25 June 1998
Source: http://www.usia.gov/current/news/latest/98062401.glt.html?/products/washfile/newsitem.shtml

USIS Washington File

24 June 1998


(Global council calls for more cooperation on Y2K) (6700)

Washington -- A U.S. Federal Reserve official says that the
international finance and banking community has much work to do to
meet the challenge of the Year 2000 (Y2K) computer problem.

Speaking as chairman of the international Joint Year 2000 Council,
Ernest Patrikis says that the sponsoring organizations of the council
"believe that mutual cooperation and information sharing can play a
key role in helping individual market participants" to prepare for the
Year 2000 problem and limit the scope of any disruptions.

While much good work is being done and there is progress in many areas
to solve the computer date problem, Patrikis, first vice president of
the New York Federal Reserve Bank, said June 23 that "more" needs to
be done in the banking and financial sectors.

Many computers in the world use two digits to keep track of the date.
And unless they are fixed, these computers will -- on January 1, 2000
-- recognize "double zero" not as 2000 but as 1900. This problem could
cause computers and computer systems to stop running or to start
generating erroneous data.

He made the comments at a hearing of the House Committee on Banking
and Financial Services. The Joint Year 2000 Council is sponsored by
several international financial organizations.

Following is the text of the statement by Patrikis as prepared for

(Begin Text)

I am pleased to appear before the Committee today to discuss the
implications of the Year 2000 computer problem for international
banking and finance. I am appearing in my capacity as chairman of the
Joint Year 2000 Council, which is sponsored jointly by the Basle
Committee on Banking Supervision, the G-10 central bank governors'
Committee on Payment and Settlement Systems, the International
Association of Insurance Supervisors, and the International
Organization of Securities Commissions (collectively referred to as
the "Sponsoring Organizations").

The international financial community has much work to do to prepare
itself for the challenges posed by the Year 2000 ("Y2K") problem.
While much good work is being done and progress in many areas is
evident, more needs doing. The Sponsoring Organizations believe that
mutual cooperation and information sharing can play a key role in
helping individual market participants carry out these preparations
and limit the scope of Y2K-related disruptions. Our major concern, of
course, will be the possible impact of the Y2K problem on the
functioning of the international financial system as a whole.

Federal Reserve Governor Edward W. Kelley, Jr. has recently elaborated
on the activities of the Federal Reserve System in connection with the
Y2K problem, as well on possible macroeconomic implications. I will
not attempt to cover those topics again here. Instead, this morning I
will begin with some background on the possible implications of the
Y2k problem for international banking and finance. Second, I will
describe how various supervisory initiatives led to the formation of
the Joint Year 2000 Council a little more than two months ago. Third,
I will discuss the actions being taken by the Joint Year 2000 Council,
particularly in the areas of raising awareness, improving
preparedness, and contingency planning.

Background on the International Implications of the Y2K Problem

The Y2K bug potentially affects all organizations that are dependent
on computer software applications or on embedded computer chips. In
other words, nearly all financial organizations worldwide are
potentially at risk. Even those whose own operations remain strictly
paper-based are likely to be dependent on power, water, and
telecommunications utilities which must themselves address possible
Y2K problems. Also, many non-financial customers have dependencies on

All countries of the world, therefore, need to address the Y2K problem
and its potential effects on their domestic financial markets. In some
cases, it is said that computer systems in particular countries are
not much affected because their national calendars are not based on
the conventional Gregorian calendar used in the United States and many
other countries. I do not derive much comfort from these statements
because in most cases operating systems and the software applications
running on them count internally with a conventional date system that
may not be Y2K-compliant.

These systems typically also need to connect and interact with other
systems that use conventional dates, so these interfaces must be
tested for Y2K-compliance. More broadly, mere assertions that computer
applications are unaffected cannot be seen as a substitute for the
rigorous assessment, remediation, and testing efforts that should be
undertaken by financial market participants worldwide.

The increasing extent of cross-border, financial-market activity has
been much remarked on in recent years. Perhaps less well known is the
fact that this activity is dependent on a large, geographically
diverse, and highly computer-intensive global infrastructure for each
of the key phases of this activity -- from trade execution through to
payment and settlement.

As an example, consider the daily financial market activities of a
hypothetical U.S.-based mutual fund holding stocks and bonds in a
number of foreign jurisdictions. Such a mutual fund would likely
execute trades via relationships with a set of securities dealers, who
themselves might make use of other securities brokers and dealers,
including some outside the United States. The operational integrity of
the major securities dealers in each national securities market is
critical to the smooth functioning of those markets. In addition,
securities trading in most countries is reliant on the proper
functioning of the respective exchanges, brokerage networks, or
electronic trading systems and the national telecommunications
infrastructure on which these all depend. Financial markets today are
also highly dependent on the availability of real-time price and trade
quotations provided by financial information services.

For record-keeping, administration, and trade settlement purposes, our
hypothetical mutual fund would also likely maintain a relationship
with one or more global custodians (banks or brokerage firms), who
themselves would typically maintain relationships with a network of
sub-custodians located in various domestic markets around the world.
Actual settlement of securities transactions typically occurs over the
books of a domestic securities depository, such as the Depository
Trust Company ("DTC") or the Fedwire National Book-Entry System in the
United States, or at one of the two major international securities
depositories, Euroclear and Cedel. Additional clearing firms, such as
the National Securities Clearing Corporation ("NSCC") and the
Government Securities Clearing Corporation ("GSCC") in the United
States, may also occupy central roles in the trade clearance and
settlement process.

Payments and foreign exchange transactions on behalf of the mutual
fund would involve the use of correspondent banks, both for the U.S.
dollar and for other relevant currencies. These transactions would
typically settle over the books of domestic wholesale payment systems,
such as the Clearing House Interbank Payments System ("CHIPS") or
Fedwire in the United States, and the new TARGET system for the euro.
Correspondent banks are also heavily dependent on the use of
cross-border payments messaging through the network maintained by the
Society for Worldwide Interbank Financial Telecommunications
("S.W.I.F.T.") to advise and confirm payments. To provide some sense
of the magnitudes involved here, consider that the Fedwire and CHIPS
systems process a combined $3 trillion in funds transfers on an
average day (split roughly evenly between the two systems). While
S.W.I.F.T. itself does not transfer funds, its messaging network
carries over three million messages per day relating to financial
transactions worldwide.

The many interconnections of the global financial market
infrastructure imply that financial market participants in the United
States could be affected by Y2K-related disruptions in other financial
markets; In assessing the scope of any such potential problems, we
should be realistic in accepting that some disruptions are inevitable,
while also recognizing that not all countries confront Y2K problems of
similar magnitudes. The problem simply affects too many organizations
and too many systems to expect that 100 percent readiness will be
achieved throughout the world. Nor are the best efforts of supervisors
and regulators capable of completely eradicating the risk of
disruption. Ultimately, the work of fixing the Y2K problem rests with
firms themselves, and even some of the most determined and well-funded
Year 2000 efforts may miss something.

Global Year 2000 Round Table

Recognizing the global nature of the issues surrounding the Y2K
problem, each of the Sponsoring Organizations undertook initiatives in
1997 to raise awareness, enhance disclosure, and prompt appropriate
action within the financial industry. Their decision last fall to
organize a Global Year 2000 Round Table was motivated by a growing
sense of the seriousness of the Y2K challenges posed in many countries
and of the potentially severe consequences for financial markets that
fail to meet these challenges. The Global Year 2000 Round Table was
held at the Bank for International Settlements on April 8, 1998. It
was attended by more than 200 senior executives from 52 countries,
representing a variety of private and public organizations in the
financial, information technology, telecommunications, and business
communities around the world.(1)

The discussions at the Round Table confirmed that the Y2K issue must
be a top priority for directors and senior management, and that the
public and private sectors should increase efforts to share
information. The importance of thorough testing, both internally and
with counterparties, was emphasized as the most effective way to
ensure that Y2K problems are minimized. Round Table participants
identified the need to continue the widening and strengthening of
external testing programs in many countries.

The communique issued by the four Sponsoring Organizations at the
close of the Round Table recommended that market participants from
regions that have not yet vigorously tackled the problem should
consider the need to invest significant resources in the short time
that remains. The Sponsoring Organizations further recommended that
external testing programs be developed and expanded and that all
financial market supervisors worldwide should implement programs that
enable them to assess the Y2K readiness of the firms and market
infrastructures that they supervise. The Sponsoring Organizations
urged telecommunications and electricity providers to share
information on the state of their own preparations and encouraged
market participants and supervisors and regulators to consider the
need to develop appropriate contingency procedures.

At the Round Table, a new private-sector initiative known as the
Global 2000 Coordinating Group was announced. The aims of the Global
2000 effort are to identify and support coordinated initiatives by the
global financial community to improve the Y2K readiness of financial
markets worldwide. For example, current Global 2000 projects include
the development of recommendations for financial infrastructure
testing and guidelines for addressing Y2K compliance issues related to
vendors and service providers. The Global 2000 Coordinating Group,
which includes representatives from over 75 financial institutions in
18 countries, represents an extremely valuable private-sector attempt
at cooperation on this important issue. At the same time, however, the
international financial supervisory community recognized that it would
be useful to establish a public-sector group, called the Joint Year
2000 Council, that would work with the private sector and also
maintain a high level of attention on the Y2K problem among financial
market supervisors and regulators worldwide.

Joint Year 2000 Council

The formation of the Joint Year 2000 Council was announced at the end
of the Global Year 2000 Round Table on April 8, 1998. The Joint Year
2000 Council consists of senior members of the four Sponsoring
Organizations. Every continent is represented by at least one member
on the Council. The Secretariat of the Council is provided by the Bank
for International Settlements. I am honored to serve as the chairman
of the Joint Year 2000 Council.

The mission of the Joint Year 2000 Council has four parts: First, to
ensure a high level of attention on the Y2K computer challenge within
the global financial supervisory community; second, to share
information on regulatory and supervisory strategies and approaches;
third, to discuss possible contingency measures; and fourth, to serve
as a point of contact with national and international private-sector
initiatives. After their meetings on May 8-9, 1998, the G-7 finance
ministers called on the Joint Year 2000 Council and its Sponsoring
Organizations to monitor the Y2K-related work in the financial
industry worldwide and to take all possible steps to encourage

The Council has met twice since being formed in early April and plans
to meet frequently, almost monthly, between now and January, 2000. At
our first meeting, we organized our work projects and approved our
mission statement. At our second meeting, we met for the first time
with an External Consultative Committee consisting of international
public-sector and private-sector organizations. Meeting with this
External Consultative Committee is intended to enhance the degree of
information sharing and the raising of awareness on different aspects
of the Year 2000 problem by both public and private sectors within the
global financial markets.

The External Consultative Committee includes representatives from
international payment and settlement mechanisms (such as S.W.I.F.T.,
Euroclear, Cedel, and VISA), from international financial market
associations (such as the International Swaps and Derivatives
Association, the International Institute of Finance, and the Global
2000 Coordinating Group), from multilateral organizations (such as the
IMF, OECD, and World Bank), from the financial rating agencies (such
as Moody's and Standard & Poor's), and from a number of other
international organizations (such as the International
Telecommunications Union, Reuters, the International Federation of
Accountants, and the International Chamber of Commerce). This
diversity of perspectives led to an extremely valuable discussion with
the Joint Year 2000 Council and stimulated work on several projects to
be taken forward with input from both the public and private sectors,
for example, the initiatives on Y2K testing and self-assessment that I
will describe shortly. Further sessions with the External Consultative
Committee are planned on a quarterly basis.

It is important at the outset for me to be clear that the Joint Year
2000 Council is not intended to become a global Y2K regulatory
authority, with sweeping powers to coordinate international action or
to take responsibility for ensuring Y2K readiness in every financial
market worldwide. Through our ability to serve as a clearinghouse for
Y2K information, however, I believe that the Joint Year 2000 Council
will play a positive role in three areas: (1) raising awareness, (2)
improving preparedness, and (3) contingency planning. In the next
portion of my remarks, I would like to address each of these roles in

Efforts to Promote Awareness

The Joint Year 2000 Council is undertaking a series of initiatives
that may be described under the heading of promoting awareness. By
this term, I do not mean to include only those initiatives aimed at
raising general awareness, although that too is still needed in some
cases. I mean to include efforts to promote better awareness of the
many efforts currently under way to tackle the Y2K problem. I have
found that, while many organizations are working hard on various
aspects of the Y2K challenge, in many cases these efforts would be
enhanced by a greater degree of information sharing with others. For
example, at the Federal Reserve Bank of New York, we have been holding
quarterly Y2K forums with a diverse set of financial organizations in
the area. Participants have requested that we continue to hold these
meetings -- in fact, to hold them even more frequently -- because they
believe that the contacts and the exchange of views are broadly
beneficial. We hope to use the Joint Year 2000 Council to achieve
similar goals.

Each of the members of the Joint Year 2000 Council has committed to
help play a leading role in promoting awareness of Y2K initiatives
within their region. Each of us will help in coordinating regional Y2K
forums or conferences and will publicly promote the goals of the Joint
Year 2000 Council in speeches and on conference programs.

The Joint Year 2000 Council will also maintain extensive
world-wide-web pages that can be accessed freely over the Internet.(2)
These pages are being maintained through the support the Council has
received from the Bank for International Settlements, in particular
from the General Manager, Andrew Crockett. These web pages will
maintain current information on the activities of the Joint Year 2000

The most extensive aspect of the Council's web site will be a series
of country pages, one for each country in the world. For each country,
the page will contain contact information for government entities
(including national coordinators), financial industry supervisors and
regulators (including central banks, banking supervisors, insurance
supervisors, and securities regulators), financial industry
associations, payment, settlement and trading systems, chambers of
commerce, and major utility associations or supervisors. For each of
these organizations, a name, address, phone number, fax number,
electronic mail and web site address will be provided. Other relevant
information on an organization's Y2K preparations may also be
included, for example, whether it has a dedicated Y2K contact or has
taken specific action with respect to the Y2K problem.

The motivation for developing these country pages is to increase
awareness of the work that is being done to address the Y2K problem
and to enable market participants to easily find out more information
about the state of preparations worldwide. Establishing these national
contacts will also help to develop the informal networks and
arrangements that may be needed in addressing other Y2K-related
issues, for example, in formulating contingency measures. Finally, of
course, the presence of the country pages may exert pressure on those
countries where more vigorous action is needed. A blank or
uninformative country listing would probably not be seen as a good
sign by some financial market participants.

In addition, the web pages of the Joint Year 2000 Council will also
provide summaries of the efforts being undertaken by its Sponsoring
Organizations as well as links to the relevant web sites. For example,
reports on Y2K surveys of supervisors and regulators being undertaken
by the Basle Committee on Banking Supervision and by the International
Organization of Securities Commissions are planned to be made
available on the Joint Year 2000 Council web site. Public papers
produced by the Joint Year 2000 Council will also be available on the
web site. A listing of international conferences and seminars related
to Y2K will be posted on the web site, together with links to other
Y2K web sites and documents.

At this stage, each member of the Joint Year 2000 Council is in the
process of finalizing the country page for its respective country.
Last week, I wrote to every contact provided by the four Sponsoring
Organizations (almost 600 contacts in over 170 countries), asking for
assistance in coordinating the development of their country page. This
also provided a further opportunity to raise the awareness of the Year
2000 problem at the most senior levels of financial market authorities
and supervisors in countries around the world. Through the effort to
develop this web site and other similar efforts by the Joint Year 2000
Council, I believe we can succeed at keeping the awareness of the
issue at a very high level within the global financial supervisory

Efforts to Improve Preparedness

Of course, awareness of the Year 2000 problem is only the first step
in addressing it. Global efforts to prepare for Year 2000 vary widely,
and many countries believe that more coordinated national action will
be necessary to tackle the problem as effectively as possible. At our
second meeting of the Joint Year 2000 Council, a strong consensus
emerged that a national government body in each country could play a
helpful role in coordinating preparations for Y2K. While the Council
did not have a strong view on what particular form or what specific
authority such a body would require in each specific country, the
Council members felt strongly that involvement in some fashion by the
national government could be beneficial.

Accordingly, the Joint Year 2000 Council plans to issue a statement in
the near future providing general support for the concept of a
national-level coordinating body for the Y2K problem. In the United
States, of course, the White House has established the President's
Council on Year 2000 Conversion, headed by John Koskinen. This effort,
as well as those of this committee under the leadership of Chairman
Leach, and of the other Congressional committees that have addressed
the Y2K problem, has shown that national government bodies have a very
important and useful role to play in encouraging progress in
addressing the Y2K problem.

Turning now to the question of how financial supervisors can implement
effective Y2K programs, the Joint Year 2000 Council intends to promote
the sharing of strategies and approaches. For example, the Basle
Committee on Banking Supervision has prepared a paper containing
"Supervisory Guidance on Independent Assessment of Bank Year 2000
Preparations". This document is aimed at moving supervisors worldwide
from a level of general awareness to a specific, concrete program of
action for overseeing Y2K preparations, both on an individual bank
basis and on a system-wide basis.

The Joint Year 2000 Council intends to adapt this paper for use by
financial market regulators and supervisors more broadly and to issue
it as rapidly as possible with the endorsement of all four Sponsoring
Organizations. The goal will be to provide guidance in developing
specific Year 2000 action plans for all types of financial market
authorities. Supervisors in countries that have gotten a head start on
the issue can thereby provide the benefit of their experience to those
who are starting later. Those supervisors getting a late start have a
need for tools of this type.

The Joint Year 2000 Council will also be working with the members of
our External Consultative Committee, particularly the Global 2000
Coordinating Group, to build on this effort and develop a Y2K
self-assessment tool that could be used broadly by the financial
industry in countries around the world. We also intend to develop
additional papers on a variety of Y2K topics that might be of interest
to the global financial supervisory community.

At this point, I am sure that members of the Committee have questions
regarding the state of Y2K preparations in various parts of the world.
I think that it is fair to say that most believe a spectrum exists,
with the United States at one end of the spectrum, and emerging market
and undeveloped countries at the other end. There are likely
exceptions of course; some developed countries are probably less far
along than they should be. Some emerging market countries, on the
other hand, appear to be quite advanced in their preparations.

Overall, however, there is still not nearly enough concrete,
comparable information on the preparations of individual institutions
to be able to make any confident statements about the state of global
preparations in any detail. Over the time remaining until January
2000, we hope to use the Joint Year 2000 Council as a means of
gathering a better picture of the state of global preparations, and to
help direct resources and attention to those regions that appear to be
faltering in their efforts. We will use the information provided for
our web site and the discussions with members of our External
Consultative Committee as our primary resources in seeking to identify
"hot spots" where more urgent efforts are needed.

If we identify regions where more needs to be done, our first step
will be to work through the relevant national financial supervisors
and regulators to increase the urgency of efforts in their
jurisdiction. We may also involve multilateral institutions, such as
the World Bank, to help increase national attention on the issue. I do
not believe that calling public attention to problems in specific
countries would be a constructive step for us to take at this stage as
we are still trying to build cooperation and our current information
is incomplete. In this context, I would also point out that the market
itself will begin to bring strong pressures to bear on specific firms
and markets that exhibit signs of being ill-prepared during the course
of 1999.

In conjunction with preparations for Y2K, the recent discussion of the
Joint Year 2000 Council with the external Consultative Committee
raised several important issues. First, in every national market there
is the question of the dependence of the banking and financial sectors
on core infrastructure such as telecommunications, power, water,
sewer, and transportation. In all cases, it seems that it is not an
everyday occurrence for representatives of these differing sectors to
get together with financial sector representatives and discuss their
mutual concerns. Yet, this must be made a priority if financial firms
and their counterparties are to achieve comfort that their own efforts
to prepare for Year 2000 will not be compromised by the failures of
systems beyond their control.

A representative of the International Telecommunications Union is a
member of our External Consultative Committee. At our meeting earlier
this month, he provided useful factual information on the preparations
being undertaken by telecommunications firms and indicated that a
further global survey and report on this topic is due to be completed
soon. This is the type of information sharing that helps all parties
understand the scope of the problem, as well as the efforts that
others are undertaking. We intend to encourage further information
sharing between the financial sector and core infrastructure providers
at future meetings of the Joint Year 2000 Council and the External
Consultative Committee. I would also strongly encourage such mutual
cooperation on Y2K preparations within each national jurisdiction.

Another issue that some participants in our Joint Year 2000 Council
are concerned about in regard to preparations in their countries
relates to the availability of human resources. In some regions, the
supply of available information technology professionals may be
hard-pressed to meet the challenges posed by Y2K. For each
organization facing resource constraints, this situation clearly
indicates the need to develop action plans for Y2K that set clear
priorities among systems and projects.

More broadly, we must also recognize that the lack of available
programming resources will be a significant overall constraint on the
scale of Y2K remediation efforts globally. As a result, the cost of
hiring computer professionals capable of addressing the problem will
continue to rise. Wealthy countries are undoubtedly in a better
position to bear these increasing costs than are poor countries.

A number of participants from our External Consultative Committee
cited the recent grant of L10 million sterling by the British
Government to the World Bank as a positive development. Among other
projects, the World Bank intends to use this grant to fund a variety
of educational and awareness-raising events related to Y2K over the
next several months. Given the potential consequences of a failure to
prepare for Y2K, the World Bank indicated to the Joint Year 2000
Council that it intends to take on an aggressive role in promoting and
assisting Y2K efforts in countries around the world. The Joint Year
2000 Council intends to work closely with the World Bank to enhance
our mutual efforts on the Y2K problem.

The subject of appropriate Y2K disclosure was also discussed by
members of the External Consultative Committee. Many of those present
agreed that greater disclosures would be helpful. However, there was
skepticism that a standardized disclosure format would be effective in
eliciting meaningful information for a wide class of financial firms,
given the complexity and variety of Y2K issues facing these firms
worldwide. It was also noted that disclosure which relies primarily on
a firm's own subjective assessments of its Y2K problems inevitably
will suffer from an optimistic bias.

In addition, most Y2K efforts will not reach the serious testing phase
until 1999. The purpose of the testing will be to uncover areas where
additional work is required, so that the first round of tests can be
expected to encounter problems. In this environment, it may be
difficult for firms themselves to assess the true state of their Y2K
preparations. Also, firms who believe they are going to be ready will
be directed by legal counsel not to make too strong a statement to
avoid liability claims in case of unforeseen problems. On the other
hand, firms that do not believe they can get ready in time will seek
to avoid stating this clearly to protect their activities during 1999.
For all of these reasons, I am doubtful that specific, reliable
information on the state of Y2K preparations by individual firms
worldwide will become publicly available.

Finally, in the area of improving preparedness, I have saved the most
important topic for last -- namely, testing. Testing programs,
particularly external testing programs, are universally regarded as
the most critical element of serious Y2K preparations in the financial
sector. The Joint Year 2000 Council encourages all firms and
institutions active in the financial markets to engage in internal and
external testing of their important applications and interfaces. To
this end, many major payment and settlement systems around the world
have developed extensive testing programs and procedures for their
participants. In the United States, for example, Fedwire, CHIPS, and
S.W.I.F.T. have coordinated shared testing days for the purpose of
testing the major international wholesale payments infrastructure for
the U.S. dollar. The Securities Industry Association ("SIA") has been
at the forefront of an ambitious program to develop a coordinated
industry-wide test of all aspects of the trading and settlement
infrastructure for the U.S. stock market. The FFIEC's efforts have
also been extremely beneficial in stressing the importance of testing
within the banking sector generally.

Yet, external testing programs globally need to be dramatically
extended and expanded. To that end, the G-10 Committee on Payment and
Settlement Systems last year started to collect information on the
state of preparedness and testing of payment and settlement systems
worldwide. To date, over 150 systems in 47 countries have responded to
the framework and posted such plans.(3) The Joint Year 2000 Council
intends to expand the coverage of this framework to exchanges and
trading systems, as well as major financial information services
providers, and hopes to expand the number of countries and systems
that are included. We will also collate and present the information
graphically to help highlight anomalies in testing schedules, and to
facilitate the efforts of systems to coordinate test scheduling where

Primarily, I see this as an exercise in peer pressure. If we list
every country in the world on our web site and the public can see that
some countries have scheduled mandatory external tests of their major
trading and settlement systems, while other countries do not provide
any information, that second country may come under greater pressure
to organize an external testing program. This is our stated goal. We
will simply have blanks for those countries that do not respond to our
requests for information.

Of course, if the Joint Year 2000 Council is going to encourage
testing to such an extent, then it is only appropriate that we also
help provide some tools for those countries trying to get a serious
testing effort underway in a short amount of time. This is another of
our high-priority projects. We will be working with members of the
External Consultative Committee -- including representatives of the
Global 2000 Coordinating Group, S.W.I.F.T., and the World Bank -- to
rapidly develop a series of documents that help countries set up
testing programs and overcome common obstacles. We intend to issue
these documents broadly by the end of the summer, and some parts well
before that.

In closing this section of my statement, I do not think it is possible
to over-emphasize the importance of testing to help improve readiness.
To illustrate this point, would like to draw on our experiences with
Fedwire, the Federal Reserve's wholesale interbank payments system.
Much of the current Fedwire software application was written in the
last five years, with the Y2K problem in mind. Nevertheless, some of
the older software code that was carried over into the new application
was not Y2K-compliant. Without the rigorous internal Y2K testing
program that the Federal Reserve adopted, our Y2K remediation efforts
might, therefore, have been incomplete. I think of this experience
whenever I hear it said that some countries are immune to Y2K because
they have only recently introduced information technology and that
recent software programs are less affected by Y2K. I ask whether those
programs have truly been thoroughly tested for Y2K compliance.

Contingency Planning Efforts

The third major role of the Joint Year 2000 Council will relate to
contingency planning. In this context, I should note that contingency
planning is something that most financial market authorities,
particularly central banks, undertake regularly with regard to a wide
variety of potential market disruptions. Most private-sector financial
firms, as well, have well developed contingency and business
continuity plans in place for their operations.

Nevertheless, it is clear that contingency planning for Y2K problems
has a number of unique characteristics. First, of course, is the fact
that one cannot rely on a backup computer site for Y2K contingency if
that site also uses the same software that is the cause of the Y2K
problem at the main site. In some cases, it is impractical to build a
duplicate software system from scratch simply to provide for Y2K
contingency. In these cases, as a senior banker explained at one of
our New York Y2K forums, contingency planning amounts to, "Testing,
testing, and more testing."

Contingency planning can also be separated into components that are
firm-specific and those that are market-wide. Each individual firm
will need to develop its own contingency plans designed to maintain
the integrity of its operations during the changeover to the Year
2000. The FFIEC has recently issued guidance to banks in the United
States regarding the core elements of their own contingency
planning.(4) The Joint Year 2000 Council will also be developing a
paper on contingency planning for the benefit of the global financial
supervisory community. This paper will seek to address firm-level
contingency as well as issues of market-wide contingency.

Market-wide contingency refers to the planning by participants and
supervisors done to ensure that individual disruptions can be managed
in ways that will prevent them from causing disruptions to critical
market infrastructures. For instance, we at the Federal Reserve have
gone to great lengths to ensure that barriers are in place to prevent
Y2K problems with a Fedwire participant from causing problems on the
Fedwire system itself. We are also now actively researching additional
steps that the Federal Reserve could take to better prepare the
financial markets as a whole to function in spite of disruptions at
individual firms.

It is also important to realize that contingency planning for Y2K is
not solely an operational issue. Financial firms may seek to adopt a
defensive posture in the marketplace well ahead of Monday, January 3,
2000 (the first business day of the new year in the United States).
For example, market participants may seek to minimize the number of
transactions that would be scheduled for settlement on January 3 or
January 4, or that would require open positions to be maintained over
the century date change weekend.

Contingency planning involves a series of elements, many of which must
be put in place well before January, 2000. For example, we must
consider many possible sources of disruption and determine what
approaches could be available to limit the impact of each possible
disruption. The sooner such thinking occurs, the more opportunity we
have to plan around the possible disruptions. In this context, members
of our External Consultative Committee noted that one of the key
obstacles to effective contingency planning is the inability to list
and consider all possible disruption scenarios. Several of these
participants noted that their firms were engaging consultants or other
procedures to expand the number of scenarios for inclusion in their
Y2K contingency planning.

In New York, we will be using our Y2K forum next month to discuss
contingency planning with a diverse set of market participants. These
local market participants will provide helpful insights for the Joint
Year 2000 Council. Clearly, more work is needed on contingency
planning for Y2K, especially at the international level. Once we get
beyond the early fall of this year, I believe that these efforts will
begin to receive much greater focus and attention, and -- together
with testing -- will dominate our discussions of Y2K during 1999.

Closing Remarks

In closing, I would like to thank the Committee for the opportunity to
appear and submit a statement on this important issue. I hope that the
efforts of the Joint Year 2000 Council will help to make a difference
in improving the state of Y2k preparations in the international
financial community. Realistically, however, I believe that it is
important to understand the limits of what financial market
supervisors can accomplish, either individually or collectively. Only
firms themselves have the ability to address the Year 2000 problems
that exist within their own organizations. Only firms working together
can assure that local markets will function normally. Supervisors and
regulators cannot guarantee that disruptions will not occur.

Given the sheer number of organizations that are potentially at risk,
it is inevitable that Y2K-related disruptions will occur. Today it
would be impossible to predict the precise nature of these
disruptions. However, we do know that financial markets have in the
past survived many other serious disruptions, including blackouts,
snow storms, ice storms, and floods. We will also have a very
interesting case at the end of this year with the changeover to
monetary union in Europe. We will all be watching carefully to see
whether the extent of operational problems related to this event is
greater or less than expected.

I would also like to say at this point that my discussions with other
members of the Joint Year 2000 Council and with members of the
External Consultative Committee have convinced me that successful
efforts to address the Y2K problem will be dependent on the
credibility of those calling for action. Those of us -- such as
members of this Committee as well as others in Congress -- who are
seriously engaged and concerned need to be able to persuade others of
the need to take appropriate actions promptly. It would be unfortunate
if general perceptions of the Y2K problem are driven primarily by
unofficial commentators whose rhetoric is seen to exceed the facts on
which it is based, and therefore easily dismissed.

As a central banker and bank supervisor, my major concern must be with
the system as a whole. At this point, I believe that we are doing
everything possible to limit the possibility that Y2K disruptions will
have systemic consequences in our markets. However, we must all
continue to work hard -- both individually and cooperatively -- in the
time that remains to ensure that this threat does not become more

In that spirit, Mr. Chairman, I would like to end my remarks by
commending the Committee for organizing these hearings on the
implications of the Year 2000 computer problem for international
banking and finance.


(1) A videotape containing highlights of the Global Year 2000 Round
Table is available free of charge from the Bank for International
Settlements. Please contact the Joint Year 2000 Council Secretariat at
the Bank for International Settlements, Centralbahnplatz 2, CH-4002
Basle, Switzerland. (telephone: 41 61 2808432, fax: 41 61 280 9100,
email: jy2kcouncil@bis.org)

The Federal Financial Institutions Examinations Council ("FFIEC") has
also placed the entirety of this video tape on its web site, where it
is available for downloading in whole or in part. Please see

(2) The web pages of the Joint Year 2000 Council can be reached at the
web site of the Bank for International Settlements 
(www.bis.org/ongoing/index.htm). These pages will also be registered 
under the name jy2kcouncil.org in the near future.

(3) The relevant information can now be found on the pages of the
Joint Year 2000 Council.

(4) See www.ffiec.gov/y2k/contplan.htm

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