This article outlines the extensive work undertaken by the various participants in Canada's financial sector to ensure "business as usual" heading into January 2000 and beyond. The article looks at preparations in the Bank of Canada's own mission-critical systems and at those of the countryís major clearing and settlement systems for which the Bank has oversight responsibility. It also looks at the steps taken by the financial institutions themselves. Contingency planning that takes account of specific year-2000 concerns is also reviewed.

Clyde Goodlet

English

Research Papers in Economics

47 BANK OF CANADA REVIEW • SUMMER 1999
Preparations by the Canadian
Financial Sector for the Year 2000
ver the past several years, Canadian ﬁnan-
cial sector participants have devoted signiﬁ-
cant time and resources to preparing for
the year 2000. It is fully expected that the
ﬁnancial sector will operate on a “business as usual”
basis heading into January 2000 and beyond. Early on,
individual ﬁnancial institutions and the operators of
shared systems focused their efforts on the identiﬁca-
tion of potential problem areas and remediation of
their mission-critical systems to make them year-2000
ready. Changes to systems shared by the ﬁnancial sec-
tor are fully completed and tested, while changes to
mission-critical systems at institutions are virtually all
completed and tested. Nevertheless, testing will con-
tinue throughout the rest of 1999 to ensure the contin-
ued readiness of these systems to interact with each
other in the year 2000. Also, moratoriums on changes
to systems have been widely implemented. During
the past six months, the focus of the preparations for
the year 2000 has shifted to reviewing and enhancing
contingency plans. In addition, increased attention
has been paid to communicating information to users
of the services provided by the Canadian ﬁnancial sec-
tor with the objective of maintaining users’ conﬁdence
in the ability of the sector to function normally.
Bank of Canada Internal Operations
The Bank of Canada’s primary responsibility is the
formulation and implementation of monetary policy.
Other key responsibilities include supplying bank
notes, settling ﬁnancial transactions, acting as the
lender of last resort, overseeing major clearing and
settlement systems, and acting as ﬁscal agent for the
Government of Canada (which includes payments of
O
principal and interest on government debt and pro-
viding banking services to the government). During
1997, the Bank of Canada identiﬁed its mission-critical
systems supporting these responsibilities. By the end
of 1998, all of these systems that required attention
had been made ready and tested. In addition, work on
most of the Bank’s non-mission-critical systems is
expected to be completed by early July 1999. To main-
tain system integrity, the Bank has also put in place a
controlled freeze on further developments to auto-
mated systems. Finally, the Bank is reviewing and
modifying its contingency plans to take account of
any year-2000 concerns. The Bank is conﬁdent that its
ability to meet its responsibilities will not be impaired
by any disruptions related to the year 2000.
Bank Notes
Bank notes are just one means by which payments can
be made in Canada. Other means of payment include
debit cards, credit cards, electronic debit and credit
transfers, and chequing arrangements. The operators
of these various means of payment are conﬁdent that
these payment arrangements will function normally
in a year-2000 environment.
The Bank routinely maintains a large reserve of notes
to meet public demand in peak periods and in extraor-
dinary circumstances, such as the 1998 ice storm in
eastern Canada. Nevertheless, the Bank is working
with ﬁnancial institutions to prepare for a possible
year-2000-related increase in demand for bank notes
towards the end of 1999. While the Bank does not
expect demand for bank notes to increase dramati-
cally, it is important that Canadians be conﬁdent that
Clyde Goodlet, Department of Monetary and Financial Analysis
An earlier version of this article appeared in the Bank of England publication, Financial Sector Preparations for the Year 2000, Issue 5,
July 1999. Available on the Bank of England Web site: www.bank of england.co.uk48 BANK OF CANADA REVIEW • SUMMER 1999
bank notes will be available to meet their needs in
advance of the year 2000. Consequently, the Bank is
taking action in 1999 to signiﬁcantly increase the
inventory of bank notes. Additional bank notes are
being printed, and old notes that would otherwise
have been destroyed are being stockpiled.
The Bank of Canada has also been working with pri-
vate sector institutions (primarily the armoured car
companies and the deposit-taking institutions) to
ensure that the system used to distribute bank notes
can meet increased demands for bank notes across the
country. It is planned to hold the larger-than-normal
inventory of bank notes at distribution centres in vari-
ous parts of the country, to be prepared to expand the
hours of operation for all entities involved in note dis-
tribution, and to increase the frequency of deliveries
of bank notes to ﬁnancial institutions.
Individual Canadian deposit-taking institutions have
recently guaranteed to their customers that their
money will be safe in their Canadian bank accounts
and that their ﬁnancial records will be fully protected
before, on, and after 1 January 2000. This guarantee is
intended to provide depositors with the conﬁdence
that there is no need to withdraw these deposits and
convert them into bank notes. The Bank of Canada has
noted in its communications that, in addition to fore-
going interest payments, individuals who hold excess
cash can put themselves at risk of theft or loss and
perhaps personal injury.
Major Clearing and Settlement
Systems
The Bank of Canada has the formal responsibility
under the Payment Clearing and Settlement Act for
overseeing major clearing and settlement systems in
Canada. The Bank’s task is to ensure that appropriate
arrangements are in place to manage and control risk
so that if a participant in one of these systems should
fail, the ﬁnancial system would not be seriously dis-
rupted. Under the act, two systems have been desig-
nated as having the potential to pose systemic risk.
These systems are the Large Value Transfer System
(LVTS), operated by the Canadian Payments Associa-
tion (CPA), and the Debt Clearing Service (DCS), oper-
ated by The Canadian Depository for Securities
Limited (CDS).
The LVTS is a real-time funds-transfer system that
handles large-value or time-sensitive Canadian dollar
payments. The system became fully operational on
4 February 1999 and was fully year-2000 ready when
introduced. In addition, the CPA completed imple-
mentation of year-2000-ready versions of all of its
other mission-critical systems by December 1998,
including the Automated Clearing Settlement System
(which is the system that handles the clearing and set-
tlement of all Canadian dollar payments other than
those made through the LVTS). All systems have been
subjected to internal and “street testing” with users of
these systems and no improvements to these systems
will be made after 1 June 1999 without approval of the
Board of Directors of the CPA. Backup arrangements,
including manual backup procedures, are being
tested. The focus of the CPA during the rest of 1999
will be on reviewing and enhancing its business conti-
nuity plans to take account of year-2000 concerns, con-
tinuing to monitor the readiness of its members, and
retesting its systems. In regard to the latter activity, the
CPA and its members participated in the successful
mid-June year-2000 Global Payments Systems Test
organized by the New York Clearing House.
The DCS is an electronic clearing and settlement sys-
tem that handles Government of Canada securities as
well as corporate money market securities. A year-
2000-ready version of the DCS was implemented in
July 1998. In addition, CDS implemented a year-2000-
ready version of its other clearing and settlement sys-
tem (the Securities Settlement Service) in November
1998. (This system processes transactions involving
equities and certain other debt instruments not han-
dled by the DCS system.) CDS intends to perform re-
certiﬁcation tests throughout 1999 and has imple-
mented a freeze on system changes effective 30 June
1999. CDS is participating in industry-wide testing
coordinated by the Canadian Securities Administra-
tors,1 and organized a test of debt market infrastruc-
ture systems. This test, involving major market
participants and the processing of a range of securities
transactions, was successfully completed in March
1999. Since CDS is the only central facility in the Cana-
dian debt markets, this test served as the industry test
of Canada’s debt markets and demonstrated that all
components of the Canadian debt markets can operate
together in a year-2000 environment. CDS has also
reviewed and enhanced its contingency plans and has
1.  The Canadian Securities Administrators are composed of the thirteen pro-
vincial and territorial securities regulatory authorities in Canada.49 BANK OF CANADA REVIEW • SUMMER 1999
made provisions designed to deal explicitly with
issues related to the year 2000.
In addition to these major clearing and settlement sys-
tems, a number of other systems operate in Canada to
handle the processing of derivative transactions,
equity trades, and mutual fund transactions. Industry-
wide tests involving sample transactions covering the
trading, order entry, validation, clearance, and settle-
ment processes in these systems were successfully
completed from 27 May to 9 June 1999. The tests
involved all the key exchanges, clearing corporations,
and service providers as well as a large representative
sample of brokerage ﬁrms, mutual fund companies,
mutual fund dealers, and custodians. The Canadian
Securities Administrators are also monitoring the con-
tingency planning by the securities industry. Given
the progress to date, it is expected that the securities
industry will be able to operate in a reliable and nor-
mal manner heading into the year 2000 and beyond.
Regulated Financial Institutions
The Bank of Canada, the Ofﬁce of the Superintendent
of Financial Institutions (the supervisor of federally
incorporated ﬁnancial institutions), and the Canada
Deposit Insurance Corporation are members of a
group coordinated by the Department of Finance that
is gathering information on the state of preparedness
for the year 2000 of the Canadian ﬁnancial sector.
The Ofﬁce of the Superintendent of Financial Institu-
tions supervises over 400 institutions (banks, federally
incorporated trust and loan companies, and federally
incorporated insurance companies). The Ofﬁce has
established milestone dates (the last of which is
30 June 1999) for the completion of various activities
related to the year 2000, including system renovations,
system testing and implementation, review of coun-
terparties and borrowers for year-2000-related credit
risk, and the review and modiﬁcation of contingency
plans. The Ofﬁce periodically surveys the progress of
ﬁnancial institutions in meeting these milestones, and
at this time the vast majority of these institutions have
met the milestones. For example, the Canadian banks’
plans called for them to have their mission-critical sys-
tems ready for the year 2000 by 30 June 1999. These
institutions will continue to retest their systems
throughout the rest of the year, and a moratorium on
system changes will be in place at all banks by the
summer of 1999. The banks are also working with
their correspondents in other countries to ensure that
international transactions will occur as usual before,
during, and after the rollover into 2000. In addition,
the Canadian Bankers Association has established a
number of year-2000 working groups with broad rep-
resentation from the Canadian ﬁnancial sector. It has
also held seminars to provide information to busi-
nesses on preparing for the year 2000, and has under-
taken a number of communication initiatives to
provide banks’ customers with the conﬁdence that
Canadian banks will be able to operate in a reliable
and normal fashion. Other institutions supervised by
the Ofﬁce are reporting similar progress and activities.
Similar progress is also being reported by provincially
incorporated deposit-taking and insurance institu-
tions. In the securities sector, the Canadian Securities
Administrators have appointed the Ontario Securities
Commission (OSC) to take the lead on their behalf in
administering a year-2000 strategy. The OSC requires
securities market participants to report on their readi-
ness for the year 2000, and this information is publicly
available on the OSC Web site.
Contingency Planning
As noted earlier, individual ﬁnancial institutions and
the operators of shared systems in the ﬁnancial sector
are actively reviewing and enhancing their contin-
gency plans to take speciﬁc account of year-2000 con-
cerns. Financial institutions are primarily responsible
for having contingency plans to deal with possible
year-2000 problems, including plans that address pos-
sible liquidity needs. In addition, the Bank of Canada,
in co-operation with government and the private sec-
tor, is examining the role that it could play in dealing
with the consequences of a highly unlikely interrup-
tion in the operation of major clearing and settlement
systems,orwithcasesofextraordinaryliquidityneeds
at ﬁnancial institutions.
The central bank has the discretionary power to make
secured loans to chartered banks in Canada and to
certain other institutions. The Bank can take a wide
range of collateral from borrowing institutions and
these loans can be made for periods not exceeding six
months (such loans could be renewed). In addition,
the Bank can purchase a wide range of securities
either outright or using repos. The purpose of such
lending and asset purchases would be to provide
liquidity to and preserve conﬁdence in borrowing
institutions that are solvent, other deposit-taking insti-
tutions, and the ﬁnancial sector, including ﬁnancial50 BANK OF CANADA REVIEW • SUMMER 1999
markets, more generally. The Bank is making special
preparations so that it will be able to respond quickly
and effectively as a lender of last resort should signiﬁ-
cant liquidity needs develop. In addition, the Bank of
Canada is consulting with a number of other central
banks on a variety of issues related to the year 2000.
The Rollover Weekend
Financial markets and associated clearing and settle-
ment systems in Canada will be open on 31 December
1999. Typically, the volume of activity is relatively low
on the last business day of the year, reﬂecting prepara-
tions by market participants for the long holiday
weekend. One might anticipate that volumes on
31 December will be even lower than usual since some
market participants are considering adopting strate-
gies that would see routine processing of transactions
reduced on the business days around the millennium
weekend.2 Financial markets and clearing and settle-
ment systems will be closed on Monday, 3 January
2000 for the normal New Year’s Day holiday. The ﬁrst
day of business will be Tuesday, 4 January. This long
weekend provides an opportunity to retest systems,
both those of individual institutions and those oper-
ated as shared clearing and settlement systems.
Arrangements are being made among various public
and private sector participants to ensure that informa-
tion generated by these tests and other activities on
this weekend can be readily shared with all ﬁnancial
sector participants. The operators of the key infra-
structure services plan to establish “command cen-
tres” that will disseminate information to appropriate
parties and coordinate any actions in the unlikely
event that difﬁculties are encountered. Key staff at
ﬁnancial institutions, clearing and settlement systems,
and public sector agencies will be on-site during this
weekend, and other staff will be “on call” to quickly
ﬁx any year-2000 glitches that may surface.
Concluding Remarks
The potential for disruptions to systems related to the
year 2000 has been recognized as an issue that must be
addressed to prevent or limit interruptions to services
2.  For example, the Canadian Foreign Exchange Committee, a group com-
posed of foreign exchange market participants, is encouraging its members to
settle foreign exchange transactions on days other than the ﬁrst few days of
January 2000.
that could have widespread implications. The ﬁnan-
cial sector in Canada has been identiﬁed as a key sec-
tor, and ﬁnancial sector participants began to address
this issue early. A considerable amount of time and
resources has been devoted to identifying and correct-
ing potential problems and a great deal of progress
has been made. There is a strong expectation that the
ﬁnancial sector will be able to operate in a reliable and
normal fashion before, during, and after 1 January
2000. Indeed, a number of knowledgeable year-2000
commentators have singled out the Canadian ﬁnan-
cial sector, particularly the banking sector, as a world
leader in year-2000 readiness.
Nevertheless, there is still more to be done. Systems
will continue to be retested throughout the rest of
1999. Increasing attention is being devoted to contin-
gency planning. The government and private sector
ﬁnancial institutions are also closely monitoring the
progress being made by key infrastructure providers
(such as electricity and telecommunications) and are
receiving regular status updates. They are conﬁdent
that these suppliers will be year-2000 ready. The com-
munication of information to interested parties is a
vital activity that will continue to be addressed by pri-
vate and public sector entities. But with sustained
effort for the rest of 1999, it should be “business as
usual” for the Canadian ﬁnancial sector heading into
the year 2000 and beyond.
Additional information is available at the
following Web sites:
Bank of Canada: www.bank-banque-canada.ca
Canadian Bankers Association: www.cba.ca
Canadian Payments Association: www.cdnpay.ca
The Canadian Depository for Securities Limited:
www.cds.ca
Ofﬁce of the Superintendent of Financial Institutions:
www.osﬁ-bsif.gc.ca
Ontario Securities Commission: www.osc.gov.on.ca
Interac Association: www.interac.ca

Preparations by the Canadian Financial Sector for the Year 2000

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Preparations by the Canadian Financial Sector for the Year 2000

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