File No. S7-32-02From: Ernest Tollerson [ETollerson@nycp.org]
Sent: Monday, October 21, 2002 3:03 PM
To: 'rule-comments@sec.gov'
Subject: File No. S7-32-02


Re:     Draft Interagency White Paper on Sound Practices to Strengthen the 
Resilience of the U.S. Financial System          

                                            

The New York City Partnership is pleased to offer comments on the "Draft 
Interagency White Paper on Sound Practices to Strengthen the Resilience of 
the United States Financial System," published in the Federal Register by 
the Board of Governors of the Federal Reserve, the Office of the Comptroller 
of the Currency, and the Securities and Exchange Commission (the agencies).  
The Partnership is the voice of New York City's business community on 
legislation, regulation and public issues that affect business and the 
economy. The Partnership strives to make New York an attractive place to 
do business by championing policies and projects that will diversify the 
city's economy and safeguard New York's position as the global capital of 
commerce and culture.

The Partnership is unequivocal in its support of the underlying goals of 
the white paper. Like the agencies, the Partnership believes that the U.S. 
financial system must have the strength and resilience to recover and resume 
operations after a wide-scale, regional disruption. In the wake of the 9/11 
terrorist attacks on New York and Washington, raising standards for resilience 
and business continuity is absolutely critical to the survival and future 
prosperity of the U.S. economy.  We also firmly believe that development of 
these essential standards should take into account the economic impact of 
these proposed standards on the New York City economy.

Two of the proposed standards identified as yardsticks of a firm's capacity 
to quickly recover and resume operations are: 

    ·       Establishing an out-of-region backup facility for data 
	        and operations; and 
    ·       Creating a second pool of workers to perform clearing 
	        and settlement functions.  

After discussions with financial services firms considered to be key to the 
functioning of the markets, the Partnership supports the conclusion of many 
in the industry. These firms found that while increasing distance might reduce 
some risk, such a move could potentially increase the risk of data loss.  In 
addition, the white paper's definition of a separate labor pool for the backup 
facility is problematic. Meeting this proposed standard would require firms 
to recruit and train a second set of workers.  Locating and maintaining such 
a pool of workers with the necessary skill set is difficult outside of major 
metropolitan areas. Recruitment and training costs could be significant. 

The Partnership joins many members of the financial services industry in 
maintaining that the firms themselves are best able to determine appropriate 
locations for backup facilities based on risk profile, available human 
resources and technology.

The Partnership offers these additional comments and suggestions on setting 
resiliency standards for major banks, top-tier securities firms and other 
institutions that are critical to the clearing and settlement functions of 
the markets:

  ·       The white paper does not make a clear or convincing case when 
it suggests or implies that creating "out-of-region" backup facilities is 
the best way to ensure a firm's rapid recovery and resumption of business 
after an area-wide disruption. It is highly unlikely that one cookie-cutter 
solution will provide all firms and all markets with the resilience required 
to recover and resume operations. It is more likely that individual firms 
will need to create customized solutions that accurately fit the architecture 
of their own settlement and claims systems here and abroad. 

  ·        The cost of compliance with some of the proposed guidelines 
in the white paper could be quite high.  While post-9/11 standards for 
resilience must be developed and implemented, it should be kept in mind 
that this process coincides with one of the worst slumps in Wall Street's
 history.  Wall Street is clearly in the grip of a bear market, and its 
 banks and securities firms are going through another round of downsizing.  
 New operating procedures should always be cost-effective. But that is 
 doubly important during a downturn. The agencies should propose standards, 
 but offer the banks and securities firms maximum flexibility to identify 
 the best ways to achieve those resiliency standards.  The firms themselves 
 are in the best position to develop uses of  human resources and technology 
 that will meet the resiliency requirements and be cost-effective at the 
 same time. 

  ·       The definition of firms that play "significant roles in critical 
financial markets" is vague. It should be clarified.  The agencies should 
develop clear, specific criteria that enable firms to determine which of 
their business units are critical to the functioning of particular markets. 
This information is essential for the firms that need to meet new resiliency 
standards. It is also essential information for local and state government 
officials who are in charge of public infrastructure systems that these 
companies rely on.  Access to this specific information may also help local 
and state officials gauge the impact of the new standards on jobs and tax 
revenue. Access to these criteria may also help shape future public investment 
decisions and strategies for economic development. 

  ·       To a great degree, a firm's ability to recover from an area-wide 
disruption is dependent on the strength and resilience of infrastructure 
systems, public and private, over which the firm has no control. Large-scale 
telecommunications failures, for example, could inhibit a firm's ability 
to transmit information to an out-of-region facility, regardless of its 
geographic distance from the primary business site or whether it is operated 
as a hot site. The agencies need to be cognizant of this fact and work with 
other governmental agencies that have jurisdiction over critical infrastructure 
systems such as telecommunications, energy and transportation upon which key 
financial firms and markets depend.

  ·       The white paper suggests that out-of-region backup facilities should 
not be dependent on the same labor pool or infrastructure components, including 
power, water, telecommunications and transportation. This preferred option seems 
at odds with the agencies' concerns about synchronous mirroring technology, 
which is limited in its effectiveness to a range of about 25 miles. In most 
major urban centers, backup facilities located within this range would be staffed 
by the same labor pool employed at the primary business site.  The firms themselves 
are in the best position to determine which backup sites make it possible to 
merge the appropriate workforce with the optimal infrastructure for clearing 
and settlement functions.

  ·       The white paper devotes a considerable amount of space to setting out 
deadlines for recovery and resumption of operations. The Partnership believes 
that these deadlines for recovering and resuming business operations should be 
developed in consultation with the firms and should be tailored to fit the 
structure of individual markets. In addition, the timelines for planning and 
implementation of these proposed resiliency standards should be revisited.

Finally, the Partnership believes that most firms have already taken or are 
planning to take additional steps to ensure business continuity in the wake of 
9/11. These measures have involved substantial investments by the financial 
services industry.  The agencies should give the industry additional time to 
perform comparative analyses of multiple means of achieving resiliency standards. 
The agencies should be supportive of the work and research that these firms have 
already undertaken.  The sound practices that the agencies contemplate should 
give these businesses maximum flexibility in their choice of appropriate, 
cost-effective ways to achieve the post-9/11 standards for resilience. Stringent 
guidelines for distance and labor pool standards are not the most effective way 
to achieve the higher levels of resiliency required in the aftermath of 9/11.

As worthy and essential as the work of the agencies is, the search for a set of 
federal standards for resilience should not lose sight of the negative impact 
this process could have on New York City's battered economy.  These deliberations 
by the agencies and the industry should strive to do as little damage as possible 
to New York City's job and tax base. 

Sincerely, 

Kathryn S. Wylde 
President and CEO 
New York City Partnership and Chamber of Commerce 

Ruth V. Thomas Melville 
Executive Assistant to 
Ernest Tollerson 
Sr. Vice President 
Research & Policy 
New York City Partnership 
 & Chamber of Commerce 
One Battery Park Plaza, 5th Floor 
New York, NY 10004 
(212) 493-7486;  (212) 509-1280 Fax