Wall Street and Financials: Getting Ready for Y2K

On Wall Street, more than 400 securities firms are set to commence work with the securities markets and utilities to test a full trading and settlement cycle using computers converted to simulate a five-day span that covers the end of 1999 and the beginning of 2000.

Accidental nuclear launches and power failures notwithstanding, the one thing consumers fear most about Y2K is what it could do to their money. That's why unprecedented efforts -- prodded by industry watchdogs and government regulatory agencies -- are under way in organizations that handle everything from stock trades to electronic fund transfers.

On Wall Street, more than 400 securities firms are set to commence work with the securities markets and utilities to test a full trading and settlement cycle using computers converted to simulate a five-day span that covers the end of 1999 and the beginning of 2000. "The magnitude and complexity of the industrywide test is unlike anything the securities industry has tackled before," says Donald Kittell, executive vice president of the Securities Industry Association (www.sia.com), which is sponsoring the testing. He notes that this testing -- which covers investment banks, broker-dealers, and mutual fund companies -- will also serve as a model for the introduction of decimal pricing of securities, which is expected in the near future.

"This will be the first time that securities firms will have the opportunity to test their internal computers' interaction with both the stock markets and the clearing and settlement utilities," Kittell adds. The tests will cover nine different financial products, including equities, options, unit investment trusts, mutual funds, corporate bonds, municipal bonds, mortgage-backed securities, U.S. government securities, and money market funds. "Each financial product has its own unique test, because each product is handled differently," says James Spellman, spokesman for SIA.

A closely watched pilot test that included 28 firms was conducted last summer. At the time, Y2K industry analysts believed the results of this test would be a bellwether for the state of Y2K readiness for all industries. The test went smoothly, with no apparent Y2K glitches, Spellman relates. The firms exchanged data, dated December 31, 1999, on mortgaged-backed securities trades. PricewaterhouseCoopers L.L.P. (www.pwcglobal.com) is overseeing and coordinating testing for SIA, as it did with last summer's test.

This next round of testing will be far more comprehensive, Spellman says. Trading on March 6 will simulate December 29, 1999; March 13 trading will simulate December 30; March 20 will correspond to December 31; and April 10 trading will represent January 3, 2000. Testing for mutual funds will continue on April 17, simulating January 4; and testing for options expiration will continue on April 24, and represent January 22.

The testing -- which covers communicating transactions to markets and utilities such as the Nasdaq Stock Market and National Securities Clearing Corp. -- follows internal remediation and testing within each participating firm. "The firms have to be able to talk to the external world in these tests," Spellman explains. Results of the industrywide test will be released in late April, and will also be submitted to the National Association of Securities Dealers (NASD). The Securities and Exchange Commission (SEC) already requires brokerage firms to disclose Y2K compliance. The SEC also requires all publicly traded companies to makes such disclosures.

In preparation for the upcoming SIA tests, the volunteers prepared scripts for the simulations that incorporate characteristics unique to each product. "We incorporated suggestions from the firms participating in the trial run of the test," Kittell says. "We learned a great deal and used this information to prepare the industrywide test." One of the lessons learned was that participating firms will require some "hand-holding" through the process, Spellman says. "Our challenge is to spend more time with the firms, to make sure they understand what to do in a testing mode."

While Spellman is confident funds will not be lost as a result of Y2K glitches, he is concerned about the impact of a consumer panic. "We want to avoid having everybody demanding statements at the end of December, and then demanding more statements in the beginning of the year so they can compare the two."

Last summer, Microsoft Corp., Hewlett-Packard Co. and MarketNet Group (www.mng.com) announced a bundle of technology and services designed to help Wall Street firms achieve Y2K readiness. Windows NT Server installations are increasing in the securities industry at an annual rate of about 100 percent, according to research from The Tower Group (www.towergroup.com), which tracks trends in the financial services industry. "Many trading floors include operating systems that require a very complex process to become Year 2000 compliant," says Tony D'Ambrosi, director of MarketNet's integrated solution group. "Some operating systems require as many as 20 patches to bring them to compliance." In addition, migrating trading systems to Windows NT requires considerable effort.

Overall, SIA estimates that the industry is spending about $5 billion on Year 2000 remediation. One firm, Morgan Stanley Dean Witter, reports it has budgeted more than $125 million for Year 2000 work. T. Rowe Price estimates that it will incur expenses of about $44 million on Year 2000 software remediation, replacement of existing systems, and development of contingency plans through the end of 2000.

On the banking and finance side, many banks and financial institutions have a handle on Y2K. A study from Weiss Ratings Inc. (www.weissratings.com) finds that only about 12 percent of U.S. banks and savings and loans feel they are behind schedule on Year 2000 compliance work. Among the 1,500 banks surveyed, 8.5 percent received "below average" Y2K grades, while another 4 percent received "low" marks for slow progress. Eleven percent reported "high" progress in achieving Year 2000 compliance.

Recent studies by Cap Gemini L.L.C. (www.capgemini.com) and GartnerGroup (www.gartner.com) confirm that the financial services sector -- perhaps due to prodding from the Federal Deposit Insurance Corp. (FDIC) and other regulatory bodies -- leads all other industries in Year 2000 remediation efforts.

But measuring the banking sector’s compliance is a tricky issue, cautions Martin Weiss, Ph.D., chairman of Weiss Ratings. Institutions are not permitted to disclose federal Y2K audit results. Plus, "since response to the survey was voluntary, it is safe to assume a tendency for the better-prepared institutions to come forward more readily," he says.

Still, FDIC's studies of insured institutions also paint an optimistic picture. The agency concludes that 94 percent of its insured institutions were making "satisfactory" progress toward Year 2000 readiness, reports FDIC Chairwoman Donna Tanoue. Only 5 percent were rated "needs improvement," and less than half of one percent -- 37 institutions out of 10,092 -- were rated "unsatisfactory." These banks are being reviewed on-site quarterly, with possible enforcement actions pending. FDIC has 370 systems, of which 39 are considered mission-critical, that are being made Year 2000 compliant.

Networks that interact with financial institutions also have a range of Y2K issues that need to be addressed. For example, San Diego-based Star System Inc., the nation's largest shared electronic payments company, announced it is undergoing critical testing processes to ensure it meets Y2K deadlines. To date, the organizations that contribute 60 percent of the Star transaction volume have been successfully tested. Testing will reach 80 percent by March 31, with completion of all remaining organizations expected by June 30, 1999.

Since electronic payment networks are complicated, Star System has had to address three vulnerable areas: processing of on-line transactions through the Star System engine or "switch" and upgrading of the operating system; the settlement system for funds owed between institutions; and the transaction exception processing system.

A myriad of interrelationships require detailed communication and coordination with other network administrators, such as FIserve, Deluxe EPS and EDS. Star System is also organizing meetings with other regional and national networks to share common Y2K concerns and solutions. In addition, the system is also contacting telecommunications carriers, electrical companies, terminal manufacturers, modem suppliers, and other third-party processors to determine the status of their Y2K efforts.