Grete Chan, 1 November 2012
As Hurricane Sandy ravished the shores of the US East Coast, leaving lower Manhattan still without power and a trail of debris, the New York Stock Exchange (NYSE) traders became uneasy as the NYSE trading floors shut down for a second consecutive day, which has not happened in US history related to natural disasters since 1888. (For a review of all extraordinary closures of NYSE, see their publication posted on the NYSE website).
NYSE decided to continue closure of the physical trading floors and move operations on to the electronic trading platform, something that has never been done before, whilst scurrying to put together an emergency plan on Sunday. This was the same emergency plan they had in place when Hurricane Irene hit but missed lower Manhattan. NYSE’s customers either didn’t understand or trust the emergency plan, and the efficiency of the market setting the opening and closing prices outside the trading floors. It seems that many firms have not tested their systems since Irene, but continued to point their finger at the stock exchange for not having a more concrete emergency plan.
Banks, brokers and exchanges continued Tuesday morning to test a new backup plan put together Monday that would shift NYSE operations to its all-electronic platform. But as weather eased, the exchange announced it would open its trading floor.
Former SEC Chairman Arthur Levitt called for greater regulator involvement in testing and overseeing emergency plans in case of natural and man-made disasters. Levitt said,
The regulators had a responsibility, particularly after 9/11, to see to it that every exchange had a backup plan that would ensure that regional disruptions wouldn’t cause them to go down.
Regulators agree, and said on Tuesday that they plan to probe whether more needs to be done to get exchanges and the trading community ready for such disasters.
Existing Rules on Business Continuity Planning
The current consolidated rule to date is FINRA Rule 4370. which sets general guidelines on the requirements of business continuity plans.
Pursuant to the Dodd-Frank Act, Rule 206(4)-7 — Compliance Procedures and Practices, it refers to the need for those registered under section 203 of the Investment Advisers Act of 1940 to have policy and procedures to at minimum, address the investment adviser’s or fund’s business continuity plan. Due to the lack of guidance from SEC, many members of the industry refer to FINRA Rule 4370. Business Continuity Plans and Emergency Contact Information, for an overview.
The former NYSE Rule 446 and certain NASD Rules 3510 and 3520 have consolidated into FINRA Rule 4370 to prevent duplication of rules as per May 2010. These rules govern member firms of the exchanges.
In the UK, the FSA Handbook covers Business Continuity requirements under High Level Standards: SYSC 4.1.6-4.1.8 and also govern controls with the UKLA Listing Rules (LR) section. It should be noted that due to electronic glitches, the London Stock Exchange was also shut down temporarily for seven hours in 2009. Industry members also debated on the topic of continuity plans in light of this event.
In Australia, ASIC has issued a Consultation Paper: Australian Market Structure: Draft market integrity rules and guidance (“CP 179”) with its draft rules expected shortly in Q3 2012. The Australian Stock Exchange also outlines the requirements under Section 4.1 of ASX Clear Operating Rules, Guidance Notes and waivers.
The Disaster Resource Guide also published a good list of rules and guidance that cover internal controls pertaining to business continuity and recovery plans.
With several major disasters in the past decades including 9/11, Hurricane Irene, and now Hurricane Sandy, the regulators are looking into enforcing disaster planning and more importantly, regular testing so that the plan may be readily executed when required.