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11 OCC Update BDUG Annual Meeting October 24, 2012 Tish Dalton, Risk Specialist Asset Management Group Office of the Comptroller of the Currency Washington,

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Presentation on theme: "11 OCC Update BDUG Annual Meeting October 24, 2012 Tish Dalton, Risk Specialist Asset Management Group Office of the Comptroller of the Currency Washington,"— Presentation transcript:

1 11 OCC Update BDUG Annual Meeting October 24, 2012 Tish Dalton, Risk Specialist Asset Management Group Office of the Comptroller of the Currency Washington, D.C.

2 2 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. Ill 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. Disclosure…

3 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 4 OCC – National Bank and Federal Savings Association AM Supervision

5 55 OCC regulates 1,304 national banks & 566 Federal savings associations. They range from large complex banks with global footprints to local community banks. Includes 70 limited purpose national trust banks and 15 trust only thrifts. Approximately 43% of all national banks and 26% of Federal savings associations have Asset Management (AM) activities, which include: Fiduciary and custody services; Retail brokerage; Investment banking and advisory services; and, Securities lending activities.

6 66 Large Banks: Deputy Comptroller, Examiner in Charge (EIC), AM Team Leader (On-site teams) Mid-size Banks: Deputy Comptroller, Assistant Deputy Comptroller, EIC, Functional EIC – AM Examiner Community Banks: Deputy Comptroller, Assistant Deputy Comptroller, Portfolio Manager, AM Examiner Trust Companies: Assistant Deputy Comptroller, Portfolio Manager – national cadre of AM Examiners OCC – National Bank and Federal Savings Association AM Supervision

7 7 Examiners are supported by Five AM Lead Experts Northeast District Southern District Central District Western District Mid-Size banks AM Policy Group Credit and Market Risk Division/Chief National Bank Examiners office Handbooks, bulletins, other guidance Training, field support, and on-site exam support OCC – National Bank and Federal Savings Association AM Supervision

8 8 Supervision by Risk Objective: Assess banks ability to identify, measure, monitor and control risk Risk Assessment System (RAS) – For 8 risk categories, determine Quantity of risk/Quality level of risk management/Direction. AM focus: Compliance, Operational, Reputation, Strategic, Credit FFIEC: Uniform Ratings System (CAMELS). FFIEC: Uniform Interagency Trust Ratings System (UITRS) – OCC focus: Composite Rating. OCC – National Bank and Federal Savings Association AM Supervision

9 99 OTS/OCC Integration (Effective July 21, 2011) Federal savings association (FSA) charters are still in effect. OCC now supervises FSAs. (FDIC supervises state savings associations, FRB supervises thrift holding companies.) Combined OCC/OTS teams now examine both National Banks (NB) and FSAs. OCC – National Bank and Federal Savings Association AM Supervision

10 10 OCC/OTS Integration - Related Regulation Changes Required rule changes implemented (See OCC Bulletin ) OCC and OTS regulations have been reviewed and differences identified. The goal is to integrate into single set of rules – watch for NPR. Fiduciary Activities: 12 CFR 9 (NB) – 12 CFR 150 (FSA) Securities Transactions: 12 CFR 12 (NB) – 12 CFR 151 (FSA) Call report Schedule RC-T has replaced TFR-FS (3/31/12) OCC – National Bank and Federal Savings Association AM Supervision

11 11 OTS/OCC Integration – Policy Impact OCC Bulletin – Supervisory Policy Integration Process OCC Bulletin – Rescission of most OTS documents Outdated, Duplicative, Conveyance and Replaced Most OCC Handbooks now applicable to FSAs OCC Bulletin Capital Planning: Guidance for Evaluating Capital Planning and Adequacy Policy Integration initiatives continue Efforts to replace similar guidance with updated, combined guidance is ongoing and will take time. Look for updated, consolidated booklets of the Comptrollers Handbook as applicable regulations are updated. OCC – National Bank and Federal Savings Association AM Supervision

12 Recent AM Guidance and Regulation 12

13 Unique & Hard-to-Value Assets Handbook – (August 2012) Defines and describes characteristics and risks of unique & hard to value assets such as: Real estate Farm & ranch Commercial real estate Timber Mineral Interests Closely held businesses Loans and notes Life insurance Tangible assets, collectibles 13 Recent AM Guidance and Regulation

14 Unique & Hard-to-Value Assets Handbook Highlights risks associated with these assets – operational, compliance, reputation and strategic Require specialized expertise May by subject to special ownership rules Are frequently hard to value Safeguarding assets often presents challenges Specialized transaction processing requirements Complex framework of applicable law, including governing instrument Often have special meaning/value to beneficiaries 14 Recent AM Guidance and Regulation

15 Unique & Hard-to-Value Assets - OCC Expectations Pre-acceptance, initial and annual reviews Policy guidelines for valuation frequency and methods Sufficient expertise to monitor third parties servicing asset class Process to ensure payment of applicable taxes and insurance Process to ensure and track timely management actions Process to track, collect and follow up on income receipts Controls such as audit and compliance reviews Risk assessment and defined risk tolerance Exception monitoring and reporting Controls to safeguard assets Proper segregation of duties 15 Recent AM Guidance and Regulation

16 OCC Short Term Collective Investment Fund (STIF) Rule Revisions to 12 CFR 9.18(b)(4)(ii)(B) published 10/9/2012 – See OCC Bulletin Effective July 1, 2013 Objective of revisions: To add safeguards designed to address participating interests risk of loss to a STIFs principal STIFs, like money market mutual funds are designed to provide a relatively risk free liquidity option. Both STIFs and MMFs received sponsor support in SEC imposed additional restrictions on MMFs; OCC considers comparable restrictions on STIFs to be warranted. 16 Recent AM Guidance and Regulation

17 STIF Final Rule requirements include: Measures governing the nature of STIFs investments Shorter duration Concentration standards Portfolio and issuer qualitative standards Ongoing monitoring of the STIFs mark-to-market value Assessment of potential changes in STIFs mark-to-market value under adverse market conditions Greater Transparency and regulatory reporting about the STIFs holdings Procedures to protect fiduciary accounts from undue dilution in the event that the STIF loses ability to maintain a stable NAV. 17 Recent AM Guidance and Regulation

18 STIF Final Rule Disclosure requirements (continued): Fund level portfolio information - Disclose to OCC, STIF participants within 5 days of End-of-month (EOM): Total assets under management Mark-to-market and amortized cost NAV (both with and without capital support agreements) Dollar-weighted average portfolio maturity Dollar-weighted average portfolio life maturity For each security owned as of EOM: 18 Recent AM Guidance and Regulation Issuer name Category of investment Principal amount Maturity information Coupon or yield Amortized cost value CUSIP or other standard identifier

19 19 AM Model Validation guidance (4 th quarter 2012) Will supplement OCC Bulletin Sound Practices for Model Risk Management. Model refers to a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates Purpose: to provide detailed information for managing model risk in banks AM related lines of business. Focus: models used by asset managers. Forthcoming AM Guidance

20 20 OCC Supervisory Focus – Asset Management

21 21 OCC Risk Management Expectations - AM OCC focuses on banks ability to effectively identify, measure, monitor and control risk. Banks risk management program should be tailored to the size and complexity of operations. Product development process should include thorough risk assessment, that includes an evaluation of banks ability to manage the incremental risk. Account acceptance process should include assessment of banks ability to meet operational requirements and manage operational risk.

22 22 Prolonged domestic and global economic weakness and uncertainty. AM activities – revenue streams increasingly important to bank earnings. Anxiety for income/improved investment performance. Fees for liquid asset management continue to be impacted by fee waivers due to low rate environment. Business restructuring, exiting certain products and markets, expanding into others. Strategic initiatives designed to improve earnings and growth in challenging market environment. Operating Environment – Asset Management

23 23 Proliferation of New Product Offerings Exchange traded fund growth Number of funds Total assets Complexity Concentration (sponsors) and leverage pose risk Structured products Provide alternatives in low-rate environment Heightened reputation risk Operating Environment – Asset Management

24 24 Compliance Risk and Control Structures Regulatory exams, investigations and inquiries Client trading activity Documentation Privacy Investment suitability Impact of new and proposed rules (US and foreign) Potential impact of Volcker Rule on banks and affiliates that organize and offer unregistered hedge and private equity funds. Operating Environment – Asset Management

25 OCC Supervisory Focus – Operating Environment FDIC Transaction Account Guarantee (TAG)Program TAG program guarantees certain transaction accounts above $250,000. The TAG will expire on December 31, 2012, unless extended by Congress. Pledge requirements under 12 C.F.R and –320 will increase with the termination of unlimited FDIC coverage. Impact of expiration on bank deposit levels remains to be seen. 25

26 26 OCC Supervisory Focus – AM OCC Expectations - Governance and Risk Management Heightened expectations- Large banks must have strong audit and risk management functions Investment risk management – must be supported by metrics, data, systems Effective management of conflicts of interest/use of affiliated investment products Focus on regulatory change management Make sure that strategic initiatives are well thought out and do not outpace control and operations area resources and capabilities

27 27 OCC Supervisory Focus – AM Investment Issues/concerns Anxiety for income/improved investment performance – increased risk taking Ineffective due diligence processes in selecting, retaining, and monitoring investment managers and funds Lack of independent risk management function over investment area Inadequate model risk management Improper oversight and controls over delegation of trust AM to affiliated brokers financial advisors

28 28 OCC Supervisory Focus – Asset Management Investment Issues Performance related litigation risk. Program/algorithmic trading activities. Investment Issues – Unique Assets Stale valuations/valuation practices Stale reviews of unique assets Lack of financial transparency Lack of product knowledge and expertise Client suitability

29 BSA/AML Compliance (OCC Bulletin ) Its not just a compliance issue – its management BSA/AML findings will now be reflected in management part of CAMELS BSA/AML finding will continue to be reflected in compliance risk assessment under the OCCs RAS Quicker reaction when a bank has multiple matters requiring attention More flexibility for citing BSA/AML violations for individual pillar violations 29 OCC Supervisory Focus – Asset Management

30 30 Impact of earnings pressure on: Internal controls Staffing Compliance/Risk Management functions Audit Coverage Third party service provider oversight IT, outsourced operations, administration, tax preparation, investments, custody Affiliated and non-affiliated service providers Asset controls On-premises/off-premises/all locations/all assets OCC Supervisory Focus – Asset Management

31 31 Appendix I Common AM Violations of Law and Regulation and Matters Requiring Attention 2012

32 Common AM Violations of Law Most common AM-related Violations of Law and Regulation (2012): Review of fiduciary accounts – violations for pre- acceptance, post-acceptance and annual review. Audit requirements Annual audit Standards of audit Audit committee membership. 32 National banks and Federal savings associations

33 Compliance Trust Risk Management Process Trust Asset/ Investment Management Trust Board/ Management Oversight No Pre-acceptance Reviews Audit & Internal Controls Annual Investment Reviews Policies & Procedures Pledging ProblemsLack of Exception Tracking Report Lack of guidance on use of alternative investments Repeat of Weak Internal Controls No initial post acceptance review Vendor Management Problems with third party investment manager agreements Poor corporate governance of AM dept Conflicts of interestPoor risk management process/controls Weak unique asset administration Lack of Reg R documentation 33 Common AM MRAs National banks and Federal savings associations

34 34 Appendix II - Asset Management Statistics

35 35 Asset Management Statistics Source: FDIC Call Reports Approximately 44% of all National Banks reported income from fiduciary, retail brokerage, and investment banking and advisory activities. All Large and Midsize Banking organizations Community Banks – 42% (528/1,273) Central District 52% (180/344) Northeastern District 57% (108/190) Western District 35% (93/264) Southern District 31% (147/475)

36 36 Asset Management Statistics Source: FDIC Call Reports Approximately 26% of all Federal Savings Associations (FSA) reported income from fiduciary, retail brokerage, and investment banking and advisory activities. Large FSA – 50% (2/4) Midsize FSA – 47% (7/15) Community FSA – 26% (138/547) Central District 31% (54/176) Northeastern District 23% (43/191) Western District 21% (20/94) Southern District 24% (21/86)

37 37 Source: FDIC Call Reports FIDUCIARY AND RELATED ASSETS ($000s)ManagedNon-ManagedTotal Assets % of Fid Assets Personal trust and agency accounts$632,092,508$297,934,197$930,026,7055% Employee benefit and retirement related trust and agency Employee benefit - Defined contribution$698,028,541$2,421,990,268$3,120,018,80917% Employee benefit - Defined benefit$867,935,637$4,351,763,974$5,219,699,61129% Other employee benefit and retirement related$242,202,467$1,827,234,498$2,069,436,96511% Corporate trust and agency accounts$35,529,870$2,757,093,593$2,792,623,46315% Investment management and investment advisory$1,041,936,273$58,363,644$1,100,299,9176% Foundation and endowment$190,798,881$33,856,960$224,655,8411% Other fiduciary accounts$186,434,001$2,515,670,626$2,702,104,62715% Total Fiduciary Accounts$3,894,958,178$14,263,907,760$18,158,865,938100% Custody and Safekeeping Accounts $77,508,201,089 Total Fiduciary & Custody/Safekeeping Accounts $95,667,067,027 Fiduciary and Related Assets All Banks and Federal Savings Associations - 6/30/2012

38 38 Source: FDIC Call Reports FIDUCIARY AND RELATED ASSETS ($000s)ManagedNon-ManagedTotal Assets% of Fid Assets Personal trust and agency accounts$445,454,505$152,437,418$597,891,92310% Employee benefit and retirement related trust and agency Employee benefit - Defined contribution$397,703,021$557,668,180$955,371,20116% Employee benefit - Defined benefit$426,185,665$582,576,074$1,008,761,73917% Other employee benefit and retirement related$81,995,572$162,507,882$244,503,4544% Corporate trust and agency accounts$27,804,289$1,751,080,340$1,778,884,62930% Investment management and investment advisory$608,611,400$21,008,949$629,620,34910% Foundation and endowment$128,817,930$11,020,058$139,837,9882% Other fiduciary accounts$164,038,215$484,267,906$648,306,12111% Total Fiduciary Accounts$2,280,610,597$3,722,566,807$6,003,177,404100% Custody and Safekeeping Accounts $29,845,990,699 Total Fiduciary & Custody/Safekeeping Accounts $35,849,168,103 Fiduciary and Related Assets National Banks - 6/30/2012

39 Source: FDIC Call Reports FIDUCIARY AND RELATED ASSETS ($000s)ManagedNon-ManagedTotal Assets % of Fid Assets Personal trust and agency accounts$9,253,560$18,924,871$28,178,4319% Employee benefit and retirement related trust and agency Employee benefit - Defined contribution$1,825,412$186,276,303$188,101,71558% Employee benefit - Defined benefit$1,093,543$32,543,482$33,637,02510% Other employee benefit and retirement related$17,754,242$12,524,779$30,279,0219% Corporate trust and agency accounts$140,608$5,107,795$5,248,4032% Investment management and investment advisory$41,978,933$181,079$42,160,01213% Foundation and endowment$1,043,351$599,713$1,643,0641% Other fiduciary accounts$102,601$472,803$575,4040% Total Fiduciary Accounts$69,789,766$256,541,954$326,331,720100% Custody and Safekeeping Accounts $550,673,979 Total Fiduciary & Custody/Safekeeping Accounts $877,005, Fiduciary and Related Assets Federal Savings Associations - 6/30/2012

40 Source: FDIC Call Reports 40 Total Fiduciary Assets All Banks and FSAs: /30/2012

41 Source: FDIC Call Reports 41 Total Custody Assets All Banks and FSAs: /30/2012

42 Source: FDIC Call Reports 42 Managed Assets – Fiduciary Accounts All Banks and FSAs – 12/31/2011

43 Source: FDIC Call Reports 43 Collective Investment and Common Trust Funds All Banks and FSAs: 2001 – 6/30/2012

44 Source: FDIC Call Reports 44 Collective Investment and Common Trust Funds All Banks and FSAs: 2002 – 6/30/2012

45 45 Appendix III - OCC AM Guidance OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of the Comptrollers Handbook for Asset Management are available at OCC Website: Capital Markets: Asset Management

46 46 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)

47 47 Selected Safety and Soundness 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) OCC AM Guidance

48 48 Selected OCC Bulletins OCC , Short-Term Investment Funds OCC , Risk Management Elements: Collective Investment Funds and Outsourced Arrangement OCC , Self-Deposit of Fiduciary Funds OCC , New Notice Requirements for Sweep Accounts OCC , Fiduciary Activities of National Banks: Annual Reviews of Fiduciary Accounts Pursuant to 12 CFR 9.6(c) OCC , Conflicts of Interest: Risk Management Guidance – Divestiture of Certain Asset Management Businesses OCC , Bank Securities Activities: SEC's and Federal Reserve's Final Regulation R OCC , Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity

49 49 Selected OCC Bulletins OCC , Soft Dollar Guidance: Use of Commission Payments by Fiduciaries OCC , Registered Transfer Agents: Transfer Agent Registration, Annual Reporting, and Withdrawal from Registration OCC , Interagency Agreement on ERISA Referrals OCC Bulletin , Risk Management of New, Expanded, or Modified Bank Products or Services: Risk Management Process OCC , Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization or its Affiliates OCC Bulletin , Bank Use of Foreign-Based Third-Party Service Providers OCC Bulletin , Third-Party Relationships: Risk Management Principles OCC Bulletin , Examination Procedures to Evaluate Compliance with the Guidelines to Safeguard Customer Information

50 50 Contact information: Tish Dalton Asset Management Group


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