Financial Markets:

Oversight of Automation Used to Clear and Settle Trades Is Uneven

IMTEC-90-47: Published: Jul 12, 1990. Publicly Released: Jul 12, 1990.

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GAO assessed the role played by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Reserve System in developing and maintaining a strong foundation of automated systems oversight.

GAO found that: (1) during the 1987 and 1989 market declines, the clearinghouses processed trades reasonably well; (2) federal regulators and clearinghouses lacked the strong systems oversight needed to ensure that automated clearances and settlement systems were consistently able to timely and accurately process trades; (3) the Federal Reserve established and followed oversight procedures for automated clearinghouse systems, but SEC and CFTC had not established strong oversight practices and had not performed technological assessments of clearinghouse computers; (4) SEC established detailed registration standards, but did not enforce one of its standards requiring clearinghouses to perform system and facility risk assessments; (5) CFTC had not issued system oversight standards; (6) SEC and CFTC attributed inadequate systems oversight to insufficient and incapable staff, but the inadequate level of oversight hampered their ability to effectively oversee clearances and settlements in financial markets; (7) SEC and CFTC officials believed that insufficient systems oversight was mitigated by the clearinghouses' oversight of their own systems; and (8) five clearinghouses performed fully documented or complete assessments of system and facility risks, although SEC only required three clearinghouses to do so.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CFTC agrees with the need to establish the technical capability to oversee market systems and has stated that establishing such a capability is a Commission priority. However, CFTC has not completed its effort, and GAO is continuing to monitor the Commission's progress under a capping report job (510618) in which GAO made a similar recommendation.

    Recommendation: To strengthen systems oversight, the Chairmen, SEC and CFTC, should allocate the necessary resources to establish the capability to assess the efficient and safe use of automation in the clearance and settlement process. This capability could be included within the agencies' existing oversight processes, such as inspections and rule reviews.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: SEC has hired one technical expert within its newly formed automation review group to strengthen its systems oversight. However, GAO believes more needs to be done, and is continuing to monitor SEC progress in this area under a capping report job (510618) in which GAO made a similar recommendation.

    Recommendation: To strengthen systems oversight, the Chairmen, SEC and CFTC, should allocate the necessary resources to establish the capability to assess the efficient and safe use of automation in the clearance and settlement process. This capability could be included within the agencies' existing oversight processes, such as inspections and rule reviews.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: On October 24, 1990, SEC instructed the securities clearinghouses to perform periodic risk assessments on an annual basis and provide such reports to the Commission for review. As of April 1991, the Commission had received two such assessment reports.

    Recommendation: To strengthen systems oversight, the Chairman, SEC, should strengthen enforcement of its clearinghouse registration standards by ensuring that clearinghouses, as part of their annual risk management programs, perform risk assessments of their automated systems and facilities.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: CFTC intends to have an interagency task force advise it on what enhancements should be made to its automated systems standards. To date, the task force had not addressed the issue. GAO intends to monitor CFTC progress on this recommendation under a capping report job (510618).

    Recommendation: To strengthen systems oversight, the Chairman, CFTC, should establish regulatory standards for the futures clearinghouses detailing prudent management practices to be used in developing and implementing comprehensive and thorough systems review programs, and CFTC should ensure that the clearinghouses adhere to such guidance.

    Agency Affected: Commodity Futures Trading Commission

  5. Status: Closed - Implemented

    Comments: On July 9, 1991, CFTC conducted a site visit to discuss the weaknesses and assess what corrective actions had been taken. Following the July meeting, CFTC continued to call and meet with clearinghouse officials to discuss their progress in this area. As a result of CFTC efforts, the clearinghouse has corrected a number of the weaknesses and is committed to resolving the others.

    Recommendation: To strengthen systems oversight, the Chairman, CFTC, should follow up on the weaknesses identified at the futures clearinghouses to ensure that they are satisfactorily resolved.

    Agency Affected: Commodity Futures Trading Commission

 

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