Originally published in the Brandywine Asset Management Monthly Report.
Hurricane Sandy struck at the heart of the U.S. financial markets earlier this week, paralyzing New York City and the venerable New York Stock Exchange. Although “only” a category 1 storm, Sandy cast a wide swath, with tropical storm force winds extending for 1,000 miles. This led to a huge storm surge that wiped out entire shoreline communities in New York, New Jersey and Connecticut. The New York Stock Exchange closed for two days, the first consecutive daily closure due to weather since the “blizzard of 1888.”
The closure and disruption to financial markets highlighted the need for redundant systems and backup technology to prevent loss of operations caused by natural disasters and other factors. It also pointed out the significance of human factors that could cause business interruptions. The New York Stock Exchange was prepared to open on Monday and remain open throughout the storm, but that would have placed its employees in a dangerous situation. Despite its distributed technology and redundant infrastructure, the actual work of the exchange required people to be present at 11 Wall Street, and the breakdown of transportation and other risks were the primary factor in the decision to close the exchange.
Brandywine understands these risks quite well. Sixteen years ago we moved into our current offices, which are located in a 17th century grist mill in southeastern Pennsylvania (you can see photos of the Mill on brandywine.com). Like all mills, we are situated next to a stream, which for 250 years was used to power the water wheel. Fortunately, we are positioned near the headwaters of the stream, and even in the most severe storms to date (including Hurricanes Floyd, Irene and Sandy) rising waters fell far short of endangering our critical systems. While our operations may not have been directly impacted by a storm, our utility providers have been, resulting in loss of our primary power. Fortunately, we are also able to operate on our backup batteries (which provide uninterrupted power) and generator for extended periods. And we have back-up communications providers that are able to handle our telecommunications requirements in the event our primary phone/internet service fails. These systems serve as our first level of defense against business interruption.
Despite these precautions and redundancies, we are still at risk of a complete loss of our facilities here at the Mill and plan as if that is certain to occur. So as an additional level of backup, we operate a separate, autonomous office in Connecticut. This is staffed by one of Brandywine’s principals, Rob Proctor.
Notwithstanding this preparation and redundancies, we still realize there is a risk of interruption to our business. But in the event that does occur, and as part of our ‘belt-and-suspenders’ approach, all data is backed up daily to the “cloud.” This allows us to recover our business and restart operations as soon as one of our facilities is operational. In that event our loss will be limited to our opportunity costs during the time we were interrupted.
In Brandywine’s 30 years of business we have come to realize that although our primary risk is still related to our trading model and risk management, business continuity is also capable of negatively affecting our clients’ portfolios. Putting in place a sound, redundant infrastructure is an essential element in producing positive returns for our clients.