Features – Y2K and the Global Financial Markets

Richard E. Camacho is an Applications Consultant with Lexis-Nexis in New York, NY. He is the developer of the Lexis-Nexis New York Intranet Knowledge Base. Prior to joining Lexis-Nexis, Mr. Camacho worked in the financial services sector in New York.

(Archived March 1, 1999)


Ask most senior executives how their year-2000 systems testing is going and most will say, “fine, thank you very much,” and change the subject.

But experts say many executives are missing the point. So what if a company’s individual systems test well? It is how well systems work together across an entire industry that will spell happiness or doom when the big day arrives.

One industry that has its collective act together, and therefore provides a good role model, is the U. S. Securities industry.

SIA Year 2000 NASD Year 2000 Lexis-Nexis Year 2000 Year 2000 Useful Links

What Good Testing Looks Like

The Securities Industry Association (SIA) recently unveiled its industry wide testing schedule for Wall Street. More than 18 months of planning went into the development of this test, which is scheduled to begin on March 6, 1999, and last approximately two months.

The planned tests will simulate a trading environment using sensitive dates such as December 31, 1999 and January 3, 2000, and will be offered to roughly 800 securities companies and exchanges that comprise the SIA. The testing methodologies and scripts will be based on the same ones used during the beta tests last summer, in which 28 securities companies and 13 exchanges, representing 50% of the average daily trading volume, participated. The actual beta test involved over 175 different trading cases that were simulated in over 10,000 transactions.

The most valuable piece of the SIA’s year-2000 testing, according to industry observers, was that it cut across multiple companies’ trading systems in an end-to-end manner, demonstrating a grasp of the interconnectedness of the year-2000 problem, something many companies in other industries do not yet understand.1

As we have heard or read, from participants and industry sources, the July beta test went surprisingly well. But John Panchery, the SIA VP and Y2K project manager who is coordinating the Street’s massive testing effort, is more cautious. “To say everything went well last summer, you’d need an asterisk.” he notes. “We got through it. But the firms had internal glitches to deal with.”

Which lead us to this spring and a massive test, which will actually run through six weekends, from March 6 through April 24, 1999. Like last summer, it will be as carefully scripted and a great deal more extensive. The SIA is aiming to have all the clearing firms involved, and has asked each of them to link up with a few of their correspondent firms. It’s also planning to include the largest buy-side firms, as well as, all the so-called “financial utilities”-the ancillary firms like the Depositary Trust Corporation that are essential to a trade’s success-and, of course, all the exchanges.

A scripted test like the SIA’s is not, of course, as tough a measure of Y2K readiness as the uncontrolled tests Wall Street firms are running internally. But, notes Edward Yardeni, chief economist at Deutsche Bank Securities and one of the Street’s preeminent Y2K doomsayers, it’s a whole lot more than anyone else is doing.

Dangers abroad

As stated earlier the U.S. financial industry has probably done more than any other sector of the global economy to combat the so called Millennium Bug. But that’s not as impressive as it sounds. With only a year to go, much of the rest of the world is only beginning to wake up to the threat posed by the date switch from 1999 to 2000.

“All of our systems have been changed over and are already in production,” says Geryl Darington, co-chief information officer at Bear, Stearns & Company, “But the rest of the world, like Europe and Asia, is lagging, and that concerns us.”

Dr. Ed Yardeni, who operates an entire Web site devoted to the Y2K problem provides some alarming statistics about the readiness of the rest of the world’s financial industries. Only nine countries began assessing before 1997, and 25% of them didn’t start until the end of 1997. Only half of over 500 financial institutions abroad surveyed last April expected to have their systems fixed by the end of 1998, leaving them dangerously short of time to test the fixes.

Europe, of course, has been absorbed by preparing for the Euro, ( BBC News site on the Euro), an occupation that Larry McArthur, president of San Jose-based Ascent Logic, which prepares Y2K risk assessments, likens to rearranging the deck chairs on the Titanic. “They’re fixing Euro code on top of Y2K code that they know is flawed and is going to break.” (Year 2000 and euro: IT challenges site of the century.)

But Europe is at least aware it’s behind. (Computerworld, Note of caution sounded in European Y2K report.) The really scary part of the world, according to most Y2K experts, is Asia. (CNN, Asia will face big Y2K hit.)

“Most of Asia, with small exceptions like Singapore, are in terrible shape,” says McArthur. “They’re 18 to 24 months behind us.” Japanese companies, in particular, seem to be wildly underestimating both the extent of the problem and the difficulty of fixing it. The Bank of Tokyo Mitsubishi, for instance, only began its Y2K project in April of 1997, but it expects to finish testing by next July.

Y2K experts come back from Japan full of horror stories. Craig Mengel, marketing vice president at Millennia III, a Westport, Connecticut-based software company that got its start in Y2K fixes, tells of addressing a group of risk managers on a recent trip to Tokyo. “Their main source of concern was that they were being bugged by American companies about Y2K compliance,” he says. “They wanted to know how to get rid of the phone calls and questionnaires.”2

Benefits of Starting Early

American financial institutions-painfully aware of their dependence on computers, and prodded by regulators and industry committees-have been gearing up for Y2K for a couple of years now. Or even longer. Bear Stearns decided in 1994 that it would fix the bug in every system on which it did maintenance. After two years of that, though, the firm discovered that its systems were working too well. “Only 20% of the code was being cycled for maintenance, and 80% of it wasn’t being touched,” says Philip Stern, Bear’s other co-CIO. “So as we got into 1996, we decided we needed to have an overt project.”

Merrill Lynch is almost as far along. “We are the bulk of the way through having virtually all systems at Merrill Lynch renovated, tested, and back into production,” says James Murtha, director of mandated initiatives. (Merrill Lynch Year 2000 Web site.)

These fixes haven’t been cheap. Merrill has had 800 people working on the problem; Bear Stearns has had over 100. Both firms have had to replace software when their vendors couldn’t guarantee Y2K compliance.3

Your Client’s Keeper

As if the readiness of the world’s financial industry weren’t enough to worry about, the Securities and Exchange Commission has dumped another issue in the Street’s lap: the readiness of its clients.

The SEC (The SEC and the Year 2000.) has made it very clear, says Stephen Schulte, partner at Schulte Roth & Zabel LLP, that Y2K preparedness is an essential part of due diligence. “They can’t accept at face value the statements management makes,” he says. “They have a duty to make all reasonable inquiries to verify them.” (SEC and NASD Year 2000 Releases, No-Action Letters and Other Pronouncements.) The Federal Reserve Board, for its part, is demanding that banks check out the Y2K preparedness of companies they lend to.

The SEC is also demanding thorough disclosure from Wall Street firms of their own preparedness. Just to convince them it’s serious, the agency fined several smaller firms this fall for failure to comply with that disclosure requirement. “That was a first warning shot,” says McArthur, “and the message was that we’re coming after you if you don’t clean up your act.” 4

The Future is Now

As we have seen in recent days, events across the world continue to have serious ramifications here in the U.S. as witnessed by the Brazilian currency devaluation in early January 1999. (Real problems from Brazil.) What’s encouraging is that a critical component of our infrastructure appears to be setting the pace for not just other industries in the United States but for the world in general.

Upon the conclusion of the SIA’s 2-month testing period, it will bear watching if the leaders in the worlds financial markets will be able to learn and apply some of the valuable lessons learned by the securities industry. As the clock continues to tick, only focus on addressing the Y2K issues will guarantee success and economic stability.



  1. InfoWorld, October 19, 1998, Section: Enterprise Computing, Pg. 71, Setting Y2K testing standards; Securities industry could act as a role model for year-2000 testing, Byline: Blaise Zerega. <back to text>
  2. Securities Data Publishing, Investment Dealers Digest, December 14, 1998, What If Wall Street’s Ready For Y2K, and Its Clients Aren’t? The SEC demands that Street firms disclose third-party, preparedness, too. Byline: Ann Monroe. <back to text>
  3. Securities Data Publishing, On Wall Street, October 1, 1998, SIA Forms Y2K Contingency Planning Committee, Byline: Jed Horowitz. <back to text>
  4. Securities Data Publishing, Investment Dealers Digest, December 14, 1998, What If Wall Street’s Ready For Y2K, and Its Clients Aren’t? The SEC demands that Street firms disclose third-party, preparedness, too. Byline: Ann Monroe. <back to text>
Posted in: Features, Year 2000