Mr Ferguson looks at the challenges to the US payments system posed by the Year 2000 problem
Central bank: fed | Type: speech | Date: 1999-04-25

## Mr Ferguson looks at the challenges to the US payments system posed by the Year 2000 problemRemarks by Mr Roger W Ferguson Jr, a member of the Board of Governors of the US Feder Reserve System, before the National Automated Clearing House Association in Atlanta, Ge on April 13, 1999.

## The Payments System and Year 2000: Current Preparations and ChallengesThank you for your invitation to speak today on the timely and critical topic of the challenge to the payments system.

As an industry, we have a tremendous responsibility public to ensure the smooth operation of the payments system through the Year 2000 and bThis morning I would like to discuss the global challenge presented by the Year 2000 and describe international efforts, particularly those of the Joint Year 2000 Council, worldwide financial services industry to be ready for the century date change.

In pa would like to focus on contingency and risk management initiatives undertaken by centra and the state of readiness of Federal Reserve payment systems, such as Fed ACH.

Finall discuss our need to recognize our responsibility to the general public and our need to develop cooperative efforts between public-sector and private-sector organizations.

## Global ChallengeWith

less than a year left before the millennium change, it still remains difficult global impact.

The good news is that we are not faced with inaction and there a indications that the financial industry, in general, is working diligently to be prepa conversion, which I will elaborate on later, demonstrates that the financial industry significant changes to its systems.

It is also important to note, however, that the deadline is not a single event; it is arriving in stages based on dates typically use systems that give us an 'early warning' of potential problems.

As an example, for any systems that look ahead one year, the early January 1999 dates provided a test of their readiness.

During 1999, other application look ahead dates will provide further indicat readiness as well as our ability to initiate our contingency plans.Given the sheer number of computers and chip-based systems, and the manual nature of th that have emerged to date, we are likely to experience some degree of disruption.

I be disruptions will prove to be mild and short-lived and, as reported in a recent article, effect will be labeled as 'headaches, not disaster.' Consequently, I do not think that global recession.

Ultimately I believe the number and extent of computer system disrupt not be used as the measure of our success in addressing the Year 2000 problem.

Inst success will be measured by our ability, and the public's confidence in our ability, business operations effectively for the balance of this year, on January 3, 2000, and th

## Current State of International Year 2000 EffortsSome

foreign governments and institutions started their Year 2000 program years ago, others were initially reluctant to recognize that a problem even existed.

This reluctan efforts to take early action.

In some areas, already limited resources were dedicat activities, such as the euro conversion or attempts to restructure weakened economie countries that recognized the problem early and had sufficient resources assembled experts from whatever source was available.

Recognizing these challenges, in April 1 Bank for International Settlements hosted a Year 2000 roundtable to raise interawareness.

At the close of the conference, the sponsoring organizations, the Basle Committee Banking Supervision, the G-10 Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors, and the International Organization of Securit Commissions established the Joint Year 2000 Council.

The Council was formed as a direct resu of the recognition of the complexity of the global financial services industry and the n communicate proactively with regulatory and supervisory authorities.As Chairman of the Joint Year 2000 Council, I work with other members of the Council to ensur that a high level of attention is given to the challenge within the global financial sup community and to serve as a point of contact with national and international private s initiatives.

To that end, the Council operates with the participation of central banks, insur securities regulators, and banking supervisors.

It is the first international body that bring such a range of financial regulators.

It is important to note that the Joint Year 2000 Counc the 'international Year 2000 enforcement agency.' We do not have on-site examiners, nor are meant to replace the efforts of national regulators.The Council established an External Consultative Committee, or ECC, to enhance the degree o information sharing between the public and private sectors.

This committee include representatives of internationally-oriented organizations including the Global 2000 Coordina Group, the International Monetary Fund, the World Bank, and financial service providers, such S.W.I.F.T., Euroclear, and Cedel.

Our most important role may be to provide a forum to facil information sharing and cooperation among supervisors.

To accomplish this, we have developed a global supervisory contact list of over 600 financial regulators and have initiated mechanisms for communicating with them.

Our most visible may be a series of bulletins, whic come out monthly, on different themes and topics.

Additionally, the Council has, and w continue to, support, cosponsor, and provide assistance in planning conferences and roundta on the Year 2000 challenge.

To date, we have conducted meetings for regulators from Europe Asia-Pacific, North and South America and the Caribbean, Africa, and the Middle East, whic have provided an excellent means of bringing supervisors together to discuss common intere within specific geographic areas.What is the state of 'international readiness?' As you can understand, it is difficult to accurately the level of international Year 2000 readiness, and certainly no one can predic confidence exactly how the century date change will unfold internationally.

There are t reasons for this difficulty.

First, there is no single indicator that can be used to judge Year 2000 readiness of any country, including the United States.

Second, the state of readin a moving target.

Judgements are usually based on anecdotal information obtained either firstthrough interviews or surveys or second-hand through other sources.

The best information subject to change.

Finally, while it may be possible to reach conclusions about the Year readiness of individual industry sectors, it remains difficult to assess the interdepend critical systems across industry sectors.

In addition, the state of Year 2000 readines country's public sector may not be an accurate indicator of the status of its private sector.With that said, I believe that, as with the United States, in most countries the financial s probably somewhat ahead of other sectors in recognizing the Year 2000 problem, and is probab somewhat more advanced in testing and business continuity planning.

The banking agencies her in the United States have recently finished Phase II evaluations.

Of the banks that the F Reserve supervises, about 95 percent are making satisfactory progress.

Of importance, the s number of 95 percent applies to foreign banking organizations operating here, which as a gr had been behind their U.S. counterparts.

I can also report that, through the regional meeti regulators that I referred to earlier, we have now had contact with regulators from over countries, and the degree of awareness among regulators is, I find, uniformly high.Similarly, with respect to regulators, I should mention the recent release of a state Basle Committee on Banking Supervision discussing the results of its second supervisory on the Year 2000 issue.

The statement highlights the need for continued efforts, esp several smaller jurisdictions.

It is noteworthy, however, that the Committee's survey of 100 regulators identified significant progress within the global financial community majority of regulators indicated that they have issued specific Y2K-related guidance banks and believe their banks are taking appropriate steps to address the issue.

I belie results illustrate the benefits of global supervisory cooperation in raising the finan awareness of the issue and in spurring action.Overall, no one can know with certainty the global impact of the century date change much good work is being done, much remains.

Banking institutions, both domestic and fo must not allow complacency to set in.

## Lessons LearnedAs I noted earlier, there were concerns last year that scarce programming resources i were primarily focused on the euro conversion and that Year 2000 readiness efforts lag euro conversion is completed and its success can best be measured by its perception by and public as a non-event.

While the scale of system changes involved in the euro conver significantly less than the Year 2000, the characteristics of the problem are similar an 2000 Coordinating Group conducted a workshop on the euro conversion to identify 'le learned' that could improve Year 2000 preparedness.

The results are valuable and I woul use them as a framework for describing payment system readiness efforts underway at the Reserve.The first lesson was the need for suppliers of liquidity and credit management to offs and funding dislocations.

Central banks were urged to accept responsibility for these be able to make decisions with 'less than perfect information.' The Federal Reserve h steps to increase its currency order and to be prepared to provide any necessary liquid year-end through open market operations and discount window lending.

We are remind depository institutions that the Federal Reserve is available to meet liquidity n appropriate circumstances and encouraging those that are including the Federal Reser lender of last resort, in their Year 2000 liquidity contingency plans to complete discount window documentation and collateral arrangements as soon as possible.

We ar meeting with agencies such as the Federal Housing Finance Board and the National Credit Administration to discuss liquidity issues that might affect the institutions they superAnother lesson of the euro conversion was the need to provide for timely and a information sharing between industry participants and with regulators.

Effective in sharing structures, such as communication centers, must be set up that enable fast an communications between market participants; among commensurate organizational levels, senior management through operations; and with regulators.

Although the Federal Reser demonstrated its ability to manage crisis situations, we are evaluating and augmen existing communication structures where appropriate.

We are developing local and nationa management centers to maintain a consistent flow of information within the Federal R with our business partners, and with the public at large.Regarding this last point, we are in the process of improving our information sharing most critical supplier, the telecommunication industry, through our participatio Telecommunications Sector Group of the President's Council on Year 2000 Conversion and l with the Federal Communications Commission (FCC).

The Joint Year 2000 Council iundertaking initiatives that will improve cross-border information sharing between countr particularly plans for business resumption and event management.The third lesson is the need to expand contingency planning beyond operations, to addre business continuity, coordinate planning with third-party providers, and test these plan established a Century Date Change Council, comprised of senior management officials, to dire the Federal Reserve's approach to business continuity and contingency planning for the Ye 2000.

The Council considers risk mitigation actions to lessen the likelihood of a pro occurring and to reduce the impact if a problem should occur; and oversees development contingency response procedures in the event problems do occur.The Federal Reserve's planning for Year 2000 business continuity is well underway.

Eac business completed an assessment of the adequacy of its existing contingency scenarios for Y 2000 problems last June.

In addition, last November each Federal Reserve entity servici customers documented its plans to respond to the possibilities of customer problems.

Altho the responsibility for having sound contingency plans lies with the management of the deposi institutions, we recognize that Federal Reserve preparations to deal with potential cus problems are an important component of our business resumption planning.

Our emphasis now is on continuing to monitor, and where possible, reducing risk and on refining the Federal Reser plans through testing, independent reviews, and other means of coordination.Lastly, and not surprisingly, many problems that did occur with the euro conversion could h been identified with more thorough testing.

Since mid-year 1998, the Federal Reserve has off customers the opportunity to test future-dated transactions for payment applications, such a ACH, and other services with electronic data exchanges.

We are continuing to offer test opportunities both during the week and on weekends through early 2000 and, in the second ha of 1999, opportunities will be provided to revalidate application readiness and to test cont procedures.

As of the beginning of April 1999, over 6,200 institutions had tested with Fed and approximately 94 percent of our larger-volume ACH customers have tested.I am also encouraged by the testing efforts of private service ACH operators.

In February ACH operators exchanged files future dated to the rollover weekend and a second test scheduled for May 10.

The Federal Reserve and NYACH will test using leap year dates this weekend.We strongly support domestic and international testing efforts by major market participants, as the New York Clearing House, the Securities Industry Association, and S.W.I.F.T.

to t critical data exchanges.

Under the leadership of the New York Clearing House and with th support of the Federal Reserve, cross-border testing of major payment transactions and S.W.I. is planned to take place in June 1999.

For all countries participating in this test, June conform to January 3, 2000; and June 13 will conform to January 4, 2000, the first business on which all major international money markets are open after the century rollover.

## Public OutreachThe Joint Year 2000 Council strongly recommends enhanced information sharing as critical t readiness efforts and to avoid unnecessary uncertainty in financial markets.

In many count there is currently a lack of adequate information on Year 2000 readiness.

This is of con because it impedes efficient preparations by market participants and may exacerbate negat perceptions in the marketplace.

Financial institutions should share information in orde strengthen confidence that the Year 2000 challenges are being met in all financial sec worldwide.

In February 1999, the FFIEC issued guidance to financial institutions on howaddress customer expectations.

It emphasizes that maintaining customer confidence financial services industry now and after the Year 2000 needs to be a top priority of th and its senior management.In 1999, our outreach program will focus on business resumption activities, including Y risk mitigation and contingency response actions.

The first outreach program occu December 1998, when officials from the Federal Reserve presented, via videoconferenc interactive session with its depository institution customers on the Federal Reserve's planning for the Year 2000.Banks are urging their regulators and other government officials to promote public conf speaking clearly and forcefully about Year 2000 preparedness.

Regulators can play a con role in making sure that Year 2000 information disseminated to the public is factually balanced, and broadly distributed.

Communications are a shared responsibility.

Research that customers want to hear directly from their bank and that the public is interested not generalities, about our preparations.

The Federal Reserve is expanding its pr outreach, with every Reserve Bank working on an aggressive program of local communicatio urge you to do the same.

The public needs to know that the Year 2000 is like other chal have met through careful preparation, risk reduction, and contingency planning to all work around any problems that might occur.

## Public Obligations and Patterns of BehaviorAs we get closer to the century date change, there will no doubt be more sensational c the media.

It is our obligation to be smart consumers of information and to listen to not alarmist, voices.

Remember, as with anything that has a degree of uncertainty, always be those who predict the most dire outcomes.

They have generally been wrong in th and I expect that they will be wrong again.

There are likely to be some disruptions century date change; nothing this large and complex can be perfectly faultless.

We remember, however, that there have been serious disruptions to service in daily life be storms, temporary power outages, disruptions of telephone service, etc. In general, the be annoying and inconvenient, but nothing more.We also need to maintain reasonable and responsible patterns of behavior.

It is pos market participants may reduce clearing and settlement activity on December 31 and Jan Several participants, however, have indicated plans to reduce activity over a substant period, up to a month.

While such a reduction may appear to be prudent to an individ such action by multiple participants raises the possibility of thin markets with acc erratic price behavior.

Our perspective has been to encourage market participants, those who hold themselves out as intermediaries, to consider carefully the overall im including for market liquidity, of reductions in trading volume so that risks and bene initiatives are appropriately balanced.I understand that some organizations that normally make payroll or other payments us ACH are thinking about whether they should make these payments by cheque in the d immediately following the rollover to the Year 2000 as part of their contingency planni these organizations carefully consider all of the implications of such a step before ma decision in this regard.

We have a high degree of confidence in the ability of the Fede and the banking industry to continue to process electronic payments during this per drawbacks to the payment recipients of this change to business-as-usual practices m outweigh any perceived benefits.

## ConclusionI believe that the financial services industry has made great progress in addressing Year issues.

During this next year you will not only need to do your best to continue to repair your own systems, but will also need to evaluate the risk of potential failures and the e these failures on your business.

Further, you will need to test fallback procedures or workprocesses that mitigate the effect of such failures on your ability to continue to conduct b Finally, we must continue to be a reliable source of accurate and sound information to main the public's trust.

I do not doubt that we can collectively rise to these challenges.