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Exchanges say AOK for Y2K

If the dark predictions of the millennium pundits are to be believed, mother earth will suffer a massive coronary on January 1, 2000, when bad data will begin to clog the arteries of computer systems around the globe.

The financial industry in general and the futures industry in particular have all taken a number of steps to avoid being among the detritus. Last year, the Futures Industry Association, the Securities Industry Association and the Securities and Exchange Commission each began developing time frames for Y2K compliance. The FIA and SIA are planning industry-wide beta tests for Y2K this summer and fall, while the SEC has proposed a requirement that all medium- to large-sized exchange clearing members in the securities industry report their Y2K progress at regular intervals.

Derivatives exchanges have a major advantage over most other businesses in that comparatively little date-specific processing is required. Most trade data processing occurs on an intraday basis. “Other than some of our autoquote packages, order-processing and cancel-replacement processing,” says Bruce Smith, vice president of technology and year 2000 task force chairman at the Philadelphia Stock Exchange, “most of our processing is ‘here today, gone tomorrow.’” And the rapid technology buildup to advance the goal of electronic trading has meant that some of the industry’s trading systems already fit the Y2K-compliance bill.

But the country’s biggest derivatives exchanges aren’t out of the woods yet. None is even close to full Y2K compliance in their floor operations, and a slew of outmoded mainframes and rusty PCs threaten to wreak havoc on their internal infrastructures. Luckily, they saw the train coming a long time ago, and have been scurrying ever since to get out of the way.

“Everything that is staff or membership related will be ready in the first half of next year.”
Bill Jenks
senior vice president and chief information officer, Chicago Mercantile Exchange

The Chicago Mercantile Ex-change believes it’s ahead of the pack. More than one-third of its systems are already Y2K compliant, including its two-year-old Clearing 21 system, which was built with Y2K in mind. The exchange is currently in the final step of a three-step overall plan for the remainder of its systems. First, it performed an inventory assessment to determine the extent of its difficulties. RCG Quintech, an outside consultant, ran a diagnostic program throughout all the exchange’s software, including its MVF, Tandem and UNIX mainframes. The program searched through the Merc’s reams of code to identify date-dependent fields. Once it had an idea of the scope of the problem, the Merc sent out a request for proposal to outside consultants, and it has settled on RCG Quintech. Now 19 RCG consultants are running around the exchange performing remediation.

The Merc will undergo three different testing phases, says Bill Jenks, senior vice president and chief information officer at the exchange, to make sure that “everything that is staff or membership related is ready in the first half of next year. We don’t want anything that’s critical to our members hanging out there past then.” It has scheduled what it calls “industry unit testing,” geared toward clearing firms and their software vendors, such as Rolfe & Nolan and SunGard. During this phase, which begins later this month, all entities will make sure they can work with the Merc’s remediated code. In addition, the FIA beta tests this fall, which will examine full clearing cycles over entire weekends, will help participating exchanges refine their remediation, and the SIA’s full industry tests next spring will help iron out any final kinks.

The Chicago Board of Trade got an even earlier start on Y2K compliance than the Merc. It began evaluating its accounting systems in 1994 and its regulatory systems a year later. The CBOT has a much simpler task than other exchanges, because it doesn’t have a clearing system to grapple with. And its core strategic systems, such as those for price reporting and electronic trading, are being replaced this year and, naturally, were designed for Y2K compliance. Still, the CBOT isn’t home free just yet. It has hired a consultant to perform a six- to eight-week review of all of the exchange’s systems, as a double check on its internal efforts.

The Chicago Board Options Exchange began its Y2K project in 1996, and plans to spend “a couple of million dollars on conversion,” says Charles Henry, president and chief operating officer at the CBOE. The CBOE is that rare exchange that is handling the entirety of the Y2K project in-house, and it plans to have all its trading systems converted by June. “We’re lucky in that a great deal of our technology is client-server, which doesn’t conflict with Y2K at all,” says Henry.

One obstacle that remains, however, is converting the exchange’s aging infrastructure to Y2K compliance. “When we checked our own software,” says Henry, “we found that our old 286 and 386 PCs can’t handle Y2K. One of those controlled our heating and ventilating systems and another controlled our elevators. As you can imagine, we fixed those immediately.”

The Philadelphia Stock Ex-change began assessing its Y2K needs in April 1996, and by September of that year it had begun converting systems. Its goal is to be fully Y2K compliant by December 16. It’s first order of business was tackling its MVS mainframe, although some legacy software systems that run on it remain unconverted. It plans to “bridge” its system with an eight-character format, says Smith, “to make sure that we have insulated ourselves from our external customers, so that if they’re not ready for Y2K, we can take their information the way it is.” The PHLX has purchased a package from an outside vendor that will convert any remaining unconverted code. Its trading platforms were less of a challenge, says Smith, because of the lack of date-specific code required. While the exchange didn’t have to hire additional programmers to take up the Y2K challenge, it still spent a cool $3.5 million on conversion—not chump change, but not the end of the world, either.

The futures and options regulatory systems are in good shape as well. The Commodity Futures Trading Commission told the Senate Agriculture, Nutrition and Forestry Committee in May that the vast majority of its systems are already Y2K compliant, including its two “mission critical” mainframe systems, the Integrated Surveillance System and the Exchange Database System. The ISS allows CFTC employees to monitor the daily trading of futures and options, while the EDS is used for market investigations. Both systems, says CFTC chairwoman Brooksley Born, have been processing Y2K data successfully since 1994. Only one major system remains non-Y2K-compliant — the commission’s financial management system, used to manage its budget. The FMS is slated to be fully Y2K-compliant by June 30, 1999—one year after a replacement system is implemented.

Pork Bellies 101—On-Line
The Chicago Mercantile Exchange has joined the matriculation business. For $99 and some Internet connection fees, aspiring futures whizzes can now obtain a “certificate of completion” after passing the final exam in the industry’s first-ever Internet correspondence course, “Introduction to Futures.”

The Merc launched the cyber school in May to reach out to students not able to attend its regular classes.

“The courses are designed for those who have not had the time or the opportunity to participate in CME classes in the past,” says Tom Bently, chairman of the Merc’s education committee. “They will give students the flexibility and freedom to learn at their own pace at whatever time of day or night fits their schedule.”

Courses are divided into chapters, with a test after every section. Students have up to six months to complete each course, and the Merc also offers a bulletin board where students can post questions and receive answers.

For more information about the school, including course offerings and prices, see www.cme-courses.com.

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