Global Asset Management and Custody Banks

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Global Asset Management and Custody Banks Powered By Docstoc
					Regulator Open
Session - OCC
 Joel Miller
 Asset Management Group Leader
 Office of the Comptroller of the Currency
 April 29, 2009


                                             1
Presentation Overview
   OCC – Asset Management Supervision
   Asset Management Risks
       Focus on Market Disruption Issues
   Managing Asset Management Risk
   Asset Management Examination Focus
   Conclusions
   Appendix I: OCC Guidance



                                            2
OCC - Asset Management
Supervision




                         3
OCC Asset Mgt. Supervision
   OCC regulates 1600 national banks and 70
    limited purpose trust companies
     Range from large complex banks with global
       operations to community banks
   Approximately half of all national banks have
    fiduciary, retail brokerage, investment banking
    or advisory activities.
   About 150 OCC examiners with AM expertise
    perform on and off-site supervision.

                                                      4
OCC Asset Mgt. Supervision
   Supervision by Risk
       Objective: Assess a bank’s ability to identify,
        measure and monitor risk
       Risk Assessment System (RAS) – For nine risk
        categories, determine:
           Quantity of risk
           Quality level of risk management
           Direction
       FFIEC: Uniform Ratings System (CAMELS)
       FFIEC: Uniform Interagency Trust Ratings System
        (UITRS) – OCC focus: Composite Rating
                                                          5
OCC Asset Mgt. Supervision
   Integrated risk-based supervision
   Large Banks: EIC/AM Team Leader
   Mid-size Banks: EIC/Functional EIC-AM
   Community Banks: Portfolio Manager/AM
    Examiner
   Supported by five AM Lead Experts and
    Washington based AM Policy Group

                                            6
Asset Management
Risks



                   7
Asset Management Risk Areas
   Broad Risk Categories - Asset
    Management Activities
       Reputation
       Strategic
       Compliance
       Transaction (Operational)
   CAMELS: Management & Earnings
   Market Disruption – Has highlighted these
    risks, especially in certain products and
    activities                              8
Asset Management Risk Areas
   Reputation and Litigation Risks
       Market disruption resulted in a substantial
        decline in the market value of fiduciary
        assets across almost all asset classes.
           Discretionary (managed) accounts and employee
            benefit accounts (e.g., 401-k), pose the greatest
            reputation and litigation risk to bank fiduciaries.
           Clients reassessing which asset managers best
            weathered the storm and moving assets
            accordingly. Client retention a key focus.
                                                              9
Asset Management Risk Areas
   Valuation of assets in illiquid markets
       Accounting guidance (FAS 157) requires fair
        value to represent current market conditions,
        but not the price that would be received in a
        forced or distressed sale.
       Pricing services dropped coverage of illiquid
        securities and bank asset managers and
        custodians had to seek other pricing
        sources.
                                                    10
Asset Management Earnings
   Why Focus on AM Earnings?
       Effects Earnings/CAMELS
       Significant losses can erode Capital
       Market disruption
           Firmwide high risk initiatives may be driven by
            earnings pressure
           Effective risk management in AM needed to
            avoid taking on excessive risk to compensate for
            lost earnings
                                                           11
Asset Management Risk Areas
   Market Sensitive Earnings Decline
       Asset base and administrative fees contract as
        market value of assets declines.
       Performance fees decline as many alternative
        investment strategies have turned negative.
       Flight to quality – investor movement away from
        higher profit margin business (equities) to lower
        margin cash/cash equivalents (MMMFs) – reduces
        management fees.
       EB Defined Contribution Plans Fees effected by:
           Reductions in employer match reductions
           Reductions in employee contributions as a result of layoffs
            or uncertainty                                             12
  Asset Management Revenue
        AM revenue of $6.36 billion in 4Q08
         comprised 25% of national banks’ non-
         interest income and 7% of operating
         income.
        National Bank AM revenue by Call Report
         category:
                Fiduciary Revenue $3.6 billion
                Securities Brokerage Revenue $1.3 billion
                Annuity Sales Revenue $95 million
                Investment Banking, Advisory and Underwriting
                 Revenue $1.4 billion
                                                                                                                     13
Source: Call Report. Includes full-service national banks and limited-purpose national trust banks as of 12/31/08.
     Fiduciary Income Linked to
     Assets under Management
                    Positive correlation between Fiduciary income
                     and S&P 500.
                    Decline in equity markets = decrease in bank’s
                     AUM and income.
               $9.50                                                                                                                                                                                   1,600
               $9.00
               $8.50                                                                                                                                                                                   1,400
               $8.00
               $7.50                                                                                                                                                                                   1,200
               $7.00
                                                                                                                                                                                                       1,000




                                                                                                                                                                                                               S & P 500
        $ Billions




               $6.50
               $6.00
                                                                                                                                                                                                       800
               $5.50
               $5.00                                                                                                                                                                                   600
               $4.50
               $4.00                                                                                                                                                                                   400
               $3.50
               $3.00                                                                                                                                                                                   200
               $2.50
               $2.00                                                                                                                                                                                   0
                       Dec-   Mar-   Jun-   Sep-   Dec-   Mar-   Jun-   Sep-   Dec-   Mar-   Jun-   Sep-   Dec-   Mar-   Jun-   Sep-   Dec-   Mar-   Jun-   Sep-   Dec-   Mar-   Jun-   Sep-   Dec-
                        02     03     03     03     03     04     04     04     04     05     05     05     05     06     06     06     06     07     07     07     07     08     08     08     08

            Income     $4.91 $5.25 $5.52 $5.63 $5.92 $6.19 $6.03 $5.87 $6.55 $6.43 $6.51 $6.63 $7.20 $6.78 $7.35 $6.84 $7.18 $7.50 $7.90 $7.40 $8.50 $8.50 $9.00 $8.20 $7.40
            S&P 500    885    875    909    994    1,044 1,114 1,124 1,111 1,148 1,192 1,186 1,217 1,228 1,276 1,284 1,278 1,366 1,420 1,471 1,497 1,493 1,388 1,359 1,280 1,003


                                                                                                                                                                                                      14
Source: Call Report. Includes all full-service commercial banks and limited-purpose national trust banks as of 12/31/08.
           Total Fiduciary & Custody Assets
           All Banks (2004 – 2008)
           Growth in both fiduciary and custody assets leveled
           off by mid-year 2008, then dropped significantly by
           end of year.
                        Total Fiduciary Assets - All Banks                                                               Total Custody Assets - All Banks
           $25.0                                                      $22.6    $22.9                        $70.0
                                                             $21.8
                                                    $20.0                                                                                                             $57.8    $57.1
                                                                                                            $60.0
           $20.0                  $17.3    $18.3                                        $18.2                                                                $50.4                       $50.3
                         $16.1                                                                                                                      $47.4
               $15.5                                                                                        $50.0                          $42.3

                                                                                                 Trillion
Trillion




           $15.0                                                                                            $40.0        $35.7    $36.5
                                                                                                                $33.2
           $10.0                                                                                            $30.0
                                                                                                            $20.0
            $5.0
                                                                                                            $10.0
            $0.0                                                                                             $0.0
               Dec-04    Jun-05   Dec-05   Jun-06   Dec-06   Jun-07   Dec-07   Jun-08   Dec-08                  Dec-04   Jun-05   Dec-05   Jun-06   Dec-06   Jun-07   Dec-07   Jun-08   Dec-08



      Source: Call Report. Includes all national and state-chartered commercial banks and national trust banks.
                                                                                                                                                                                        15
Asset Management Risk Areas
   AM products and services impacted by
    ongoing Market Disruption
       Hedge Funds
       Securities Lending
       Auction Rate Securities
       Collective Investment Funds
       Money Market Mutual Funds/STIFs


                                           16
Asset Management Risk Areas
   Hedge Fund Issues
       Most strategies performing poorly in current market
       Performance and client liquidity needs lead to increasing
        redemption requests
       Which leads to gates raised/fund lock-ups
       Risks to bank fund managers.
           Decline in earnings potential due to industry contraction
           Litigation risk
           Reputation risk
       Banks are particularly vulnerable where they placed
        discretionary client assets in hedge funds and funds-of-funds
        that are now frozen or in liquidation.
       Bank custodians also vulnerable as clients seek out deep
        pockets to indemnify their hedge fund losses.
                                                                        17
Asset Management Risk Areas
   Madoff Fraud
       Direct and Indirect Exposures
           Investments by individuals, foundations,
            endowments, and pension plans in Madoff “fund” –
            bank may be acting in a fiduciary capacity
           Indirect investments in fund-of-funds that invest a
            percentage of their assets in a Madoff “fund”
           Custodial relationships in which bank holds Madoff
            “fund” assets
           Lending exposure to clients who invested in Madoff
            “fund.”
                                                             18
Asset Management Risk Areas
   Securities Lending Issues
       Once viewed as low risk by clients and banks
       Decline in value of sec-lending pools (e.g. Lehman,
        AIG assets) holding reinvested cash collateral:
           Litigation and settlements
           Restrictions imposed on customers’ ability to withdraw
            assets
       Many customers now unwilling to take on additional
        risk and sec-lending opportunities dry up.
           For some banks, contraction has substantial decreased
            sec-lending business and earnings
           Banks perceived to be stronger in sec-lending have
            prospered in “flight to quality”.

                                                                     19
Asset Management Risk Areas
   Auction Rate Securities Issues
       Regulatory actions - settlements with SEC, FINRA
        and state regulators that include buy-back schedules
        and CMPs.
       Voluntary ARS buybacks undertaken to preempt
        litigation.
       Both voluntary and involuntary buy-backs can be
        costly and saddle banks with illiquid securities with
        corresponding impact on bank earnings, capital and
        liquidity.
       Capital support agreements extended to affiliated
        funds holding these illiquid securities to buy time and
        keep ARS off the bank’s books.                        20
Asset Management Risk Areas
   Collective Investment Fund Issues
       Funds holding illiquid assets such as RE
        facing flurry of redemption requests.
        Industry seeks to avoid liquidating fund
        assets at fire sale prices.
       Expect issuance of new Labor Department
        regulation, or Congressional action, that will
        compel substantial new fee and conflict
        disclosures for employee benefit assets.
                                                         21
Market Value of Collective Investment
  & Common Trust Funds Decline
   National banks continue to be major players in offering collective investment funds.
       •66 NBs offer over 1,600 collective investment funds totaling $1.3 trillion.
                 $3.50


                                                                                                              $3.00
                                                                                              $2.94
                 $3.00
                                                                                $2.68
                                                                 $2.51
                 $2.50
                                                  $2.29

                                                                                          $2.01          $2.02           $2.00
                 $2.00
    $ trillion




                            $1.75                                           $1.74
                                       $1.67
                                                             $1.51                                                               National Banks
                 $1.50                         $1.33                                                                             All Banks
                                                                                                                      $1.30


                 $1.00   $0.85      $0.90



                 $0.50



                 $0.00
                           2001       2002       2003          2004           2005           2006            2007       2008         22
 Source: Call Report. Includes all national and state-chartered commercial banks and national trust banks.
Asset Management Risk Areas
   MMMFs and Short Term CIF Issues
       Sponsors provide support to stabilize NAVs
        or unit values. (SIVs, Lehman…)
       “Flight to safety” from Prime funds to
        Treasury and Government funds.
           Low rates – waived fees
           Some funds closed or restricted
       Government Support Programs


                                                     23
Pledge Requirements – Reg 9.10
   Enhanced FDIC insurance reduces trust
    pledge requirements:
       Coverage to $250,000 for certain retirement
        accounts
       Coverage expanded for irrevocable trusts
       Temporary coverage increase from $100K to $250K
        (through 12/31/09) for other accounts
       Temporary (through 12 /31/09) FDIC guarantee of
        certain non-interest bearing accounts
       FDIC insurance pass-through guidance applies to
        individual accounts held in covered non-interest
        bearing omnibus account.
                                                       24
Employee Benefits Deposit
Prohibition – Problem Banks
   Banks that are no longer “well capitalized”
    or “adequately capitalized” are prohibited
    from accepting any employee benefit plan
    deposits.
       Federal Deposit Insurance Act as amended
        in 2006 (12 USC 1821(a)(1)(D)(ii)) imposes
        this prohibition.
       EB depositors still receive pass through
        coverage, but bank is in violation if it accepts
        EB deposits, including additions to existing
        accounts
                                                       25
Managing Asset
Management Risk



                  26
Managing AM Risk
   Investment Management:
       Adhere to prudent investment standards
       Maintain effective and ongoing due diligence
        over external investment managers
       Maintain effective and ongoing due diligence
        over complex and alternative investments
       Properly conduct and document investment
        reviews

                                                   27
Managing AM Risk
   Effective valuation policies and
    oversight - Valuation of assets in illiquid
    markets
       Market disruption has made it difficult to
        value suddenly illiquid assets
       Pricing services dropped coverage of
        illiquid securities
       Accounting guidance (FAS 157) requires
        fair value on audited financial statements
       Improper valuations have been a key
        factor in disruption related litigation
                                                     28
Managing AM Risk
   Operational Focus:
       Potential increase in operating losses and
        trade errors associated with market volatility
       Potential stress on bank controls, operations,
        and risk management resulting from expense
        reduction
       Impact of loss of key personnel resulting
        from corporate-wide downsizing
       Need for due diligence over sub-custodians
        as highlighted by recent fraud disclosures   29
Asset Management
Examination Focus



                    30
Asset Management Risk Areas
   GLBA/Regulation R
       Effective date for most banks - 1/1/09. Must ensure
        all securities activities conducted by a bank
        department, including the Treasury desk, comply
        with broker/dealer requirements.
       Bankers need to look across all lines within the bank
        (e.g., asset management, capital markets and
        commercial) to ensure compliance with the new
        regulatory requirements.
       Failure to comply could result in securities law
        violations and rescission of trades to the detriment of
        the bank.                                             31
Recent OCC Issuances
   Conflicts of Interest Associated with
    Divestiture of Asset Mgt. Affiliates
       OCC Bulletin 2008-5
   Annual Reg 9 Reviews
       OCC Bulletin 2008-10
       Expectations
       Automated vs. Manual Reviews
       Unique Assets
                                            32
AM Examination Observations
   Investments
       Effective annual reviews
           Process/oversight
           Documentation/Exceptions
       Understanding, due diligence and oversight
        of alternative investments (hedge funds)
       Oversight of third party investment advisors
       Proper authorization for use of affiliated
        funds or brokers
       Oversight of pricing for illiquid or thinly traded
        assets                                           33
AM Examination Observations
   Account Administration and Compliance
       Inadequate Compliance/Risk Management
        programs - testing
       Accepting direction from authorized parties
       EB administration/expertise
       Adequate/current policies and procedures
       Oversight of account overdrafts


                                                      34
AM Examination Observations
   Operations/Internal Controls/Audit
       Segregation of duties & dual control
       Controls over system access
       Corporate action processing automation
       BSA audit scope/trust activities
       Monitor 9.10 pledge requirements




                                                 35
Conclusions




              36
Conclusions
   Earnings Pressures/Effective Risk
    Management
   Investment Management
       Due diligence/risks of complex investments
   Back to Basics
       Investment oversight
       Account Administration
       Operations
                                                     37
Appendix I:
OCC Guidance



               38
OCC Asset Management
Handbooks & Guidance
   Retirement Plan Services
   Collective Investment Funds
   Asset Management
   Conflicts of Interest
   Custody Services
   Investment Management Services
   Personal Fiduciary Services
   Retail Nondeposit Investment Sales
   Insurance Activities
   A Guide to the National Banking System
    http://www.occ.treas.gov/nb/nbguide.pdf
                                              39
OCC Handbooks & Guidance
   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
   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

                                                                       40
    OCC Handbooks & Guidance
   OCC 2006-24, Interagency Agreement on ERISA Referrals

   OCC 2004-2, Banks/Thrifts Providing Financial Support to Funds
    Advised by the Banking Organization or its Affiliates




                                                                     41
QUESTIONS?

   Contact:
      Joel Miller, (202) 874-4493
      Joel.Miller@occ.treas.gov




                                    42

				
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