Hi Tony,
This is one of the many valuable characteristics of the Nexus 1000v.
When the VSM is down, the VEMs will be in 'headless' mode but continue to switch traffic based on last known configuration. However, if you reboot a host during this state, it will only be able to communicate on System VLANs. You could confirm if a VEM is headless by running the command 'vemcmd show card' on the VEM (from host CLI). During this headless state we have some limitations, as the VSM is not able to communicate with the VEMs. Any operations that require the VSM to program the VEM can not be done in headless mode. Here are some operations that can't be performed without VSM interaction:
•No new ports can be brought up on the headless VEM (new VMs coming up or VMs coming up after vMotion).
•No NetFlow data exports.
•Ports shut down because DHCPS/DAI rate limits are not automatically brought up until the VSM reconnects.
•Port security options, such as aging or learning secure MAC addresses and shutting down/recovering from port-security violations, are not available until the VSM reconnects.
•The Cisco Discovery Protocol (CDP) does not function for the disconnected VEM.
•IGMP joins/leaves are not processed until the VSM reconnects.
•Queries on BRIDGE and IF-MIB processed at the VSM give the last known status for the hosts in headless mode.
(source)
If you are familiar with traditional modular switches, the supervisor programs the line cards. Nexus 1000v is the same, only the line cards (VEMs) are able to retain the last known configuration while the VSM is unreachable.
HTH,
Joe