THE Y2K READINESS OF THE U.S. FUTURES INDUSTRY
WILLIAM J. RAINER
COMMODITY FUTURES TRADING COMMISSION
THE YEAR 2000 SUMMIT
SEPTEMBER 17, 1999
Good morning. I am very pleased to be here today to discuss the Y2K readiness of the U.S. futures industry.
In 1998, more than 630 million futures and option contracts were traded on U.S. futures exchanges. Processing these transactions involves elaborate computer technology. Accordingly, for several years, the CFTC has worked closely with futures exchanges, the clearing houses, the National Futures Association, and the Futures Industry Association, to ensure the industry’s Y2K readiness. Our current assessment of the futures markets is very positive. We are very confident that there is a low probability of any significant problem.
In my comments today, I first will review the facts supporting this view. Second, I will describe the actions we have taken to achieve preparedness. Third, I will conclude by discussing the industry’s ongoing event management and contingency plan activities.
This first slide is a snapshot of the Y2K status of the futures industry. Three categories of entities are represented. The top two bars address self-regulatory organizations or SROs, consisting for this purpose of the exchanges and clearing houses. The middle two bars relate to futures commission merchants or FCMs, the primary industry intermediary, and specifically cover all FCMs that carry customer accounts or that are exchange members engaging in only proprietary trading. The bottom two bars refer to large commodity pool operators or CPOs -- those with more than one billion dollars in assets under management. Since large CPOs also tend to act as commodity trading advisors or CTAs, the chart reflects their readiness in that capacity as well.
Each orange bar represents the extent to which the entities in each category will have completed remediation of their mission critical systems this month. Completion means that those systems have been evaluated for Y2K problems and that all bugs identified have been fixed or the relevant systems replaced with systems that are Y2K compliant. The top orange bar indicates that remediation for the systems of all futures self-regulatory organizations, on average, is 97% completed. The middle and bottom orange bars show, respectively, that over 90% of FCMs have completed remediation and over 97% of large CPOs have done so.
To validate their remediation steps, SROs and registrants conducted extensive testing, both individually and with other entities whose systems interface with theirs. As part of this process, the Futures Industry Association, with CFTC oversight, organized three stages of interactive testing between firms and the exchanges. Industry-wide testing, the final and most important stage, was mandatory for all clearing members, and involved every exchange, clearing house, and the National Futures Association. A very detailed test script or "conditions catalogue" was prepared to cover every product offered by a U.S. futures exchange and all types of transactions. Industry-wide testing was completed in late spring 1999. It involved 135 firms and the processing of more than 18,000 transactions. There was an extremely low incidence of Y2K problems -- .08% -- all of which were promptly remediated.
The yellow bars on the chart represent the extent to which entities in each of the three categories will have completed all currently planned in-house and other testing this month. The top yellow bar indicates that testing is 95% complete across all SROs. The middle and bottom yellow bars indicate, respectively, that over 88% of FCMs have completed testing, and nearly 94% of large commodity pool operators have done so. It is important to note, however, that exchanges and clearing houses will continue to make their systems available to members that wish to conduct further interactive testing.
During the past several years, the CFTC, in conjunction with the SROs, implemented a comprehensive plan to assure and assess Y2K readiness. The CFTC's evaluation of the readiness of exchange and clearing house systems has involved extensive ongoing direct contact between the CFTC and each entity. The SROs have been responsible, subject to CFTC oversight, for evaluating the preparedness of their member firms. This second slide lists some of the steps that have been taken.
First, the chief executive officers of FCMs and CPOs have been required to certify by letter that their firms are Y2K compliant, and if not, to indicate when Y2K compliance is expected.
Second, the Joint Audit Committee, a group of senior financial surveillance and audit managers from the exchanges and the National Futures Association, collected industry-wide testing results and other detailed Y2K status information from firms. To assure the highest level of accountability, this testing information also had to be certified by the firm’s CEO.
Third, in 1997 the CFTC requested the Joint Audit Committee to include a Y2K component in its annual audits of exchange member firms. As a result of this arrangement, the CFTC receives quarterly reports from each exchange and the National Futures Association on FCMs' Y2K preparations.
Fourth, the CFTC, the Securities and Exchange Commission and the American Institute of Certified Public Accountants, jointly developed special "Agreed Upon Procedures" or "AUPs" that independent CPAs have used to prepare reports on FCMs’ Y2K readiness. These reports are filed with each FCM’s annual report of financial condition. They indicate that the FCM’s independent CPA has reviewed the FCM’s Y2K program and whether that program addresses the necessary elements.
Fifth, under existing Commission regulations an FCM, its independent CPA, or its designated SRO, is required to file a report of "material inadequacy" if the FCM’s operations are seriously impaired. Commission advisories published in 1997 and 1998 interpreted the term "material inadequacy" to apply to a Y2K condition.
If any of the information obtained through these various processes raises a question or concern, the entity comes under increased scrutiny from SROs and the CFTC, who ultimately stand ready to determine whether a firm’s activities should be limited or terminated.
So far I have discussed the readiness of SROs and their members. I should also mention that the CFTC has put its own systems under exacting scrutiny. The CFTC has two mission-critical systems. They both have been Y2K compliant since 1994 and have been processing data with 21st century dates since that time. The CFTC also has obtained necessary remediation and validation test results for critical infrastructures and utilities.
The focus of our industry’s efforts now has become contingency planning and event management. In June, each SRO submitted its draft contingency plan to the CFTC. In addition, a CFTC Advisory published in June required FCMs and certain other registrants to make their written contingency plans available upon request to the Commission and their SRO. In that Advisory, the CFTC also provided guidance concerning the essential content of a contingency plan.
The CFTC’s own Y2K Command Center, shown on the third slide, will be located at CFTC headquarters in Washington, D.C. It will be manned by top management and other essential staff. CFTC regional offices also will have personnel on hand. In the event that CFTC staff are unable to access a CFTC building, cell phones, portable computers and Internet access will be provided to enable essential staff to perform their duties from remote locations.
The slide also summarizes the fact-gathering that will form the basis for the CFTC’s reports to the President’s Information Coordination Center, as well as the basis for any necessary action. The CFTC, exchanges, and the National Futures Association are establishing a schedule for those SROs to collect status information from their members. The SROs will make this information available to the CFTC in the form of summary health check reports. In addition, the SROs will provide the CFTC with health check reports on their own infrastructures as industry utilities. The Commission also will receive reports from the two major service providers that supply back office bookkeeping software to most FCMs. Those reports will address their operations and the overall status of their customer firms. Finally, the CFTC will be monitoring domestic and international news reports.
In sum, the CFTC and the industry are nearing completion of a comprehensive program intended to assure Y2K readiness. In the remaining months we will continue to refine and implement our contingency plans. As I said at the outset, we do not expect any disruptions in the futures industry, but we will be prepared.