The events of 11 September exposed weaknesses in the US securities trading, clearing and settlement infrastructure. Inadequate disaster recovery arrangements by key institutions, the over-concentration of processes in too few organisations, and the lack of redundancy in communication networks are among the issues local firms, industry bodies and regulators are now attempting to address. Other countries will want to learn these lessons too and many of the global institutions that have operations in New York are asking questions about how the infrastructure in their home countries would cope with a similar attack.
In many ways, the securities industry coped remarkably well with the terrorist bombings. Most firms with offices in and around the World Trade Center (WTC) were able to switch over their systems and move at least some staff to back-up sites and were relatively quickly up and running, albeit often with reduced capabilities. The trading of bonds resumed on 12 September and equities on 17 September. And, despite the massive surge in equity volumes on the reopening, not a single problem was reported with the execution of transactions.
However, it is not clear why NYSE had to close for four days. The exchange has remote backup data centres for its systems and has access to several alternative trading sites, says an exchange spokesman. NYSE blames the disruption on the damage to connections between its floor and member firms, but has not said why it did not move to a backup floor away from the damaged section of the communications grid. What the events of 11 September exposed is that most financial institutions had set up and tested their disaster recovery plans in isolation, with little consideration as to what would happen if more than their own operation was disrupted.
Some commentators have suggested that NYSE either needs to be broken into two or more physically separate sites, or it should build a fully equipped standby site away from Lower Manhattan. But this would be an expensive overhead, as are most disaster recovery arrangements. Prior to 11 September, there was grumbling among firms about the cost of meeting the SEC’s business continuity regulations, but the events have vindicated the authority.
Phil Lynch, the chief executive officer of Reuters America, notes how the fully electronic markets like foreign exchange were little affected. “This will accelerate the move to virtual, electronic markets,” he says.
But, although the bond market did better than the stock exchange in terms of trading, it had more problems when it came to the back office. Settlement is a low margin business that relies on economies of scale to generate profits and it is increasingly centralised in a few players. The Bank of New York (BoNY) clears over half the US Treasury Bill market and has its operations in Lower Manhattan. When the World Trade Centre collapsed it severed many of the telecommunications links in the area, preventing data getting to and from BoNY. Although the bank’s internal systems continued to operate and there have been no reported losses from its difficulties, its operating problems caused confusion and anxiety among its clearing customers. Given the circumstances of 11 September, few of these customers have commented openly on the bank’s performance, but privately some are highly critical. One major European bank complained of having to “fly blind” for days while BoNY was unable to provide information on tens of billions of dollars worth of securities deals it was supposed to be clearing.
Whatever backup arrangements BoNY had, clearly they did not allow for the re-routing of data in the event of a disaster. This lack of contingency planning is unacceptable, says one major trading bank customer. “When you are the infrastructure and core plumbing for the market you have to be able to provide the service regardless of the circumstances,” it says.
In a report last month on the US securities industry’s contingency plans, Massachusetts-based Meridien Research believes the problems exposed by the events of 11 September demonstrate the infrastructure in the US is not yet ready for securities settlement the day after trading (T+1) – a goal that the Securities Industry Association (SIA) hoped to achieve by 2004. Acknowledging the work that needs to be done, and the further impact that the current economic recession will have on IT projects, the SIA last month postponed its deadline for T+1 until 2005.

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