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Notice I-98-04

February 06, 1998

Year 2000 Concerns

January 1, 2000 is less than two years away. As you are probably aware by now, the potential computer problems caused by the Year 2000 are a major issue for everyone, including the futures industry. As an NFA Member, you should already be in the process of assessing the risk of Year 2000 problems to your organization and taking the steps necessary to reduce, or eliminate those risks.

Year 2000 problems affect not only large computers and their software but also may have an impact on personal computers and related applications. In addition to potential problems with your own proprietary software and software purchased from others, there may be issues which arise from data supplied by outside vendors or services.

All NFA Members must be sure to devote the resources necessary for the assessment, testing, monitoring and correction of Year 2000 problems to insure continuous operation and full service to customers as the Year 2000 approaches.

In recent months, a number of futures industry organizations have issued notices on the Year 2000 issue. Since these notices should be of interest to everyone in the industry, we are including copies for your information. This issue should be of concern to all NFA Members, FCMs, IBs, CPOs and CTAs, regardless of size or sophistication.

JOINT AUDIT COMMITTEE

Regulatory Update 9711

TO: Chief Financial Officers
Chief Cmpliance Officer
DATE: December 17, 1997
RE: YEAR 2000 PREPAREDNESS

The Joint Audit Committee would like to stress the importance of having computer technology that is capable and ready to handle the Year 2000 and to reiterate the points in the CFTC's Advisory letter of November 4, 1997, on this topic. It bears echoing the CFTC's four minimum phases of action:

  1.  Identify each system that is Year 2000 vulnerable;

  2.  Update the system;

  3.  Extensively test; and

  4.  Have a contingency plan in the event of malfunction.

In order to assist firms in ensuring their preparedness, several activities/options are being offered by various industry participants. The Futures Industry Association has formed a task force that includes information resource professionals from the SROs and FIA members as well as service bureaus. The following "Year 2000 Industry Testing" notice from the Task Force outlines development plans and test dates. As you will note, there is a plan to conduct an industrywide test between clearing members and exchanges during the first quarter of 1999. This test will be open to all clearing member FCMs regardless of membership in the FIA. Prior to that, various SROs will be offering test dates to assist members. To that end, attached is a listing of individuals, by SRO, that may be contacted for information on test dates or any other questions you may have. In addition, your DSRO will be asking about your preparedness status during the course of its next audit.

The Year 2000 technology issue will affect all segments of the industry. The coordination efforts initiated by the exchanges, clearing organizations and the FIA will enhance all parties' efforts towards ensuring Year 2000 readiness. However, please keep in mind that it is each firm's responsibility to ensure its compliance with regulatory requirements at all points in time. Please feel free to phone your DSRO if you have questions or concerns regarding this very important issue.

The Joint Audit Committee is a representative committee of U.S futures exchanges and regulatory organizations including the ACC, CBOT, CME, COMEX, CSC, KCBOT, MGE, NYCE, NYFE, NYMEX, PBOT and NFA.

Year 2000 SRO Contacts
AMEX Commodities Corp. Gary Gray
Surveillance + Automation Enhancement Group
212-306-1546
Chicago Board of Trade Rich Lee
Information Systems
312-435-3711
Chicago Mercantile Exchange Wayne Wright
Manager, Systems Architecture
312-930-2332
Coffee, Sugar, Cocoa Exchange Richard Hampp
Project Manager, MIS
212-742-6172
Commodity Exchange Allen Feryus
Senior Vice President Information Systems
212-496-5029
Kansas City Board
of Trade
Joseph Ott
Manager, Compliance
816-753-7500
Minneapolis Grain
Exchange
Gary Wollan
Vice President of Operations
612-321-7171
National Futures Association Ken Haase
VP of Information Systems
-or-
Steve Earl
Director of Information Systems
312-781-1350


312-781-1354
New York Cotton Exchange Joe Giordano
Financial Director
212-742-5144
New York Mercantile
Exchange
Allen Feryus
Senior Vice President of
Information Systems
212-299-2740
Philadelphia Board of
Trade
Bruce A. Smith
VP of Project Planning
and Control
215-496-5029

COMMODITY FUTURES TRADING COMMISSION

Advisory: 55-97
For Release: November 4, 1997

YEAR 2000 COMPUTER PROBLEM

The Commodity Futures Trading Commission (Commission) wishes once again to emphasize the importance for all segments of the futures industry of taking immediate action to avoid the serious disruptions that could be caused by the use of computer technology which is not "Year 2000 compliant." Two-digit date field applications could interpret a year 2000 date to mean the year 1900. The Commission is aware that government agencies and self-regulatory organizations (SROs) have efforts ongoing to raise awareness of the potential Year 2000 problem and that many futures commission merchants (FCMs) and other Commission registrants have begun to address this issue. The Commission has asked all SROs to report on their preparatory programs and is conducting follow-up reviews. The Commission also has asked SRO auditors to include a Year 2000 readiness inquiry in their FCM inspections and to share with the Year 2000 Task Force of the Futures Industry Association and report to SRO management and the Commission any concerns with respect to the Year 2000 readiness of the members they inspect.

It bears repeating that a sound Year 2000 preparedness plan should, at a minimum, include the following phases:

  1. Identification of systems that are Year 2000 vulnerable;

  2. Update of the systems;

  3. Extensive testing; and

  4. Contingency planning in the event of malfunction of any part of the systems.

The Commission considers it to be the responsibility of each SRO and Commission registrant to inquire whether each entity on which it relies for any part of its operation, such as a service bureau, is actively involved in bringing its Systems into Year 2000 compliance and to conduct testing to ensure that system interdependencies have been adequately addressed.

The Commission further:

  • reminds FCMs and IBs that any "material inadequacy," as defined in Commission Regulation 1.16(d)(2), related to the Year 2000 question must be reported in accordance with Commission regulation 1.16(e)(2);

  • reminds commodity pool operators (CPOs) and commodity trading advisors (CTAs) that Commission regulations 4.24(w) and 4.34(o), respectively, require CPOs and CTAs to disclose all material information to existing and prospective pool participants and clients. The presence of a Year 2000-related condition that may affect the soundness of disclosure by a CPO or CTA would be material information; and

  • reminds SROs that Commission regulation 1.51 requires each contract market and related clearing organization to use due diligence in maintaining a continuing program to ensure that its automated systems function properly and that such requirement includes Year 2000-related issues.

Questions regarding this advisory should be addressed to Harvey Theberge at (202) 418-5200.

FUTURES INDUSTRY ASSOCIATION

Year 2000 Industry Testing

Overview

The Year 2000 Subcommittee of the FIA's Information Technology Division is coordinating a series of industrywide tests to assure that all market participants are able to process trades and transactions in the Year 2000. Participants are to include exchanges and their clearing members, non-clearing firms, back office vendors and market data vendors.

All U.S. domestic exchanges are expected to participate in these tests, and major foreign exchanges are being contacted to determine the feasibility of their inclusion as well. U.S. exchanges are to supply the subcommittee with a list of all back office interfaces, indicating for each whether or not it is date-sensitive.

Development of the Test Plan

At the FIA's April 1997 Optech Conference in New York, several Year 2000 roundtables were devoted to the subject of the Year 2000 problem as it affects exchanges, their member firms, and the futures industry in general. In order to ensure that all participants in the trade process would be ready for the millennium, an industrywide test was planned. Coordination of the plan was to be handled by a new subcommittee of the FIA's Technology Division; committee members include bookkeeping vendors, exchange representatives, and staff from clearing and non-clearing firms.

Representatives from the SIA's Year 2000 Futures & Options Product Focus Group are also represented on the committee to ensure coordination with that group's test plans.

The committee began to meet on a regular basis after Optech to design the test plan and work out the details of the data to be tested. Meetings with exchange representatives and members of key clearing firms were arranged during the 1997 FIA Expo to obtain feedback on the plan, and further meetings with these groups were planned for New York and Chicago to work out the details of the test data.

The near-term objective is to have a complete test script for all domestic exchanges by mid-December. This will allow time for committee review and presentation to the SIA Year 2000 Committee at the SIA January 1998 conference in New York.

Test Conditions

In order to ensure that software is tested for all processing dates at the millennium change, and to minimize the time and effort required to do so, the following business processing dates were selected for the test:

December 31, 1999 Last business day of this century
January 3, 2000 First business day of the next century
January 4, 2000 Second business day of the next century
February 29, 2000 Leap day and month end in the next century

Depending on the response to the recent request by the SIA and FIA to the Federal Reserve to make December 31, 1999 a holiday, these dates may be adjusted.

A Conditions Catalog is currently under development which will list in detail all trades and transactions to be included in the test. As indicated above, contributors to this catalog include all domestic exchanges, key clearing member firms from both New York and Chicago, and the FIA Year 2000 Subcommittee.

The Conditions Catalog has three sections describing the trades and transactions to be tested. The first section is a comprehensive enumeration of the various types of trades and transactions to be tested: regular trades, giveups, EFPs, exercises, etc. The second section lists individual products by exchange within broad product categories such as indices, interest rates, metals, and so on.

The third section is derived from the first two by combining each product to be tested with all applicable transaction types and showing the result in chronological sequence. It would show for example, that a long option would be entered on day one, and partially exercised on day two. The actual trade details are then filled in on a subsequent page from the summary, and this will be the source from which the actual test data would be keyed.

The premise of the test is that the first day of transactions will be used to build up positions in the test accounts. All test accounts used should therefore have a flat position in all of the test commodities prior to the first day.

The Year 2000 Committee will meet with each U.S. domestic exchange to ensure that we have properly catalogued all possible transaction types for the selected products. Clearing member staff from the operational and technical side of the business will assist in working out the catalogue detail.

It is proposed that all clearing firms participating in an exchange's test will be submitting the same complement of test data for each day being tested. This will make it easier for the exchange to check the desired results, since all position and trade registers would be the same for each firm.

The preferred technique for testing the clearing process is a 'buddy system' where each firm on one side of the trade is paired with another firm on the other side. An odd firm could be paired with a dummy firm or another firm that would double up. Each exchange will need to decide which system works best for it.

This means that there will actually be two sets of test trade scripts generated for the process, one for each side of the trade. Once firms have been paired up for the test, then the exchanges can assign opposite firms and brokers where needed to ensure a clean match. The trade price and strike price used in the trade scripts will be determined after the exchanges have set up their test data base. This will ensure that trades entered do not edit out due to price range errors or invalid strikes.

The premise of the test data for 12/31/99 is that each product tested will start with a flat position, and that trades for this date will be used to build a position in the product for adjustment on subsequent dates.

Testing Phases

Testing is to occur in three distinct phases:

    1) Unit Testing

      The first phase of these tests will focus on the links between the exchange and the back office, and will include back office vendors, key clearing members, and those members who employ their own back office software.

      This phase is scheduled to run from May through August of 1998. While exchanges are responsible for setting the testing times, it is generally expected that these will occur on weekdays during regular business hours. Test environments must be available on both the back office systems as well as those of the exchanges to avoid interruption of normal business activities.

      Testing in this phase will not need to be coordinated across firms; as such, firms can submit or receive test data at any time within the constraints imposed by the exchanges.

      Ancillary processes which are part of the trade processing cycle such as order entry and quote systems should be tested as part of this phase. Integration of these processes with the full scale tests would increase the complexity of the testing logistics without much additional benefit.

    2) Beta Testing

      This phase of the test is expected to occur in September and November of 1998. Exchanges will run full clearing cycles for each of the four test dates, and all participating firms will run a full day's processing cycle, including trade submission and import, batch processing, and position reporting such as Large Trader, Open Interest and Position Change Reporting. Test data to be submitted will follow the scripts developed as part of the Conditions Catalog. Testing firms are expected to be the same as those in the unit test.

      Expectations are that these tests will take place on weekends, since they will require that both the firms and the exchanges IPL their machines to the required dates and utilize test environments to ensure thorough testing. Dates selected are as follows: September 12-13, September 26-27, November 7-8 and November 14-15

      The November dates have been selected for contingency purposes in case testing in September failed or was inconclusive. A single day is allotted for each test date, given that processing two test dates on a single day would be a very lengthy process. We also have to consider that any problems that are encountered in the first few days of testing must be remedied before the subsequent day can be tested.

    3) Full Industry Test

      The final phase of the test is expected to occur in the first quarter of 1999, and may be coordinated with similar tests in other financial markets that will be run by the Securities Industry Association. This will help to minimize the number of weekends spent by staffs of firms who must participate in both FIA- and SIA-sponsored tests. These tests are expected to involve all clearing member firms, non-clearing firms, CTAs, etc. - anyone in the trading process who transmits or receives data to anyone else.

Compliance Determination

The testing process only has validity in the sense that its conclusion is a verifiable outcome. Industrywide testing is designed to ensure that both clearing and back-office systems will handle Year 2000 issues. Depending upon the exchange, some of this can be accomplished on a mechanical basis. Out-trades or position differences can point out where an individual firm has not passed the test. Clearing firms themselves will be responsible, however, to ensure that back office position and activity reports properly reflect the test cases. It will also be in their interest to check reports and balancing data produced by the exchange to ensure that they have achieved the desired result. Exchanges may assist in this process by publishing a copy of these reports beforehand for comparison after the test.

Web Site

The Futures Industry Association is maintaining a page in its Web Site where both summary and detailed information about this test will be posted. A list of each exchange's interfaces will be posted on the Web Site along with an indication of the interface's sensitivity to date issues. The Conditions Catalog will be posted here as well, to allow participants in the testing process to review and comment on the details of the testing process.

Transaction Flow

A summary of files that are key to the testing process is presented below.

Input

Output

CBOT/MCE
Regular trades submitted by back office through ARCS/MQM Trade file to back office
Project A Claims, executions to back office
OTIS: APS trades to back office
Giveup aloocations
 APS processing
 Exercises/assignments
SPAN arrays, price files
End-of-day files from back office: Large trader reports
Open interest
Trade register files
CME
Regular trades submitted by back office through MQM Trade file to back office
Globex Claims, executions to back office
TES:
 Giveup allocations
 APS processing
 Exercises/assignments
SPAN arrays, price files
End-of-day files from back office:
PCS files
Large trader reports
Trade register files
NYCE
Trades keyed into exchange system Routing file to back office
SPAN arrays
End-of-day files from back office:
Large Trader
Open interest
Trade register files
NYMEX/COMEX
Trades keyed into exchange system Routing file to back office
SPAN arrays
End-of-day files from back office:
Large Trader
Open interest
Trade register files
CSCE
Trades keyed into exchange system Routing file to back office
SPAN arrays
End-of-day files from back office:
Large Trader
Open interest
Trade register files
KCBT
Trades keyed into exchange system Routing file to back office
SPAN arrays
MGE
Trades keyed into exchange system Routing file to back office
SPAN arrays

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