What implications does the Year 2000 problem have for the global custody industry? With January 1 2000 now less than 13 months away, European custodians and their institutional clients are, understandably, in-creasingly concerned that the much-fêted day will be one of alarming, if not disastrous financial turmoil.
The Year 2000 problem has generated many column-miles of print in the general press over the past few years. Unfortunately, much of this coverage provides little in the way of practical advice. The investment press have sometimes covered the 'Y2K Problem' (as the cognoscenti like to refer to it) but even they have often been more scare-mongering than they should have been, and have rarely covered the problem from the point of view of custody. This seems strange, as the prodigious amounts of money for which custodians are responsible means that if there ever was a sector which should be worried about Y2K, it's custody. Fortunately for institutional investors, most leading custodians are fully aware of the urgency of ensuring that their own systems are fully compliant not only with Y2K but also with the euro. In the case of the euro, of course, the problem is even more urgent.
The word within the custody industry is that most major global custodians - that is, those who routinely act as 'lead' custodians and will be responsible for delegating custody responsibilities in certain countries to selected sub-custodians - have already added Y2K and euro compliance to their computer systems, or are so close to having done this that they cannot truly be said to have a problem in this respect.
However, it is by no means necessarily the case that all smaller custodians - that is, domestic custodians who do not usually act as 'lead' and whose involvement tends to be restricted to handling requirements in the country in which they themselves are located - have all got their systems in order.
Some of these banks (needless to say, none are admitting to having the problem) are known to be working around the clock to solve the problem. Unfortunately, though, adapting a computer system to embody Y2K and euro functionality involves overcoming several significant technical challenges which are especially acute if the system requiring adaptation dates from 20 or 30 years ago, as many banks' computer systems do. Transforming these cumbersome, elephantine systems (the industry term is legacy systems) into streamlined, agile, state-of-the-art information technology resources which comply fully with Y2K and the euro is no mean feat: it's a bit like training an elephant to dance the polka.
Even if an institutional investor's custodian is operating a system which is fully Y2K and euro-compliant, that isn't much use if the investor itself is using a system that doesn't feature this essential compliance.
As Margaret Harwood-Jones, head of corporate trust and relationship management Midland Securities Services says: The problem of legacy systems within the investment community is compounded by the fact that many in-stitutional investors have come to ad-dress the Year 2000 problem much later than they should have done. They have - understandably, of course - been preoccupied with day-to-day bus-iness challenges and management matters. They often just haven't had the time to give proper attention to the fundamental information technology system which powers their operations. The Year 2000 problem is there: they know it's there; they just hope it won't let them down. But replace their existing system with something else? The thought probably terrifies them, as well it might."
Harwood-Jones is firmly of the opinion that dealing with Y2K and euro problems needn't be a nightmare. "It's essentially a business problem: no more, no less, and should be dealt with just as you would deal with any other business problem: by deciding what your objectives are, choosing a course of action which will solve the problem, and then implementing it vigorously and with determination."
She adds: "Institutional investors should bear in mind that the challenge posed by the euro and the millennium gives them the important opportunity to effect a sweeping improvement in all their administrative, accounting and service-delivery technology. This means that solving the ,millennium problem cannot only be a defensive measure designed to protect the in-tegrity of the institutional investor's business, but also an offensive measure aimed at giving a new impetus to the institution's bid for that all-important competitive edge." James Essinger"