Year 2000 Computing Crisis: Federal Reserve Has Established Effective
Year 2000 Management Controls for Internal Systems Conversion (Letter
Report, 04/09/99, GAO/AIMD-99-78).

Pursuant to a congressional request, GAO reviewed the Federal Reserve
System's (FRS) efforts to remedy the year 2000 problem for its internal
computer systems.

GAO noted that: (1) FRS' year 2000 progress reports and plans show that
its Year 2000 program is on schedule with Office of Management and
Budget milestones; (2) further, GAO found that FRS has effective
controls to help ensure that its year 2000 progress is reported
accurately and reliably; (3) GAO also found that FRS is effectively
managing the renovation and testing of its internal systems and the
development and planned testing of contingency plans for continuity of
business operations; (4) despite its progress, FRS has much to
accomplish before it is fully ready for January 1, 2000, such as
completing validation and implementation of all its internal systems and
completing its contingency plans to address both unexpected internal
system failures and potential external business partner and public
infrastructure system failures; (5) however, FRS has plans for
completing remaining tasks, and has implemented management controls to
ensure that they are accomplished; and (6) while there is no way to
guarantee that significant year 2000-induced business failures will not
occur, if FRS implements its plans, it will have effectively reduced the
risk of such failures.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-99-78
     TITLE:  Year 2000 Computing Crisis: Federal Reserve Has Established 
             Effective Year 2000 Management Controls for
             Internal Systems Conversion
      DATE:  04/09/99
   SUBJECT:  Y2K
             Computer software verification and validation
             Systems conversions
             Strategic information systems planning
             Information resources management
             Computer software
             Data integrity
             Financial management systems
             Financial institutions
             Requirements definition
IDENTIFIER:  Y2K
             FRS Integrated Accounting System
             FRS Check Processing System
             FRS Fedwire Funds Transfer System
             FRS National Book Entry System
             FRS Treasury Direct System
             FRS Electronic Tax Application System
             FRS Automated Clearing House System
             FRS Bulkdata File Transfer System
             FRS Year 2000 Program
             
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AI99078.book GAO

United States General Accounting Office

Report to Congressional Requesters

April 1999 YEAR 2000 COMPUTING CRISIS

Federal Reserve Has Established Effective Year 2000 Management
Controls for Internal Systems Conversion

GAO/AIMD-99-78

United States General Accounting Office Washington, D.C. 20548
Lett er

Page 1 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

GAO

Accounting and Information Management Division

B-280502 Letter

April 9, 1999 The Honorable Robert F. Bennett Chairman,
Subcommittee on Financial

Institutions Committee on Banking, Housing, and

Urban Affairs United States Senate

The Honorable James A. Leach Chairman, Committee on Banking and

Financial Services House of Representatives

This report addresses the Federal Reserve System's (FRS) efforts
to remedy the Year 2000 problem 1 for its internal computer
systems and is the latest in a series of reports and testimonies
responding to your requests to review federal financial regulatory
agencies' Year 2000 efforts. 2

Established by the Federal Reserve Act of 1913, FRS is
instrumental to our nation's economic well-being by providing
depository institutions and government agencies services, such as
(1) processing checks, (2) transferring funds and federal
securities, and (3) auctioning, issuing, servicing, and redeeming
Treasury securities. If FRS does not effectively manage its Year
2000 program, key systems that process trillions of dollars could
malfunction or fail, potentially causing serious national and
international financial disruptions.

The objective of our review was to determine whether FRS has
established effective management structures and processes for
managing and reporting on its internal Year 2000 program. To
satisfy our objective, we analyzed FRS' Year 2000 program
management structures and processes against our

1 The Year 2000 problem is rooted in the way dates are recorded
and computed in automated information systems. For the past
several decades, systems have used two digits to represent the
year, such as 99 representing 1999, to conserve electronic data
storage and reduce costs. With this two- digit format, however,
the Year 2000 is indistinguishable from 1900, or 2001 from 1901,
etc. As a result, system or application programs that use dates to
perform calculations, comparisons, or sorting may generate
incorrect results or not function at all.

2 We previously reported and testified on the Year 2000 oversight
efforts of the Federal Deposit Insurance Corporation, Federal
Reserve System, National Credit Union Association, Office of the
Comptroller of the Currency, and Office of Thrift Supervision.
(See appendix III for a list of these products.)

B-280502 Page 2 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

Year 2000 guidance 3 to determine if important management controls
for increasing Year 2000 readiness and reducing Year 2000 risks
were in place. For eight mission-critical systems that support the
processing and movement of trillions of dollars in checks, funds,
and securities in a majority of FRS' core business processes used
by depository institutions and the federal government, 4 we
reviewed supporting documentation to verify that the controls were
functioning as intended. Appendix I provides a description of FRS'
core business functions and systems environment.

On February 25, 1999, we provided the Chairman of the Board of
Governors of the Federal Reserve System with a draft of this
report for review and comment. FRS' comments are discussed in the
Agency Comments section of this report and are included in
appendix II.

Results in Brief FRS' Year 2000 progress reports and plans show
that its Year 2000 program is on schedule with Office of
Management and Budget (OMB) milestones.

Further, we found that FRS has effective controls to help ensure
that its Year 2000 progress is reported accurately and reliably.
We also found that it is effectively managing the renovation and
testing of its internal systems and the development and planned
testing of contingency plans for continuity of business
operations.

Despite its progress, FRS has much to accomplish before it is
fully ready for January 1, 2000, such as completing validation and
implementation of all its internal systems and completing its
contingency plans to address both unexpected internal system
failures and potential external business partner and public
infrastructure system failures. However, FRS has plans for
completing remaining tasks, and has implemented management
controls to ensure that they are accomplished. While there is no
way to guarantee that significant Year 2000-induced business
failures will not

3 Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-
10.1.14, issued as an exposure draft in February 1997; issued in
final in September 1997); Year 2000 Computing Crisis: Business
Continuity and Contingency Planning (GAO/AIMD-10.1.19, issued as
an exposure draft in March 1998; issued in final in August 1998);
Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21,
issued as an exposure draft in June 1998; issued in final in
November 1998).

4 Integrated Accounting System, Bulkdata File Transfer System,
Check Processing Systemfor the Dallas Reserve Bank, Funds Transfer
System, National Book Entry System, Treasury Direct, Electronic
Tax Application, and Fed Automated Clearing House. (See the scope
and methodology section of this report for a description of these
systems.)

B-280502 Page 3 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

occur, if FRS implements its plans, it will have effectively
reduced the risk of such failures.

FRS Has Reported Meeting OMB Year 2000 Milestones

FRS' reported status of its Year 2000 efforts meets OMB
milestones. As of December 1998, FRS reported that renovation of
mission-critical internal systems was complete and that over 75
percent of these systems have been validated as Year 2000
compliant. FRS' plans call for implementing all of its validated
mission-critical systems, i.e., moving them back into production,
by OMB's Year 2000 implementation milestone of March 31, 1999. FRS
also plans to develop (1) contingency plans for ensuring
continuity of business operations and (2) plans for supporting
event management by the end of March 1999--and to test these plans
beginning in April 1999.

FRS Is Effectively Managing Its Year 2000 Program

FRS has established and implemented effective Year 2000 management
controls, including structures and processes for overall program
management, system renovation and testing, and contingency
planning for continuity of business operations, as described in
our Year 2000 guides. For example, FRS (1) has assigned management
authority and responsibility for Year 2000 activities, (2) has
defined Year 2000 compliance criteria, (3) is engaging independent
verification and validation agents, (4) has issued Year 2000 test
guidance specifying, among other things, the types of tests to be
conducted (e.g., unit, integration, system acceptance, and end-to-
end), (5) is actively managing risks, and (6) is analyzing
existing emergency and disaster recovery plans and augmenting them
to address Year 2000 contingencies. FRS is also ensuring that its
management controls are operating as intended. Specifically, our
analysis of renovation and testing activities on selected
components of the eight aforementioned mission-critical systems
demonstrated that FRS' Year 2000 policies, procedures, and
guidance governing such things as test plans, conditions, outputs,
and documentation, were being satisfied.

FRS Has Established Effective Structures and Processes for Year

2000 Reporting

FRS has established and implemented effective controls to help
ensure that its Year 2000 reports are accurate and reliable. For
example, FRS has defined the frequency, format, and content of the
Year 2000 information to be reported. Also, the program office
periodically reviews the reports' contents to determine that the
reporting requirements are satisfied and that inaccurate or
obsolete data are removed. In addition, the general auditors at
each reserve bank independently review the status and reported

B-280502 Page 4 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

progress of Year 2000 projects at their banks for compliance with
the program office policies, procedures, guidance, and plans. For
example, the general auditor's compliance review of the Electronic
Tax Application at the Minneapolis Reserve Bank disclosed only two
minor documentation issues that the bank subsequently resolved.

To determine if FRS' reporting controls were functioning as
intended, we analyzed internal reports on the status of selected
components of the eight aforementioned mission-critical systems
against FRS' reporting requirements and found that the reports
were complete. Also, we traced the reported status information
back to supporting documentation and found no discrepancies or
inaccuracies.

Scope and Methodology

To assess FRS' management structures and processes, we reviewed
FRS' Year 2000 program management plans, guidance, procedures, and
organizational structures relating to Year 2000 renovation,
testing, contingency planning, reporting, quality
assurance/independent verification and validation, and risk
management, and compared them to GAO's Year 2000 guides. In
particular, we analyzed the following: Year 2000 project plan,
test strategy, technical reference manual, risk assessment,
guiding principles, contingency policies and guidelines, business
resumption plan guidance, and a variety of documents maintained on
the FRS Year 2000 intranet web site.

We then reviewed system documentation to determine whether
remediation and reporting requirements specified in FRS' plans,
procedures, and guidance were being satisfied for selected
components of eight of FRS' mission-critical systems. More
specifically, we judgmentally selected at least 10 software
components for each of the 8 systems and compared internal Year
2000 status reports on each to supporting project documentation. 5
For these systemcomponents, we reviewed relevant Year 2000
documentation, including project plans, schedules, and status
reports; test plans, test scripts, and test results; source code;
configuration management plans; quality assurance plans and
reports; audit reports; and approvals for moving renovated code
back into production.

5 We did not statistically sample FRS system components. Instead,
we selected components that satisfied one or more of the following
criteria: critical to the system's ability to function as
intended, large in terms of software size, and recently completed
testing.

B-280502 Page 5 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

The systems that we reviewed were:  Integrated Accounting System,
the system that maintains the general

ledger and processes all accounting entries for FRS;  Bulkdata
File Transfer System, the file transfer utility used by FRS to

exchange data between FRS applications and with depository
institutions and government entities;  Check Processing System for
the Dallas Reserve Bank, one of the 12

unique FRS check systems;  Fedwire Funds Transfer System, an
electronic payment system used by

depository institutions and the U.S. Treasury for the transfer of
large- dollar 6 amounts, including certain federal government
receipts and disbursements;  National Book Entry System, a
consolidated book-entry securities 7

processing system that (1) maintains the commercial book-entry
securities accounts of depository institutions and certain
governmental entities and (2) transfers securities to and from
participating institutions, including the U.S. Treasury;  Treasury
Direct, a system of book-entry securities accounts for

institutions and individuals that allows individuals and
institutions to hold their securities directly with the Treasury;
Electronic Tax Application, an automated system by which
businesses

report and pay federal taxes on the day they are due through their
depository institutions, which forward the data to the Treasury
through the reserve banks; and  Fed Automated Clearing House, a
nationwide system designed for the

electronic exchange of low-dollar, repetitive retail payments
between participating depository institutions as a substitute for
paper checks.

We selected these systems because they are mission-critical
systems that support a majority of the FRS core business processes
used by depository institutions and the federal government.
Collectively these processes provide cash; process checks; make
electronic payments and settlements; receive tax receipts;
maintain accounts; and issue, transfer, and redeem federal
securities.

6 According to FRS, the average 1998 funds transaction was about
$3.35 million, with daily averages of about 390,000 transactions
totaling over $1.3 trillion.

7 Book-entry securities are marketable securities in electronic
form issued primarily by the federal government. According to FRS,
the 1998 average book-entry transaction was about $13.8 million,
with daily averages of over 57,000 transactions totaling nearly
$785 billion.

B-280502 Page 6 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

To supplement our documentation review, we also interviewed
officials from the Board of Governors of the FRS and at the
Federal Reserve Banks of Boston, Dallas, New York, Minneapolis,
Philadelphia, and San Francisco. Interviewees included staff from
audit, program management, project management, reserve bank
management, and technical services.

Our audit work was performed from May 1998 through March 1999 in
accordance with generally accepted government auditing standards.

Agency Comments In its comments on a draft of this report, FRS
agreed with the report's findings and conclusions. FRS also stated
that during the remainder of

1999, its highest priority is to complete and rigorously test its
contingency plans.

We are sending copies of this report to Senator Richard Bryan,
Senator Christopher Dodd, Senator Phil Gramm, Senator Paul
Sarbanes, Representative Stephen Horn, Representative John
LaFalce, and Representative Jim Turner, in their capacities as the
Chair, Vice Chair, or Ranking Minority Member of Senate and House
Committees and Subcommittees. We are also sending copies to: The
Honorable Robert Rubin, Secretary of the Treasury; The Honorable
Alan Greenspan, Chairman, Board of Governors of the Federal
Reserve System; The Honorable John D. Hawke, Jr., Comptroller of
the Currency; The Honorable Donna Tanoue, Chairman, Federal
Deposit Insurance Corporation; The Honorable Ellen Seidman,
Director, Office of Thrift Supervision; The Honorable Norman E.
D'Amours, Chairman, National Credit Union Administration; The
Honorable John Koskinen, Chair, President's Council on Year 2000
Conversion; The Honorable Jacob Lew, Director, Office of
Management and Budget; and The Honorable Barry Snyder, Inspector
General, Federal Reserve Board. Copies will also be made available
to others upon request.

B-280502 Page 7 GAO/AIMD-99-78 Federal Reserve Year 2000
Management Controls

If you or your staffs have any questions about this report please
contact me at (202) 512-6240 or by e-mail at [email protected].
Major contributors to this report are listed in appendix IV.

Randolph C. Hite Associate Director Governmentwide and Defense

Information Systems

Page 8 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Contents Letter 1

Appendix I Description of FRS' Core Business

Functions and Systems Environment

10

Appendix II Comments From the Federal Reserve System

12

Appendix III GAO Reports and Testimonies on Federal Depository
Institutions Regulators' Year 2000

Preparations

13

Appendix IV Major Contributors to This Report

14

Abbreviations

FRAS Federal Reserve Automation Services FRS Federal Reserve
System OMB Office of Management and Budget

Page 9 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Page 10 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Appendix I

Description of FRS' Core Business Functions and Systems
Environment Appendi x I

FRS' mission is to provide a safe, flexible, and stable monetary
and financial system for the country. To accomplish its mission,
FRS has established core business functions and organized its
operations to (1) conduct monetary policy, (2) maintain the
stability of financial markets, (3) provide services to financial
institutions and other governmental agencies, and (4) supervise
and regulate banks and bank-holding companies. Each of these
business functions is described below.

 In conducting monetary policy, the Federal Reserve carries out
activities to influence the money supply and credit conditions in
pursuit of full employment and stable prices. For example, FRS
affects the money supply by buying and selling U.S. securities in
the open market (known as open-market operations). FRS also buys
and sells foreign currencies and securities to affect the dollar's
exchange rate and help stabilize financial markets
internationally.  In maintaining the stability of financial
markets, FRS increases the

liquidity of markets by temporarily supplying extra reserves to
the banking system through open-market operations and lends funds
to financial entities through its discount window operations. FRS
also safeguards the integrity and efficiency of the nation's
payment systems.  In assisting financial institutions, FRS
provides such services as check-

clearing and processing and electronic funds transfers between
financial institutions. For example, FRS reported in 1998, that it
made a daily average of about 390,000 Fedwire electronic funds
transfers-- totaling over $1.3 trillion--between financial
institutions. FRS also provides services for the U.S. Department
of the Treasury and other agencies. For instance, it distributes
and receives Federal Reserve notes (paper money) and coins, holds
U.S. securities to back its notes, and ensures that enough
currency and coins are in circulation to meet public demand. It
also auctions, issues, and redeems Treasury securities (e.g.,
bills, notes, and bonds) used to fund federal government
operations.  In supervising and regulating financial institutions,
FRS oversees

(1) more than 5,000 U.S. bank-holding companies, (2) 994 state
chartered banks that are members of the Federal Reserve, (3) 15
Edge Act 1 and agreement corporations, (4) the foreign activities
of member banks, and (5) the U.S. operations of 256 foreign banks.
It does this by

1 Edge Act corporations are corporations chartered by FRS to
engage in international banking activities. The Board of Governors
of FRS reviews and approves the applications to establish Edge Act
corporations and also has supervisory responsibility for examining
the corporations and their subsidiaries.

Appendix I Description of FRS' Core Business Functions and Systems
Environment

Page 11 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

establishing standards for the safe and sound operation of
financial institutions and examining institutions to ensure these
standards are followed. As part of this effort, FRS ensures that
institutions are adequately mitigating Year 2000 risks. 2

To perform these functions, FRS relies extensively on information
technology and has a Federal Reserve Automation Services (FRAS)
organization to provide mainframe data processing and network
services to the 12 Federal Reserve Banks. FRAS operates three data
centerslocated at the New York, Richmond, and Dallas Federal
Reserve Banks supporting 61 applications that are used by all
Reserve Banks, such as the Fedwire Funds Transfer System. These
data centers also support another 50 applications that are used by
selected Reserve Banks. Depository institution and Reserve Bank
users access these applications and data via the FEDNET
telecommunications system, which is controlled and operated by
FRAS' primary network operations center in Richmond, Virginia, and
its alternate network operations center in Chicago, Illinois.

2 Our work on FRS' Year 2000 oversight of financial institutions
found that FRS was taking the Year 2000 problem very seriously and
had devoted considerable resources and effort to ensure that the
institutions it oversees mitigate Year 2000 risks. (See Year 2000
Computing Crisis: Federal Reserve Is Acting to Ensure Financial
Institutions Are Fixing Systems, But Challenges Remain (GAO/AIMD-
98-248, September 17, 1998).)

Page 12 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Appendix II

Comments From the Federal Reserve System Appendi x I I

Page 13 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Appendix III

GAO Reports and Testimonies on Federal Depository Institutions
Regulators' Year 2000 Preparations Appendi x I I I

Year 2000 Computing Crisis: Federal Depository Institution
Regulators Are Making Progress, but Challenges Remain (GAO/T-AIMD-
98-305, September 17, 1998).

Year 2000 Computing Crisis: Federal Reserve Is Acting to Ensure
Financial Institutions Are Fixing Systems, But Challenges Remain
(GAO/AIMD-98- 248, September 17, 1998).

Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure
Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-
98-116, March 24, 1998).

FDIC's Year 2000 Preparedness (GAO/AIMD-98-108R, March 18, 1998).
Year 2000 Computing Crisis: Office of Thrift Supervision's Efforts
to Ensure Thrifts' Systems Are Year 2000 Compliant (GAO/T-AIMD-98-
102, March 18, 1998).

Year 2000 Computing Crisis: Federal Deposit Insurance
Corporation's Efforts to Ensure Bank Systems are Year 2000
Compliant (GAO/T-AIMD-98- 73, February 10, 1998).

Year 2000 Computing Crisis: Actions Needed to Address Credit Union
Systems Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998).

Year 2000 Computing Crisis: National Credit Union Administration's
Efforts to Ensure Credit Union Systems Are Year 2000 Compliant
(GAO/T-AIMD- 98-20, October 22, 1997).

Page 14 GAO/AIMD-99-78 Federal Reserve Year 2000 Management
Controls

Appendix IV

Major Contributors to This Report Appe ndi x I V

Accounting and Information Management Division, Washington, D.C.

Keith Rhodes, Technical Director Gary Mountjoy, Assistant Director
Ronald Hess, Assistant Director

Atlanta Field Office Carl Higginbotham, Assistant Director Tonia
Brown, Senior Evaluator

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