UK Financial Sector Market Wide Exercise 2006 Report

Transcription

1 UK Financial Sector Market Wide Exercise 2006 Report

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3 Market Wide Exercise 2006 Contents Tripartite Deputies Foreword 2 Executive Summary 3 Main Report 6 Scenario Exercise delivery Week by week scenario and participant response Conclusions 25 Follow up/further work 26 Appendix 1 Objectives 30 Appendix 2 Response to exercise questions 31 Appendix 3 Results from feedback questionnaire 36 Appendix 4 Experts commentary 40 Appendix 5 Acknowledgements 48 Financial Services Authority The Financial Services Authority owns the copyright and any other rights in this document. This document has been produced specifically for the purpose of the Market Wide Exercise 2006 and you must not reproduce or use this material without the FSA s prior written consent. 1

4 Tripartite Deputies foreword to the Market Wide Exercise Report This year s Market Wide Exercise was the largest of its kind anywhere in the world. No other country has undertaken such a thorough test of its financial sector s resilience to pandemic influenza. We had two main objectives: firstly, to provide each of the participants with an opportunity to test the effectiveness of their plans for responding to a flu pandemic; and, secondly, to assess whether there were any sectorwide issues which might need to be addressed in order to strengthen the capability of the financial sector to cope with a pandemic. We are in no doubt that the exercise has been a major success. The post-exercise feedback from participants, summarised in this Report, overwhelmingly confirms that the exercise presented them with a genuine challenge which has already prompted many of them to make adjustments to their business continuity plans. Many organisations are now re-evaluating long standing business continuity strategies and policies in areas such as human resources, third party dependencies, outsourced ancillary services, suppliers, operational priorities and communications. Certainly the Bank of England, HM Treasury and the FSA have learned a great deal both as individual participants and working together as the Tripartite authorities. In addition, this Report describes a number of sector-wide issues which were identified for further consideration such as the constraints on home working and the pressures a pandemic would exert on the retail financial services sector. We will be taking these and other issues forward with the industry through a series of follow up workshops and seminars. The unusual nature of the exercise has meant that we depended more than ever on the close partnership between Tripartite and sector this year. We would like to express our deep appreciation and thanks to all those who contributed to its success. Hector Sants Jon Cunliffe John Gieve Managing Director Managing Director Deputy Governor FSA HM Treasury Bank of England 2 Market Wide Exercise 2006

5 Executive Summary Introduction A flu pandemic is currently considered by government to be one of the leading risks to the UK. Thus, for this year s exercise, rather than simulate a sudden impact event (which had already been rehearsed several times), we decided to model the first wave of an influenza pandemic. The exercise ran for six weeks, from 13 October to 24 November simulating 22 weeks of a pandemic. Seventy organisations from across the financial sector took part including some that extended the exercise to include their overseas offices; in total around 3500 people were involved. To gauge the success of the exercise we asked all participants to complete a detailed feedback questionnaire. Sixty-three of the seventy participants did so which gives us a high level of confidence in the reliability of the responses. The key objectives of the exercise were: firstly, to improve the sector s preparedness by providing each of the participants with an opportunity to review, test and update their plans for managing a pandemic threat; and, secondly, to assess whether there were any sector-wide issues which might need to be addressed collectively in order to improve the capability of the financial sector to cope with a pandemic. The feedback from participants has told us unequivocally that these objectives were overwhelmingly met. High-level Findings The distinguishing feature of a pandemic is that its main impact is upon the availability of personnel rather than on physical assets. In order to simulate that impact the scenario modelled a gradual increase in the overall level of absenteeism, rising from 15% at the start of the exercise to a peak of 49% at the height of the pandemic with clusters of absence taking the peak rate up to 60% in some business units. The main impact of these absence levels was to move firms personnel management policies to centre stage and subject them to increasing stress as absence levels rose. The issues raised were wide-ranging and forced firms to examine a whole range of their polices including repatriation of staff from overseas locations, quarantine rules, certifying 3

6 sickness, use of vaccines, absence due to caring for children (following the closure of schools and crèches), voluntary absence, (the fear factor ), bereavement counselling, dealing with financial hardship and the fungibility of staff across business units. The home working strategies of firms were also tested and many issues surfaced in relation to ensuring effective compliance and control over remote activity, IT security considerations, maintaining IT support capabilities and health and safety issues. The exercise also raised the question of whether the telecoms infrastructure would be able to support large-scale home working for a prolonged period when staff shortages in the telecoms sector progressively eroded maintenance capability. Across the financial sector as a whole, not surprisingly, the heaviest impact of the pandemic was upon the more labour-intensive parts, notably the provision of customer-facing retail financial services. The scenario set the distribution of cash across the country as an early challenge for the industry and the Authorities to respond to. Although no overall cash shortage emerged during the exercise, there were bottlenecks. In addition, growing staff shortages forced the high street banks to close an increasing number of branches, which reduced the availability of retail banking services to the public, including ATMs. A clear lesson learned from the exercise is that there would be much to be gained from developing a coordinated strategy for responding to these challenges. In relation to the use of debit and credit cards some participants were able to extend expiry dates as a workaround to the difficulty of issuing new cards due to postal delays, but not all were able to do this. Again, this is an issue we intend to follow up. In the wholesale markets, firms responded to the growing shortages of front, middle and back office staff by reducing trading volumes. Proprietary activity was sharply cut back as firms concentrated their resources on fulfilling customer-driven business and maintaining strong liquidity positions. Throughout the scenario virtually all trading was conducted on-site as firms were not comfortable that they would be able to maintain a sufficient level of compliance and control to allow trading from home on a prolonged basis. Financial infrastructure providers produced regular updates on their operational status to the market throughout the exercise. Due to the high level of automation of their processes it appears that only very high levels of absenteeism would threaten their critical functions. Despite the sharp fall in activity the universal feedback from firms was that it was important to keep the markets open, even if on reduced hours. There was some appetite to establish an additional forum to discuss practical and operational difficulties faced jointly by the banks in relation to credit and liquidity risks. The scenario appeared to be less testing for insurance sector participants than for the others but they would clearly face a major challenge in processing the surge of claims they would face during a pandemic. In response to that challenge insurance firms considered a number of mechanisms for expediting the payment of retail claims, including, for example, making payments direct to the credit or debit cards of claimants where those cards had been used to pay the premiums. We will explore these and other issues with representatives from the insurance sector. 4 Market Wide Exercise 2006

7 Next Steps Individual participants were given an unparalleled opportunity to test thoroughly their plans for responding to a pandemic. Clearly, the main responsibility for embedding the lessons learned lies with them. However, as noted above, there were a number of cross-sector issues which the Tripartite authorities will be taking forward through a series of workshops and seminars with participants in the first part of 2007, details of which will be communicated in the near future. Do the various concerns raised by firms about reliance on home-working undermine its potential role in a pandemic? What arrangements can be made to make cash distribution more resilient to a pandemic? Can improvements be made to coordination between high street banks to enhance the availability of branch networks and ATMs to consumers during a pandemic? Can improvements be made to other parts of the retail payments system to make them more robust? What would be the most appropriate forum for addressing credit and liquidity issues in the wholesale markets during a pandemic? What are the impacts of disruption or closure of exchanges or infrastructure providers? In what areas, and when, would firms be seeking regulatory forbearance during a pandemic? Lastly, although a number of overseas regulatory agencies contributed to scenario planning it was not possible during the exercise to include them in any live play. Clearly, in a real event, close coordination of cross-border regulatory responses would be essential to an effective response to the developing situation. We will, therefore, be discussing with our regulatory counterparts the key issues involved in ensuring crossborder regulatory coordination to keep financial markets operating in a pandemic. 5

8 Main report The following sections include details about how we planned the exercise; the reactions of participants week by week, including significant learning points; the areas we identified for further work; and how we plan to take this forward. Appendices at the end of the report include graphical representations of participants responses to key exercise questions, statistics from the overall feedback questionnaire, and experts commentary on their experience in developing and participating in this year s exercise. Scenario Design In describing the scenario throughout this report we refer to World Health Organisation (WHO) pandemic phases and UK pandemic alert levels. We have summarised the WHO phases (described in the WHO global influenza preparedness plan) and UK alert levels (described in the UK Influenza Pandemic Contingency Plan) in the table below. Table 1: WHO phases and UK alert levels WHO Phases UK Alert Levels Phase 1 No new influenza virus subtypes have been detected in humans. An influenza virus subtype that has caused human infection may be present in animals. If present in animals, the risk of human infection or disease is considered to be low. Phase 2 No new influenza virus subtypes have been detected in humans. However, a circulating animal influenza virus subtype poses a substantial risk of human disease Pandemic Alert Period Phase 3 Human infection(s) with a new subtype, but no new human-tohuman spread, or at most rare instances of spread to a close contact. Phase 4 Small cluster(s) with limited human-to-human transmission but spread is highly localised, suggesting that the virus is not well adapted to humans Phase 5 Large cluster(s) but human-to-human spread still localised, suggesting that the virus is becoming increasingly better adapted to humans, but may not yet be fully transmissible (substantial pandemic risk). Pandemic Period Phase 6 Pandemic phase: increased and sustained transmission in the general population Past experience suggests that a second, and possibly further, waves of illness caused by the new virus are possible three-nine months after the first wave has ended depending on the season. The second wave may be as, or more, intense than the first. Post-pandemic Period Return to inter-pandemic arrangements. UK not affected OR UK has strong travel/trade connections with affected country OR UK affected UK not affected OR UK has strong travel/trade connections with affected country OR UK affected UK Alert Levels 1. Virus/cases only outside the UK 2. Virus isolated in the UK 3. Outbreak(s) in the UK 4. Widespread activity across the UK 6 Market Wide Exercise 2006

9 The baseline scenario simulated the spread of influenza from Thailand to the UK covering a five-month period in six weeks of exercise. The following table shows phases of the pandemic which were selected for the exercise following consultation with facilitators and the governance groups. Scenario phases table Exercise Week Phase Impact Date 1 Phase 4/5 Outbreak and spread of cases through Thailand Absenteeism Model Weeks October 2 Phase 6 (UK alert level 2) First cases in the UK Week 7 24 November Phase 6 (UK alert level 4) Widespread in UK Week December Phase 6 (peak I) Peak in UK Week 18 9 February Phase 6 peak (II) Peak in UK Week February Phase 6 recovery Reduction in cases Week 22 9 March 2007 We based the absenteeism figures for the UK and the 16 overseas countries chosen for illustrative purposes on the modelling figures for clinical infections provided by the Health Protection Agency together with assumptions added for school closures, fear factor and normal absenteeism. The speed of infection reaching a country was based on international air travel statistics (from IATA data) and the spread within the country was affected by the size of country and population. We gave participants detailed country information showing the spread of cases and number of deaths as well as absenteeism in each of the 16 countries to show the differing rates of spread around the world. Specific absenteeism clusters were added to the overall UK level of absenteeism to reflect the impact that closed community infections could cause. An alphabet model was used to enable facilitators to generate random absenteeism within a set percentage across each participant organisation. This was well received by participants as it generated serious impacts, in some cases resulting in whole trading desks and key crisis management decision makers being absent. This forced participants to consider issues around trading strategies; delegation of authority; hand-over processes; and communications. Modelling Market data was modelled on the basis of a number of high-level assumptions with the aim of raising business issues that organisations would need to consider in their pandemic response. 7

10 During the exercise, some organisations requested very detailed modelling, chiefly on changes in market volumes, but also central bank interest rates, changes in consumer retail behaviour, telephone outage by postcode. Providing this level of detail was outside the scope of the exercise objectives, however, and would have required resources and expertise beyond those available to the scenario control group. Exercise Delivery The exercise was delivered weekly using four distinct tools: FSC (Financial Sector Continuity) website - the exercise area of the secure part of the Tripartite website acted as the primary exercise delivery tool. We designed the site to be simple and easy-to-navigate, providing access to each week s scenario. Statements from the Tripartite, sector and industry groups, infrastructure and exchanges were given as the exercise progressed. We published answers to questions posed in previous weeks and links to other exercise tools. Discussion boards were also available to participants. FSA exercise website designed as an extension of the scenario provided on the FSC website, it included news pages outlining absenteeism and market models, impacts in other countries, and links to authoritative sites with information on pandemic influenza. INONI the FSA s online survey tool was used to collate the responses to weekly regulatory questions, exercise feedback, queries from participants to expert groups and exercise specific questions. alerts used to alert facilitators of the weekly release of the scenario and the publication of statements or messages from the Tripartite, industry and sector groups, infrastructure and exchanges on the FSC website. Week one Scenario Exercise date October Week one began with an outbreak of H5N1 in Thailand, with 75 reported deaths, leading to the WHO announcing Phase 5 on 27 October. This signified the likelihood that an influenza pandemic was considered by experts to be imminent. Week one was characterised by: Strong media and public interest in the preparedness of the UK and falls in market indices. Foreign & Commonwealth Office (FCO) advice against travel to parts of SE Asia. UK government advice that its borders would remain open and calls for business as usual. Department of Health public health guidance. Public concern about the impact on the UK s infrastructure of a pandemic outbreak with transport under particular scrutiny. 8 Market Wide Exercise 2006

11 Intended challenges for participants Organisations with operations in the Far East assess the immediate impact. Activation of staff welfare plans in affected areas, including repatriation. Organisations to think about how well they are prepared for global spread. Staff welfare considerations, in particular health protection, e.g. policy on antivirals. Review of communications plans for customers, employees and other stakeholders. Material participant reactions Responses showed that eight firms with operations in the affected area had been impacted though not to a significant degree. No firms reported any impact on their UK operations. Most participants had activated some or all of the following elements of their initial response plans: Established specific response team. Discussed issues at Board level. Issued guidance to staff on pandemic preparedness. Discussed response plans with key suppliers/counterparties. Implemented restrictions on staff travel to high-risk areas. Implemented quarantine policy for staff returning from infected areas. Reviewed policy around repatriation of staff working in infected areas. Reviewed absence policy. Initiated home-working strategy. Initiated additional cross-training. Conducted a review of business areas core functions and their priority. Reduced visits to/from other firms. Considered relocation of some business processes in affected area. Tripartite The Tripartite activated its business continuity arrangements, agreed a timetable for future meetings and agreed to publish a statement on the joint FSC website. The Authorities reported that they had no operational issues. The FSA asked its experts to look at the potential impact of pandemic on the reinsurance sector particularly, since reinsurance renewals take place in November. The Bank of England indicated that it would be considering the potential stresses on cash distribution. The Treasury engaged with other government departments to gain a view of the impact on their sectors. 9

12 Significant learning points highlighted by participants in week one Communications Need to provide clear, authoritative guidance and advice made available via government agencies that can be disseminated across the business using consistent terminology internally and publicly. Roll-out of business continuity plans to include a wider group to increase awareness and ensure employees understand their individual and collective roles in a pandemic. Employees should know where to find information during emergency situations, internally and externally. Key dependencies Improve understanding of the capabilities of suppliers, counterparties and financial infrastructure providers and understand how their plans for a period of prolonged disruption fit with own plans/assumptions about these key dependencies. Review plans Need to review business continuity plans to ensure synchronisation across the whole business, taking account of cross-border and regional issues and internal business functions including the identification of non-critical functions. Ensure that plans are aligned to WHO pandemic phases and the UK alert levels. Plans should remain flexible to reflect that UK-only organisations may not be affected by the initial WHO phases. Policies Review and adapt HR policies including business and personal travel policies, home working capabilities and options and policy on antivirals. Key themes for further consideration Have organisations planned for the key decisions they are likely to have to make during a pandemic and the trigger points for these? We asked participants if they were satisfied that they had effective plans in place for the primary contingency measures likely to be required in the event of a pandemic: e.g. suspension or curtailment of core/non-core services, transferring operations in affected areas to alternative locations, implementing home working arrangements. A significant proportion (59%) indicated that they needed to undertake further work to understand and/or plan for some measures. 10 Market Wide Exercise 2006

13 Week two Scenario Exercise date 25 November With isolated cases reported in Australia, China, India and Hong Kong and reports of unconfirmed clusters of cases in USA, France, Germany, Japan and elsewhere and 15,000 cases per week reported in Thailand, WHO declares Phase 6. The UK Government moves to Alert level 2 of its Pandemic Preparedness Plan as the first case in the UK is confirmed and there are reports of more cases in several regions. Week two was characterised by: UK absenteeism of 25% as panic sets in. Continued falls in market indices. Growing concern of employees over welfare with many asking to work from home. Rise in demand for internet banking and broadband connections. Some closures of UK schools and crèches in areas of reported outbreaks. Higher than normal demand for cash sources estimated extra 5 million withdrawals totalling around half a billion pounds this week (an increase of 1% above the "normal" levels). Panic buying of non-perishable food and petrol in some regions. Increase in cash-in-transit robberies. Employees based overseas demand repatriation. International flights cancelled due to crew shortages in affected regions. Guidance issued by government on use of anti-viral drugs. Intended challenges for exercise participants Markets busy and highly volatile. Firms dealing with sudden absenteeism caused by transport disruption and school closures. Pressure grows on firms to clarify their pandemic strategy, in particular homeworking plans and alternative travel arrangements (if any). Activation of staff welfare plans in all affected areas including handling the demand for repatriation in affected areas. How will organisations handle the fear and panic likely to be surfacing within workforces? Travel restrictions begin to affect organisations operations at home and abroad. Above- normal demand for cash. 11

14 Material participant reactions Participants reported no significant problems at 25% absence levels although most indicated that their capacity to absorb further increases in absenteeism was limited. A number of organisations had invoked home-working plans. Strategies for home working varied, with some organisations prioritising critical functions while others gave priority to those affected by school closures and unable to travel to work. Participants started to consider what non-critical functions could be reduced or stopped if the situation worsened. The scenario indicated that demand for cash was above normal levels although the movements remained within normal seasonal ranges. There was no overall shortage of cash, however, as the Bank of England made clear in a statement. Both the Bank and APACS (the UK payments association) issued statements encouraging the public to use alternatives where available e.g. cards. Retail participants were reviewing the capability of the means available to obtain cash, e.g. cash back from retailers, using other means of payments, on-line banking to accommodate the increase in customer usage and identified capability to accommodate a significant increase while also reconsidering what online services could be supported. The absence model created some local clustering within organisations, which required participants to consider arrangements for cover between teams, particularly where functions were critical but the team was small. Some participants implemented shift patterns in certain areas and others worked additional hours to cover technology infrastructure and also to ensure that there was adequate cover for cut-off times. Participants also indicated that they had implemented additional hygiene measures and increased communications with staff. Tripartite The Standing Committee met to discuss the impact on the sector and agreed an updated statement for the FSC website confirming that at the present time there was no significant disruption. The Operations & Strategy questionnaire (covering MIDAS, FSA s initial damage assessment tool) was expanded to include questions about possible operational pinch points in prime brokerage, collateral management and derivatives trading. More detail was sought on the impact on back office operations located outside the UK. Following requests from participants around guidance about regulatory forbearance, the FSA issued a press statement drawing attention to its rules in the Handbook under GEN 1.3 covering emergency situations. Significant learning points highlighted by participants in week two Key dependencies Review global dependencies while absence levels are low. Identify key services and agree how they will be maintained. 12 Market Wide Exercise 2006

15 Review Plans Identify the level at which absence becomes an issue for each business area to understand different strategies across all functions. Understand key skill sets for each function within the organisation and plan cross training of relevant staff. Ensure plans identify staff requiring laptops for home working. Policies Review travel arrangements for commuting to work and overseas travel. Review policy for dealing with staff refusing to come to work because they are scared and provide guidance for managers to help manage attendance. Review policy on remote access to systems and legal and compliance issues in respect of home working. Review policy on cancellation of leave. Key themes for further consideration How much do organisations business continuity plans reflect their dependency on the transport infrastructure and include contingency arrangements such as, private coaches, and include plans for prolonged disruption? What steps will organisations take to safeguard their key risk control measures in the face of anticipated high absenteeism? Despite prominence of cash as an issue, it should be emphasised that cash is a resilient payment mechanism because it naturally recycles between users. The vast majority (around 95%) of cash dispensed uses recycled, used notes rather than new notes. The system is also resilient because of its geographic dispersion both in terms of the institutions that recycle cash and the cash dispense channels (ATMs, branch counters) themselves. There is no plausible scenario in which an overall shortfall in the supply of Bank of England notes could arise. In the normal course of events, there is about 42 billion of notes and 3 billion of coins in circulation in the UK. Substantial contingency stocks of notes are held by the Bank of England to be able to meet any increase in demand. It is also possible that demand for cash may fall in a pandemic if normal levels of retail spending are lower (e.g. in restaurants, pubs etc). A flu pandemic might lead to a short-term disruption to the efficient running of the cash distribution network, which has a heavy reliance on labour input and manual processing. Foremost among these points is the reliance on the Cash-In-Transit (CIT) network, and particularly the supply of CIT vehicle drivers (in other words, the security lorries that are used to deliver and collect notes around the country). Staff shortages among drivers in the CIT industry could mean that, while there could be an adequate supply of notes in circulation to meet public demand, the normal 13

16 arrangements for distribution may be hindered. This might affect, for example, the re-loading of ATMs in a timely manner. However, there are also a number of approaches that the banking system and the authorities would seek to encourage: a) alternative methods of cash distribution to ATMs e.g. over-the-counter from bank branches and post offices (though in a pandemic, fewer branches would be open); b) using cashback from retailers (although there may be some constraints around this including security issues); c) substituting other payment types for cash e.g. greater use of cards. The exercise has provided a valuable indication of areas where the resilience of the cash distribution system could be further improved. It has, in particular, provided additional impetus to the contingency planning already undertaken by the wholesale cash handlers (major banks and CIT companies) in collaboration with the Bank of England; they are already well-placed to keep an adequate level of cash available throughout a pandemic. Many participants, in particular those involved in cash distribution, asked the government to relax obligations under the Working Time Directive and Security Industry Authority licensing requirements so that they could respond more flexibly and implement measures to mitigate the high levels of absenteeism. The Treasury will take this work forward with the Cabinet Office and other Government Departments as appropriate. Week three Scenario Exercise date 15 December The pandemic continued to spread throughout the world with confirmed cases in most major cities. In Thailand the authorities indicated that they expected a significant increase in the number of new cases (from 350,000 to one million) and a threefold increase in fatalities by 15 December. Department of Health declared Alert level 4 of the UK plan as the number of confirmed cases reach 1000 and the number of deaths reached 14 with many more predicted. Week three was characterised by: Absenteeism in the UK reached 36%. All major UK cities were affected with hotspots in Surrey, Essex, Manchester and Edinburgh and significant clusters elsewhere. Reduced service operating on public transport; some underground stations closed and rail networks similarly affected. As people switch to cars, the road networks become jammed. Up to 65% of schools and 74% of crèches closed. Public events cancelled for public health reasons. Continued panic buying but generally stores able to cope with demand. 14 Market Wide Exercise 2006

17 Growing fears over payroll departments and banks' ability to process salary payments. Further falls in market indices. Downturn in equity markets across the globe and a large hedge fund rumoured to be in financial difficulty. Concern reported over strain on infrastructure from home working activity and capacity problems for in-demand internet sites. Intended challenges for exercise participants Absenteeism now at significant levels, forcing organisations to implement specific contingency measures, e.g. suspension of non-critical services. Alternative location plans, e.g. split site, home working plans in place/implemented? Have organisations now implemented staff welfare arrangements? E.g. employee helpdesk set up to answer questions. Economic impacts starting to be felt. Impact on consumers? Material participant reactions At this stage more than 50% reported that they were affected by events although most were still managing to operate at close to business-as-usual levels. Some pressure points were arising, however. The absence model created shortages in front and back-office staff, leading to reduced trading volumes. All firms contacted reported that they were in favour of keeping markets open if possible. The British Bankers Association (BBA) and APACS issued a press notice to explain that there were no general difficulties with cash availability and to make the public aware of alternative means of obtaining cash and making payments. Tripartite There were no significant issues for the Authorities operational teams; however, some split-site and home working arrangements were implemented. It was agreed that the next supervisory questionnaire would include questions about system-operation areas, such as maintenance of cash machines and security staff. Significant learning points highlighted by participants in week three Communications Positive communications plan required to address issues of absence due to fear. Further coordination within the investment management sector would help to identify and resolve issues such as fund redemption limits. 15

18 Key dependencies Review back-up plans in case internet and telecoms are disrupted. Understand the impact of disruption on financial counterparties. Need for accurate information about the capabilities of suppliers, counterparties and financial infrastructure providers. Policies HR to advise on action to be taken to address staff absence due to fear. Review of plans Review of governance structure to ensure timely decision making at a global, regional, business function level. Redeployment of staff and cross training. Prioritisation of functions to provide ongoing support business. Key themes for further consideration Supplier dependencies We asked participants if they had a detailed understanding of their organisation s key dependencies (other than financial infrastructure) e.g. inter-departmental, IT suppliers, building service suppliers. A significant proportion (57%) indicated that they needed to undertake further work to understand and/or plan for some dependencies. Home working Home working forms an integral part of many financial sector organisations pandemic response strategies and many tasks can be reasonably accommodated as part of homeworking arrangements. Although some organisations have concluded it is impractical to carry out trading activity from home due to concerns about compliance arrangements and technical feasibility; also some functions are not sustainable except through direct access to office systems and support. The exercise is unlikely to have represented a significant test of organisations home working arrangements. Some participants may wish to examine further the practical considerations likely to arise in the event of people working at home for an extended period. For example: Have you identified the specific functions and tasks that you would undertake from home locations? Have the risks associated with these activities been fully assessed, with additional control measures identified? 16 Market Wide Exercise 2006

19 Have you carried out a home working capability assessment across your organisation, to identify those staff likely to be required to work at home, the likely duration, their equipment needs and the impact on your systems? Have you fully considered the management control issues associated with home working? For example, how will assigned tasks be coordinated? Have you thought about the Health and Safety requirements? We need to understand better the technical, legal and control issues around home working and the FSA will host a workshop to consider these issues further. The Treasury will engage with other government departments and telecoms providers on telecoms and internet capacity in a pandemic and feed these issues into follow up activities in early Week four Scenario Exercise date 9 February 2007 Globally, millions of new cases reported each week. There are now over 70 million confirmed cases in Asia, Africa, Middle East, Europe and the Americas. Global mortality expected to increase above one million by 9 February. Cases in Thailand started to decline having peaked at four million cases per week in January. In the UK the number of cases increased to over 5m with 3m new cases confirmed in the space of a week. The number of deaths in the UK rose to 57,000. Week four was characterised by: Absenteeism in the UK estimated to be 49%. Further falls in market indices and dramatic decline in trade volumes. Pressure on market infrastructure providers to shorten the trading day and extend clearing and settlement timescales. An above average number of ATMs and bank branches were not operational. Large increases in mortgage and credit card arrears and insurance companies were trying to cope with the volume of claims. Network rail companies operating skeleton services on all mainline routes and all suburban and branch lines shut. London Underground and the DLR running skeleton services and many stations closed. Some localised fuel shortages but supplies generally getting through. Government warns of possible planned power cuts to conserve energy supplies. Hospitals overwhelmed, all non-urgent surgery cancelled. GPs struggling to keep up with demand for medical certificates and anti-virals. Almost all schools and nurseries closed and leisure events cancelled. Maintenance worker absenteeism causes Health & Safety issues for businesses. 17

20 Intended challenges for exercise participants What levels of business disruption are organisations experiencing? Issues likely to be arising from long-term homeworking arrangements. Delays in the banking system e.g. cheque processing cause consumer problems. Mortgage defaults on the rise. Material participant reactions Operations for participants continued to become more difficult to perform. Many firms reported that they had stopped taking new business. Some firms switched operations to less affected locations. The suspension of non-critical activities included IT development, new business initiatives, marketing, maintenance, internal projects, account reviews, reduced confirms chasing, reduction in nostro investigations, preparation of management accounts and other non-critical management information, and the suspension of internal audit. Trading volumes were significantly down reflecting the shortage of staff in front, middle and back office and reluctance of many firms to allow traders to work from home. The financial infrastructures (CHAPS, CRESTCo, London Stock Exchange (LSE), euronext.liffe, London Metal Exchange (LME), Virt-x) announced reduced market/service hours. The retail network was put under more pressure with the increasing number of branch closures. The Bank called a meeting of the Cross Markets Business Continuity Group (CMBCG). CMBCG members took the view that the markets should be kept open, with the exchanges operating on reduced opening hours. Relief on regulatory reporting was also requested. A second meeting was called specifically to discuss the implications if there was a significant increase in absenteeism in the coming weeks. Members indicated that, while there was some scope to move staff between functions, if absenteeism reached between 60-70% critical operations would be at risk. The importance of maintaining consistent opening hours was also raised. The CMBCG cited core activities as liquidity and collateral management, book/record keeping, and counterparty financing/credit risk management. The Foreign Exchange Joint Standing Committee (FXJSC) chair contacted members regarding their preparations for reducing business to essential flow only. The Money Markets Liaison Group (MMLG) thought that low trading volumes would reduce the pressures on operational areas. It was thought more funds would be deposited on Reserve Accounts at the Bank of England on account of low credit risk and liquidity. The BBA issued a statement urging borrowers in financial difficulty to contact their bank. 18 Market Wide Exercise 2006

21 Tripartite The Authorities reported that they were able to maintain core functions. Home working strategies had been employed where possible. Standing Committee took a forward look at the impact on the market of higher levels of absenteeism, including: How market trading operations would be prioritised; How a sector wide solution to the retail networks capacity problems could be brokered to ensure banking availability to consumers; Mechanisms for international coordination of opening hours. The Authorities agreed to issue a press release focusing on market issues. Significant learning points highlighted by participants in week four Communications Greater need for cross-sector communications. Communications programme for clients to advise on service levels. Introduction of a communications strategy for fatality announcements across the business. Freedom of information/data protection issues would there be flexibility around statutory obligations? Review of plans Many issues arising could have been planned for in advance. Need to establish what level of service disaster recovery providers provide in a pandemic situation. Policies Carry out a detailed analysis of processes to improve understanding of when non- critical activities become critical and affect other business functions. A skills database would be helpful when considering redeployment of staff. Review of home working capability and practicality including health and safety issues. Clear governance structures to include trustees and board and other decision makers. HR policies to include emergency financial support, transport, accommodation and death in service benefits. 19

22 Key themes for further consideration To combat the transport disruption, participants were using home-working strategies, alternative locations, shift patterns, making alternative travel arrangements and investigating the possibility of using hotels. However, organisations should also consider the impact that these flexible working arrangements might have on building services such as cleaning, maintenance and security. Some participants were planning to conduct further work to identify staff with school-age children to assess the impact of pandemic plans and critical functions. The focus of the exercise was on UK operations. However, as part of follow-up work the Authorities will liaise with other regulators, including those overseas, to identify areas for collective action such as coordinating the opening and closing hours of payment systems infrastructure (e.g. CLS) and exchanges, and cross-border issues around regulatory forbearance. During the exercise the retail banks and the BBA discussed the coordination of bank branch closures. Further work is required to develop more detailed plans surrounding coordination amongst the retail banks and we propose that this strand of work is linked with the follow-up work proposed on cash distribution. Week five Scenario Exercise date 16 February 2007 Globally, the number of cases increased to 120 million and mortality expected to rise above two million. The number of cases in Thailand started to decline rapidly. Decline in cases expected in other countries in the next few weeks. Number of UK cases over nine million, with four million new cases confirmed in the past week. Total number of deaths in the UK more than 100,000. Week five was characterised by: Overall UK absenteeism around 48% but worse in London because of adverse weather in South East. Significant cluster absences. In addition to ongoing business impacts from week four, businesses also contending with daily rota power cuts. Continued fall in market volumes. Growing retail debt problems. Increasing concerns about market abuse due to erosion of financial controls. Only essential foods available as absenteeism seriously affected supply chain. Sharp gas prices rises following increased demand arising from shortfall in energy supply and the cold snap. An authorised vaccine developed but not expected to be available until June 2007 and then only on a limited basis. 20 Market Wide Exercise 2006

23 Intended challenges for exercise participants Clusters of higher absenteeism in London arising from additional transport disruption due to adverse weather. Have risk control measures broken down? Retail debt problems mount. Organisations contend with bereavement issues as death toll mounts. Businesses across the country contend with daily rota of power cuts. Material participant reactions A financial infrastructure provider elected to close for three days because of high absenteeism levels and the uncertainty caused by the additional severe weather conditions. Power outages made it difficult to guarantee a reliable service working from home. Deferred settlement arrangements were invoked. In its advisory role to the Tripartite Standing Committee, the CMBCG discussed repercussions with core firms and the main exchanges. CMBCG members noted the issues around risk of market uncertainty if the infrastructure provider were to remain closed for longer than initially expected. Generally the wholesale firms were still able to maintain core functions. It was suggested that a forum similar to the CMBCG might be convened to look at the practical and operational difficulties being faced by the banks for credit and liquidity risks. On the retail side, some banks indicated that they were able to extend expiry dates on their credit and debit cards or, in light of postal delay, issue new cards earlier than usual. Issues were raised around the geographical spread of the availability of channels to dispense cash (branches and ATMs) and the capacity of the CIT industry. There was a high level of bank branch closures (50%) with some delays in refilling ATMs. The insurance sector reported no major problems, although some regional insurance offices were closed. Claims processing was also under pressure as a result of absenteeism, and firms were prioritising and making hardship payments. Firms also discussed payment methods for claims with the ABI, including for example, making payments direct to credit or debit cards where those cards had been used to pay premiums. At this stage the insurers were concerned about the potential increase in claims following bad weather. Firms indicated that they were willing to extend policies for renewal by up to one month. The FSA issued a press statement giving guidance on extending the deadline for preparing annual accounts and reminding firms about their obligations for reporting market abuse and insider dealing. FXJSC held discussions with members on key risks around higher absenteeism (clusters). 21

24 MMLG thought that low volumes would reduce the vulnerability of some infrastructure providers. However, contingency measures would still be reviewed in case the operational disruption became more acute. Tripartite The Standing Committee published a joint press release covering closure of the infrastructure provider, possible delays to the opening of Real-time Gross Settlement (RTGS) past the agreed 7.45am opening, cash distribution and the situation of each Authority. The Authorities were alert to an increased operational risk due to staff fatigue and delays to routine maintenance. They considered what issues might arise for them and for the financial sector in planning for a return to normal business, e.g. managing an orderly reopening of infrastructure in coordination with the market, including the consideration of the impact on hedge funds and private investors and coordination of decision making on corporate actions. Further consideration was given to the impact on CLS operations of delaying the opening time of RTGS. As other countries would be similarly affected in a pandemic, it is likely that the CLS settlement window would further contract. Significant learning points highlighted by participants in week five Key Dependencies Focus on establishing closer relationships with suppliers and outsource providers, to gain a better understand the potential impact of reduced or no service of financial and non-financial infrastructure. Understanding the implications of a closure of a key infrastructure provider. Review of plans Review plans that place heavy reliance on home working. Policies Develop policies around staff welfare. This is an area that has not previously received much focus, for example hardship funds and bereavement counselling. The importance of a streamlined governance structure to enable timely decisions. 22 Market Wide Exercise 2006

25 Key themes for further consideration Thirty eight percent of participants indicated that they needed to do further work to gain a detailed understanding of their organisation s dependencies on financial infrastructure providers. The decision of a key infrastructure provider to close temporarily demonstrated that we need a better shared understanding of the impact of disruption to or closure of the financial infrastructure, and other approaches workarounds and alternatives to ease that impact. The Bank and the FSA will set up a working group to consider this issue. Week six Scenario Exercise date 9 March 2007 Globally, over 500 million cases with mortality expected to increase above nine million. The pandemic peaked in the UK and in many parts of the world. Total of 15 million confirmed cases in the UK with 800,000 cases confirmed in the past week. The UK death toll increased to more than 291,000 fatalities. Week six was characterised by: Absenteeism in the UK fell to 24%. Volumes in the markets start to rise but liquidity still slow to rise. Backlogs in back office processing caused concern and we asked businesses to consider the priorities for return to normal operations. Off-shoring concerns increased as the number of cases in India began to rise. Rumours of identity fraud representing a security risk for banks. Insurance companies faced with increase in life claims. Organisations dealing with staff welfare issues. NHS still stretched. First doses of vaccine not expected to be available before June, priority to be given to front-line health workers. Delays to burials and cremations Improved transport services across the country but some disruption likely to continue due to maintenance issues. Energy supply meeting demand. Maintenance issues continued to impact all utility services and the focus remained on repair work. The first schools and crèches reopen but still an acute shortage of childcare provision. Fears of second pandemic wave grow. 23

26 Intended challenges for exercise participants Impact on off-shore operations as flu cases peak in India. Employee welfare considerations, e.g. skills shortages, staff morale. Businesses assess priorities for return to normal operations. Residual issues adversely impact a return to normal operations, e.g. back office backlog. Insurance companies faced increase in life claims. Material participant reactions Following its closure for three days, the financial infrastructure provider reopened with reduced hours. The insurance companies were operating well, particularly for paying claims. Firms were preparing to return to business as usual and thinking about planning for a second wave of a pandemic e.g. prioritising reinstating operations and adapting plans to incorporate lessons learned during the first wave. Tripartite Standing Committee discussion focused on ensuring an orderly return to business as usual and preparing for a second wave of a pandemic. It was expected that in a real event, CMBCG would meet to discuss issues for an orderly return to business as usual. Significant learning points highlighted by participants in week six Review of plans Planning for a second wave of a pandemic should be included in plans. Plans should include triggers for returning processes to business as usual. Policies Retaining staff might be a problem for some organisations as business returns to normal. Better understanding of child-care commitments would help planning. Important to maintain internal controls and reconcile positions before over committing to front-office activities. 24 Market Wide Exercise 2006

27 Key themes for further consideration During the exercise the insurance sector reported no significant issues although there were some concerns about the impact of increased claims volumes once the peak of the pandemic had passed. Further work is required with the insurance sector to explore the impact on them of more challenging scenarios. The FSA will lead a workshop with insurers to explore this in more detail. While the focus of the exercise was the impact of the scenario on UK operations, the scenario ensured that participants considered the impacts on global operations and the robustness of their overseas outsourcing arrangements. What would organisations do differently when planning for a second wave? Conclusions The exercise raised a number of issues where we know now that further cross-sector work is required to improve the capability of the sector to cope with a pandemic. Unsurprisingly the largest impact was on the more labour intensive parts of the retail sector. The exercise raised issues around how the cash distribution network would perform in such a situation and the coordination of branch closures. It is clear that further work is required in these areas to develop a strategy to respond to these challenges. On the wholesale side the high level of automation of key processes suggested that only very high levels of absenteeism would threaten their critical functions. Levels of activity reduced as the impact of the pandemic resulted in staff shortages in front, middle and back office functions. Discussions on home-working strategies highlighted participants own concerns around the maintenance of effective compliance and controls and also the sector s dependence on the capability of the telecoms infrastructure to continue to provide a service when also faced with similar absence levels. The closure of an infrastructure provider highlighted the need for a better understanding of the complex interrelationships between the providers of these core services. 25

28 Follow up/further work Follow up work to the 2006 Market Wide Exercise will begin in the first part of This will include seminars and workshops to take forward key issues that arose during the exercise. Category Summary of Issue Next Steps Retail A number of issues need to be considered including: The Bank of England will take the lead with the cash industry to consider the issues around the cash distribution; distribution of cash by the CIT industry during a pandemic and how central direction by the coordinated opening/closure of bank authorities could operate. branches and ATMs; The FSA to liaise with the Retail Bank Group to extending the expiry date on credit discuss the coordination of branch closures (which and debit cards will be linked with the cash distribution work described above) and establish whether it is feasible to extend the expiry date on cards; and look at mechanisms for informing cardholders. Wholesale Insurance Financial Infrastructure Government/ Dependencies Regulatory Forbearance International Home working: improve understanding of practicality, technical requirements, legal and HR issues and controls, compliance issues. Insurers were not as stretched as other sectors during the exercise. Improve understanding of impact of disruption/closure of exchanges or infrastructure providers and possible workarounds. Relaxation of Working Time Directive and Security Industry Authority licensing requirements; information about power prioritisation schemes, education, health issues etc. Issues to be considered around approach, potential guidance, principles. Improve understanding of how other regulators will respond to a pandemic, for example coordinating the opening and closing hours of exchanges, CLS. The FSA will host a workshop to consider the issues around home working. The Treasury will engage with other government departments and telecoms providers about telecoms and internet issues. The FSA will hold a workshop with insurers to consider more challenging scenarios. The Bank of England and the FSA to convene a working group to consider the impact of disruption to the financial infrastructure and identify possible workarounds. The Treasury to discuss with the Cabinet Office and other government departments as appropriate. The FSA to host a workshop to discuss issues around regulatory forbearance. The Bank of England and the FSA to explore issues with international regulators and publish key findings. 26 Market Wide Exercise 2006

29 Wider government The Treasury will follow up key issues raised during the exercise about dependencies on other critical infrastructure, in particular the utilities, with the relevant departments and agencies. We will also have the opportunity to feed these issues into a crossgovernment exercise on pandemic flu scheduled for early Tripartite Conference The Treasury will host the next annual Tripartite Conference in July 2007, and the agenda will focus largely on follow up work to the Market Wide Exercise. Invitations and a provisional agenda will be circulated in spring Tripartite Lessons The Authorities also have lessons that they will be taking forward, both collectively and individually. These include: HR Policy areas to be considered include monitoring staff who have travelled to infected areas; balancing leave entitlement for those who have worked through the pandemic and those who have been absent either due to illness or caring for family etc. Communications the Authorities will review their procedures for drafting and agreeing statements to be published on the FSC website. Contingency sites the Authorities will review arrangements at their recovery sites. IT support the Authorities will consider whether in certain circumstances IT support staff / expertise could be shared within the Tripartite. 27

30 28 Market Wide Exercise 2006

31 Market Wide Exercise 2006 Appendices Appendices 29

32 Appendix 1 Objectives of the exercise 1 To explore and better understand the potential impact of a flu pandemic on the financial sector; 2 To improve the sector s preparedness by providing opportunity to review, test and update plans and therefore response to a pandemic threat; 3 To identify and think through the strategic decision-making that could result; 4 To develop an understanding of the Tripartite role in responding to a rising tide event causing major operational disruption (MOD); 5 To aid development of wider communications strategies for responding to a pandemic; 6 To increase awareness of the issues involved and provide opportunities for training e.g. in parallel exercises. 30 Market Wide Exercise 2006 Appendix 1

33 Appendix 2 Responses to week 6 Project Feedback questionnaire In week six of the exercise we asked participants questions about the status of their business continuity arrangements to deal with a pandemic. Over half of those that responded indicated that further work was required to ensure that they have effective plans in place to deal with a pandemic. Responses to these questions have been summarised in the graphs below. Question 1 Have you carried out a formal assessment covering the potential impact on your organisation of a Pandemic outbreak in the regions in which you operate? Under review Response Options Yes, but conclusions still to be factored into Corporate Risk Management plans Yes, conclusions factored into our Corporate Risk Management plans Number of Responses Appendix 2 31

34 Question 2 To what extent are you satisfied that you have effective plans in place for the primary contingency measures likely to be required in the event of a pandemic? Under review Response Options Further work required to understand/plan for some measures Plans well understood and contingency plans developed Number of Responses Question 3 To what extent are you satisfied that your existing Business Continuity plans include provision for the activities required to ensure a return to normal operation following a Pandemic? Under review Reponse Options Existing plans require further development Included in existing plans Number of Responses Question 4 Do you have a detailed understanding of your organisation s dependencies on financial infrastructure? Under review Response Options Further work required to understand/plan for some dependencies Risks well understood and contingency plans developed Number of Responses 32 Market Wide Exercise 2006 Appendix 2

35 Question 5 Do you have a detailed understanding of your organisation s other key dependencies, e.g. Inter Departmental, IT suppliers, Building Services suppliers etc? Under review Response Options Further work required to understand/plan for some dependencies Risks well understood and contingency plans developed Number of Responses Question 6 To what extent is your organisation s exposure to public transport system failure well understood and planned for? Under review Response Options Further work required to understand/plan for transport system failure Risk well understood and contingency plans developed Number of Responses Question 7 To what extent is your organisation s exposure to other utility failures (e.g. power, water, telecoms) well understood and planned for? Under review Repsonse Options Further work required to understand/plan for utility failures Risk well understood and contingency plans developed Number of Responses Appendix 2 33

36 Question 8 To what extent are you satisfied that your staff welfare arrangements/plans will meet the demands of your workforce during a pandemic? Under Review Response Options Further development required in all or some areas Existing arrangements/plans generally adequate Number of Responses Question 9 Please indicate your organisation s planned strategy on distribution of antiviral drugs to your employees during a Pandemic? Under review Response Options We do not plan to distribute antiviral drugs to our employees We plan to distribute antivirals to key workers only We plan to distribute antivirals to our entire workforce Number of Responses Question 10 Do you consider that your existing home working arrangements/plans would broadly meet the demands of your business during a pandemic? Under review Response Options No, further development required Yes Number of Responses 34 Market Wide Exercise 2006 Appendix 2

37 Question 11 To what extent are you satisfied that you have an effective Communications strategy in place to deal with the impact of a Pandemic or other major Business Continuity event? Under review Response Options Further development required Strategy and plans developed Number of Responses Appendix 2 35

38 Appendix 3 Results of the Overall Feedback Questionnaire Following the exercise we asked participants to complete an exercise feedback questionnaire, we received responses from 63 participants. Overall feedback on the exercise was very positive. Almost all participants have said that they will be making changes to their plans as a result of this exercise. The exercise met its key objectives but the Authorities recognise that there is still work to do to enable the market to improve its understanding of the Authorities role. The feedback also highlighted the challenges participants faced as a result of the weekly exercise cycle. In planning the exercise we recognised that the timetable would be demanding and considered this issue carefully as part of the design. The challenging response deadlines were necessary to allow sufficient time to review responses to ensure that the scenario remained relevant and to provide an opportunity for the experts to respond to participants questions, which we felt was a valuable part of the exercise, participants rose to the challenge remarkably well. The table below summarises the responses that we received. 36 Market Wide Exercise 2006 Appendix 3

39 Strongly agree Agree Disagree Strongly disagree INONI (the online survey tool) The feedback tool was easy to use The questions asked were clear and relevant The INONI FAQ page was helpful The feedback tool captured your weekly status and responses effectively The feedback tool added value to the exercise Project Objectives The exercise enabled you to improve your preparedness by providing an opportunity to review, test and update plans for managing a pandemic threat The exercise has helped to identify strengths and weaknesses within your plans The exercise enabled you to enhance your understanding of the Tripartite Authorities role Issues the exercise allowed participants to consider Select the issues the exercise allowed you to consider/address: Global issues HR policy issues Interfaces with dependencies (suppliers) Interfaces with other counterparties, financial infrastructure providers Recovery phase/return to normal operations UK Issues regional UK national Scenario Delivery Injects were made available at the agreed time in accordance with the Exercise Cycle Scenario material was easily accessible via the FSC website The FSA exercise website was well designed and user-friendly The website and news articles added value, realism and flavour to the exercise The exercise cycle provided sufficient time for you to consider injects and prepare your response Your facilitator was well briefed and able to provide you with answers to questions raised Total Appendix 3 37

40 Strongly agree Agree Disagree Strongly disagree Scenario The exercise delivered a credible and engaging scenario/storyline The scenario was sufficiently challenging The injects were comprehensive and covered many significant issues The injects were clear, relevant and easy to understand The media injects were well considered, realistic and relevant The market data injects were well considered, credible and relevant Weekly Expert responses feedback on the FSC website was useful Project Office - before exercise The Project Office was easily accessible by phone and The Project Office was able to answer your questions and replied promptly The Project Office was helpful The Project Office was well informed Project Office - during exercise The Project Office was easily accessible by phone and The Project Office was able to answer your questions and replied promptly The Project Office was helpful The Project Office was well informed Exercise Information The communiqués were timely and useful in setting a timetable of key dates The communiqués assisted you in your preparation for the exercise The Rules of Engagement were clear and assisted with your preparation for the exercise The Participants Reception provided you with an opportunity to clarify any additional questions regarding exercise planning The Facilitators Briefing provided you with an opportunity to clarify any additional questions regarding exercise planning Total 38 Market Wide Exercise 2006 Appendix 3

41 Strongly agree Agree Disagree Strongly disagree Total Participation The exercise was good value for money Yes No Have you made/will you be making any changes to your plans as a result of this exercise? Do you wish to be invited to participate in future market wide exercises? Core Extended Extended Total crisis team abroad across the business Did you run an extended exercise? Sum of approximate number of participants 3500 Appendix 3 39

42 Appendix 4 Experts commentaries Richard Maddison (FSA) Chair of Steering Group The steering group consisted of 12 representatives drawn from across the sector, including the Tripartite Authorities. The group met each week during exercise planning and throughout the exercise itself. I thank members for the support, experience and challenge that they provided and that was an important contributor to the success of the project. Our role was to ensure that objectives were met by overseeing the design and delivery of the exercise. The fresh approach to exercise design and the fact that we chose not to use consultants meant that there was plenty to consider, but the excellent work of the exercise team, project office and governance and expert groups meant that, although work continued right up to the start of the exercise, the project ran to plan. The risk log identified over 40 risks and mitigations; the one most closely monitored was the potential for participant and exercise team fatigue. The only significant change in approach sanctioned was the original intention of having one hundred injects for each week prepared in advance. In retrospect the revised approach, to design the core injects whilst leaving half of the rest to be written during the exercise proved to be more efficient, as did combining injects thus reducing the overall number. Finally it is pleasing to note the high satisfaction levels, given the length of the exercise and the wide range of participants. Angela Hobley (Bank of England) Chair of Planning & Logistics Group The Planning and Logistics Group (P&L) comprised a small team of respected BC professionals from a variety of UK and global financial institutions. Their experience in preparing and delivering exercises within their own organisations was key to the advice and guidance they were able to bring to the MWE The group was purposely small to ensure that issues as they arose could be discussed constructively with clear guidance and recommendations as an outcome in each sitting, allowing the project to progress. I would like to thank the P&L members for their valuable, level-headed, open and honest input, which helped ensure the successful delivery of this exercise. 40 Market Wide Exercise 2006 Appendix 4

43 Within the governance structure responsibility for the Project Office (PO) fell under the remit of P&L. At its peak the PO consisted of 8 staff who worked diligently, with humour and professionalism throughout. The approach to the exercise from the very concept stages was based on simple project management protocols. The project office developed project plans, facilitated and provided secretariat support for the governance groups, designed and delivered regular communications for participants, and organised receptions. Their responsibilities also included collation of scenario materials, design and management of the online tools, FSC, FSA and INONI, in addition to responding to the day to day telephone and queries from participant organisations. Challenges Time available for exercise preparation once the format, scenario and duration were agreed at Tripartite level. Convincing ourselves and then participants that a six week exercise with a day and a half for participants to respond to the events presented was achievable and realistic and that it could be set at a sufficient level to engage senior management. Preparation of materials to ensure that the full six weeks were engaging and held sufficient interest and benefit for all sectors participating, each at different stages in their own pandemic planning. Preparation and testing of exercise delivery and response tools. Determining the right balance on information and delivery style, keeping format simple yet stimulating both visibly and in content. What did we discover? A six-week exercise was right for a pandemic scenario. It worked well for most participants but we recognise that it would not be right for most other traditional scenarios. Reconfirmed that in designing an exercise of this size, regardless of the scenario or duration, it is essential to do so in close partnership with experienced representatives from both the business continuity and finance industry. This ensures balance in exercise content, scenario emphasis and coverage of areas of concern that individual sectors have identified. Reconfirmed that regular and uncomplicated communication is critical to success. In advance of the exercise a number of planned communications interspersed with ad-hoc messages were delivered and supported by facilitator and participant briefings. These together ensured that all organisations involved had every possible opportunity to give feedback, influence how the exercise was delivered and understood what the six weeks looked like for them. Reconfirmed that it is very easy to get too close to a project, which can cause you to miss the obvious. The formation of the governance groups helped retain perspective and ensured that the exercise remained on track and delivered to specification. Appendix 4 41

44 Reconfirmed that it is essential for organisers of exercises to be accessible and available to answer questions, from the simple exercise delivery type questions through to the more intricate and complicated questions covering industry specialisms. The project office team did this effectively in the weeks leading up to and throughout the exercise. We discovered it is critical that as organisers you know when to say no to new requests to ensure that the scenario scope is not hijacked by individual sectors or groups to the detriment of other sectors participation or areas of interest. Elizabeth Roberts (HMT) Chair of Scenario Control Group The Scenario Control Group brought together a wide range of experts from across the public and private sector. It has been interesting to see different models of engagement emerge across the different expert groups, in a more decentralised way than I have observed in the last two market wide exercises. Each operated differently. The Health group benefited from being a tightly coordinated group already used to working with each other on exercises. The Utilities group required a great deal of coordination of a diverse range of experts. The Finance group provided a valuable kickstart to detailed inject production by hosting two brainstorming sessions which generated many ideas for inject content which were then allocated across the expert groups. The Health group played a key role in providing base assumptions for the exercise scenario that were then discussed and reviewed by the Scenario Control Group, Steering Group, and the Challenge Group. The pandemic scenario involved a great number of assumptions to be agreed on a variety of factors including the clinical scenario, the source and spread of infection, the phases and countries to include, absenteeism factors and market data. Communiqué 3 gives more details about how the assumptions were made. Following the Scenario challenge and the final selection of exercise phases, the scenario effort then focussed on the development of the storyboard and inject catalogue for each exercise week. FSA and the Project Office managed the inject catalogue and the production of material for the FSA exercise website. This was developed with the assistance of the FSA Web Communications team who did a great job developing and updating the site each week on top of their day job. A small control group, with independent support, managed the review of the wide range of material provided by the expert groups and best efforts to use feedback from game play to produce a streamlined inject package which would meet the expectations of participants and meet exercise objectives. 42 Market Wide Exercise 2006 Appendix 4

45 As Chair of the SCG, I have found it hard work but very satisfying to deliver a product which challenged and engaged so many organisations for the full six weeks of the exercise. I would like to thank the many experts who have engaged in a very positive way to bring their knowledge and experience of scenario development which ensured the delivery of a high quality scenario. My thanks also go to the many others who have supported its production. The Tripartite Authorities have learnt a great deal from the planning and delivery of the pandemic flu scenario and will want to ensure that lessons are followed up. Anita Blake and John Simpson (Health Protection Agency) Health Expert group To run a flu pandemic exercise on this scale is a very ambitious undertaking. The method of delivery via the website, the ability to respond to questions from players and the scheduling over six weeks has enabled a far more comprehensive consideration and, we hope, resolution of the issues than the more conventional desktop exercises that we have been involved in. Whilst we have been at the sharp end of the delivery vehicle from the health point of view, we have called upon many of the experts within the Health Protection Agency and the Department of Health to give us guidance and advice to address the issues. Players should therefore be reassured that they have received the most informed and best advice available although we hope that they realise that definitive answers to certain questions will only be possible when the influenza pandemic actually arrives. Dermot McCarthy Chair of non-financial infrastructure group Infrastructure, for the purposes of this exercise, is a very broad concept encompassing a wide range of organisations and sectors. Developing the infrastructure elements of the exercise emphasised the interdependencies which exist in modern society. For the Financial Services Sector, indeed for any sector, it is not simply the effect of the pandemic itself that will cause a problem, but how other sectors and organisations respond to it. Once the exercise began it was clear from an early stage that out of all the infrastructure issues participants were concerned principally with telecoms and transport. Indeed, during the first couple of weeks telecoms seemed to become almost an obsession, reflecting the crucial role it plays in across the sector and society generally. Richard Maddison Chair of international regulators group Although the main focus of the exercise was the U.K. we were in touch with authorities in thirteen countries before and during the exercise. Several provided useful advice and responded. Cross border issues and areas of common interest will be explored as part of the follow up work. Appendix 4 43

46 Paul Tucker (Bank of England) Chair of Cross Market Business Continuity Group (CMBCG) Overall it was useful for the CMBCG to be involved in the exercise. First in terms of logistics, it allowed the mechanics of the Group to be tested and, except for intermittent feedback during the second conference call, these worked well. The level and expertise of participation varied across firms. We remain confident that firms would engage at the right level in a real crisis. There was a clear sense that CMBCG would have met more frequently in a real crisis of this type, but members were comfortable, so far as we can tell, with the frequency of in-game meetings. Second, in terms of substance, discussions provided confirmation that when things get really tough, firms want to focus on funding and collateral management; but the other key focus, at least for some firms, was books and records. Discussions on how firms/infrastructure providers might cope with higher levels of absence (60% or more) revealed that there would be considerable difficulties and that there is a question about whether firms are completely clear what their contingency plans might have been in that context. Active trading from home was almost uniformly regarded as unrealistic. The lack of an international dimension meant that some issues around time-critical payments, for example with respect to CLS, were not explored. The scripted reaction in financial asset prices to the scenarios seemed rather small; while this may have reduced the realism of the exercise, it allowed players to focus on issues around absences etc. The last call focused on the response to the closure (in the exercise) of part of the infrastructure for a few days during the worst part of the pandemic. Whilst this showed that there was a potential for some firms to be able to help by lending staff resources in those circumstances, it revealed that more work was needed on coordinated contingency plans for the closure and reopening of any part of the market. Paul Fisher (Bank of England) Chair of Foreign Exchange Joint Standing Committee (FXJSC) The exercise was followed each week by the JSC Main Committee and the Operations Managers Group. We held a conference call in Week 4 where the market view was that trading volumes could and would be reduced quickly once absence rates reached critical levels. There were no further issues for FX front offices distinct from those being discussed at CMBCG (see above) and so no further conference calls were held. The Committee discussed the state of play a second time at its regular meeting which was, coincidentally, held during Week 5 of the exercise. The problem surrounding the dependence of CLS on RTGS opening hours could have been a significant issue for trading in the FX market and this was an important learning point from the Market Wide Exercise. From the FX market perspective, I am expecting that the issues raised will be considered further by the JSC Operations Manager Group and its Business Continuity Sub-Group during Market Wide Exercise 2006 Appendix 4

47 David Rule (Bank of England) and Money Market Liaison Group (MMLG) & MMLG Operations Group The MMLG met once (by conference call) in the penultimate week of the exercise. As planned, the MMLG s Operations Sub-Group was involved in each week of the exercise, both considering the likely impact on sterling money markets and payments, and giving feedback to the organisers on the scenario. The Sub-Group mostly communicated by but did also hold a conference call. The Operations Sub-Group considered the likely impact of staff absences on money market participants and infrastructure. In the early weeks the main effect was the impact on CLS arising from staff absence levels in Asian centres. In later weeks, members considered how sterling money market participants would scale back trading and perhaps increase reserve targets at the Bank of England. Members also commented on the need for CHAPS to open early enough to facilitate CLS settlement, constraining its ability to open later in the morning. Members encouraged the Bank of England to move to T+1 settlement for its open market operations, giving more time for stretched back offices. In the penultimate week of the exercise, MMLG met to discuss the orderly closure of a financial infrastructure provider for three days due to staff shortages. Members agreed that CHAPS could continue to function and market participants would switch to unsecured trading, with some potential impact on utilisation of credit limits. Transactions would be for deferred settlement and members noted the backlog of settlement that could build up. But members agreed that the impact on sterling money markets would be manageable. A benefit of the exercise was to allow participants to think through the impact of staff shortages and how they would cope, including raising awareness of the options open to market participants, infrastructure providers and the authorities. Some members questioned whether the exercise could have been shortened to focus sooner on the crunch period in the penultimate week and reduce the demands on participants time. Andrew Wallace (APACS) APACS participated from the point of view of retail payments (wholesale payments being covered by CHAPS), so this included cheques, cards and cash. MWE brought some parties round the table who hadn t participated before in a contingency exercise with such a range of counterparties and key suppliers. MWE confirmed many key aspects of our plans for handling a flu pandemic, and the inherent operational reliability of electronic payment systems, and of banknotes and coin. But it shone a spotlight on the areas where human resources are key to delivering the business as usual; it enabled us to explore where interdependencies would arise or alternatives could be used to advantage; and it identified where we need to strengthen our flu plans. The main task here is to work with the many parties with a stake in the cash distribution cycle and develop a response which can be relied on to give a better outcome for people and businesses. Appendix 4 45

48 Ian Schuster (Royal Bank of Scotland) on behalf of the Retail Banks Business Continuity Group The 2006 Market Wide Exercise provided a valuable opportunity for the Retail Banks to validate their individual pandemic plans and improve their understanding of the potential impact of a flu pandemic on the financial sector. It also proved a valuable extension of the work already undertaken by the Retail Banks Business Continuity Group (RBBCG). Many of the issues previously discussed surfaced during the exercise and reinforced the need for the financial sector and Tripartite to support one another in exploring these areas in more detail during In summary, a successful exercise with further work still to be completed during 2007 to improve the robustness of the financial sector in responding to a pandemic outbreak. In terms of meetings, the RBBCG met weekly on a Tuesday at midday. Malcolm Brooke (Credit Suisse) for SIBCMG The Securities Industry Business Continuity Management Group (SIBCMG) met virtually throughout the exercise to share market-wide concerns, key risks and issues. This year s exercise provided a valuable opportunity for individual firms to test their current pandemic plans and challenge their assumptions against a credible scenario. The exercise also offered a unique insight into how our peer group & regulators might react during a pandemic. It was reassuring that our operational response and market concerns were materially aligned across the sector. A number of common lessons learned were identified which will no doubt be subject to further market-wide discussion & debate. John Wilson (LIFFE) for Joint Exchanges Committee Business Continuity Group The co-ordination of response to the evolving situation was handled through the JEC Crisis Management arrangements; it provides a forum for the Exchanges and other trading infrastructure providers eg CREST and LCH.Clearnet to discuss proposed individual courses of action to enable as far as possible the Markets to be presented with a co-ordinated response. As Recognised Bodies the JEC members final response to a situation, is of course, their own decision. The JEC Crisis Management group met several times a week throughout the exercise engaging staff from multiple disciplines in formulating a co-ordinated response to the evolving scenario. The JEC members found the exercise to be very beneficial, exercising aspects of the JEC members Business Continuity arrangements that had not been exercised in previous Market Wide Exercises and provided an added dimension to the regular JEC Crisis Management scenario exercises. The multiple facets of the final stages of the exercise proved challenging and provided some key learning points. 46 Market Wide Exercise 2006 Appendix 4

49 Heather Curran (Bank of America) Scenario Control Group When preparing a pandemic tabletop exercise an element of guesswork is unavoidable. However, the Tripartite worked diligently to ensure that the scenario was based on factual evidence and expert advice wherever feasible. The modelling of a pandemic wave in terms of absence rates across the globe has provided a clear indication regarding the spread and impact of such a threat. The MWE has highlighted the practical implications of a pandemic, from a medical, social and business perspective. Key messages have been reinforced and our governance and business continuity planning have been questioned and tested. We are now working to ensure that lessons learnt are translated in to clear strategies and deliverables to further enhance Bank of America s preparedness. Appendix 4 47

50 Appendix 5 Governance Group members We list below those individuals and organisations that assisted the Tripartite Authorities in the design and delivery of the exercise without whom this exercise would not have been successful. Steering Group FSA APACS (The UK payments association) Bank of England Credit Suisse on behalf of Securities Industry Business Continuity Management Group (SIBCMG) HM Treasury Prudential Royal Bank of Scotland on behalf of Retail Banks Group (RBG) Swiss Re Virt-x on behalf of Markets and Exchanges Regulatory Liaison Information Network (MERLIN) Planning & Logistics Bank of England Barclays FSA HBOS HSBC 48 Market Wide Exercise 2006 Appendix 5

51 Societe Generale Standard Chartered Project Office reporting to Planning and Logistics Chair Scenario Control HM Treasury Bank of America Bank of England Chair of Finance expert group Morgan Stanley on behalf of SIBCMG Chair of Government expert group (Civil Contingency Secretariat, CCS) Chair of Health expert group (Health Protection Agency, HPA) Chair of Infrastructure expert group (City of London/Barclays) Chair of International Regulators expert group (FSA) FSA London Stock Exchange Scenario Health Health Protection Agency (HPA) Department of Health Scenario Government Civil Contingencies Secretariat Scenario - Finance Morgan Stanley on behalf of SIBCMG APACS Bank of England British Bankers Association (BBA) Credit Suisse Royal Bank of Scotland on behalf of Retail Banks Group Appendix 5 49

52 Scenario Infrastructure City of London/Barclays British Telecom EDF Energy John Lewis London First London Resilience Team Network Rail Sainsbury s Thames Water Transport for London Advisors Independent Advisor Steven Kent Scenario Challenge - Members of SCG and P&L plus challengers from Bank of England Civil Contingencies Secretariat Department of Health FSA Other Expert assistance Bank of America Bank of England Consumer Panel FSA Goldman Sachs Lehmans MMLG Bank of England Morgan Stanley Noreen Tehrani, Chartered Psychologist, ESTD 50 Market Wide Exercise 2006 Appendix 5

53 Post Office Swiss Re US Embassy London International Regulators The Tripartite Authorities would also like to thank the international regulators who contributed to the development of the scenario and were able to consider questions posed by participants during the course of the exercise. Appendix 5 51

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