Acronyms Abound in Operations
IM, BCP and STP are all part of the alphabet soup that operations professionals grapple with every day.
The recent Securities Industry Association's Operations Update Conference highlighted the love financial-services professionals have for shortening the names of big problems. As if it makes them easier to manage, business-continuity planning becomes BCP, straight-through processing contracts to STP and the growing problem of instant-messaging retention shrinks to IM.
But as everyone in attendance realized, these problems only become worse if ignored. Regulators, in fact, are working to ensure that the business practices associated with some of these issues are codified so compliance can be more accurately measured.
IM
Speak to almost any operations professional in the financial-services industry and they will invariably describe e-mail as a retention-and-storage piece of cake compared to instant messages. Due to its fleeting nature, many players hoped that IM would be categorized apart from e-mail and subject to less stringent regulation. Those hopes have proved a waste of energy.
"Instant messaging is viewed as less formal than e-mail," says Stephanie Dumont, associate general counsel with the National Association of Securities Dealers, "but this lack of formality in no way excepts it from general standards of formally communicating with the public."
To that end, the NASD released a "Notice to Members" (03-33) that outlines the regulators IM expectations of its member firms. The notice clearly states that it is the message rather than the medium that determines a communications treatment. " ... the content and audience of each type of electronic communication determines the appropriate supervisory and recordkeeping treatment," states the notice.
Those recordkeeping requirements include Securities and Exchange Commission rule 17a-4 that also specifies it is the content and not the medium which determines retention and NASD rules 3010 and 3110.
Speaking to an audience of operations professionals, Dumont cautioned, "The bottom line is if you are unable to establish an adequate supervisory program for IM then you should forbid the use of it."
BCP
Both the NASD's Dumont and SEC Senior Special Counsel in the Division of Market Regulation Jeffrey Mooney say that BCP need to remain a high priority for financial-services firms.
The SEC, for its part, joined forces with the Fed and Office of the Comptroller of the Currency to issue an interagency white paper that aimed to provide guidance for core clearance and settlement members of the industry. The NASD has proffered rules 3510 and 3520 (awaiting SEC approval) that would require member firms to have BCP plans on file at the NASD with contact information for critical staff.
"We have tried to avoid a one-size-fits-all approach," says Dumont, who adds that the core goal is to ensure a firm continues to meet its customer obligations. The regulations would not require that a firm stay in business following a disaster. "That decision is up to the firm," she says.
Mooney says that the SEC has organized a working group "focused on creating a new clearing bank that could be a shell entity and remain dormant - possibly owned by the large market participants - that would only be activated in the event of a problem with one of the clearing banks." An affected organization could "contract with the bank to take over services," he says.
Not content to only deal with the critical clearance and settlement segment of the industry, the SEC is now turning its BCP attention to trading markets, including exchanges and ECNs. In a recently released policy statement, the commission outlines steps such organizations should take to recover business operations as quickly as possible (see sidebar).
STP
What operations conference would be complete without a digression into everyone's favorites subject: STP?
Once seemingly on the verge of mandating conversion to a one-day-settlement cycle - pre-Sept. 11 - the SEC had been largely silent on the issue. That is, until now.
The SEC's Mooney says the commission supports the goal - championed by the SIA's Institutional Transaction Committee - of having 100 percent same-day affirmation rates. That means a trade would be executed, allocated, confirmed and affirmed in the same day.
Mooney also talked about matching - the comparison of trade details among broker/dealers, asset managers and custodians. He noted that the only vendor to receive SEC approval to operate as a provider of matching services to date is Omgeo. However, Mooney says Omgeo probably won't be alone forever. "We anticipate that other entities will also be providing similar services and that competition in this area will be beneficial to the entire industry," he says.
Mooney goes on to say that although matching helps the industry reach higher levels of same-day affirmation, the SEC won't be mandating it anytime soon.
Mandating matching "would essentially prevent innovation and competition. While matching is the technology of today, in the future, with technological improvement, there would more than likely be other services. Another problem is that mandating matching may impose undue burdens on small brokers and asset managers."
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Internal Communications and Recordkeeping Requirements
NASD Rule 3010 requires each member to establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations.
SEC Rule 17a-4(b)(4) and NASD Rule 3110 require firms to preserve for a period of not less than three years, the first two years in an easily accessible place, originals of all communications received and copies of all communications sent by the firm or its employees relating to its business.
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