From the AMEX "Year 2000 Technology Index" to the recent Congressional hearings held by the Technology and Government Subcommittees, the "Year 2000 problem," as it's commonly called, continues to strike fear into technology budgeters worldwide. But should derivatives market participants be worried? The short answer is yes and no.

The problems affect systems that use a two-digit date format and, thus, could have problems processing a date ending in "00." According to a recent study by the Gartner Group, a Connecticut-based research consultancy (www.gartner.com), approximately 80 percent of the code with millennial issues resides on mainframes; the remaining 20 percent is spread over client/server applications, microcomputers and the like.

Anyone who depends heavily on either mainframe-based applications or non-mainframe applications that rely on mainframe-generated data should be afraid. But financial professionals who are using brand-new client/server systems that are not influenced by data dependencies can probably relax.

According to the Gartner Group, many financial institutions believe that if their old mainframes have been upgraded or replaced, they no longer have to worry about the Year 2000. They're wrong. According to the latest Gartner bulletin, "this is like upgrading your 386 PC to a Pentium and then observing that bug-ridden software crashes in a shorter period of time." The bottom line: if a mainframe has been upgraded with state-of-the-art hardware but the software hasn't been updated, people are still in trouble when 2000 hits.

Global risk managers may also have something to fear. Firm-wide risk management initiatives frequently draw critical data from a multiplicity of legacy systems. And recent state-of-the-art middleware, which allows risk systems and legacy systems to "talk to each other," has allowed many institutions to delay the replacement of these legacy systems and thus save money. The downside: many brand new client/server, 2000-bug-free enterprise risk management systems now depend on data generated by mainframe systems plagued by Year 2000 bugs.

This mainframe-generated data may also feed mission critical, multi-user data warehouses which, in turn, are used by sales, marketing, product development and top management executives.

The good news is that trading desks running front-office software purchased over the last three years can most likely ignore Year 2000 software bugs.

On the surface, it's a case of Main Street vs. Wall Street. San Rafael, Calif.-based Fair Isaacs is a retail credit-scoring company that uses sophisticated statistical analysis to evaluate retail credit risk. Credit card issuers subscribe to this data, which they use to select recipients in order to mail and process credit card applications and to assign lines of credit. This data is also used by mortgage lenders and other providers of consumer credit.

Berkeley, Calif.-based Risk Management Technologies, by contrast, is a risk management software development company that offers the RADAR decision support system. RMT also provides portfolio risk management research and consulting services to commercial bank treasuries. Clients include Chase Manhattan, First Union, Wells Fargo and Sumitomo Bank in Tokyo, and RMT reached $7.2 million in revenues for 1996.

Fair Isaacs, which hit $148.7 million in sales for 1996, recently announced it was buying RMT for $46 million in a stock swap to be complete by July 1, 1997-a multiple of nearly seven times RMT's 1996 earnings. Says one risk management software executive: "RMT is a great company, and I have a lot of respect for its work...But $46 million? That's just excessive."

Alan Tobey, a RMT marketing executive, argues that the acquisition price-which has raised more than a few eyebrows-makes a lot more sense when you consider what RMT's value would have been if the company had chosen to undertake an IPO. He also points out that Fair Isaacs and RMT have the potential to combine their expertise to create an even wider view of enterprise risk management that includes bank retail business as well as capital markets activities. "We believe that there is a huge market for high-level portfolio risk management at large retail and commercial banks," he explains. "Many credit card banks are driven by many individual, discrete credit decisions. RMT could help these banks use quantitative risk management techniques to see the cumulative effect of these decisions."

This might include identifying concentration exposures-such as a large number of cardholders who work in the same industry-as well as blending retail credit risk with credit risk associated with other bank businesses such as loans as part of a portfolio-wide risk measurement. "There is intelligent life outside of Wall Street and the investment banking community," notes Tobey.

For more information, contact Alan Tobey, RMT, 1-800-233-2635 x243.