Undersea cable damage bring an issue of operantion risk in Basel
The earthquake stoke southern Taiwan on 26 Dec caused a major disruption of network communication in Hong Kong. It is believed that several cable connecting Taiwan, Japan and US were damaged and the restoration will take days.
As banks and stocker brokers rely heavily on electronic settlement and straight though system, their operation are affected. Especially cross country trading, i.e. accepting oversea order to be executed in Hong Kong Exchange and at the same time, placing order to the US market. One of my broker in HK informed me that they will not be able to accept buy order until the network is restored (sell order is possible since they will execute instruction with telephone).
The real issue is with STP system, there is a timeout value for each data transmissions and the timeout value is usually set to a reasonable time under normal network connections. The system may retry after timeout but the number of retry will only create more traffic on an already congested network.
There are many issues with this kind of disruptions but I like concentrate on the operation risk of Basel. Banks intended to use the Advanced Measurement Approach (AMA) will need to calculate their regulatory requirement as the sum of expected loss (EL) and unexpected loss (UL). In order to do accurately calculate, the bank must track relevant event linked to their operations, technology process and settlements are one of them.
Network disruption due to services provider unable to meet SLA may be classified as one loss. But it is not the biggest one. I am thinking of the sudden increase of manual settlements and the inability of pricing provider to provide accurate pricing.
It will be a lesson for regulators and banks to learn how AMA of operation risk will work under extraordinary conditions. The lesson is not finished yet as the network connections will not restore to normal for a few days .
As banks and stocker brokers rely heavily on electronic settlement and straight though system, their operation are affected. Especially cross country trading, i.e. accepting oversea order to be executed in Hong Kong Exchange and at the same time, placing order to the US market. One of my broker in HK informed me that they will not be able to accept buy order until the network is restored (sell order is possible since they will execute instruction with telephone).
The real issue is with STP system, there is a timeout value for each data transmissions and the timeout value is usually set to a reasonable time under normal network connections. The system may retry after timeout but the number of retry will only create more traffic on an already congested network.
There are many issues with this kind of disruptions but I like concentrate on the operation risk of Basel. Banks intended to use the Advanced Measurement Approach (AMA) will need to calculate their regulatory requirement as the sum of expected loss (EL) and unexpected loss (UL). In order to do accurately calculate, the bank must track relevant event linked to their operations, technology process and settlements are one of them.
Network disruption due to services provider unable to meet SLA may be classified as one loss. But it is not the biggest one. I am thinking of the sudden increase of manual settlements and the inability of pricing provider to provide accurate pricing.
It will be a lesson for regulators and banks to learn how AMA of operation risk will work under extraordinary conditions. The lesson is not finished yet as the network connections will not restore to normal for a few days .
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