I.T. system conversion to the Year 2000

Situation of the financial markets as of June 18, 1999

The "Year 2000 Problem" (or "millennium bug") is an issue that affects all facets of domestic and international business (whether real goods or services be exchanged) and financial relations.  In fact, given today's widespread use of information technology, it is impossible to single out an aspect of trading relations that would not be potentially affected.  Yet, it is indeed upon the financial sector that system risk, that is to say, one's failure affecting someone else's operation, becomes especially material.  On the other hand, it must be noted that the financial system, at least theoretically, appears better positioned than others to meet this challenge, having recently gone through the shift to the Euro, which has represented an occasion to review information procedures (from negotiation to accounting) and, therefore, to deal with the Year 2000 issues at a relatively early stage.

In any case, the Issue has determined a considerable effort by Authorities and operators, and has been tackled at both national and international level as growing world economic integration demands.  The extent of the effort is remarkable, albeit difficult to measure, but it is justified by the catastrophic repercussions that any weaker approach would have brought about.  In particular, figures have been provided upon the worldwide cost that business and governments will bear for the millennium bug fight; such figures are in the hundreds of billions $ US.   We recalled these figures because they help to explain the significant increase in share value of those firms that are involved (this time with a "positive spin") in the production of remediation items, even though it might seem a paradox that the world economic system must shoulder a cost (a very substantial cost) to correct that which may be defined as a mistake originated from software manufacturer's short-sightedness (although, at least in part, they were bound to technical ties), while the same are the sole beneficiaries of the I.T. remediation process. 

International coordination of "Year 2000" related initiatives appears particularly important in such a highly, globally integrated sector as that of the financial markets.  For this reason, Italy's Securities and Exchange Commission-- (Commissione Nazionale per le Societa' e la Borsa) CONSOB--in addition to its domestic initiatives, has also become active within those international instances in which it is traditionally present.

In particular, the International Organization of Securities Commissions (IOSCO), which gathers financial monitoring Authorities of major countries, has confronted the Year 2000 Problem within its Technical Committee, advising members upon the potential problems connected with the millennium change, and issuing a statement that suggested technical fixes for I.T. system conversion, and encouraging members to discuss of operational problems that are likely to affect several jurisdictions.

Moreover, on an initiative by IOSCO, the Basel Committee, of the Committee on the payment systems, and the International Association of Insurance Supervisors (IAIS), the Joint Year 2000 Council was established which, besides acting as a check point for the various initiatives, manage information and assess progress status of national initiatives, has suggested the establishment, in the various countries, of a public entity to coordinate the various initiatives to be adopted.

The Year 2000 problems were also discussed at the Europeann Council in Cardiff (June 15 - 16, 1998), where measures to contain to a minimum potential disruption and contingency plan preparation were called for.

Consob's mission business is to assure transparency and correctness.   Therefore, even with regard to the "Year 2000 Problem", the Commission's main concern has been that of guaranteeing that all interested subjects adopt adequate measures to assure correct information flow and orderly transactions.

First of all, the Commission has completed conversion of its own I.T. procedures in order to prevent any possible Year 2000 related mishaps. These include internal systems and external interface (supervised subjects and shareholders).  In particular, conversion included the programs used to receiving on line communication from supervised subjects as required by regulations, as well as those that are used for database management and query (on Commission's deliberation and transparency of business participation) that are accessible in the Consob Website.

With regard to on-line market operation, Consob's action has focused on the assessment of transaction service supplier's "Year 2000" remediation procedures  (Borsa Italiana Spa, Ced Borsa, Monte Titoli e Cassa di Compensazione e Garanzia).

The immediate purpose of the assessment--which is still in progress and can benefit from the experience gathered from the simulation drill during the shift to the Euro--is that of assuring, through correct market operation, adequate shareholder protection.   Moreover, it is of the utmost importance that, especially in a phase of marked competitiveness among the various financial markets, the Italian system be able to affirm the advancement level of its own micro-structure as well as the reliability, even technical, of its own negotiation systems so as not to undermine its ability to attract foreign investments.

Specifically, drill sessions are coordinated with similar drill at the Banca d'Italia (Italy's Central Bank) with the purpose of verifying the adequacy of the settlement systems which represent a crucial element in the "production threader" through which the provision and production of services connected with the actual negotiation system offered by the Stock Exchange may be represented.  Such services (which include reserve account with Monte Titoli and the clearing and settlement services by the Cassa di Compensazione e Garanzia) represent a critical element for the potential "system risk" implications.

To this regard, it must be underscored how the "Year 2000 Problem" comes at a time when the stock exchange industry, at least in Europe, is undergoing deep organizational changes.  In fact, under raising competition pressure, which was enhanced by the shift to the Euro, a financial market integration process can be witnessed (which could prelude to an actual merger) together with a re-organizational effort aimed to increasing efficiency and fee competitiveness within their production chain.  This process, which in Italy pairs up with undergoing privatization (e.g., Ced Borsa-Sia merger) obviously involves I.T. procedure conversion by the interested parties.  Such conversion, operational in scope, well represents an occasion to deal with the "Year 2000 Problem" with substantial economies of scale.  To better appreciate the weight that such economies of scale, even within a cost structure characterized by high fixed costs, could have upon the ability of the european exchange system to compete with other financial markets, we may recall that SEC (US Security and Exchange Commission) has calculated that, in the last five years, the US Stock Exchanges and their settlement systems have spent $ US 110 million for Millennium Bug related I.T. system conversion.  Italian sources have estimated an expenditure of 25/30 billion Lit. ($ US 14/17 million) for the domestic bond and stock markets.

While keeping in mind system risk,  the "Year 2000 Problem" must also be aknowledged at the company level, and each single broker must adopt adequate internal and customer management procedures.  From this point of view, the most important profiles are those of security and functionality of market I.T. interface procedures as well as those of "internal" operation systems.  For this reason, as already mentioned, Consob has been promoting drill sessions for early detection of possible Year 2000 related disruptions and their timely fix.  More precisely, drill cycles are still in progress and shall be completed on the coming July 2.   Completed drill (2 out of 3) have shown encouraging results and a satiscfactory participation level.

On October 9, 1998, Consob issued guidance letter n. 98079574 with the twofold intent of providing guidance for the conduct of corporate and control bodies of public companies and to define adequate disclosure, to be reported in the six-monthly budget report starting with 1998 financial year, to explicitate Year 2000 cost and activities.

In particular, as concerns conduct, it was recommended that management monitor the whole corporate I.T. system so as to allow timely assessment of software correction requirements.  On this specific item, it can be stated that software conversion of public companies and participating companies is nearing completion.   Moreover, it must be noted how some major firms have offered to help their main suppliers, shouldering the consequent cost, to convert their systems in order to prevent   production process disruptions.

The recommendation has also clarified the tasks of the monitoring Board that must supervise correctness of adopted initiatives and effectiveness of adopted measures to safeguard corporate assets.

Consob has also enquired with Certifying Companies about the opportunity of working out a plan to assess reliability of public companies accounting- administrative system, and making it mandatory to report any project delays to the Board.

The Divisione Affari Contabili has reviewed the information reported in public companies 1998 budget:  73% of MIB30 (S.E. Index) companies have reported an average Year 2000 conversion cost of over 49 billion Lit. (ab. $US 27 million) (with a peak of 300 billion or ab. $US 170 million for Telecom).

4. Conclusions

Overall, the Italian financial system, recently tested with the shift to the Euro, and which uses I.T. infrastructures that were developed in the early 1990s--later than more financially advanced countries (USA)--and are, for the very same reason, the result of more advanced technology seems to have devoted, even under the supervision of Monitoring Authorities, the proper attention to the problem, showing how, in a sector with a swift technological evolution a delay, when adequately filled in, may not always be penalizing.

This, coupled with the good results of the tests thus completed (and that will be continued), allows us to face the Issue with a reasonable degree of confidence upon the general capacity of the system.