A glitch embedded in computer programs could cause major headaches for giant financial services companies handling trillions of dollars of investments and cost them tens of millions of dollars to fix.
The glitch is related to the year 2000. Because of past programming practices using only two digits for the calendar year, many programs might not recognize the turn of the century. As a result, calculations for which the date is critical - e.g. those involving bond maturity - could be incorrect.
According to computer experts, the problem is serious because for many financial service companies, potential glitches are hidden in millions of lines of computer code. Financial companies also receive data from each other, which could be another source of problems.
Fixing computer code, because there is so much of it, is expensive; one estimate is $1.50 to $1.75 a line. A large financial services company could have 100 million to 200 million lines of computer code in its systems. But some experts believe even heavier costs will be involved during the testing.
Officials for many of the companies say they have begun extensive testing to expunge or correct the incorrect computer code and are in a race against the year 2000, when the not easily detectable glitches could first occur.
The predicament threatens virtually all companies with extensive computer code, even the biggest and the brightest in the investment arena, experts say.
Managers like Fidelity Investments and John Hancock Funds; custodians like Chase Global Investors, Bank of New York and Northern Trust Co.; and pension consultants like The Frank Russell Co. and Wilshire Associates plan extensive tests to determine the scope of the problem.
The problem is correctable, but the solution is expected to take years to complete. Because financial companies are in the testing stage, it is hard to determine the exact cost for the financial sector. But some experts believe the number could go as high as billions of dollars.
"I think this is a global issue that everyone is trying to investigate," said Rene Nalitt, a vice president at Chase Global Investor Services, New York, who is heading up its "Year 2000" effort.
"We are aware of the issue and we are in the process of developing a plan of attack on the problem," said a spokesman for John Hancock.
A spokesman for Fidelity said that firm is doing the same.
Several banks in Chicago are considering forming a group to discuss problems in computer code related to 2000, said Brian Ekkebus, a vice president and technology risk manager at Northern Trust.
Sounds simple, but isn't
The problem faced by financial companies sounds simple but isn't. Computer programmers decades ago began writing software that used only two digits to indicate a year.
As a result of the two-digit scheme, many programs think "00" means "1900" or something else, not 2000. The correct date can be critically important in the financial services sector because many calculations depend on a calendar date - for example, when computing interest or using transaction, maturity or payment dates in a calculation. Sorting by year also can be a problem.
"Once the year turns over to 2000, all of the mathematics of how you calculate interest and everything else gets screwed up because you are now starting with a zero," said Bill Imhof, a principal with the Alliance for Fiduciary Consultants, Parsippany, N.J.
But not all two-digit date fields are trouble. Financial companies need to know when date fields in their programs are part of a calculation or another mathematical function that could cause a problem. Consequently, companies have put together project teams to hunt down date-dependent errors in computer logic.
Typically, companies plan to use other computer programs to simulate conditions in 2000 to find what part of their code needs repair.
"Software logic could be incorrect, say in the calculation of an amortization schedule for a bond. There could be any number of ways that this problem could come up," said Steve Sunquist, chief information officer with Frank Russell, Tacoma, Wash. Problems could pop up with callable bonds. Security pricing services can include date-related fields in their databases, he said.
No universal solutions
But a solution will not be universal because each company uses different programs, different combinations of programs and different suppliers.
The practice of using two digits started when computer storage space was expensive, but continued even after storage costs plummeted. As a result, older programs might contain most of the problems related to 2000, but some relatively recent ones could have problems, too.
Even though 2000 is more than three years away, some less diligent companies might be slow fixing the problem.
"It's not very politically acceptable to go to your CEO and say you need $30 million or $40 million to fix a problem that is not going to bring anything to the bottom line," said Peter Katz, a vice president with Micro Focus, Palo Alto, Calif. The software services firm builds applications to identify computer code problems related to 2000.
Some companies are taking an aggressive stance. Ms. Nalitt said Chase's program is bankwide. Department heads gather at leadership councils to share thoughts, and have the full support of senior management.
Part of the difficulty will be in knowing where to look.
Mr. Sunquist of Russell said there is a long list of potential trouble spots in both computer data and programming code.
Russell is consulting with its electronic data suppliers to determine how they are testing their programs for potential problems.
Exported data also a problem
Besides worrying about data coming into a firm, companies also have to correct problems in the data they send out. Mr. Sunquist said Russell, which sends performance data to pension funds, money managers and other consultants, already made sure Russell Data Services is free of any troublesome two-digit designations.
And the problem isn't confined to U.S. borders. Northern Trust is checking with its worldwide network of banks and subcustody banks. "This is a very big issue. We have contacted (other banks and suppliers of information) to find out what their plans are at this point," said Mr. Ekkebus.
Should any of Northern Trust's suppliers be unable to correct problems, Northern Trust will have software interfaces by 1998 to screen incoming data for problems, he said.
Typically, institutional investors rely on consultants or government regulators to deal with serious problems. But with this problem, there is no central authority or clearinghouse to monitor testing and repair, said Mr. Sunquist.
"Off the top of my head, I don't know what the status is for money managers or about custody banks," said Stephen Nesbitt, a senior vice president for Wilshire Associates. Mr. Nesbitt said Wilshire executives suspect they might have problems of their own in Wilshire's code for mainframe computers.
Tom Ryan, chief information officer at Wilshire, said the firm will replace the old code within a year. He added most of Wilshire's computer code is relatively new and not subject to the date-related faults.
In addition, Mr. Ryan said Wilshire is cleaning up, when needed, data it receives from its suppliers and translates calendar year dates into four-digit form. Even so, Wilshire plans to test all of its computer code for problems, he said.
Reluctant to talk
Even though most computer experts agree the problem is serious, most company executives are reluctant to talk about it. One consultant who didn't want to be identified said that although he was a specialist in the area of custody banks, he hadn't heard much discussion about how the banks were solving the problem.
Fixing the problems could be so costly the Securities and Exchange Commission unofficially has cautioned companies it regulates to include a statement in their financial 10Q and 10K reports if they think the problem could have a significant financial impact, said an SEC spokesman.
Executives at many financial firms say tests have just begun and they have no idea what the financial impact on them might be.
But not everyone thinks the computer problems will be serious.
"Our major loan processing systems have been dealing with the data beyond the turn of the millennium for a long time," said Richard Pace, chief technologist at Bank of New York.
"The 30-year bond crossed over the millennium mark in 1970 so I don't expect major, major problems in those systems. I do expect some format-related problems and some cosmetic-type problems to surface in our testing."
Some software consultants and the news media have exaggerated problems, Mr. Pace said. "I don't think much of the financial community will see problems with it."
However, Micro Focus' Mr. Katz said the issue isn't "overblown at all." While it's true an individual firm might not have a serious problem, "the reason the issue is not overblown is that nobody is really certain until they have gone through a complete assessment," said Mr. Katz. "Just to do an assessment is a major size problem."
Maturity dates of securities by themselves typically are written in four digits and aren't a problem, said Ed Longo, a senior vice president with Keane Inc., a software services firm in Boston. But a problem can develop with maturity dates when used in conjunction with a calendar date the computer can't correctly read, he said.
For most firms, the 2000 year problem is much more serious than formatting or cosmetics, said Mr. Sunquist.
"I don't think it is the least bit true that this is some scare tactic. Each of us with organizations of any size that have much of a history with application software have the problem. And it is not the figment of someone's imagination or some vendor's sales hype," he said.