GAO: Disaster Recovery Rules Needed

February 19, 2003 ( - The financial markets might find it tough going to reopen after a major disaster without regulatory guidelines about how trading firms should prepare for a major disruption.

While a new study   from the General Accounting Office (GAO) praised banking and securities regulators for their work already done on payment and clearing system disaster planning, it argued that explicit standards were still needed, according to Dow Jones.

“Trading on the markets for corporate securities, government securities, and money market instruments is also vitally important to the economy, and the United States deserves similar assurance that trading activities would also be able to resume when appropriate and without excessive delay,” the GAO study said.

The GAO said regulators needed to take more of a stand on how trading functions would resume. At a minimum, the GAO report called for broker-dealers to make customer accounts available for transfer more quickly. That way, if an individual firm was unable or unwilling to resume trading, customers would be able to move their assets to an operational broker-dealer.

“Without identifying specific recovery goals and sound business continuity practices for trading organizations, the appropriate exchanges, broker-dealers and banks needed for trading to occur may not take all necessary steps to be operational,” the GAO study said.

Industry Groups Not Happy with Proposal

Regulators and industry groups said they shared the GAO’s concern, but they resisted the call for government-set standards. The US Securities and Exchange Commission (SEC), the Bond Market Association and the Securities Industry Association said trading is a business decision that should be left up to individual firms.

“Regulators should be encouraging markets to resume trading as quickly as possible rather than shutting them down,” John Ramsay, senior vice president and regulator council for the Bond Market Association, told Dow Jones. “That’s not the same thing as saying the government needs to set some sort of industry regulations telling people to resume trading.”

Meanwhile, the SEC agreed with the GAO’s broad goals, but resisted its call for more oversight of trading practices. “Because risking capital and providing brokerage services are in essence business decisions, a broker-dealer’s choice whether to continue trading or not in a crisis is not primarily a matter of government regulation,” the SEC wrote in a January 21 letter.