VII.J     Testing for Core and Significant Firms

Management at core and significant firms should develop verification strategies and execute exercise and testing activities to validate that the entity implemented sound recovery practices consistent with the entity’s role in the industry. Additionally, management should consider the impact of an event at its entity on the entire financial sector. The elements discussed in the Sound Practices Paper supplement the agencies’ respective policies and other guidance on business continuity planning. Entities not designated as core and significant firms may also consider guidance from the Sound Practices Paper as a model for enhancing their testing processes.

Identification of external interdependencies is important given the sector’s reliance on core and significant firms. Internal testing activities should include systems that support critical market activities in which these firms are core or significant. Exercise and testing activities should confirm that such critical clearing and settlement activities could be recovered within RTOs. Industry standard time frames are continually adjusted based on available technology, pertinent risks, and industry initiatives. Management should adjust its RTOs to be in line with industry standard time frames. Furthermore, management should design testing activities to demonstrate the ability to perform the following activities if a wide-scale disruption affects the accessibility of key personnel:

  • Complete pending material payments and transactions.
  • Access funding.
  • Manage material open risk positions.
  • Make related entries to books and records.
  • Validate internal and external communication protocols.
  • Ensure connectivity, functionality, and volume capacity.

Management should test with the relevant core firms from their alternate sites and meet testing standards the core firms establish specifically for significant firms and for participants more generally. Management at core and significant firms should perform testing to assess the effectiveness of their recovery strategies. Management is also encouraged, to the extent practical, to participate in pertinent market-wide and cross-market testsIndustry and cross-market tests are often conducted by associations such as the Securities Industry Association, Bond Market Association, and Futures Industry Association. These associations are mentioned for illustrative purposes only; this note is not an endorsement of any of these associations. that validate connectivity from alternate sites and include transaction, settlement, and payment processes.

Examination and supervisory activities may include evaluations of verification strategies and testing plans to assess whether core and significant firms, which are the focus of the Sound Practices Paper, have achieved the resilience to protect the financial system from a wide-scale disruption.


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VII.I Third-Party Service Provider Testing
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VII.K Post-Exercise and Post-Test Actions