate business continuity efforts between key settlement and clearing house operations, as well as broker/dealer operations.
As for how proactive the SEC will become, "that is difficult to say," Tabb added. "However, it's clear that business continuity is here to stay and that the SEC is most likely going to be taking a very hard look at your plans in the not too distant future.
"Hold on to your crisis management plans and business impact assessments," says Tabb. "It could very well be a bumpy ride."