The Year 2000 Bug: What, Me Worry?
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.
Do Retail Banks Need Advanced Credit Modeling?
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
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,"
For more information, contact Alan Tobey, RMT, 1-800-233-2635 x243.