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Our Ref. : B9/39C
14 May 1999
The Chief Executive
All authorized institutions
Dear Sir/Madam,
Guidance Note on Y2K External Testing and
System Considerations for Y2K Contingency Planning
Further to my letter of 8 April 1999, I am writing to provide specific
suggestions to you on Y2K testing with external parties ("external
testing") and some system considerations for the Y2K contingency
planning process of your institution. This is the second of a series
of guidance notes on specific areas of Y2K contingency planning.
External Testing
As indicated in my letter in October 1998, upon achieving Y2K compliance,
Authorized Institutions ("AIs") are in a position to conduct
external testing to validate the interactions of their systems with
those of external parties with which they interface. As a matter of
fact, service providers of many shared financial systems have provided
external testing opportunities for AIs that are participants in the
shared systems(1). Although the service providers have essentially required
all relevant AIs to participate in the external testing, I would take
this opportunity to urge institutions to pay particular attention to
validate their system interfaces if any with the S.W.I.F.T. system,
given the financial industry's heavy reliance on the system. Apart from
shared financial systems, AIs are also expected to conduct external
testing whenever necessary with their business counterparties (e.g.,
correspondent or agent banks, custodians, customers, outsourcing service
providers) and, where appropriate, head office/parent bank and subsidiaries.
Given the diminishing time and resources available, it is important
that AIs focus on testing that is likely to deliver the greatest benefits
against the costs incurred. International experience suggests that a
sound internal testing programme remains the most effective type of
testing in identifying system problems. In general, an institution should
proceed with external testing only if the relevant internal testing
programme has been properly completed. AIs should prioritise the importance
of external testing with different parties and seek efficient ways to
accomplish the testing process, for example, through selection of counterparties
to conduct bilateral testing, testing the connectivity and processing
capability with key service providers first, and proxy testing(2).
To a certain extent the external testing schedule of your institution
will depend on the agreements with or arrangements of the external parties.
However, the HKMA expects your institution to complete your critical
external testing as early as possible taking into account the "change
freeze" policy of your institution (see below). The main purpose
of this is to allow your institution sufficient time to rectify any
system problems unveiled in the external testing. International experiences
gathered after the introduction of Euro suggest that many of the problems
encountered during the Euro conversion could have been avoided through
more thorough testing. You are therefore encouraged to conduct as much
testing as time permits. You are also expected to inform the HKMA
if you cannot complete all the external testing for mission critical
systems and significant dependencies by end-June 1999.
System Considerations in Y2K Contingency Planning
Enhancement of system capacity
As the century date change draws closer, it is possible that customer
demand for AIs' services (e.g., account inquiry, balance updating, statement
printing, cash withdrawal) will be significantly higher than usual.
This may put pressure on the computer systems of AIs, especially on
the customer deposit system, ATM system, phone banking system and other
retail banking systems. If such stress on system capacity causes system
failure of an institution near the turn of the century, it could undermine
public confidence on the Y2K preparedness of the institution. Furthermore,
it should be noted that even if the system capacity limitation only
temporarily affects the availability of the institution's services,
inappropriately worded messages given by the system concerned to customers
can cause undue concerns over the Y2K readiness of the institution.
It is therefore important for your institution to ensure that its systems
can cope with the potential increased demand for services towards the
end of this year. It should also be noted that certain contingency measures
such as those involving manual procedures may require certain computer
reports and printouts. This may pose additional requirements on system
capacity. In this regard, I notice that some institutions have already
planned to upgrade the processing capacity of their systems. The HKMA
considers that it would be good practice for your institution to review
the need to upgrade the capacity of its systems. In addition, your institution
should identify and monitor early warning indicators that might point
to potential problems ahead. Indicators may include unusual frequency
of system breakdown, output errors and significant increase in transaction
volume. It will be advisable to consider when your institution should
take steps to limit transaction volume(3) to be processed by its systems
during the transition to 2000. Your institution should also review the
appropriateness of the wordings of the system messages that will be
given to customers in the event that its systems are temporarily out
of service due to capacity problems.
Apart from system resources, your institution should make arrangements
in advance to ensure the availability of key decision makers, necessary
staffing resources and vendor support(4) during Y2K critical periods
to cope with any possible problems with its systems.
Early implementation of tested systems
Your institution should also adopt an early implementation policy,
if it has not done so already, to put tested/compliant systems into
production use by end-June if possible and certainly not later than
end-September 1999. This can help identify any unresolved problems
with the systems at an early stage through interaction with counterparties
and customers during normal day-to-day operations. Your institution
should also put in place adequate control procedures to ensure that
system changes introduced to the implemented systems should be made
with extreme care and properly tested before they are put into production.
"Change freeze" policy
Another measure that your institution should take is to adopt a "change
freeze" policy, under which a stringent change management process
should be in place to prioritise and minimise operational changes (including
major relocation and new outsourcing initiatives) as well as hardware
and software changes during the second half of 1999 and early 2000.
This can help minimise the chances of introducing new system errors.
Moreover, this can help avoid diverting resources from the Y2K project
and contingency planning.
In general, during the period from the last quarter of 1999 up to the
first two months of 2000, system changes in your institution should
be kept to a minimum and confined to those required to rectify system
problems or to meet essential but unforeseen needs. Nevertheless, your
institution should continue to take measures and if necessary enhance
its system security during the "change freeze" period to safeguard
its systems against any possible threats to system security and integrity
(e.g., unauthorized access to computer systems, computer virus).
Computer virus
Institutions should be aware that many computer problems around the
critical Y2K dates are likely to be interpreted as Y2K related, including
those caused by computer virus. The possibility of attack by purposely
created Y2K virus should not be ruled out. This could be created by
both pranksters or disgruntled employees. The recent incident of widespread
attack on computers around the world by the CIH virus suggests that
it is important for AIs to maintain sufficient system security to safeguard
against attack by computer virus. While the fact that the Hong Kong
banking sector was not significantly affected by the CIH virus may suggest
that good precautionary measures are already in place, AIs need to remain
vigilant on this.
Outsourced operations
Some institutions may have outsourced their operations, for instance
to other regional offices or external service providers. Such institutions
are expected to ensure that all relevant guidance given by the HKMA
including the suggestions in this circular will be appropriately implemented
in respect of the outsourced operations. Institutions should also make
sure that their contingency plans are able to address the possibility
of disruptions to the outsourced operations arising from the Y2K problem.
If you have any questions on the above, please contact Mr. Brian Lee
at 2878-1651 or Miss Florence To at 2878-1197.
Yours faithfully,
(D T R Carse)
Deputy Chief Executive
c.c. Chairman, HKAB
Chairman, DTCA
Secretary for Financial Services (Attention: Miss Vivian Lau)
- For instance, the Hong Kong Interbank Clearing Limited organised
two rounds of external tests in August 1998, April 1999 and a further
round will be conducted in August 1999, whereas other external test
opportunities have been offered by S.W.I.F.T., JETCO, EPSCO, credit
card companies, etc. As far as the securities and futures industry
is concerned, the relevant exchanges and clearing houses completed
two rounds of street-wide tests in January and March 1999 respectively.
- Proxy testing is testing conducted by a third party as an alternative
to testing by an institution itself. Proxy testing may be appropriate
when it is not practical for every user of a service to conduct tests
with other user of the service. It may be useful in setting priorities,
especially for institutions with limited resources and time to complete
external testing, e.g. if some users of the service concerned have
successfully tested with the service providers, other users might
consider testing the service at a later date in order to focus on
higher priorities.
- For instance, your institution may consider rescheduling interest-posting
transactions to be performed near year end to some other periods.
Your institution may also consider exploring with large corporate
customers the feasibility for the latter to pay the December payroll
well before the end of 1999.
- For instance, your institution may wish to request relevant vendors
to keep sufficient spare parts in Hong Kong such that normal failures
can be rectified quickly during Y2K critical periods.
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