09.04.2012
By Terry Flanagan

RBS Software Glitch Highlights Legacy IT Concerns

Firms in the U.K. are being urged to upgrade their IT systems following a software glitch in late June that caused computer systems at the Royal Bank of Scotland (RBS) to crash.

The Treasury Select Committee, which today published a series of letters between high street bank RBS and the Financial Services Authority (FSA), the U.K.’s financial regulator, has concluded that the episode could have threatened the U.K.’s entire financial system.

“Every bank should be checking its IT systems,” said Andrew Tyrie, MP and chairman of the Treasury Select Committee. “We need to have confidence that such a failure cannot happen again.”

Firms are being warned that older legacy systems may not now be able to cope with today’s technological advancements.

“While legacy systems are in fact highly reliable, technology obsolescence represents an increasing operational risk, and regulators are unlikely to treat future such events so kindly,” said Daniel Mayo, practice leader, financial services technology, at U.K. consultancy Ovum.

The FSA, which is to conduct its own separate review on the IT meltdown at RBS, has written to the U.K’s nine largest banks and building societies to warn them against allowing such an issue to happen again. The problem saw around 17 million RBS customers unable to access their account for several weeks when a software update went wrong. RBS has put aside £125 million to pay compensation to customers affected by the breakdown.

“Much focus has been on disaster scenarios rather than ‘glitches’ that can escalate into major incidents as shown by the RBS processing failure,” said Mayo. “Banks need to ensure that they not only try to identify potential risks, and put necessary controls and procedures in place, but ensure that their general incident control, governance and procedures have the ability to escalate management attention quickly if minor incidents similarly escalate.”

Meanwhile, RBS was last month forced to admit that one of its foreign exchange traders had made a ‘fat finger’ trade in the euro-swiss franc pair. This caused a series of algorithmic trades from other traders to flood the market for a short period, causing the EUR/CHF pair to spike from 1.2015 swiss francs to 1.2093 in a matter of minutes on August 6 despite the Swiss National Bank (SNB), the Swiss central bank, having imposed a floor of 1.20 for the pair for almost a year. The trades, which occurred on the EBS foreign exchange platform, were deemed valid by EBS despite previous little stability in the pairing due to the SNB’s Swiss franc floor.

The trading error came hot on the heels of the more serious problems that Knight Capital faced, when the U.S. market maker was left close to bankruptcy last month following an algorithmic error that caused erratic trading activity and left the firm with billions of dollars of unwanted securities.

While in May, trading glitches marred Facebook’s initial public offering on the Nasdaq stock exchange in New York. All of these issues have brought calls for better monitoring technology to be introduced at trading venues as well as a restriction of high-frequency, or algorithmic, trading.

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