Year 2000 Preparations in the Australian Banking and Financial System 3. Australian Securities & Investments Commission and Securities Markets

3.1. Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) administers the Corporations Law, regulates securities markets and has responsibility for consumer aspects of insurance, superannuation and banking.

Early in 1998, ASIC (then the Australian Securities Commission) developed a strategy for communicating the Year 2000 issue to the financial services sector and the wider business community. The key elements of the strategy were:

  • general awareness raising activities, including speeches and media interviews on Year 2000 by Commissioners and senior officers;
  • release of an Information Sheet to highlight the issue and to cover required disclosure;
  • inclusion of a Year 2000 message on the annual return forms provided to all Australian companies for lodgement with ASIC in respect of 1998/1999;
  • development of a media campaign;
  • communication with all licensees;
  • establishment and maintenance of links with government, securities industry bodies, and securities and futures markets regarding their Year 2000 initiatives; and
  • completion of ASIC's own systems compliance program and development of a testing environment for use by external organisations linking into ASIC.

ASIC issued an Information Sheet, The Millennium Bug – Don't Get Caught, in May 1998, which can be obtained from the ASIC web site (www.asic.gov.au) or via Infoline (1300 300 630). The Information Sheet covers what the problem means to businesses and their disclosure obligations.

The 1999 annual return, completed by every registered Australian company, contained a Year 2000 warning message and the accompanying guide for completion of the annual return contained a brief explanation of the Year 2000 issue.

ASIC has also been active in communicating with the business community, securities industry, industry associations and the public through speeches, media exposure and publications. In mid-1998, ASIC launched a media campaign directed at small and medium businesses.

Licensees

ASIC has direct responsibility for licensing all advisers and dealers in the securities and futures markets. Since July 1998, ASIC has also taken over licensing of intermediaries in the fields of superannuation and insurance.

ASIC considers that Year 2000 compliance is essential if a licensee is to meet the fundamental requirement of its licence to operate their securities or futures business ‘efficiently, honestly and fairly’. ASIC considers that the failure to ensure that a licensee's business is ready for Year 2000 may constitute a breach of their responsibilities as licensee and may, in given circumstances, provide grounds for disciplinary action.

In March 1998, ASIC wrote to all securities and futures licensees making them aware of their obligations and setting out what it considered to be the minimum steps that should be adopted. As a follow up to this letter, ASIC conducted a survey of a sample of 700 licensees in December 1998/January 1999 to determine what action had been undertaken. This sample was composed of securities advisers and dealers licensees and insurance intermediaries which had not already been covered by surveys from APRA, ASX and SFE ­ that is, smaller licensed securities dealers, investment advisers and insurance brokers. By March 1999, less than half of the sampled organisations had responded.

The survey found that, among licensees who did respond, the importance placed on solving the problem by the board was very high. The vast majority of licensees have completed risk assessment and planning. Just under half have completed corrective action. The survey found that approximately 35 per cent have achieved Year 2000 compliance, 25 per cent expected to be compliant by end-March 1999 and 35 per cent by end-June 1999.

While those that responded indicated that they were making significant progress with correcting the problem and preparing contingency plans, ASIC was concerned by the lack of response of the others. Accordingly, in April 1999 ASIC wrote to all licensees and insurance brokers to seek an assurance that all reasonable steps are being taken to ensure readiness for the Year 2000 and that appropriate contingency and business continuity plans are being developed. Responses were required by May 1999.

ASIC requested each licensee and insurance broker to provide ASIC with a Year 2000 Statement of Readiness from the board or the principal stating that the licensee or insurance broker is:

  • aware of the Year 2000 issue and its potential impact;
  • taking all necessary steps to ensure Year 2000 compliance; and
  • developing appropriate contingency and business continuity plans.

Licensees and insurance brokers were also asked to advise ASIC of previously lodged statements with other regulatory bodies.

Two-thirds of securities licensees and insurance brokers (companies and individuals) have responded with a Year 2000 Statement of Readiness. ASIC is still receiving responses and will continue to closely monitor licensee and insurance broker Year 2000 compliance. Those that responded have indicated that they have made significant progress in preparing for the Year 2000 and developing contingency plans.

Superannuation

Following comments from industry participants in response to ASIC Information Release 99/015, ASIC does not intend to make it mandatory for superannuation trustees to disclose their Year 2000 readiness to superannuation fund members. Rather, ASIC will be encouraging trustees to voluntarily disclose as a means of ensuring that they are well placed to reassure their members about their Year 2000 readiness.

3.2 Liaison with Industry Bodies, Government and International Bodies

ASIC has been active in working with other bodies to promote the Year 2000 issue. ASIC has been involved with the year2k Industry Council organised by the Federal Government's year2k Industry Program, and with the CFR Year 2000 Coordinators Group. From a global perspective, ASIC has participated in Year 2000 activities of the International Organisation of Securities Organisations (IOSCO) and the Joint Year 2000 Council.

3.3 ASIC's Internal Preparations for Year 2000

ASIC has reviewed its own systems, developed a compliance plan and has had a project to implement the changes required. ASIC reports each quarter to the Office for Government Online (OGO) on these plans.

All ASIC's core applications have been updated where necessary, and tested for compliance using the Year 2000 compliance testing environment set up for this purpose. Testing of ASIC's critical systems was completed in early July 1999. Full compliance, covering systems, building and facilities, is expected in September 1999.

This testing environment has also been made available to external bodies to test the compliance of their systems, but as yet few clients have availed themselves of this facility.

ASIC has prepared a statement of its Year 2000 status (in the format in which listed companies were required to report their status to the ASX). This disclosure statement has been published on the ASIC web site. ASIC has released a media statement highlighting its disclosure and encouraging other companies to publish their status in a similar way.

3.4 Australian Stock Exchange

The Australian Stock Exchange (ASX) operates primary and secondary markets in equities. In addition, it operates markets in warrants and options.

The ASX commenced an assessment of the Year 2000 status of its systems in 1996. In May 1997, following completion of a detailed exercise to determine the ASX's potential exposure to the Year 2000 problem, the ASX formally established a project with the responsibility for ensuring that the ASX's critical business services will not be interrupted as a consequence of processing date references beyond 1999.

As a basis for assessing the Year 2000 readiness of its critical systems, the ASX uses the British Standards Institute definition (see Appendix 3) as a guide. If the ASX states that an ASX system or service is Year 2000 ready, it means the following:

The system or service has undergone an internal review process. In addition, as a minimum, each critical ASX application has been tested using an appropriate set of representative dates. On the basis of this review, and any associated test results, ASX assesses that the risk of a material failure of the system or service as a result of a date processing problem is not significant.

Critical systems used by the ASX in operating the equities and options markets include:

  • equities and warrants trading system (SEATS);
  • equities (and warrants) clearing, settlement and registration system (CHESS);
  • Derivatives Trading Facility (DTF);
  • Derivatives Clearing System (DCS); and
  • Company Announcements Platform (CAP).

SEATS

SEATS is the Stock Exchange Automated Trading System for equities and warrants. The Year 2000 ready version of SEATS was released into production in August 1998. Since September 1998, the ASX has provided a SEATS Year 2000 Open Interface test facility. This facility is designed to assist broker organisations assess their level of Year 2000 readiness.

CHESS

CHESS is an electronic clearing, settlement and registration system for equities and warrants. Testing for Year 2000 compliance commenced in 1997 and all components of CHESS are Year 2000 ready. Since February 1998, the ASX has provided a CHESS Year 2000 test facility. This facility is designed to assist CHESS users (eg brokers, institutions and issuers) assess their level of Year 2000 readiness.

Derivatives Trading Facility

The Derivatives Trading Facility (DTF) is used to trade exchange-traded options. ASX uses a system provided by OM Technology (Sweden). The ASX has completed its own Year 2000 testing of the version of the software that has been stated as Year 2000 ready by OM Technology. The Year 2000 version of the software was implemented into ASX production in mid-August 1999. Since July 1999, the ASX has provided a DTF Year 2000 test facility, designed to assist DTF users assess their level of Year 2000 readiness.

Derivatives Clearing System

The Derivatives Clearing System (DCS) is used for clearing exchange-traded options. DCS is a new system which was successfully implemented into ASX production in mid-June 1999. This software has passed the ASX's own Year 2000 readiness testing.

Company Announcements Platform

The Company Announcements Platform (CAP) is used to support the ASX Company Announcements Office in the role of informing the market of announcements which are required to be made by listed entities and other parties. The Year 2000 ready version of CAP was released into ASX production in December 1998.

Industry Testing

The ASX, in conjunction with a representative set of organisations (eg selected broking organisations, institutional settlement participants and banks) successfully completed an industry test during April 1999. The adopted approach was in line with the recommendation of the Global 2000 Coordinating Group. This test concentrated on the day-to-day trading and settlement processes in the equities market.

Disclosure of Listed Companies

The ASX first requested each listed organisation, excluding exempted foreign issuers and debt issuers, to provide a disclosure on two areas concerning the Year 2000 problem by 30 June 1998. First, each organisation was required to provide an assessment of its exposure to the Year 2000 problem. Sources of exposure include suppliers, operations and customers. Secondly, each organisation was required to outline the scope and status of its Year 2000 activities, whether it intends to be Year 2000 compliant (and whether a standard definition of compliance was used), whether it intends to develop and implement contingency plans for continued operation of its critical systems, whether it intends to obtain independent verification of its Year 2000 activities and the estimated total Year 2000 project cost.

The ASX requested updated disclosures from listed companies (excluding exempt companies) by 31 March 1999. The ASX is now requiring further information about listed entities' progress so as to be satisfied that they are meeting their continuous disclosure obligations under ASX Listing Rules. The ASX has called for this third and final disclosure by 30 September 1999. These disclosures are available to interested parties on request (the ASX National Call Centre telephone number is 1300 300 279). The ASX is not in a position to verify the claims made by the organisations in their Year 2000 disclosures and assumes no liability in relation to these disclosures.

Business Continuity Plans

The ASX already has tested Business Continuity Plans (BCPs) in place for each of its critical systems. Each of these plans were reviewed in light of potential Year 2000 problems. Specific Year 2000 BCPs have now been prepared for each critical ASX system/service. Each Year 2000 BCP focuses upon failure of individual critical components. Alternative methods or components were identified where feasible. This assessment was based upon the level of risk associated with each component (ie high risk/high impact).

The ASX is currently planning in detail the activities that will be undertaken between 31 December 1999 and 2 January 2000. Over the transition weekend, the ASX will undertake a number of verification activities to assess whether its critical services will be able to continue effectively in 2000.

During the early days in 2000 the ASX will continue to monitor the ability of participant organisations to settle.

Broker Readiness

The ASX requested broking organisations to complete a self-assessment of their Year 2000 activities and associated progress. Following a review of the completed self-assessments, the ASX is following up areas of significant concern.

Further information on all Year 2000 matters can be found on the ASX web site (www.asx.com.au).

3.5 Sydney Futures Exchange

Structure

The Sydney Futures Exchange (SFE) and New Zealand Futures & Options Exchange (NZFOE) Year 2000 Project has the highest priority and the full support of senior management and the board.

The SFE and NZFOE Year 2000 Project addresses:

  • enhancement and testing of SFE and NZFOE systems;
  • the review of the preparedness of core service providers and vendors; and
  • the monitoring of SFE and NZFOE markets' Year 2000 progress.

The exchanges have prepared an inventory of all infrastructure and have established dedicated test environments for all critical and most non-critical systems. Detailed test plans have been formulated using, as required, the exchanges' Year 2000 mandatory test dates (09/09/99, 31/12/99, 03/01/00, 29/02/00, 29/12/00 and 02/01/01) and other dates as necessary for date-related functionality testing.

Status

As at 31 July 1999, SFE and NZFOE core systems had passed compliance testing with the exception of SYCOM® IV. SYCOM® IV is undergoing Year 2000 compliance testing and is targeted for completion in September 1999. Additional compliance testing of core systems' interfaces with SYCOM® IV is also being performed.

In July 1999 the SFE and NZFOE performed an Industry Wide Test, with the 22 members participating meeting the core success criteria (refer below).

Industry Wide Test

In July the SFE completed an Industry Wide Test (IWT). The objective of the IWT was to perform an integrated Year 2000 test of core systems used within the day-to-day activities of the futures industry for the SFE, NZFOE and member firms. Twenty-two members elected to participate in this test, including 21 of the exchanges' 25 clearing members. All back office accounting system providers within each market also supported the IWT.

The results of the IWT have been reviewed and signed-off by SFE Information System Audit. All participants met the core success criteria established for the IWT by reconciling cash and position for each of the test days to the SFE's Clearing House.

A minor Year 2000 related problem was experienced during testing of 3 January 2000, when an application software of two participating members had the incorrect date of 3 January 1900 displayed. This problem was rectified on the day by a simple software upgrade provided by the members' software vendor.

Business Continuity Plan

As part of the SFE's preparations for the changeover to Year 2000, the existing Business Continuity Plan (BCP) has been reviewed and is being upgraded.

To effectively update the SFE's BCP in relation to Year 2000, a series of internal Year 2000 scenario workshops have been undertaken. The scenarios covered included the potential problem involved with power and communication infrastructure outage, settlement and clearance system outage and psychological and physical events affecting international financial markets.

The SFE has developed a BCP Member Communication for Transition to Screen Trading and Year 2000, with Issue 1 being distributed on 13 August 1999. An ongoing process with members will be progressed during the third quarter to ensure BCP procedures are in place for identified Year 2000 risk scenarios with specific focus on SFE/NZFOE core system failure.

The key policy decisions that the SFE has ratified include:

  • the SFE does not intend to leave the Trading Floor infrastructure intact post floor closure to be used as a contingency;
  • the SFE does not intend to set up an alternative screen trading facility for Year 2000 purposes;
  • members are responsible for having their own BCP; and
  • in a screen trading environment, where there is a major trading system outage, and where appropriate, the SFE intends to rely on telephone trading.

Market Implementation

A process to survey market readiness for the Year 2000 will continue through to the end of 1999. An initial questionnaire was sent to all dealing and clearing members in June 1998 requesting details of their Year 2000 programs. Questionnaire 2 was distributed in February 1999, with Questionnaire 3 due for distribution in September 1999. Responses to these questionnaires are reviewed to monitor the market's ability to maintain services into the Year 2000 and beyond.

Further information on current status and project progress is available on the Year 2000 pages on the SFE web site at www.sfe.com.au or by contacting the Year 2000 Project Team at year2000@sfe.com.au.