Moves to Outsourcing Force Pace of Disaster Recovery Strategies
Global custodians have long been aware of an interesting paradox: if their operations go down, they can probably survive the experience - but some of their clients may not.
Such has become the dependency of many asset managers on their custodians that they literally cannot live without them. Ten years ago, managers might have chosen to work with two or three preferred custodians, spreading the risk and building in some measure of contingency in the event that one should have processing problems. Today, however, an increasing number of managers are actively seeking to appoint a single custodian, concentrating their risk on a single provider.
With outsourcing of managers' middle and back offices now an established business model, the need for watertight disaster recovery procedures has never been greater. Most requests for proposal include lengthy and highly technical questions about the scope and scale of back-up facilities and contingency planning. Arcane and tedious it may be, but managers and their advisers realise that the health of their business may largely depend on how well their custodians respond to abnormal conditions.
As a result, the big custodians have taken a number of steps to protect themselves and their clients from any long-term service disruptions. Regular dry runs are undertaken, switching between main and back-up systems, with the occasional involvement of senior management teams to rehearse contact procedures and fine-tune action plans. Some firms use the weekends to practise reconstructing business days.
In 1996, one big custodian had the chance to put its well-documented disaster recovery blueprint into action. When the IRA bombed London's Canary Wharf tower, State Street was one of the larger tenants of the 50-storey building, from where it ran its UK custody operations as well as much of its European client servicing. With back-up facilities based in Hertfordshire, a county north of London, State Street lost only minutes of normal service as implementation of its plan worked almost faultlessly.
Today, an attack on Canary Wharf would undoubtedly wreak more havoc in the custody business than five years ago. State Street has been joined in the tower by Clearstream and the Bank of New York, while HSBC, Citigroup and Northern Trust will shortly move into the area. Even so, the vast bulk of operational facilities will continue to be housed in other locations.
Banks that have a large presence in the UK and mainland Europe have chosen a number of diverse operating centres: Bournemouth, on the south coast of England, for JP Morgan; Brussels for the Bank of New York; Edinburgh for Deutsche Bank, and Dublin for Citibank. …