Operational Resilience and the Critical Role of Simulation Exercises in Stress Testing Against Risk Scenarios
For many organizations, 31st March 2025 is looming large on the horizon. For those involved in Operational Resilience (OR) planning, this deadline is not just a calendar entry—it marks the end of the transition period set by regulators. As we approach this critical point in time, firms are expected to have moved beyond the “build” phase of their operational resilience plans and be firmly entrenched in the “Business As Usual” (BAU) phase, with a formal self-assessment that has been reviewed and approved at the board level.
The reality is that the pressure is mounting. With less than 6 months to go, firms must prepare for board sign-off on compliance and provide sufficient evidence to meet the rigorous expectations outlined by the regulators. Central to this process is the expectation that firms not only know their operational risks but have effectively stress-tested their resilience against a variety of disruption scenarios, and taken action to remediate identified vulnerabilities.
In this context, simulation exercises are proving to be a pivotal tool in operational resilience planning. By simulating risk scenarios and testing how the organization reacts under pressure, these exercises help identify potential gaps in readiness and ensure a more robust response to real-world disruptions. When run effectively, these sessions are a critical opportunity to improve internal awareness, preparedness and muscle memory by practising the crisis management and business continuity response to key scenarios. This article will explore how simulation exercises can help firms meet regulatory expectations, build operational resilience, and prepare for the final push to meet the 31st March 2025 deadline.
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The Need for Operational Resilience and the Regulator’s Expectations
Regulators are clear: operational resilience is no longer a theoretical concept. Firms must demonstrate that they can withstand and recover from a range of disruptions—whether cyberattacks, supply chain failures, or financial crises—without causing material harm to customers or stakeholders. By 31st March 2025, firms must:
– Have a clear picture of their operational risks.
– Define the tolerable levels of disruption their organization can endure.
– Develop and implement a comprehensive action plan to deal with disruptions.
– Stress-test their ability to handle such disruptions.
– Remediate any vulnerabilities discovered during testing.
In addition, firms must provide evidence of this resilience planning to the regulators and their boards. This is where the importance of stress testing becomes evident.
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Stress Testing and Simulation Exercises: A Crucial Component of Operational Resilience
Stress testing is a cornerstone of operational resilience, and simulation exercises play a central role in this process. These exercises allow organizations to test their preparedness and response capabilities in a controlled environment, replicating the impact of various risk scenarios.
For firms working towards compliance with the regulatory requirements, simulation exercises can address key areas that regulators will scrutinize, including:
Understanding Operational Risks
One of the first steps in operational resilience is having a detailed and accurate picture of the operational risks facing the firm. This includes risks such as:
– Cybersecurity threats (data breaches, hacking, ransomware)
– Supply chain disruptions
– IT system failures
– Regulatory compliance issues
Simulation exercises allow firms to create and execute scenarios based on these risks. By walking through a variety of realistic disruption scenarios—such as a major system outage or a cyberattack—teams can assess whether they have accurately identified all relevant risks. More importantly, they can test how these risks play out in real time, allowing them to refine their risk identification processes and ensure they are fully prepared for potential threats.
Testing Disruption Tolerance
Another key regulatory requirement is defining the acceptable level of disruption the firm can tolerate. This is often referred to as the **”Impact Tolerance”**. What level of disruption would cause significant harm to customers? How much operational downtime can the organization absorb before it starts to affect its customers and bottom line?
Simulation exercises help organizations explore these questions in depth. For example, a simulated scenario might involve a system outage that disrupts customer transactions for a period of time. By running this exercise, teams can measure the operational and customer impact, assess the firm’s tolerance for such disruptions, and adjust their operational plans accordingly. This also provides real-world evidence that can be presented to regulators as part of the firm’s self-assessment.
Action Plans and Response Readiness
Once the acceptable levels of disruption are defined, organizations must have a clear, actionable plan for how to respond. This includes incident management protocols, communication strategies, recovery plans, and more. Simulation exercises test these plans by forcing teams to respond in real time to disruptions.
For example, a simulation could involve a cyber security incident where sensitive data is compromised. The exercise would force the organization to activate its cybersecurity response protocol, notify stakeholders, and begin the recovery process. This allows the organization to evaluate whether its incident response plans are robust enough to handle the stress of a real-world attack, whether roles and responsibilities are clear, and whether the team can maintain control under pressure.
Stress-Testing and Resilience Under Pressure
The most important role of simulation exercises in operational resilience planning is in stress-testing. Regulators expect firms to have tested their ability to handle disruption across multiple risk scenarios, and to have remediated any weaknesses identified during these tests.
Stress-testing through simulation exercises provides the opportunity to challenge the firm’s resilience under varying degrees of stress. These exercises simulate high-pressure, fast-moving situations where time is critical and decisions must be made quickly. For instance, a firm might conduct a simulated crisis involving both a cyberattack and a supply chain breakdown, forcing teams to manage multiple issues simultaneously.
By subjecting the firm to these high-stakes scenarios, simulation exercises help to identify vulnerabilities in systems, processes, and communication structures that may not have been apparent during planning stages. Vulnerabilities discovered during simulations can then be addressed proactively before the actual disruption occurs.
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The Value of Independent Assurance in Stress Testing
As the deadline for the transition period approaches, organizations must also decide whether they feel comfortable providing self-certification for their operational resilience readiness or whether they require independent assurance. Given the complexity and high stakes involved, independent assurance can provide additional confidence that the firm’s plans are robust, well-tested, and compliant with regulatory requirements.
Simulation exercises, conducted either internally or with third-party facilitators, provide critical evidence for this assurance process. Independent facilitators can assess whether the stress tests are realistic, comprehensive, and aligned with the firm’s risk profile. Their insights and evaluations add credibility to the firm’s self-assessment and reassure regulators that the organization has undergone rigorous testing and has remediated vulnerabilities where necessary.
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Conclusion
As firms work towards the 31st March 2025 deadline, simulation exercises are invaluable tools in ensuring that their operational resilience plans are comprehensive, tested, and ready for real-world disruptions. By simulating high-stress risk scenarios and stress-testing their responses, organizations can identify vulnerabilities, refine their plans, and gain the confidence needed to demonstrate compliance with regulatory expectations.
The road to operational resilience is not easy, but with the right stress-testing mechanisms in place—particularly simulation exercises—firms can build a more resilient future, ensure business continuity, and with independent insight and debriefing provide crucial evidence and assurance to regulators and stakeholders alike that they are prepared for whatever may come.
For more information on readiness exercising to validate your plans and people click here. For resources to support your own Exercising download our Exercise planning guide, develoepd with Conducttr.
