A s senior vice president at JPMorgan Treasury Services, Linda McLaughlin-Moore, oversees the firm's global clearing business. On September 11, 2001, she had been slated to speak with a BS&T editor about continuous linked settlement and CLS Bank. Other events that day intervened.
In the days following the World Trade Center attacks, McLaughlin-Moore was among the company leaders who guided JPMorgan through the chaotic period, ensuring that systems were rerouted to contingency sites across the country and around the world. In the months since the tragedy, JPMorgan Chase and McLaughlin-Moore have worked with clients to evaluate and update their disaster recovery strategy to help ensure operation through any type of crisis.
A year later, McLaughlin-Moore agreed to sit with BS&T senior associate editor Ivan Schneider and share her insights on disaster recovery, business continuity and the reshaping of the clearing and settlement systems post-September 11.
BS&T: Where were you on September 11?
McLAUGHLIN-MOORE: I was in Tampa, actually, establishing a command center for the wire business. We were in the process of migrating all of our operations from New York to Tampa, a strategic decision by the firm to isolate some of our high-risk concentration activities out of the same area.
We were fortunate on 9/11, because we did have multiple processing sites in robust form. We were fully staffed here and we were fully staffed in New York. We were in the middle of our migration, and we were dealing with the whole training of the new staff in Tampa, so we were able to turn off New York and not have a hitch.
BS&T: How would having CLS have helped on September 11?
McLAUGHLIN-MOORE: CLS is a payment versus payment network for the purposes of foreign exchange transactions. Its origins began with the goal to eliminate settlement risk within the foreign exchange trading business. Therefore, its primary benefit in any type of a situation or contingency situation for the payments business is that if one leg of the transaction doesn't settle, then the other leg of the transaction doesn't settle.
What we experienced on 9/11 was a lot of half-legs. A lot of items were out there without the counter-transaction being out in the market. Therefore, clients and financial institutions found themselves, depending on what situation they were in, to be very long or very short.
If you're very long in balances and payments, you can send a lot of payments out into the market. But if you're very short, you get stuck because you just don't have enough money to be forwarding the payments out.
CLS would eliminate a lot of that. What would have happened on 9/11, in my view, is that if one side of the foreign exchange contract did not settle, it would essentially just drop both sides and not incur so much exposure to the counterparties in the deal, or cause as much of a bottleneck in the payment system.
BS&T: So with those rules in place, nobody would have been stuck with the half-legs, then.
McLAUGHLIN-MOORE: That's right. It would have almost nullified the transaction. Obviously, it would have been picked up again later that day or the next morning when everybody got their act together. It definitely would have been helpful.
BS&T: What has your firm learned about disaster recovery over the past year?
McLAUGHLIN-MOORE: We really needed to tighten our whole communication chain a lot better through a whole series of education and awareness processes, to make sure that employees know where to go, when in fact you can't get a hold of them.
For the high-risk real-time businesses, we can't just have dual functions, we need to have tertiary functions. Of course you're really looking for tertiary plans across physical sites, meaning that the building itself needs to have more than just two alternatives. And the people now, which was the big shock from 9/11. Most of us could never have fathomed that we could lose an entire building along with all of the people. And obviously that's a big thing that we should make sure we have in place.
BS&T: What have been your major technology challenges?
McLAUGHLIN-MOORE: When you start moving technology further away, real-time, mirrored contingency becomes more difficult from a technology perspective. Not impossible, but more difficult and more expensive. That would probably be the biggest challenge since you still want immediate recovery, but now you're traveling a fairly sizable distance with the data.
BS&T: How have you helped your corporate clients to go through the same type of process for their systems?
McLAUGHLIN-MOORE: We've been having a very structured dialogue with a lot of our big clients, both financial institutions and corporations around the world, about how we measure the risk of the operations and processes we have. Obviously, we're a financial institution, not a manufacturer, but the same kind of logic occurs: How long can this particular process be out of sync until it starts having a detrimental effect on the business?
We have devised a consultative technique to share what we look at and how we value things, as an example to help the clients do the same within their own firms.
BS&T: SWIFT recently announced that it would permit corporate access to its messaging network, SWIFTNet. What effects do you expect from that?
McLAUGHLIN-MOORE: Actually, there's an interesting side effect from 9/11. We are, in fact, in very hot dialogue with many of our large payment clients, manufacturing companies, predominantly, in regards to using SWIFTNet as an alternative to traditional electronic banking and Web-browser banking services.
SWIFTNet allows corporations, sponsored by banks, to use the SWIFT messaging system as a vehicle to communicate to a closed user group. That closed user group could be the banks they do business with, and it could be their vendors if they want to relay payment instructions as well as data in regards to the settlement of funds. You can define the user network or the closed user network in multiple ways. SWIFTNet is the messaging that's going to facilitate that. That's been pretty hot right now as an alternative to the corporate market going forwards, on the off chance that the banks' client access systems are not functioning properly.
Over time, it stands a very good chance of becoming more the norm. This way, every time clients pick up a new banking relationship, they don't need to interface directly with that bank's proprietary systems. It really opens up the opportunity for corporations to benefit from common message formatting for their financial transactions.
BS&T: Any other big movements in the payments industry?
McLAUGHLIN-MOORE: More from a U.S. view, but that will definitely extend to the other major currencies as well-and CLS is really one of the catalysts for it-is the extension of the clearing processing day. Many of the currencies, in order to participate in CLS, had to extend their central bank clearing day for their funds, so that we could settle both legs of the trade in different currencies simultaneously.
In the U.S., for a while now both the Fed and the clearing houses, as well as some of the major banks, have been looking to open the dollar currency market during the Asian time zone, so that dollars can actually settle with finality while the Asian businesses are in fact still open.
So that's still in process, and that's going to add another dimension to the clearing and payments business, because we're all going to start dealing with technology questions, predominantly around how do you operate with just a two-hour window between each day? Can you close down your system and then reopen it again?
The alternative question, which we're certainly going to be tackling, is how do you run two days parallel and not have a reconciliation nightmare? What happens if one bank is having a problem and we extend that beyond when you open up your day for Asia? How do you handle both days simultaneously?
BS&T: Does that reduce the ability of the Fed to extend the day?
McLAUGHLIN-MOORE: That's one way of handling it.
BS&T: What's another way?
McLAUGHLIN-MOORE: The other way of handling it is to see if you can actually run the U.S. clearing system still finishing off, while you actually start accepting transactions for Asia. It's a parallel process. I'm not saying that that's going to be able to be easily done, but I think it is an alternative we have to think through.
BS&T: Or we need a longer day, really.
McLAUGHLIN-MOORE: Let's not push for that, shall we? Between the cell phone and the Blackberry, I don't think there are any more hours I can work without passing out.