oversight

Year 2000: Financial Institution and Regulatory Efforts to Address International Risks

Published by the Government Accountability Office on 1999-04-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Ranking Minority Member
                Committee on Commerce
                House of Representatives


April 1999
                YEAR 2000
                Financial Institution
                and Regulatory Efforts
                to Address
                International Risks




GAO/GGD-99-62
GAO                United States
                   General Accounting Office
                   Washington, D.C. 20548

                   General Government Division



                   B-281294

                   April 27, 1999



                   The Honorable John D. Dingell
                   Ranking Minority Member
                   Committee on Commerce
                   House of Representatives

                   Dear Mr. Dingell:

                   On July 29, 1998, you requested that we review the international risks that
                                                                                           1
                   the Year 2000 computer problem poses to U.S. financial institutions. These
                   institutions are active participants in international financial markets as
                   dealers of foreign exchange and derivative products, lenders to foreign
                   organizations, and investors in foreign securities. You were concerned that
                   U.S. financial institutions could encounter significant difficulties in
                   operating internationally and could potentially incur substantial losses on
                   their trading and investment activities if foreign markets and financial
                   institutions have not adequately prepared their computer systems to
                   correctly process Year 2000 dates.

                   To address your request, we assessed the extent to which (1) large,
                   internationally active U.S. financial institutions were addressing
                   international Year 2000 risks; (2) U.S. banking and securities regulators
                   were overseeing these risks for the institutions they regulate; (3) large
                   foreign financial institutions and their regulators are addressing Year 2000
                                                                                          2
                   risks; and (4) other issues may require attention before 2000 arrives.

                   Large U.S. financial institutions have financial exposures and relationships
Results in Brief   with international financial institutions and markets that may be at risk if
                   these international organizations are not ready for the date change
                   occurring on January 1, 2000. However, the seven large U.S. banks and
                   securities firms we visited were taking actions to address these risks. They
                   had identified the organizations with which they had critical foreign
                   business relationships, had assessed the Year 2000 readiness status of
                   these organizations, and were developing plans to mitigate the risks that
                   would be posed by the lack of Year 2000 readiness of one or more of these

                   1
                       For this assignment, we addressed the activities of large U.S. banks and securities firms.
                   2
                   You also asked us to review Year 2000 issues for the insurance industry. We are providing the results
                   of that work in a separate report to be issued at a later date.




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organizations. They told us that they did not expect potential Year 2000
disruptions to have much long-term effect on their global operations.

U.S. banking and securities regulators were also addressing the
international Year 2000 risks of the institutions they oversee. Banking
regulators had issued guidance for banks on addressing international Year
2000 risks and were assessing bank preparations for these risks during
bank examinations. Securities regulators, although not directly responsible
for securities firms’ foreign activities, were assessing these firms’ efforts to
address international and other external Year 2000 risks using information
obtained through the regulated U.S. broker-dealer affiliate.

Foreign financial institutions reportedly have lagged behind their U.S.
counterparts in preparing for the Year 2000 date change. One of the major
reasons cited for the lag was that these firms also had to make systems
modifications to prepare for the introduction of a new European currency
in January 1999. Officials from four of the seven large foreign financial
institutions we visited said they had scheduled completion of their
preparations for Year 2000 about 3 to 6 months after their U.S.
counterparts, but they planned to complete their efforts by mid-1999 at the
latest. The officials also said they were assessing the readiness of the
entities with which they did business. Foreign regulators in France,
Germany, Japan, Korea, and the United Kingdom said they were assessing
the readiness of the institutions they oversee, but their efforts generally
appeared less extensive than those of U.S. regulators. In addition, key
international market support organizations, such as those that transmit
financial messages and provide clearing and settlement services, told us
that their systems were ready for the date change and that they had begun
testing with the financial organizations that depended on these systems.
Two international organizations created to assist international Year 2000
efforts, the Global 2000 Coordinating Group and the Joint Year 2000
Council, were also playing a major role in assessing readiness and helping
global financial market institutions and regulators address Year 2000
issues.

As the Year 2000 approaches, some issues will continue to require the
attention of U.S. and foreign financial institutions and regulators. For
example, officials from the large U.S. and foreign financial institutions we
visited said they were concerned about the readiness of foreign
infrastructure providers, such as those that supply telecommunications,
power, water, and other services. The readiness of these organizations is
important because financial institutions and their international
counterparts depend on these providers for their continued business



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             operations. Another issue that financial regulators and financial
             institutions said they were addressing that will require continued attention
             was the need for mechanisms to coordinate actions and information
             among regulators and other organizations during the date change period.
             Promoting additional Year 2000 readiness disclosure by foreign
             organizations was an additional issue for which regulators have taken
             steps and which financial institutions saw a continued need to address. As
             2000 approaches, the availability of such disclosures will be critical for
             financial institutions in planning for and addressing Year 2000 risks. In
             addition, regulators acknowledged the need to continue developing
             strategies for communicating the readiness status of the financial sector to
             alleviate concerns among members of the public.

             The Year 2000 problem exists because the data that computers store and
Background   process often use only the last two digits to designate the year. On January
             1, 2000, such systems may mistake data referring to 2000 as meaning 1900,
             possibly leading to numerous errors and disruptions in processing.
             Financial markets in the United States and countries throughout the world
             are highly dependent upon the accurate transmission of electronic
             information, and thus the systems they use must be readied to correctly
             process Year 2000 dates.

             If the computer systems used by foreign financial markets and institutions
             are not ready for the Year 2000 date change, U.S. financial institutions
             could be adversely affected in various ways. If systems used by foreign
             markets fail, U.S. institutions may not be able to alter their holdings of
             foreign financial assets. Market closures and the resulting uncertainty
             could also cause dramatic drops in prices, thereby producing large losses
             for U.S. institutions holding such assets. If foreign financial institutions’
             systems are not ready, U.S. institutions may not be able to access financial
             assets held by their foreign business partners and customers or may not
             receive payments owed by such institutions. If the systems used by foreign
             infrastructure providers, including those providing telecommunications,
             power, water, and other services, are not also ready for 2000, U.S.
             institutions may not be able to communicate with its foreign business
             partners and customers. They may also be unable to conduct financial
             transactions with such institutions or within affected countries.




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              To gather information on the extent of U.S. financial institutions’
Scope and     international activities, we obtained data on U.S. banks’ lending exposures
Methodology   from U.S. banking regulators. For information on U.S. entities’ investments
              in foreign securities, we obtained information from the U.S. Bureau of
              Economic Analysis and from Morningstar, Inc., which is a private
              investment research firm that maintains a proprietary database of U.S.
              mutual funds’ investment portfolios. We obtained data on foreign
              exchange and over-the-counter derivatives markets from the Bank for
              International Settlements. To gather information on how U.S. financial
              institutions were addressing international Year 2000 risks, we interviewed
              officials and reviewed available Year 2000 documentation from the
              headquarters offices of seven major banks and securities firms that were
              among the most internationally active financial institutions. We
              interviewed additional representatives of some of these firms in countries
              outside of the United States. We also interviewed U.S. banking and
              securities regulators to obtain information on how U.S. financial
              institutions were assessing their international Year 2000 risks.

              To gather information on how U.S. regulators were addressing
              international Year 2000 risks, we reviewed guidance and other issuances
              and discussed international Year 2000 risks with representatives of the
              Federal Reserve, the Office of the Comptroller of the Currency (OCC), and
              the Securities and Exchange Commission (SEC). We also reviewed these
              organizations’ internal analysis summaries of U.S. and foreign financial
              institutions’ progress in addressing Year 2000 and securities firms’
              regulatory reports by discussing their Year 2000 efforts.

              To determine how foreign financial institutions and regulators were
              addressing Year 2000 risks, we interviewed representatives of seven large
              financial institutions, three market support organizations, and regulatory
              agencies in France, Germany, Japan, Korea, and the United Kingdom. We
                                                                            3
              also reviewed reports and statements by other organizations that have
              assessed the Year 2000 readiness of foreign financial institutions. The
              foreign countries whose Year 2000 efforts we evaluated included 4 of the
              top 10 countries in which U.S. organizations had significant lending and
              mutual fund investment exposures. In addition, we interviewed officials
              from and reviewed Year 2000-related documents provided by international
              market support organizations that are responsible for clearing and settling
              transactions, transmitting payment instructions, and other financial

              3
               These included organizations such as the Gartner Group, which is an information technology
              consulting firm, and the Global 2000 Coordinating Council, which is a private sector group set up to
              address international Year 2000 issues.




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                             messages. We also interviewed officials from and reviewed documents of
                             key international organizations that were established to address Year 2000
                             problems in global financial markets, including the Global 2000
                             Coordinating Group and the Joint Year 2000 Council.

                             To identify issues that may require further attention, we interviewed
                             officials at the organizations we contacted. We also reviewed reports and
                             other documents issued by U.S., foreign, and international organizations.
                             Information on foreign institutions and regulation in this report is based on
                             interviews and secondary sources, not our independent technical or legal
                             analysis.

                             We did our work from July 1998 to March 1999 in accordance with
                             generally accepted government auditing standards. We obtained oral
                             comments on a draft of this report from staff of the Board of Governors of
                             the Federal Reserve System and SEC and written comments from the OCC
                             (see app. I). We discuss their comments at the end of this letter.

                             Large, internationally active U.S. financial institutions, which account for
Large, Internationally       most of the financial exposures and relationships with foreign financial
Active U.S. Financial        institutions and markets, may be at risk if the foreign organizations are not
Institutions Were            ready for the Year 2000 date change. However, officials from the U.S.
                             institutions we visited told us that they have mostly completed the changes
Assessing International      required to ready their own computer systems to process Year 2000 dates.
Risks                        With financial relationships around the world, these officials also said they
                             were assessing the Year 2000 readiness of their customers, business
                             partners, and financial counterparties. Further, they said that they are
                             preparing plans to mitigate the risks their international activities pose to
                             their operations, but that they generally did not anticipate Year 2000
                             problems in other countries to have a significant long-term impact on their
                             business operations.

Large U.S. Financial         Although many financial institutions may be active internationally, fewer
                             than 25 large institutions account for most of the total foreign financial
Institutions Are Active in   exposures of U.S. banks and securities firms. The Year 2000 readiness of
Global Financial Markets     foreign organizations’ computer systems is important to these large U.S.
                             financial institutions because they have substantial international financial
                             exposures.

                             U.S. financial institutions are active in various global financial activities.
                             Large U.S. banks and securities firms are active participants in the foreign
                             exchange markets in which transactions valued at $1.5 trillion were
                             estimated to be occurring daily as of April 1998. Determining the portion of



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                                         U.S. financial institutions’ foreign exchange activities that are conducted
                                         with foreign entities is difficult, but about 18 percent of the daily volume of
                                         foreign exchange trading is reported to occur in the United States. The
                                         comparable share of global daily trading volume in London, which is the
                                         most active foreign exchange trading center, was about 32 percent. U.S.
                                         firms are active in London and other world foreign exchange centers as
                                         well. Over-the-counter derivatives dealing is another global financial
                                                                                                                    4
                                         market activity in which U.S. financial institutions actively participate.
                                         About $70 trillion in notional principal was outstanding in June 1998, with
                                         U.S. banking institutions having an estimated $28.2 trillion outstanding as
                                                      5
                                         of that time.

                                         U.S. banks are also active globally as lenders of funds and, as of June 30,
                                         1998, had a total foreign lending exposure of about $487 billion. Six U.S.
                                         banks accounted for over 75 percent of this total exposure. As shown in
                                         table 1, U.S. banks’ largest lending exposures were concentrated in the
                                         major European markets and Japan.

Table 1: Top 10 Foreign Country
Lending Exposures for U.S. Banks as of   Dollars in millions
June 30, 1998                            Country                                                                        Lending exposure
                                         Germany                                                                                 $47,845
                                         United Kingdom                                                                           36,835
                                         Japan                                                                                    36,531
                                         France                                                                                   32,709
                                         Italy                                                                                    26,464
                                         Brazil                                                                                   25,602
                                         Canada                                                                                   21,868
                                         Netherlands                                                                              19,940
                                         Switzerland                                                                              19,820
                                         Spain                                                                                    18,751
                                         Total                                                                                  $286,365
                                         Source: U.S. Federal Financial Institutions Examination Council.




                                         4
                                          Derivatives are financial products whose value is determined from an underlying reference rate, index,
                                         or asset. The underlying include stocks, bonds, commodities, interest rates, foreign currency exchange
                                         rates, and indexes that reflect the collective value of various financial products. Over-the-counter
                                         derivatives are distinguished from exchange-traded derivatives because they are privately negotiated
                                         financial contracts.
                                         5
                                         Notional principal amounts, which are the amounts upon which payments are often based, are one
                                         way that derivatives activity is measured. Although these amounts are indicators of volume, they are
                                         not necessarily meaningful measures of the actual risk involved. The actual amounts at risk for many
                                         derivatives vary by both the type of product and the type of risk being measured.




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                                       Although most of their lending was in developed countries, large U.S.
                                       banks also had exposures to organizations in various emerging market
                                       countries. As shown in table 1, exposures to organizations in Brazil ranked
                                       among the top 10 for U.S. banks as of June 30, 1998. U.S. banks also had
                                       lent over $16 billion to Mexico and had exposures to other emerging
                                       market countries in Latin America and the Caribbean totaling about $31
                                       billion. U.S. banks’ lending exposures to Asian countries, excluding Japan,
                                       were about $41 billion and to Eastern Europe were about $11 billion.

                                       U.S. entities are also active in securities investing internationally. As of
                                       year-end 1997, U.S. entities held foreign financial stocks or bonds worth
                                       about $1.45 trillion, according to data compiled by the U.S. Bureau of
                                       Economic Analysis. However, SEC officials told us that only about 12
                                       securities firms engage in substantial international activities. Other entities
                                       active in investing in other countries include U.S. mutual fund
                                       organizations. According to information compiled by Morningstar, Inc.,
                                       U.S. mutual funds’ foreign equity investments were also concentrated in
                                       the major European markets and Japan (see table 2).

Table 2: Top 10 Foreign Country U.S.
Mutual Fund Equity Investments as of   Dollars in millions
January 1999                           Country                                                            Investment value
                                       United Kingdom                                                             $69,958
                                       France                                                                      36,975
                                       Netherlands                                                                 34,073
                                       Japan                                                                       33,377
                                       Germany                                                                     25,960
                                       Canada                                                                      22,429
                                       Switzerland                                                                 18,990
                                       Italy                                                                       15,181
                                       Sweden                                                                      14,689
                                       Finland                                                                     12,474
                                       Total                                                                     $284,106
                                       Source: Morningstar, Inc.


                                       Equity investments by U.S. mutual funds outside of the largest countries
                                       generally represented a much smaller portion of the mutual funds’ total
                                       foreign activity. According to the data compiled by Morningstar, Inc.,
                                       investments in markets outside of the largest countries accounted for only
                                       25 percent of the mutual funds’ total foreign investments.




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Large U.S. Financial         U.S. financial regulators have determined that large U.S. financial
                             institutions are assessing the Year 2000 readiness of their key financial
Institutions Are Assessing   relationships. Bank regulators required all U.S. banks to complete
the Readiness of Their Key   assessments of their internal exposures, including international exposures,
International Financial      by September 30, 1998. Bank regulators told us that their most recent
Relationships                examinations showed that large U.S. banks had adequately completed
                             these assessments. SEC officials told us that large U.S. securities firms
                             have reported that they are also gathering information about the Year 2000
                             readiness of organizations in which they have key financial exposures,
                             including international exposures.

                             At the large U.S. banks and securities firms we contacted, representatives
                             of these institutions described (1) the progress they had made in readying
                             their own systems to process Year 2000 dates and (2) the actions they had
                             taken to assess their international exposures. Officials at each of the seven
                             institutions we contacted told us that the work and testing needed to make
                             nearly all of their systems ready for 2000 was completed by the end of
                             1998. The securities affiliates of six of these institutions participated in a
                             securities industry test in July 1998, which required them to have part of
                             their systems Year 2000 compliant by that date.

                             Officials at these institutions said they also have incorporated into their
                             overall Year 2000 programs assessments of the readiness of key domestic
                             and international customers, business partners, and their counterparties in
                             financial transactions. The officials said they had detailed programs to
                             both prioritize and assess the readiness of their key suppliers, electronic
                             linkages, business partners, and customers. In most cases, they described
                             using questionnaires to make these assessments. The officials also said
                             they were sending teams to make on-site visits and to personally review
                             the Year 2000 programs of the entities that were their highest priority
                             exposures. For example, representatives of one of the financial institutions
                             we contacted told us that they had determined that, of the over 15,000
                             relationships the firm had worldwide, 4,000 were deemed to be critical to
                             its operations. They said they prioritized these relationships using various
                             factors, including the extent of business the firm did with each
                             organization.

                             The firm identified about 450 domestic and foreign organizations that it
                             considered most critical to its operations, which included about 200
                             providers of information technology and infrastructure services and about
                             250 financial institutions. To assess the readiness of these organizations,
                             officials at this firm told us that they sent survey to the organizations and
                             were conducting on-site visits during which they were attempting to



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                               review these organizations’ Year 2000 project plans. The officials said they
                               also were holding discussions with the organizations’ staff on at least 10
                               areas of concern, such as management involvement and testing
                               procedures.

                               Officials of the U.S. financial institutions we contacted said that
                               contingency planning would be the primary focus of their Year 2000 efforts
                               in 1999, because they have generally completed system remediation and
                               are continuing with testing efforts. Among the efforts that officials at these
                               institutions described were those designed to minimize disruptions to their
                               businesses operations arising from problems encountered by their own
                               institutions, their business partners, or infrastructure providers. Such steps
                               included having alternate power or telecommunication sources or
                               arranging to conduct financial transactions with more than one institution
                               in other countries in the event that their normal partner experienced Year
                               2000 problems.

Large Financial Institutions   Representatives of the U.S. financial institutions we contacted said they
                               planned to use the results of their assessments of outside organizations in
We Contacted Anticipated a     making business decisions regarding whether they should maintain the
Limited Year 2000 Impact       same levels of exposure or activity with these organizations. Most of these
on Their Activities            financial institutions expected their main foreign counterparts to be ready
                               and did not anticipate having to alter large numbers of business
                               relationships for Year 2000 readiness reasons. We talked to four
                               representatives of financial institutions about their firms’ foreign financial
                               relationships. The representatives said that they chose to do business in
                               different foreign markets because they believed these relationships and
                               investments were sound. The representatives also said that they were
                               determined to remain committed to these investments until the business
                               fundamentals in these countries were altered.

                               The Year 2000 readiness of the organizations in some countries, including
                               those considered to have made less progress in their preparations than
                               U.S. financial firms, is less likely to have a serious impact on the U.S. firms
                               because of recent events in world markets. For example, officials in Russia
                               have already acknowledged that they lack the resources to adequately
                               address Year 2000 problems. However, according to officials of most of the
                               U.S. financial institutions we contacted, exposures in markets such as
                               Russia, Eastern Europe, and Southeast Asia have already been
                               substantially reduced due to the market turmoil that has occurred in those
                               regions since 1997. According to Morningstar, Inc., data, U.S. mutual fund
                               investments in Russia totaled just $181 million in January 1999, or less than
                               1 percent of all such funds’ foreign investments. Banks were more exposed



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                          to Russian organizations, with over $6 billion in loans outstanding, but this
                          was just 1.3 percent of U.S. banks’ total foreign lending exposure in 1998.

                          Officials from most of the U.S. financial institutions we contacted said
                          that, in their view, the impact of Year 2000 disruptions in other countries’
                          markets was not expected to be severe. For example, they said that their
                          firms were advising clients with investments in countries that were more
                          likely to experience Year 2000-related disruptions to, at worst, be prepared
                          for periods of difficulty with payments and settlements in these regions
                          ranging from a few hours to a few weeks. Because these officials believe
                          the duration of any Year 2000-related problems will likely be short, they
                          are advising their clients not to alter their investments solely on the basis
                          of Year 2000-related concerns. Instead, they suggested balancing the
                          impact of these potential, temporary disruptions against the merits of the
                          investments they have made in these regions.

                          One of the large U.S. securities firms we contacted issued a research
                                                                           6
                          report on Year 2000 readiness in January 1999. The report stated that,
                          although significant failures by foreign organizations to make payments or
                          to deliver securities could conceivably disrupt segments of the U.S.
                          financial system, the U.S., European, and other monetary authorities have
                          the capability to cover any resulting liquidity shortfalls. Also, a research
                          analysis done by another of the securities firms we contacted examined
                          the Year 2000 readiness of various industrial sectors in the United States
                                                          7
                          and at least 19 other countries. This report noted that Year 2000 problems
                          would probably not cause a major disaster, but that the problems had
                          more potential for disruption in emerging markets. Nevertheless, the
                          report stated that companies will likely cope with Year 2000 problems in
                          the same ways they do during power outages or other disruptions of
                          telecommunications or computer services.

                          U.S. bank and securities regulators are assessing the international risks
U.S. Banking and          faced by the entities they oversee. These regulators have approached
Securities Regulators     oversight of Year 2000 issues on the basis of their overall regulatory
Are Assessing             mandate. The approach taken by bank regulators focuses on their
                          regulatory mandate to protect the safety and soundness of the banking
International Year 2000   system. Without direct authority to regulate the foreign affiliates of U.S.
Risks                     broker-dealers, SEC has also assessed the international risks that Year
                          2000 problems may pose to the securities market participants it regulates.
                          6
                          Getting Over the Bug: An Assessment of the Y2K Preparedness of the S&P 500 Companies, Morgan
                          Stanley Dean Witter (New York, NY: Jan. 1999).
                          7
                              Y2K: Implications for Investors, Merrill Lynch (New York, NY: June 1998).




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U.S. Bank Regulators Are     U.S. bank regulators view the Year 2000 problem, including the risks posed
                             by banks’ international activities, as potentially threatening the safety and
Concerned About Bank         soundness of individual institutions. The regulators have jointly issued at
Safety and Soundness         least three sets of guidance that address the risks posed to banks from
                             potential Year 2000 problems experienced by their customers, suppliers,
                             and other business partners, including those in other countries. In a March
                             1998 statement, bank regulators required banks to assess the Year 2000
                             readiness of both their domestic and international customers, including
                             organizations that borrow from, provide funds to, or conduct capital
                                                                          8
                             market transactions with their institutions. The regulators required banks
                             to have these assessments substantially completed by September 30, 1998.

                             Since 1997, bank regulators have reported that they conducted at least one
                             examination of all U.S.-chartered banks, including the foreign branches of
                             overseas banks. On the basis of these reviews, bank regulators rated the
                             Year 2000 progress of about 96 percent of the institutions examined as
                             satisfactory. The regulators started a second round of examinations in
                             September 1998. This round is to focus primarily on testing, contingency
                             planning, and efforts to assess the readiness of external parties. According
                             to representatives of the Federal Reserve and the OCC, which oversee
                             banks with international operations, large banks appear to have conducted
                             their customer assessments adequately, but some smaller institutions had
                             failed to conduct assessments of all the organizations whose Year 2000
                             readiness could affect their banks.

Securities Regulators Lack   SEC is charged with protecting U.S. investors and ensuring fair and orderly
                             markets, but SEC does not have the authority to regulate the international
Direct Authority Over        activities of U.S. securities firms that are done outside of the regulated
International Issues                         9
                             broker-dealer. However, SEC has assessed the readiness of U.S. securities
                             markets and the organizations that participate in them, including any
                             relevant international activities of these organizations. SEC has conducted
                             examinations of securities markets, broker-dealers, investment companies,
                             investment advisers, and other organizations they regulate as part of their
                             Year 2000 oversight effort. In addition, since 1990, SEC has had the
                             authority to assess the degree of risk that the securities firms’ unregulated



                             8
                              Interagency Statement: Guidance Concerning the Year 2000 Impact on Customers, Federal Financial
                             Institutions Examination Council (Washington, D.C.: Mar. 17, 1998).
                             9
                              Large U.S. securities firms generally consist of many legal entities under a parent or holding company
                             structure. Legal entities that conduct securities activities with U.S. customers must register with SEC
                             as broker-dealers and subject themselves to regulation by that agency.




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                                                        10
activities pose to the regulated entity. Under this authority, SEC requires
securities firms’ regulated broker-dealer affiliates to report on the
exposures of their foreign affiliates and holding companies. Finally, SEC
requires the entities it regulates to provide supplemental reporting on their
Year 2000 efforts.

SEC officials have concluded that the Year 2000 risks posed by U.S.
securities firms’ international activities are not significant. They said that
the foreign exposures of U.S. securities firms are relatively modest
compared to their U.S. operations. Moreover, the U.S. securities firms’
most significant international exposures were largely concentrated in their
U.K. affiliates. These firms conduct considerable over-the-counter
derivatives activities in the United Kingdom, although derivatives
exposures may arise from business being conducted with entities in other
countries. SEC officials told us that U.K. regulators were active in
overseeing these firms’ operations.

Since the end of 1998, SEC has required the entities it regulates to file
                                                                 11
reports discussing their efforts to address Year 2000 problems. In these
reports, organizations are to provide additional information on their Year
2000 readiness efforts beyond that required in other statements filed with
SEC. Organizations required to submit these reports include all but the
smallest securities firms’ regulated broker-dealer affiliates and investment
advisers with over $25 million under management or that provide advice to
an investment company registered under the Investment Company Act of
1940. The primary purpose of these reports is to provide SEC with more
specific information on these entities’ actions to address their Year 2000
problem. In the reports, the firms are required to describe their plans,
including the resources they have committed, their progress against the
various milestones in the process, and their contingency planning efforts.
For broker-dealers, the first reports were required to be filed no later than
August 1998 and are to be filed again no later than April 1999. In addition,
the regulated entities are also to submit a separate report completed by the
firms’ external auditors that serves as an independent verification of the
accuracy of the firms’ April 1999 submission. These reports are to be made
publicly available, and SEC has posted the August 1998 submissions on its
Web site.


10
 The Market Reform Act of 1990 authorized SEC to collect information from regulated broker-dealer
about the financial condition of their holding companies, foreign affiliates, and other entities that are
reasonably likely to have a material impact on the financial and operational condition of the firm.
11
     See 17 C.F.R. §240.17a-5, 17 C.F.R. §275.204-5, and 17 C.F.R. §240.17Ad-18 (1998).




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                        These reports also provide SEC with some information on the extent to
                        which the entities it regulates are addressing the risks posed by the Year
                        2000 readiness of external organizations, including those in other
                        countries. One section of the report seeks information on the activities
                        firms have undertaken to assess the readiness of any third parties that
                        provide mission-critical systems, including clearing firms, vendors, service
                        providers, counterparties, and others. In their submissions, the broker-
                        dealer affiliates are to identify the number of the entities they rely upon,
                        whether they have contacted these entities regarding their Year 2000
                        readiness, and whether their contingency plans address the potential
                        failure by third parties to be ready. Although these reports were
                        technically just required to be filed by the securities firms’ broker-dealer
                        affiliates subject to SEC regulation, SEC officials told us that the firms
                        submitting these reports have generally provided information that
                        addresses the global operations of their firms outside of the regulated U.S.
                        entity, when relevant.

                        We reviewed the August 1998 submissions by 11 of the largest U.S.
                        securities firms. All of these broker-dealer affiliates’ reports indicated that
                        they covered the firms’ global operations and activities with foreign
                        clients. The officials said that they would use the information gathered in
                        these reports to identify entities that they may select for an on-site
                        examination concerning their Year 2000 preparations. SEC officials told us
                        that, as of March 1999, no organizations had been selected specifically for
                        their international operations. However, they said that they have begun
                        developing plans for examining the international operations of selected
                        firms, particularly for those firms active in over-the-counter derivatives.

                        Like their counterparts in the United States, officials of the foreign
Foreign Financial       financial institutions we visited said they were also working to ready their
Institutions and        systems for the date change in 2000, although their progress generally
Regulators We Visited   lagged those of U.S. institutions. Financial institutions in the countries we
                        visited were also attempting to assess the Year 2000 readiness of their
Were Also Addressing    customers and the organizations with which they do business. Financial
the Year 2000 Problem   regulators in these countries told us that they were also assessing the Year
                        2000 efforts of the entities they oversee, although their activities varied
                        and appeared less extensive than efforts made by U.S. regulators. Other
                        key participants in international financial markets include organizations
                        that provide market support services, such as financial message
                        transmission and clearing and settlement activities. The market support
                        organizations we contacted were also readying their systems for 2000.
                        Finally, two international organizations, including one focusing on
                        regulatory issues and another focusing on issues of concern to financial



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                               institutions, provided guidance and other assistance to financial regulators
                               and institutions attempting to address the Year 2000 problem.

Foreign Financial              According to external assessments by consulting groups, regulators, and
                               others, foreign financial institutions have generally made less progress in
Institutions We Visited Were   addressing the Year 2000 problem than have institutions in the United
Readying Their Systems and     States. Officials of financial institutions in the countries we visited said
Assessing Readiness of         they were readying their systems for the date change in 2000, but not all of
External Parties               these institutions expected to complete their work in the same time frame
                               expected of U.S. institutions. One reason these institutions’ time frames
                               are different is because many institutions, particularly those in France and
                               Germany, had placed a higher priority on modifying their systems for the
                               introduction of the new European common currency, called the euro, in
                                              12
                               January 1999.

                               To prepare for the date change in 2000, U.S. regulators expected banks and
                               securities firms to have completed both internal systems modifications and
                               testing by December 1998. We obtained Year 2000 readiness information
                               from seven large foreign financial institutions. Officials from two Swiss
                               institutions and one U.K. bank said that they had mostly completed their
                               internal systems modifications and testing by December 1998. Officials
                               from a German institution we visited said that they had also completed
                               their internal systems modifications by December 1998, but that they had
                               completed the testing of only about 40 percent of their systems by
                               February 1999. Officials from one of the French institutions we contacted
                               expected to complete systems modification and testing by the first quarter
                               of 1999, and officials of the remaining two institutions—including one
                               French and one U.K. bank—expected to be finished by the second quarter
                               of 1999.

                               Although their work on the euro has delayed their Year 2000 efforts,
                               officials representing financial institutions in France and Germany
                               indicated that their euro efforts would help them complete their Year 2000
                               work on time. For example, these officials said they already had detailed
                               inventories of their information systems and applications, existing test
                               facilities, and project management teams with experience and personnel
                               that could be used for completing their Year 2000 programs. However,
                               some officials of financial institutions and regulators in the United States

                               12
                                On January 4, 1999, 11 member countries of the European Union, including Austria, Belgium, Finland,
                               France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain, took a major step
                               toward merging their national currencies into a single currency, the euro. From this date, the
                               currencies of these countries can be exchanged for a fixed amount of euros and financial transactions
                               can be conducted in euros. Eventually, the euro is to replace the currencies of these nations.




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                            and United Kingdom expressed concerns over whether institutions in
                            countries that had focused on the euro conversion would be ready for the
                            date change. These officials said they expected the larger financial firms
                            would have sufficient resources to address the euro conversion and Year
                            2000 efforts simultaneously. However, they said they were concerned that
                            small to medium-sized firms would not be able to adequately complete
                            both projects in such short time frames.

                            Like financial institutions in the United States, officials in the foreign
                            financial institutions we contacted said they also were assessing the Year
                            2000 readiness of their vendors, electronic linkages, business partners, and
                            customers. These officials said they were also generally using surveys to
                            assess external entities’ readiness and were conducting selected on-site
                            visits to review such organizations’ Year 2000 programs in more detail.

Foreign Financial           The financial regulators in the foreign countries we contacted said that
                            they had taken steps to assess the Year 2000 efforts of the entities they
Regulators Had Some Year    oversee. However, their oversight program approaches varied across
2000 Oversight Programs     countries and, in some cases, appeared to be less extensive than those
That Appeared Less          made by U.S. financial regulators.
Extensive Than Those of
                            The guidance issued by foreign regulators and regulatory requirements for
U.S. Financial Regulators   disclosing the readiness of foreign financial institutions appeared to be
                            less extensive than those mandated for U.S. financial institutions. In the
                            United States, bank regulators issued at least 11 statements to provide
                            guidance for banks on a variety of topics to help them prepare for the Year
                            2000. In contrast, foreign regulators in the countries we had visited had
                            issued guidance to the institutions they oversee only once or twice, and
                            this guidance covered a narrower range of topics than the U.S. regulators’
                            guidance. Regulators and financial institution officials in several of the
                            countries we visited indicated that the U.S. regulators’ guidance had
                            proved helpful.

                            For firms operating in these countries, the requirements regarding publicly
                            disclosing their Year 2000 efforts also differed. In March 1998, the U.K.
                            accounting standards body required firms to discuss the following in
                            public financial statements: Year 2000 risks, efforts to address those risks,
                            and the costs of those efforts. In France, the securities regulatory body
                            mandated that firms issuing publicly available securities make similar
                            disclosures. Germany required no such disclosures, but an official with a
                            German bank indicated that financial institutions were making disclosures
                            for competitive reasons. Financial regulators in Japan had issued a
                            checklist addressing Year 2000 issues to financial institutions in their



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country, and regulatory examiners reviewing firms’ activities also were
using this document. Regulators in Korea had issued guidance on Year
2000 issues, but examiners in that country had also reviewed guidance
issued by and received training from U.S. banking regulators.

Foreign regulators had also placed less emphasis than U.S. regulators on
having the financial institutions they oversee assess the Year 2000
readiness of their key financial relationships. U.S. bank regulators required
the institutions they oversee to complete assessments of the readiness of
their key financial relationships by September 30, 1998. U.S. securities
regulators required U.S. securities firms to report on their own readiness
and the extent to which their contingency planning assessed the readiness
of external organizations. In general, regulators in France, Germany,
Japan, Korea, and the United Kingdom had not specifically directed their
financial institutions to make assessments of the Year 2000 readiness of
their customers or other entities with which they have critical financial
relationships. However, regulators in France and Japan had included
questions relating to third-party or customer assessments in the surveys
they had administered to financial institutions. In Germany, banks had
worked through industry associations to develop a standardized
questionnaire for use in obtaining information on customer readiness.
Korean regulators had recommended that banks take the Year 2000
readiness of their customers into account when making credit decisions.

Approaches to examinations also varied in these countries. In Germany
and the United Kingdom, external auditors rather than regulatory bodies
usually conduct examinations of banks. Financial regulators in both of
these countries said they have tasked the external auditors to address Year
2000 issues as part of the reviews they conduct of banks. Financial
regulators in the United Kingdom also said they were making their own
limited visits to banks to discuss Year 2000 issues and have incorporated
Year 2000-related questions into their regular examinations of securities
firms. In France, financial regulators said they were conducting specific
Year 2000 examinations of all banks and securities firms. In Japan and
Korea, multiple regulatory bodies said they were involved in conducting
periodic and ad hoc reviews of financial institutions’ Year 2000 efforts.




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Major International Market    Conducting international financial transactions frequently requires the
                              involvement of market support organizations, which perform clearance
Support Organizations         and settlement or other necessary services. For example, many financial
Report Completing             institutions use the services of the Society for Worldwide Interbank
Modifications for Year 2000   Financial Telecommunication (SWIFT) in Belgium, which provides a
                              proprietary network for transmitting messages pertaining to financial
                              transactions. SWIFT transmits information among as many as 7,000
                              institutions in 160 different countries and processes messages relating to
                              an average of $3 trillion per day. Two other key support organizations
                              based in Europe are Euroclear in Belgium and Cedel Bank in Luxembourg.
                              These organizations perform clearance and settlement services on behalf
                              of many internationally active financial institutions, with Euroclear having
                              about 2,200 participants in 70 countries and Cedel Bank providing services
                              to customers in 80 countries. Because of the role they play in international
                              finance, these organizations’ ability to successfully ready their systems for
                              the date change in 2000 is important.

                              Officials from SWIFT, Euroclear, and Cedel Bank told us that they had
                              completed most of their internal systems modifications and testing by
                              December 1998. These officials said that they have testing programs under
                              way with the financial institutions they service. These organizations are
                              also scheduled to participate in a June 1999 global test of worldwide
                              central banks and payment systems that is being sponsored by the New
                              York Clearing House Association. This association operates an electronic
                              payments system for international dollar payments.

Two International             Two organizations have taken the lead in addressing Year 2000 issues from
                              the perspective of how these issues affect financial institutions and
Organizations Are Active in   markets internationally. The Global 2000 Coordinating Group is a private
Ensuring the Readiness of     sector organization comprising many of the world’s largest banks and
Global Financial Markets      securities firms and is leading efforts to ensure the readiness of the global
and Institutions              financial system. This group was formed in April 1998 with the mission of
                              identifying and providing resources to areas where coordinated initiatives
                              would assist the financial community in improving its readiness for the
                              date change in 2000. As of January 1999, the group had participants from
                              244 institutions in 53 countries.

                              To assist financial institutions in addressing the Year 2000 problem, the
                              Global 2000 Coordinating Group has encouraged its members to self-
                              disclose the status of their readiness efforts and has developed a template
                              to standardize the presentation of this information. The group has also
                              developed country assessments that attempt to assess the level of
                              readiness of the financial sector and infrastructure providers such as



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                         telecommunications, power, water, and government. Although not being
                         released publicly, these country assessments are being shared with
                         selected public and private sector officials in their respective countries.
                         The group has also published guidance on contingency planning and is
                         attempting to compile a comprehensive list of testing activities being
                         conducted globally.

                         The Joint Year 2000 Council is the other organization actively addressing
                         international Year 2000 issues. The council was formed in April 1998 and
                         comprises senior representatives of the Basle Committee on Banking
                         Supervision, the Committee on Payment and Settlement Systems, the
                         International Association of Insurance Supervisors, and the International
                         Organization of Securities Commissions. Currently, a member of the U.S.
                         Federal Reserve Board of Governors chairs the council. Other staff from
                         the U.S. banking regulators and SEC also participate in several of the
                         activities of the Joint 2000 Council and have also been active in other
                         international forums on a variety of Year 2000 concerns.

                         The council’s main goals have been to (1) share information on Year 2000
                         oversight strategies and approaches and contingency planning and (2)
                         serve as a focal point for other national and international Year 2000
                         remediation initiatives. The council has issued various sets of guidance for
                         financial regulators and financial institutions, including papers on testing
                         and procedures for assessing financial institutions. In February 1999, the
                         council released a series of papers on contingency planning.

                         Although the financial sectors in the United States and the other countries
Various Issues Require   we contacted were actively addressing the Year 2000 problem, other issues
Continued Attention by   will require continued attention from financial regulators, financial
the Financial Industry   institutions, and other organizations as 2000 approaches. The readiness of
                         infrastructure providers—including telecommunications, power, water,
and Other                and other services—were a concern to financial institution officials with
Organizations            whom we spoke. Other areas that financial regulators and financial
                         institutions said they are addressing that will require continued efforts
                         include (1) developing mechanisms for coordinating between regulators
                         and other organizations during the date change period, (2) promoting
                         additional Year 2000 readiness disclosure by foreign organizations, and (3)
                         developing strategies for communicating the readiness status of the
                         financial sector to public. Lastly, financial institutions’ experiences as they
                         participate in the recent introduction of the new currency in Europe and
                         the results of various Year 2000 tests slated to occur around the world in
                         1999 will likely provide lessons learned and indications of the prospects
                         for a successful Year 2000 transition.



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Readiness of Foreign          The Year 2000 readiness status of infrastructure providers in foreign
                              markets, such as telecommunications firms and power providers, is a
Infrastructure Is Important   major concern to the U.S. and foreign financial institutions operating
to the Financial Sector       internationally that we contacted. Regardless of their own readiness and
                              contingency planning, financial markets and the firms participating in
                              them will not likely be able to continue operating after the date change
                              unless the various infrastructure providers are also ready. Regulatory and
                              financial institution officials in the countries we visited expressed several
                              concerns about the readiness of infrastructure providers in their own and
                              other countries.

                              First, officials indicated that they did not have adequate information about
                              the readiness status of many infrastructure providers in other countries.
                              This lack of information contributed to uncertainty about the readiness
                              status of these providers. Many of the officials we contacted said that the
                              providers should make more information publicly available to reduce this
                              uncertainty. The Joint Year 2000 Council has attempted to address the
                              infrastructure readiness issue, noting in its October 1998 bulletin that the
                              scarcity of information available from operators of key infrastructure
                                                                                                        13
                              components has inhibited prudent planning by users of these services.
                              The council also noted that in many areas, no existing public sector body
                              has been directed to require action by providers or the oversight structure
                              is too disjointed to allow one authority to lead such an effort.

                              Another concern of financial market officials regarding infrastructure is
                              that Year 2000 problems in one country’s infrastructure could create
                              problems for other countries because of cross-border linkages. In a
                              September 1998 report, the Organization for Economic Cooperation and
                              Development noted that, along with international financial transactions,
                              sectors such as transport, telecommunications, power provision, and other
                              activities depend on cross-border interconnections that could be
                                                                      14
                              vulnerable to Year 2000 breakdowns. In addition, regulatory and financial
                              institution officials told us that they were concerned that inadequate
                              attention was being paid to cross-border dependencies among
                              infrastructure providers. For instance, officials indicated that some
                              German power providers rely on natural gas from Russia, a country that
                              has already acknowledged lacking resources to address Year 2000 issues.
                              Officials expressed concerns that no organization appears to have taken
                              the lead to address this and other such cross-border dependencies.
                              13
                                   Council Bulletin Issue Two, Joint Year 2000 Council (Basle, Switzerland: Oct. 6, 1998).
                              14
                               The Year 2000 Problem: Impacts and Actions, Organization for Economic Cooperation and
                              Development (Paris, France: Sept. 30, 1998).




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An official with the Global 2000 Coordinating Group noted another
example of these dependencies, explaining that Swiss power companies
supply power to other countries during peak periods. However, over 1,000
power suppliers exist in Switzerland and determining what actions these
organizations have taken to ready their systems for the date change has
been difficult. Because power supplies are shared among neighboring
countries, in December 1998, the European Commission urged that
relevant authorities in each country closely monitor progress in this sector,
exchange information with their counterparts, and publicly disclose such
               15
information. The commission also urged that such information be shared
about air, rail, maritime, and road transport sectors because it also found
that little cross-border coordination and information exchange has
occurred in these areas.

Various organizations are addressing infrastructure issues within
                                                                           16
individual countries and internationally. As we previously recommended,
the banking regulators have been meeting to develop contingency plans
addressing domestic and international infrastructure issues. According to
an OCC official, a Federal Financial Institutions Examination Council
         17
(FFIEC) working group on contingency planning meets monthly and has
various subgroups addressing specific issues including international
payment systems and the readiness of major institutions in key markets.
This official also told us that U.S. banking regulators obtain information
from their counterparts in other countries on the readiness of
infrastructure providers in those countries and emphasize to these
counterparts the importance of having more information publicly
disclosed on the status of key infrastructure sectors.

In addition to the financial regulators’ efforts, the President’s Council on
Year 2000 Conversion has working groups addressing issues relating to
various infrastructure sectors in the United States and has also taken
actions related to cross-border concerns. For example, national Year 2000
coordinators from the United States and as many as 120 countries
discussed infrastructure issues at a meeting held at the United Nations in
December 1998. Officials of the President’s Council have also met with

15
 Communication from the Commission: How the European Union is Tackling the Year 2000 Computer
Problem, European Commission (Brussels, Belgium: Dec. 2, 1998).
16
 Year 2000 Computing Crisis: Federal Depository Institution Regulators Are Making Progress, But
Challenges Remain (GAO/T-AIMD-98-305; Sept. 17, 1998).
17
   This body is an interagency forum for the Federal Reserve, OCC, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the Office of Thrift Supervision and
prescribes uniform principles, standards, and report forms for these agencies.




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                            their counterparts in other countries to discuss cross-border infrastructure
                            issues. Internationally, individual infrastructure sectors also have taken
                            steps to address Year 2000 issues. For example, the International
                            Telecommunications Union has attempted to gather readiness information
                            and coordinate cross-border testing of telecommunications services.

Coordination, Disclosure,   Other important issues, including coordination, disclosure, and
                            communication issues, require attention by U.S. regulators, financial
and Communication Are       institution officials, and others as the date change in 2000 approaches. For
Among Issues Requiring      example, regulators and financial institution officials with whom we spoke
Attention as 2000           said that regulators will have to be involved in creating a mechanism for
Approaches                  managing information collection shortly before and immediately after the
                            date change. The Joint Year 2000 Council stated, in February 1999, that the
                            accurate exchange of information in late 1999 and the beginning of 2000
                            between the public, private, and financial market sectors both
                                                                                                     18
                            domestically and across borders would be vital to a smooth transition. As
                            a result, the council encouraged financial market authorities to establish
                            communication channels that could be used before, during, and after the
                            date change. The council also noted that authorities could consider
                            establishing a centralized location for collecting and exchanging
                            information among financial regulators, other authorities, and financial
                            market participants. Such information centers may be useful in
                            coordinating contingency plans in the event of disruptions and failures and
                            may reduce the information demands on financial institutions, which
                            would allow them to concentrate their resources on fixing problems that
                            may occur.

                            Some of the financial institution officials we contacted also called for the
                            establishment of such a coordination mechanism. These officials said that
                            their main concern was the need for a centralized mechanism for gathering
                            and disseminating accurate information about events during the date
                            change to avoid panic. They suggested that government regulators act in
                            this capacity because they generally have access to government
                            counterparts in other countries and could provide more complete and
                            accurate information to the markets. For instance, a representative of one
                            financial institution told us it would be good to have some organization in
                            place that could be contacted in the event institutions were having
                            difficulty with a telephone system in one of the foreign markets in which
                            they conduct business. A Federal Reserve official noted that the U.S.
                            banking regulators were considering how to facilitate this type of

                            18
                             Planning by Financial Market Authorities for Year 2000 Contingencies, Joint Year 2000 Council (Basle,
                            Switzerland: Feb. 1999).




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communication and were discussing it as part of the contingency planning
efforts with other regulators and private-sector financial officials. An OCC
official explained that each of the banking regulators was developing its
own plans for having coordination mechanisms in place, and that
eventually they plan to integrate these efforts through the FFIEC
contingency planning working group. As part of this, the banking
regulators were also developing a list of contacts among the staff of
financial regulators in other countries from whom information about the
status of the date change outside of the United States could be readily
obtained.

Another issue that should concern U.S. and foreign regulators before 2000
arrives involves the need for additional disclosure by organizations in
other countries of their Year 2000 readiness status. Many of the financial
institution officials we contacted indicated that more information about
readiness status should be publicly disclosed by entities in other countries.
Because of the need to disclose information to other countries that have
an economic interest in their member nations, the European Commission
noted in a December 1998 report that member state governments should
accelerate or establish mechanisms for coordinating and monitoring Year
                 19
2000 readiness. The commission also noted that it is better to have
information that problems exist and are being addressed than to have
uncertainty created by a total lack of information. On January 29, 1999, the
Global 2000 Coordinating Group called for (1) financial firms to redouble
their efforts to disclose their Year 2000 readiness and (2) governments to
provide more detailed public disclosure of the readiness of sectors that are
critical to the safe functioning of the financial industry. Banking regulatory
officials told us that, whenever possible, they discuss with foreign
regulatory organizations the need for more public disclosure on the Year
2000 readiness status of financial and other organizations. An OCC official
                                                                        20
said that the December 1998 issuance by the Joint Year 2000 Council on
information sharing, which encourages foreign regulatory and other
organizations to disclose more information, was an example of how U.S.
regulators were supporting this issue.

A final issue concerning regulators before the Year 2000 date change
occurs involves the need to communicate accurate information about the
readiness status of the financial sectors to the public. In the December

19
 Communication From the Commission: How the European Union is Tackling the Year 2000 Computer
Problem, European Commission (Brussels, Belgium: Dec. 2, 1998).
20
 Year 2000 Information Sharing and Disclosure, Joint Year 2000 Council (Basle, Switzerland: Dec.
1998).




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                              1998 paper on information sharing, the Joint Year 2000 Council stated that
                              financial market authorities should set an example by implementing a
                              comprehensive information-sharing program that includes communicating
                              with the general public. The council noted that promoting and preserving
                              public confidence requires strategic coordination. It stated that financial
                              market authorities should develop communication plans to reinforce, as
                              appropriate, the public’s confidence in the financial system. In an
                              additional issuance in February 1999, the council stated that, by providing
                              periodic status reports on the readiness of the financial sector, authorities
                              could shape the perceptions and expectations of the public and minimize
                                                                                21
                              irrational and potentially destabilizing behavior.

                              U.S. and foreign financial institution and regulatory officials told us that
                              regulators and governments would have to inform the public about the
                              financial sectors’ Year 2000 status. The U.S. regulatory officials we
                              contacted acknowledged that this need existed, and that they intended to
                              address this issue in the future.

Events in 1999 May Indicate   Various upcoming events may indicate the potential success of Year 2000
                              remediation efforts. Many industry and regulatory officials told us that the
the Potential Success of      degree of success experienced during the euro conversion would provide
Year 2000 Efforts of          some indication of how well financial institutions may be able to manage
Financial Market              the Year 2000 date change. Like the Year 2000 problem, the euro
Participants                  conversion required financial institutions to identify, modify, and test
                              internal computer systems to ensure accurate processing.

                              According to U.S. banking officials, the euro conversion in early January
                              1999 was mostly successful. However, they said some institutions did
                              experience problems in processing transactions. In addition, adequate
                              information about firms’ operating status during the conversion was not
                              always available. In particular, these officials said that organizations that
                              experienced processing difficulties were reluctant to report any problems
                              they had during the conversion. Financial institutions involved in the
                              conversion had contracted with a private-sector information provider to
                              arrange for dedicated display space on its proprietary network as a means
                              for reporting and sharing information about the status of the financial
                              institutions’ operations. However, when problems began occurring, the
                              institutions involved did not report them using this network. They noted
                              that the failure to disseminate information about problems being
                              experienced by some institutions could have created more serious

                              21
                               Planning by Financial Market Authorities for Year 2000 Contingencies, Joint Year 2000 Council (Basle,
                              Switzerland: Feb. 1999).




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                      problems. However, many firms continued transmitting their portions of
                      payments due despite a lack of information about the operating status of
                      other institutions or assurance that they would receive the corresponding
                      payments from other institutions.

                      A U.S. banking official said that, although the institutions involved handled
                      the problems that did arise during the euro conversion, the problems could
                      have been more serious if the U.S. institutions had not continued to make
                      their payments when problems arose. A U.S. banking regulatory official
                      said that the regulators and financial institutions should take action to
                      decrease the likelihood that similar information-sharing problems will
                      occur during the Year 2000 date change.

                      The results of testing by markets and institutions around the world in early
                      to mid-1999 should provide another indicator of the international financial
                      markets’ Year 2000 readiness. Many major markets are to conduct tests of
                      their Year 2000 readiness in 1999 and several tests involving multiple firms
                      are also to be conducted, including the U.S. securities industrywide test
                      that began in March 1999 and a global payments system test planned for
                      June 1999. If successful, these tests should provide more assurances that
                      financial markets and financial institutions will be ready for the actual date
                      change in 2000. Although industrywide testing can demonstrate the
                      coordinated and smooth functioning of U.S. financial markets, some
                      officials cautioned that the results of tests such as these should not be
                      considered definitive proof that participating financial institutions are
                      completely ready for 2000. Large financial institutions may participate in a
                      wide variety of financial activities, and all of their systems would not
                      necessarily be tested in any one industrywide test. For example, officials
                      of two organizations, which conduct a wide range of financial activities in
                      the United States and other countries, said that less than 10 percent of
                      their total systems were used during the U.S. securities industry test in
                      July 1998.

                      We obtained oral comments on a draft of this report from staff of the
Agency Comments and   Board of Governors of the Federal Reserve System and SEC and written
Our Evaluation        comments from OCC (see app. I). Each of the agencies that commented on
                      this report said that it was an accurate summary of the activities that their
                      organizations and the financial institutions they oversee are undertaking to
                      address international Year 2000 risks. They also agreed that the issues we
                      highlighted as requiring their continued attention were important. OCC’s
                      written comments are reprinted in appendix I. SEC staff also suggested
                      some technical changes that we incorporated where appropriate.




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As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 10 days from its
issue date. At that time, we will send copies of this report to
Representative Thomas Bliley, Chairman, House Committee on
Commerce; Senator Robert F. Bennett, Chairman, Senate Special
Committee on the Year 2000 Technology Problem; The Honorable Arthur
Levitt, Chairman, Securities and Exchange Commission; The Honorable
Alan Greenspan, Chairman, Board of Governors of the Federal Reserve
System; and The Honorable John D. Hawke, Jr., Comptroller of the
Currency, Office of the Comptroller of the Currency. We will also make
copies available to others upon request.

Please contact me on (202) 512-8678 if you or your staff have any
questions. Major contributors to this report are listed in appendix II.

Sincerely yours,




Richard J. Hillman
Associate Director, Financial
Institutions and Markets Issues




Page 25                    GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Contents



Letter                                                                                                    1


Appendix I                                                                                               28

Comments From the
Office of the
Comptroller of the
Currency
Appendix II                                                                                              30

Major Contributors to
This Report
Tables                  Table 1: Top 10 Foreign Country Lending Exposures for                             6
                          U.S. Banks as of June 30, 1998
                        Table 2: Top 10 Foreign Country U.S. Mutual Fund Equity                           7
                          Investments as of January 1999




                        Abbreviations

                        FFIEC         Federal Financial Institutions Examination Council
                        OCC           Office of the Comptroller of the Currency
                        SEC           Securities and Exchange Commission
                        SWIFT         Society for Worldwide Interbank Financial Telecommunication




                        Page 26                   GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Page 27   GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Appendix I

Comments From the Office of the
Comptroller of the Currency




              Page 28   GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Appendix I
Comments From the Office of the Comptroller of the Currency




Page 29                      GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Appendix II

Major Contributors to This Report


                     Michael Burnett, Assistant Director
General Government   Cody Goebel, Assistant Director
Division             Jean Paul Reveyoso, Senior Evaluator




                     Page 30                 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Page 31   GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Page 32   GAO/GGD-99-62 Financial Institution and Regulatory Efforts
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