Mr. Chairman, members of the committee, my name is Donald Serpico.  I am Executive Vice President, Operations for the Chicago Mercantile Exchange.  I appreciate the opportunity to appear before this committee and discuss the Year 2000 Program at the Chicago Mercantile Exchange (CME).

The Chicago Mercantile Exchange is an international marketplace enabling institutions and businesses to manage their financial risk and allocate their assets.  On its trading floors, buyers and sellers meet to trade futures contracts and options on futures through the process of open outcry and electronic trading.  After regular trading hours, trading continues virtually round-the-clock on the GLOBEX® electronic trading system.  The CME's product line consists of futures and options on futures within four general categories: agricultural commodities, foreign currencies, interest rates, and stock indexes. Members of the CME include the world's largest banks and investment houses, as well as independent traders and brokers.  All over the world pension fund and investment advisors, portfolio managers, corporate treasurers and commercial  banks trade on the CME as an integral part of their financial management strategy.  The CME is a not-for-profit corporation owned by its 2,725 members.  These members, as well as individuals that have leased seats from members, execute trades for their firms or for themselves.  They elect from themselves a Board of Directors, which establishes Exchange policy.  The CME employs approximately 850 staff to support and service these trading activities.  The majority of these employees are located at the CME Center in Chicago.

The CME's Board of Directors and senior executives are well aware of the severity of the Year 2000 problem and the need for an aggressive program to address it.  To this end a Year 2000 Program Office comprised of senior CME executives and a full time Year 2000 Program Manager was established to oversee the Year 2000 Program.  Also, key personnel were assigned from each of the technology and operational areas to work with the Program Manager and staff in their respective areas to determine the impact to their areas.  At the current time there are approximately twenty staff members directly involved with this effort in addition to fifteen to nineteen full-time consultants.  A detailed project tracking and reporting system has been established for monitoring progress through all phases of the project.  A key part of the reporting system is the scheduled status updates to members of the Program Office and the Board of Directors.

The futures industry has been processing forward dated transactions for a number of years with many futures contracts already crossing the Year 2000 boundary.  The major concern for the CME is crossing the boundary from December 1999 to January 2000.  The CME approached this as an enterprise-wide business problem and not just as a technology problem.  The major efforts began in 1996 to define the program and how best to organize the program going forward.  The efforts were viewed as proceeding in three phases: inventory development, impact assessment, and code renovation and testing.

The program was organized into five major areas that were addressed as part of the Year 2000 efforts.  The first area is CME's internally developed application systems software and vendor software packages.  The second area is the technology infrastructure software and hardware for all of the CME's technology platforms.  The third area includes environmental facilities such as energy monitoring software, cooling/heating hardware, elevators, escalators, etc.  The fourth area includes telecommunications hardware and software, and the fifth area includes all standard desktop software employed at the CME.

The first phase in each of these areas was to develop a detailed inventory of all programs/systems, software, hardware, and facilities used within the Exchange. As part of capturing the inventory, Exchange-critical systems were identified to assist in scheduling efforts in later phases.  After the inventory was completed, the next phase was to perform an impact assessment to determine the Year 2000 status of each inventory item.  To address any external vendor software and hardware, a vendor certification letter was developed and mailed to each vendor.  The letter outlined which of the vendor's software and/or hardware the CME uses and requested certification of the status of the product in relation to Year 2000 compliance.  If the product was not compliant at that time then the vendor was requested to provide the release level and estimated release date of the Year 2000 compliant version.  This approach covered all the major areas except for the internally developed application systems software.

For the CME-developed application systems, a consulting firm that specializes in Year 2000 efforts was engaged to perform the inventory and impact assessment.  The consulting firm used its proprietary software to analyze all programs, files, and databases to determine the Year 2000 compliance status and identify potential problem areas.  The results of the impact assessment indicated that approximately 43 percent of the CME legacy programs were potentially non-compliant.  Detailed reports were provided from the impact assessment that reported on the status of each program.

The next and current phase is to go forward in each of the major areas with any required software upgrades, code renovation, and testing.  From the response to the vendor certification letters we were able to ascertain the status of all vendor products.  Where a product was not compliant at the time, a schedule was developed as to when the correct version of the product was to be available and an estimated implementation date. The majority of the vendor products that the CME uses are now compliant and the compliant versions have been installed or will be by the end of the third quarter of 1998.

For the code renovation and testing phase for the internally developed application systems, a different approach was taken.  A Request for Proposal (RFP) outlining the results of the impact assessment was issued to fourteen consulting firms who specialize in the Year 2000 practice.  The CME received detailed proposals from seven of these firms.  After a comprehensive review of the proposals, three firms were selected by the Year 2000 Team to proceed to the next step, a vendor "due diligence" review focusing on the vendor's business, staffing, project management, methodology, automated tools, and successful completion of other Year 2000 projects.  This included site visits to their corporate offices and meetings with senior executives of the consulting firms.  This process was completed in January 1998 and the code renovation and testing started in February 1998.  The Exchange-critical systems are being addressed first, but it is expected that all code renovation and testing will be completed by March 1999.  These efforts are currently on schedule.

Like other organizations, we have realized that testing will encompass approximately 50 percent of the Year 2000 efforts.  Not only must we be concerned with testing our systems internally, but also a major concern is testing with our external business partners. This means that in addition to exchange testing we must also address industry-wide testing.  Over the past year Chicago Mercantile Exchange personnel have been working very closely with the Futures Industry Association (FIA) Year 2000 Committee in developing an industry-wide Year 2000 test plan. It has become apparent to the CME, working as a member of the FIA Year 2000 Committee, that a critical part of the efforts to move successfully into the next millennium is to have a well defined and coordinated set of industry-wide test scenarios that can be executed between the exchanges and Futures Commission Merchants (FCMs).  The CME has made a major commitment to supporting these testing efforts and will require that all the CME's Clearing Members also participate.

The FIA industry test is to occur in three phases: 1) unit testing, 2) beta testing, and 3) full industry testing.  For these tests we will be using a set of predefined testing scenarios that include trades and transactions that are representative of the Exchange's products.  The unit testing phase will focus on the links between the Exchange and the member firms' back offices, and will include back office software vendors, key clearing members, and those clearing members who employ their own proprietary back office software.  This phase began in June 1998 and will continue through August 1998.  The beta testing phase of the FIA industry-wide test is scheduled to occur in September and November 1998.  The Exchange will run full clearing cycles for each of four test dates, and all participating FCMs will run a full day's processing cycle including trade submission and batch processing.  The full industry testing phase is expected to occur late in the first quarter of 1999 and will be coordinated with similar tests in other financial markets that are being sponsored by the Securities Industry Association.  The testing agenda for the full industry testing phase is the same as the beta testing phase and is expected to include all clearing member firms, non-clearing member firms, Commodity Trading Advisors (CTAs), etc.  Participation in this phase will be mandatory for all Clearing Members.

The final major area to address is contingency planning.  Although we believe that all CME systems and facilities will be Year 2000 compliant within the necessary time frame, we realize that all prospective problems may not be uncovered, despite extensive testing.  The first phase of contingency planning focuses on Year 2000 problem avoidance and the second phase focuses on operational risk management.  In the area of problem avoidance we have taken steps to determine and track the readiness of all business-critical facilities and services.  Internally this includes all computer applications, operating system software, network software, security systems, and communications facilities.  Externally it includes such areas as clearing members, settlement banks, and other business partners.  Certification checklists have been prepared to track readiness with expected or actual compliance dates.  Testing schedules have been set for testing all dependencies that have been or will be certified within the assigned time window.

For the second phase of contingency planning which focuses on operational risk management, we are addressing this potential on a number of different levels.  First, we are addressing the potential for failure internally to the CME; second, we are addressing the potential of failure of an external interface with our clearing members and other business partners; and third, we are addressing the potential that a clearing member firm may have operational problems.  We are utilizing the data compiled in the problem avoidance process to compare against current disaster recovery plans, emergency procedure plans, and Exchange Rules to see if all scenarios are covered.  For those potential failures that are not addressed in current Exchange procedures, we are developing contingency scenarios and alternative procedures.

We have recently entered into a dialogue with the Commodity Futures Trading Commission (CFTC) in the area of contingency planning.  In addition, as a member of the FIA Year 2000 Executive Committee, we are participating in the development of Year 2000 Contingency Planning Guidelines for members of the futures industry.

In summary I believe that the Chicago Mercantile Exchange will be well positioned for the Year 2000.  Our efforts were started early, and the inventory and assessment phases were completed well within the schedules.  A Year 2000 Program Office was established to oversee and monitor the progress of the program.  We have a very effective project tracking and reporting system with milestones and defined reporting structures.  For the remediation and testing of CME's internal systems, an experienced Year 2000 consulting firm with proven methodology and automated tools was engaged.  We are on schedule to complete our efforts by the end of the first quarter of 1999.

Over the past months, we have learned a tremendous amount about the Year 2000 problem and how to address it.  It has become very clear that it is a problem of major magnitude and will require cooperation and coordination across the futures and financial services industries.  Working together will ensure a smooth and successful transition into the next century.

Thank you for the opportunity to appear before this committee, and I will address any questions that you may have.