Bank of New York Mellon Corp. was unable to process client payment instructions sent over the Swift network for several hours earlier this week, a rare outage that caused some payments to fail and casts a spotlight on operational risks at one of Wall Street's largest custody and clearing banks.

The incident comes as the bank has drawn scrutiny from supervisors at the Federal Reserve for its large market share as a payment and settlements provider.

The outage affecting BNY Mellon and its clients started around 2:30 p.m. EST Sunday and was resolved by 9:51 a.m. Monday, according to a memo obtained by The Wall Street Journal that was dispatched by the bank to its clients late Tuesday.

The incident affected institutions that routinely tell BNY Mellon to make hundreds of billions of dollars of payments on their behalf by sending messages over Swift, or the Society for Worldwide Interbank Financial Telecommunication, a funds-transfer network.

During the window when its technology systems were affected, BNY couldn't process those payments on time. It took BNY until Monday afternoon to catch up, and the matter is being scrutinized inside the bank because some payments failed to meet their cutoff times and had to be completed Tuesday instead.

Cheryl Krauss, a BNY spokeswoman, said the bank became aware of an issue that "impacted our ability to send messaging to and from the Swift network." She said the bank's systems are now fully functional and additional real-time backup systems have been established to help reduce the risk of any future disruptions.

When the bank first became aware of the problem, its Swift processing was slowing and the bank eventually lost connectivity to Swift, the BNY memo said. Once the bank discovered the issue, a technology vendor helped the bank to get the system back up and running, but those initial attempts were unsuccessful, according to the memo.

Not all of BNY's customers were affected, because some use alternatives to Swift. The ones who were affected mostly waited for BNY to fix the problem, instead of resorting to contingency plans, said people familiar with the episode.

Eventually, the traffic was redirected to another system so the team could process the instructions and start to clear the backlog. Teams lent special assistance to clients who had been forced to "allow for alternative methods of instruction," the memo said.

As a result of the delays, BNY requested an extension in the Federal Reserve's payments-clearing system, known as Fedwire, the people added. Such extensions are sometimes allowed, particularly for banks processing large volumes of payments.

Darren Gersh, a Fed spokesman, declined to comment on the technology disruptions at the bank. The U.S. central bank oversees the bank and monitors its systems.

People familiar with the matter said the root cause of the outage appeared to be a technological issue inside one of the platforms hosted by the bank that takes Swift messages and translates the instructions to different business units.

In June, the Fed approved capital plans for BNY as part of the regulator's annual checkup on the health of financial institutions, called "stress tests." The central bank found that the bank could weather a severe hypothetical downturn in economic conditions, and the test included projections of operational risks at the firm.

In an Oct. 14 report on the stress tests, BNY management wrote, "We recognize the pivotal role that we play in the financial system with respect to payment, clearing and settlement activities, and that it is incumbent on us to ensure the continuation of our services in the event the firm encounters stress."

The Fed worried as far back as 2006 that one of BNY's businesses had too large a role in payments and settlements, and considered forming a utility as a backup. J.P. Morgan Chase & Co.'s announcement this summer that it will exit the business of settling U.S. Treasury bond trades resurfaced some of those concerns.

Today, BNY operates custody services, manages portfolios of assets for clients, and offers clearing and settlement services to clients in 35 countries.

The incident involving Swift comes as regulators have stepped up scrutiny of the network operator, which has been hit by a string of cyberattacks in recent months. In August, the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. told their banking examiners to look more closely at the security of banks' links to Swift.

A Swift spokeswoman, declined to comment on the BNY episode, saying, "We never comment on individual entities."

Write to Katy Burne at katy.burne@wsj.com

 

(END) Dow Jones Newswires

December 07, 2016 19:05 ET (00:05 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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