Standing the test of time
By the nature of what they do custodian banks have a big year 2000 problem. Custodians exchange data with many organisations - brokers, dealers, sub-custodians and others.
So they need to fix not only the millennium bug (the inability of computer systems to interpret the date change to 2000 correctly because they only store the last two digits of the year) in their own computer systems, but they must also ensure those with whom they deal will also handle the date change.
Testing for year 2000 problems where systems pass data between them can be complex and time consuming. Therefore, a number of organisations - custodian banks, broker-dealers and international securities depositories - got togand ether at the be-ginning of this year set up Custody 2000, which aims to provide methods and management for testing among its members. It is a partner of Global 2000, an industry-wide body attempting to co-ordinate initiatives on the millennium bug, and whose web site it shares.
Custody 2000 uses the concept of proxy testing whereby a test between one custodian and one sub-custodian is accepted as a proxy for other custodians that use the sub-custodian in that market. By pairing off and using a standardised test, the members of the group reduce the number of tests.
Custody 2000 has 37 members, including Royal Trust, Paribas, Citibank, Deutsche Bank, Cedel and Euroclear, who are undertaking proxy tests in 66 markets. They are using a test based on Swift messages in standard test scripts. On completion, they produce a test book with the results and an independent observer audits the whole process.
Members submit a list of the 15 most critical markets they want tested. The Custody 2000 committee allocates them three to test and divides the remainder among the other members. “If you are a global custodian, you may have 100 different sub-custodians. There is no way you are going to be able to test all those markets on your own,” says Jon Lloyd, year 2000 client executive for Paribas and committee member of Custody 2000 responsible for the test process. Tests began in February and are now about half way through, says Lloyd. Custody 2000 expects members to have completed all tests and published their results by the end of July.
How widely the information is disseminated is down to the sub-custodians who own the test books. Paribas, for example, is publishing its results only for its clients.
“We don't see this (information) as being a competitive tool,” says Lloyd. “We’re not going to be using this to say we’ve done our tests but they haven’t done theirs. That is not the spirit of Custody 2000.” Rather, the spirit is one of co-operation. Paul Stillabower, managing director of Royal Trust Global Custody and chair of Custody 2000, agrees. “In general, people are facing the same issues with year 2000,” he says. It is a shared problem that requires a shared solution.
Paribas says that it has found no bugs in the tests it has run. Nor does it expect to find substantial problems.
“We’re testing for success,” says Lloyd. All participants should have already tested their systems internally three or four times.
But what if a test does go badly, if an organisation does appear not have the bug under control? “Custody 2000’s approach allows for an organisation to take the test, make repairs and re-test within the time frame given for publishing the results,” says Stillabower. “The reality is participants have a confidence level their tests will work. If an organisation fails to publish a test result, it may lead to its partners reviewing their relationship with them. But so far, by all accounts, tests have gone well.”
The custodians and their partners still have much work to do but they are confident that they will be well prepared for when the year rolls over. All the key players are involved in Custody 2000, says Lloyd. They are covering all the key markets. Compared with the rest of the financial sector they are well up to speed in their preparations - and the financial sector has a reputation among experts as being at the forefront of tackling the bug.
“In terms of proxy testing we’re a beacon to the industry,” says Lloyd. The group has pioneered the concept and proved it viable.
But Custody 2000 recognises however well its members prepare there is still a degree of uncertainty. Even if all tests are successful the group will not certify that any member is ready for year 2000.