Millennium Bug Could Cost Billions - Study By Ruth Morris NEW YORK (Reuters) - Just one large bank experiencing a Year 2000 computer system failure could cost global currency markets up to $3.3 billion dollars in five days of suspended trade, bottlenecking and non-receipt of payments, according to a study. A series of such disruptions could cause gridlock across global financial markets "based on sheer nervousness alone," Computer Sciences said in a report on the Year 2000 computer problem, also called the millennium bug and the "Y2K" problem. "The message we're trying to get through is that there is a business risk issue with Y2K that actually goes beyond domestic borders," CSC senior consultant Adrian Sharp told Reuters. In other words, a bank, or clearinghouse, whose computer systems have not been fixed to handle date-sensitive transactions in the Year 2000, could cause financial hiccups, if not spasms, in another corner of the world. CSC reported its findings, based on interviews with more than 90 individuals at financial institutions, clearinghouses and regulatory bodies, at the SIA Year 2000 Conference in New York. The study focused on the settlement of foreign exchange transactions as an "operational trigger" that could cost the market more than $10 billion in the first week after the Year 2000 clicks over. The Year 2000 problem is born of a long-standing practice by programmers to save memory space by denoting years using just two digits. Thus, systems in which the problem is not remedied would be unable to read any date correctly after the year 2000. Sharp said respondents to a CSC survey on the problem generally felt millennium renovations were well underway in the United States, but he added: "Another way to think about it is to ask, 'If every financial institution in the United States was Year 2000 compliant would we still have a problem?' and the answer is, 'Yes, you potential could, because we do a lot of business with the rest of the world." As a result, institutions dealing in foreign exchange have a high stake in encouraging their overseas counterparts to tackle the problem head-on. And some countries are performing better than others. "Asia is seen as being behind," said CSC Banking & Capital Markets Practice director Peter Shelton. The study concurred, noting that clearinghouses in Asia account for more than one-third of the foreign exchange market. The study found that bottlenecks from Year 2000 noncompliance could cause settlement failure rates to jump from the current one percent to as high as five percent in currency exchanges. A settlement failure refers to an institution's inability to deliver on its end of a foreign exchange transaction. The institution must then pay an "interest claim" to compensate the receiving party for the money it loses by not holding that asset. The costs could be compounded by lost opportunities as investors shy away from transactions for fear that counter parties might not be Year 2000 compliant, Sharp said. A trading slowdown, in turn, could be drawn out as institutions investigated noncompliant trades. "The system can handle stresses, but the question remains exactly what levels of stress can it absorb before gridlock occurs," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell. Earlier this month, Yardeni said he believed there was a 40 percent chance of global recession during 2000 as severe as the 1973-74 downturn. And when it comes to routing out the computer bug, the foreign exchange market faces an obstacle that other financial organs do not. The New York Stock Exchange and the Nasdaq Stock Market can work to insulate themselves from the programming glitch, but foreign currencies are not traded at a centralized location and will not enjoy that safe haven.
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