OCC Update
BDUG Annual Meeting
September 24, 2013
Tish Dalton, Risk Specialist
Asset Management Group
Office of the Comptroller of the Currency
Washington, DC
1
Disclosure
• The views and opinions expressed in this presentation are my
own, and do not necessarily represent those of the Office of
the Comptroller of the Currency.
• I’ll refer frequently to national bank and Federal savings
association regulations and guidance – while similar in
principle, you should refer to the regulations and guidance of
your primary regulator.
2
Overview
•
•
•
•
•
OCC Asset Management Supervision
OCC Asset Management Regulation and Guidance
Key Risks/Asset Management Supervisory Focus
Asset Management Examination Findings
Discussion Topics
– AM Operations Training
– AM Operations Best Practices
– DTC Initiatives
• Appendix I: OCC Asset Management Guidance
• Appendix II:
3
The Mission of the OCC
“assuring the safety and soundness of, and
compliance with laws and regulations, fair access
to financial services, and fair treatment of
customers by, the institutions and other persons
subject to its jurisdiction.”
•
From Title III of the Dodd-Frank Act
4
OCC Asset Management
Supervision
Statistics and Structure
5
OCC Supervision
• The OCC regulates over 1,250 national banks and more than 500
Federal savings associations.
• They range from large complex banks with global footprints to local
community banks.
• Includes 63 limited purpose national trust banks and 15 trust only
thrifts.
• Approximately 42% of all national banks and 28% of Federal savings
associations have Asset Management (AM) activities, which include:
• Fiduciary services including trust and investment management
services;
• Institutional custody and securities lending activities; and,
• Retail brokerage activities.
6
OCC Asset Management
• Over 150 examiners with specialized Asset Management expertise
perform ongoing supervision both on and off bank premises.
• Large Banks – Resident Examiner Program
• Midsize/Community Banks – Field Office Staff Program
• National Trust Banks – Focus on limited purpose trust companies
• OCC AM Policy Group in D.C. works extensively with OCC’s
examiners on policy guidance for the industry, internal training, and
addressing specific bank issues, including potential violations and
matters requiring attention.
• AM Policy also works closely with OCC Legal and other internal and
external groups on matters including Dodd Frank (Volcker Rule);
FSOC issues (including identification of systemically important
entities and MMF risks); and interpretations of Regs 9 and 12.
7
Fiduciary & Related Assets
June 30, 2013
(all national banks, insured state banks, and FSAs)
Non-Managed
Total Assets
% of Fid
Assets
FIDUCIARY AND RELATED ASSETS ($000s)
Managed
Personal trust and agency accounts
$670,208,418
$297,069,107
$967,277,525
5%
Employee benefit - Defined contribution
$823,287,554
$2,785,112,124
$3,608,399,678
19%
Employee benefit - Defined benefit
$962,910,032
$3,701,054,536
$4,663,964,568
24%
Other employee benefit and retirement related
$285,668,463
$2,521,958,161
$2,807,626,624
14%
$36,243,554
$2,581,792,141
$2,618,035,695
13%
$1,304,064,214
$65,161,690
$1,369,225,904
7%
Foundation and endowment
$210,046,205
$114,457,925
$324,504,130
2%
Other fiduciary accounts
$426,449,786
$2,625,213,596
$3,051,663,382
16%
$4,718,878,226 $14,691,819,280 $19,410,697,506
100%
Employee benefit & retirement related trust & agency
Corporate trust and agency accounts
Investment management and investment advisory
Total Fiduciary Accounts
Custody and Safekeeping Accounts
Total Fiduciary & Custody/Safekeeping Accounts
$75,903,948,250 $75,903,948,250
$95,314,645,756
8
OCC Asset Management
Guidance
Recent and Upcoming OCC & AM
Group Guidance
9
AM Group Guidance
• OCC’s objective to integrate and consolidate OTS and OCC
regulations. Consolidated regulations are still in
development. As with most Federal rulemakings, there will
be opportunities for industry comment.
• Handbook update project – OCC’s AM Policy Group publishes
ten booklets in the Comptroller’s HB series. We are working
on re-issuing each of these – starting with Retirement Plan
Products and Services; Collective Investment Funds; Conflicts
of Interest; and Retail Non-Deposit Products.
• Where possible, older guidance (such as the remaining Trust
Banking Circular and certain AM Banking Circulars) will be
rescinded and incorporated into revised HBs.
10
AM Group Guidance
• OCC Revised Short-Term Investment Fund (STIF) Regulation
• Revises 12 CFR 9.18(b)(4)(ii)(B); filing requirements described in OCC
Bulletin 2013-8 (March 2013)
• Became effective July 1, 2013
• Objectives: Enhanced safeguards designed to address potential risk of loss
to a participant’s principal; achieve a level of consistency with regulation
of comparable MMFs (Rule 2a-7)
• STIF Final Rule requirements include:
• Measures governing the nature of a STIF’s investments
• Ongoing monitoring of a STIF’s amortized cost and mark-to-market values
• Assessment of potential changes in STIF’s mark-to-market value under
adverse market conditions
• Greater transparency and reporting of STIF’s holdings
• Procedures to protect fiduciary accounts from undue dilution in the event
that the STIF loses ability to maintain a stable NAV.
• Fund level portfolio information – disclosures to OCC and STIF participants
within five business days of month end.
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Key Risks & Asset Management
Examination Focus
12
Key Risks
• Market Volatility
• Impact on earnings
• Investment Management & Liquidity Risks
• Product selection, suitability, and potential conflicts of interest
• Regulatory Change
• Resources to manage regulatory change and implement necessary
platform and process changes.
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Key Risks
•
•
•
•
Investment Management Risk
AM Governance Risk
AM Operations Risk
Regulatory Reform Risk
14
Key Risks
• Investment Management Risk
• Market influences
• Government policies and politics
• Economic uncertainty
• Interest rates Investment Opportunities/Risks
• Use of increasingly complex products
• Reaching for yield
• Potential conflicts of interest
• Need for Heightened Investment Risk Management
• Initial and ongoing due diligence
• Investment selection, retention and disposition process
• Analytical tools and systems, with an emphasis on credit and
interest rate risk
• Valuation practices
15
Key Risks
• Investment Management Risk – Examination Focus
•
New product approval processes
• Increasing complexity/increasing need for due diligence
• Focus on conflicts of interests
• Review of Investment models/analytical tools
• Refer to OCC Bulletin 2011-12 “Sound Practices for Model Risk
Management
• Initial and ongoing due diligence
• Should accurately evaluate risk on an individual security and
portfolio basis.
• Pre-purchase and ongoing credit analysis of fixed income
securities
• Emphasis on analytical tools, and particularly fixed income credit
analytics.
• Investment portfolio performance
• Under or over performance
• Risk management and controls.
16
Key Risks
• AM Governance Risk
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•
•
•
•
Committee and Management Structures
Management, Board, and Committee Reporting
Control Infrastructure Evolution
Conflicts of Interest
Metrics
• Supervisory Focus
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New product due diligence and approval
Internal and third party vendor management
Staffing levels and expertise
Conflicts of interest
17
Key Risks
• AM Operations Risks
• Core Operational Processes – Capability/Capacity of Legacy Systems
• System capabilities – new products, regulations, industry
infrastructure changes
• Manual Processes/“Work-Arounds”/User Developed Tools
• Internal Controls
•
•
•
Money Movement
Asset Custody
Reconciliations
• Oversight of Internal and Third Party Vendors
• Fraud
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Key Risks
• Regulatory Reform Risk
• Significant Regulatory Change
– Dodd-Frank Implementation Continues
– SEC and DOL proposals (money market reform, muni advisor,
fiduciary standard, etc.)
– CFPB’s Involvement in AM Activities Remains Uncertain
– Increased focus on Financial Market Utilities
• Resources and Infrastructure to Analyze and Implement Change
– Oversight
– Project teams
– Reporting
• Legal, Audit, Compliance, Risk Management involvement
19
Examination Issues and Findings
•
Review of fiduciary accounts – failure to comply with 12 CFR
9.6 - pre-acceptance, initial post-acceptance, annual review
•
•
•
•
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Inadequate account acceptance
Not including all assets in review
Adequacy of assets in meeting investment objective
Not meeting requirements of OCC Bulletin 2008-10
Audit requirements – failure to comply with 12 CFR 9.9
•
•
•
•
Inadequate scope of audit
Not including all significant fiduciary activities
Ineffective audit program
Majority of audit committee members are involved in day-to-day
oversight of trust area
20
Examination Issues and Findings
• Account Administration
• Adequacy of administrative review process
• Discretionary distribution process
• Self-directed IRAs
• Asset/Money Movement
• Free deliveries
• Disbursement controls
• Vendor Management
• Inadequate monitoring of 3rd party providers
21
Examination Issues and Findings
• Pledge Requirements of 12 CFR 9.10
• Expiration of TAG – increase in self-deposits > FDIC coverage
• Fiduciary control of collateral
• Computation of required collateral
•
•
•
•
Discretionary and non-discretionary funds awaiting investment/distribution
Sweep vehicles/short term deposits
Suspense accounts
Outstanding checks
• Requirements of 12 CFR 9.12
• Confirms - Notification by agreement
• Requirements for fixed income securities
• Officer and employee personal securities transaction reports
• Portfolio Accounting – P & I allocation/cash management
• Fraud – disbursement controls
22
Discussion Topics
23
AM Operations - Training
• Discussion Topic – Operations Training
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–
–
–
–
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Systems training
Internal process training
Regulatory compliance training
Line of business/product knowledge training
Securities Industry Training
Risk assessment
– Challenges
• Keeping current
• Time constraints
• Costs
24
AM Operations - Best Practices
– AM Operations Best Practices
– Effective front-end controls
– Straight through automated processing
– Workflows and procedures that focus on “hand-offs” from one
business group to another, including to service providers
– Well thought out system access profiles, ongoing due diligence
– Effective exception reporting/aging/escalation
– Procedures that take processes “full-circle” to ensure completion
– Third party servicer oversight/in-house expertise
– Management and staff expertise – including specialized products
and services
25
AM Operations – DTC Initiatives
• DTC Initiatives
– DTC Reduction of RAD limits
– Settlement Finality Initiatives
– Settlement Web
– OCC focus
• Impact on systemic risk (FSOC perspective)
• Impact on participant banks’ risk profiles
• Bank due diligence and oversight
– Systems/risk analysis
– Process Updates
– Front-end controls
– Employee training
26
Appendix I
Selected OCC Asset Management
Guidance
OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of
the Comptroller’s Handbook for Asset Management are available at
www.occ.gov
OCC: Capital Markets: Asset Management
27
OCC AM Guidance
• Comptrollers Handbook for Asset Management Booklets
–
–
–
–
–
–
–
–
–
Asset Management (2000)
Asset Management Operations & Controls (2011)
Collective Investment Funds (2005)
Conflicts of Interest (2000)
Custody Services (2002)
Investment Management Services (2001)
Personal Fiduciary Services (2002)
Retirement Plan Services (2007)
Unique and Hard to Value Assets (2012)
28
OCC AM Guidance
•
Comptroller’s Handbook for Selected Safety and
Soundness – Selected Booklets:
–
–
–
–
–
–
–
Community Bank Supervision (2010)
Large Bank Supervision (2010)
Bank Supervision Process (2007)
Internal and External Audits (2003)
Internal Control (2001)
Insurance Activities (2002)
Retail Nondeposit Investment Sales (1994)
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Selected OCC Bulletins
– OCC 2013-8, Short-term Investment Funds Reporting Requirements
– OCC 2012-31, Short-Term Investment Funds
– OCC 2011-11, Risk Management Elements: Collective Investment Funds
and Outsourced Arrangement
– OCC 2011-12, Supervisory Guidance on Model Risk Management
– OCC 2010-37, Self-Deposit of Fiduciary Funds
– OCC 2009-19, New Notice Requirements for Sweep Accounts
– OCC 2008-10, Fiduciary Activities of National Banks: Annual Reviews of
Fiduciary Accounts Pursuant to 12 CFR 9.6(c)
– OCC 2008-5, Conflicts of Interest: Risk Management Guidance –
Divestiture of Certain Asset Management Businesses
– OCC 2007-42, Bank Securities Activities: SEC's and Federal Reserve's
Final Regulation R
– OCC 2007-21, Supervision of National Trust Banks: Revised Guidance:
Capital and Liquidity
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Selected OCC Bulletins
– OCC 2007-7, Soft Dollar Guidance: Use of Commission Payments by
Fiduciaries
– OCC 2007-6, Registered Transfer Agents: Transfer Agent Registration,
Annual Reporting, and Withdrawal from Registration
– OCC 2006-24, Interagency Agreement on ERISA Referrals
– OCC Bulletin 2004-20, Risk Management of New, Expanded, or Modified
Bank Products or Services: Risk Management Process
– OCC 2004-2, Banks/Thrifts Providing Financial Support to Funds Advised
by the Banking Organization or its Affiliates
– OCC Bulletin 2002-16, Bank Use of Foreign-Based Third-Party Service
Providers
– OCC Bulletin 2001-47, Third-Party Relationships: Risk Management
Principles
– OCC Bulletin 2001-35, Examination Procedures to Evaluate Compliance
with the Guidelines to Safeguard Customer Information
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Appendix II: Asset Management
Statistics
32
Total Fiduciary Assets
• All Banks and FSAs: 2006 – 1Q2013
$25
$22.9
$20.0
$20.3
$20.0
$20
$18.2
$20.5
$18.8
$18.6
$17.5
$18.2
$19.5
$18.8
$18.5
Dec-12
$22.6
Sep-12
$21.8
$10
Mar-13
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
$0
Jun-07
$5
Dec-06
Trillion
$15
33
Total Custody Assets
• All Banks and FSAs: 2006 – 1Q2013
$90
$74.4
$76.9
$76.5
Mar-13
$80.1
Dec-12
$77.6
$80
$70.9
$70
$67.6
$57.8
$60
$47.4
$57.1
$50.4
$57.1
$50.3
$51.9
$42.3
$40
$30
$20
Sep-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
$0
Dec-06
$10
Jun-06
Trillion
$50
$60.4
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Managed Assets: Fiduciary Accts
All Banks and FSAs: 2009 - 2012
28%
Common & Collective Funds
25%
Other common & Preferred Stocks
Other Notes & Bonds
Miscellaneous
Other Short-term Obligations
8%
Equity MFs
Munis
8%
Other MFs
Unregistered & P/E Funds
MMMFs
US Treasury/Gov. Agency
Real Estate
Deposits
0%
5%
10%
2012
15%
20%
25%
30%
35%
2009
35
CIFs & CTFs
All Banks and FSAs: 2001 – 1Q 2013
$3.50
$3.00
$2.94
$3.00
$2.68
$2.51
$2.50
$2.36
$2.29
$2.01
$2.02
$2.37
$2.34
$2.40
$2.12
$2.00
$2.00
$1.75
$1.74
$1.67
$1.62
$1.51
$1.50
$1.00
$1.62
$1.70
$1.42
$1.33
$0.85
$1.64
$1.26
$0.90
$0.50
$0.00
2001
2002
2003
2004
2005
2006
2007
National Banks
2008
2009
2010
2011
2012
2012
All Banks
36
CIFs & CTFs
All Banks and FSAs: 4Q 2011 – 1Q 2013
4Q2011
$ Amount of Funds
Domestic
Equity
All FDIC-insured State Banks (48)
$239,462,434
$109,605,198
$86,687,952
$36,934,801
$1,682,485
$168,284,562
$43,389,037
All National Banks (57)
$430,704,299
$362,048,074
$66,153,193
$386,968,517
$4,714,422
$111,534,622
$58,863,573 $1,420,986,700
$1,562,627
$715,588
$1,854,124
$1,077,871
$35,750
$0
Total (109)
$671,729,360
$472,368,860
$154,695,269
$424,981,189
$6,432,657
$279,819,184
1Q2013
$ Amount of Funds
Domestic
Equity
All FDIC-insured State Banks (35)
$291,764,349
$137,417,418
$94,065,448
$44,126,388
$1,571,467
$145,460,201
$42,235,774
All National Banks (53)
$545,500,938
$500,861,642
$105,044,565
$326,236,184
$4,116,110
$119,479,357
$67,366,104 $1,668,604,900
$2,255,560
$7,726,692
$4,812,360
$3,373,368
$28,609
$0
$839,520,847
$646,005,752
$203,922,373
$373,735,940
$5,716,186
$264,939,558
All Federal Savings Banks (4)
All Federal Savings Banks (5)
Total (93)
International
Equity
International
Equity
Stock/Bond
Blend
Stock/Bond
Blend
Taxable Bond
Taxable Bond
Municipal
Bond
Municipal
Bond
STIF/Money
Market
STIF/Money
Market
Specialty/
Other
Total
$8,206,552
$686,046,469
$13,452,512
$110,459,162 $2,120,485,681
Specialty/
Other
Total
$0
$756,641,045
$18,196,589
$109,601,878 $2,443,442,534
37
Fiduciary & Related Svcs Revenue
All Banks and FSAs: 2002 – 1Q 2013
1,600
$10
$9
1,400
$8
1,200
S&P 500
1,000
$6
800
$5
$4
600
Revenue $Billions
$7
$3
400
$2
200
$1
0
$0
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Revenue
S&P 500
38
OCC Contact Information
Tish Dalton
Asset Management Group
Credit & Market Risk Division
Patricia.Dalton@OCC.treas.gov
202 649-6401
39