October 24, 2002 -- New disaster recovery proposals by Federal regulators could spur demand for Internet data centers from Wall Street firms, who may need to establish fully-staffed recovery "hot sites" outside the New York area.
But financial industry trade groups are objecting to some elements of the plan, which calls for greater geographic diversity of backup sites for firms handling data critical to the bond markets and banking system.
The plan won't be finalized for months. But the data center industry is watching with interest, as the outcome could prompt some facility shopping. Some financial institutions are said to be exploring additional data center space outside the New York market.
But the new guidelines could also be a blow to companies who have already spent millions establishing backup sites which may now be considered too close to their primary operations center.
The recommendations were developed jointly by the Federal Reserve, Treasury Department and Securities and Exchange Commission. They were published as a white paper designed to guide Wall Street firms on business continuity plans.
But the document says regulators may seek to enforce their final recommendations among a core group of 20 to 30 banks and brokerages that play key roles in the markets.
Regulators want the markets to be able to recover from a large regional disaster and resume operations the same business day. The best way to assure that, they say, is to spread out the data storage.
"All core clearing and settlement organizations should begin to implement plans to establish out-of-region back-up resources within the next year," the agencies state. "The objective is to minimize the risk that a primary and backup site, and their respective labor pools, could both be impaired by a single wide-scale regional disruption."
The Securities Industry Association, in its response to the white paper, argues that this standard is too specific and too costly.
Nearly all these firms already have backup data centers that mirror their trading data in real time. Most are outside Manhattan. But current real-time mirroring technology limits the distance between the primary and secondary data centers to no more than 60 miles.
The industry groups "do not believe that the White Paper should recommend a specific distance or sound practice that specifies an 'out-of-region' approach," the SIA wrote. "A prescriptive approach to distance in the White Paper would require changes to current plans that could result in a huge loss of this investment for many participants.
"Firms have already made and continue to make significant investments in alternative sites and data centers," the industry response continued. "The cost of defending against some scenarios may be so high as to make it impossible for some organizations to continue to operate profitably."
The comment period closed Monday. The SEC, Federal Reserve and Treasury Department will review the comments and then prepare a final report. No timetable has been set for that final document, but once it is released financial firms will have 180 days to make their best effort to comply.
"The agencies intend to incorporate these sound practices into supervisory expectations," the white paper noted, adding that regulators would review individual business continuity plans and take a "keen interest" in their compliance.