Comptroller of the CurrencyAdministrator of National Banks

OCC Operations Update

Michael D. DruryAsset Management Policy GroupOffice of the Comptroller of the CurrencyOctober 16, 2007

OCC and Asset Management Group

The OCC is responsible for ensuring that the national banking system is safe and sound.

Part of the OCC’s responsibility is to review the adequacy of each national bank’s asset management activities, including operations.

The Asset Management Policy Group located in Washington, D.C. is responsible for drafting policies and guidelines applicable to national bank asset management activities.

Operations Topics

Examinations Issues Risks Regulations Outsourcing and Offshoring Handbook

Operations Examinations

Request Letter Upfront Meeting Discussions Walkthroughs Updates Exit Meeting

AM Operations Issues

Dual Control and Separation of Duties Reconciliation Monitoring Corporate Actions Manual Processes – Workarounds System Access and Administration Statement Processing Tax Reclaims Control over Pledged Collateral

Dual Control

Dual Control of Asset and Money Movement Assets should be properly controlled and safeguarded

at all times whether physically or electronically. Dual control starts in administration or portfolio

management. Continues through each phase of operations.

Automated vs. Manual Dual Control

Reconciliation Monitoring

Reconciling Item Identification Status Standards Aging of Items Trend Analysis and identification of

weaknesses Management Escalation Solutions and changes to procedures

Corporate Actions

Notification Comparing announcements to asset holdings Notifying appropriate persons Receiving instructions Independent review Execution of instructions

Manual Process - Workarounds

Hard copy forms Asset and money movement

Data bases for reporting purposes Tracking systems Check for change of name and address

System Access and Administration

Inadequate system access monitoring Weak review of employee system access for

incompatible capabilities Inadequate manager review of employee

access to multiple systems and the access relationship between systems

Inappropriate retention of trust system access by employees enabling embezzlements

Lack of daily independent review of system administration activities

Statement Processing

Account statements at least annually Administrative staff should not have access

to statements Independent person should mail the

statement Changes to statements should be

independent Management’s enhanced review of accounts

that do not receive statements

Tax Reclaims

A portion of the income from foreign securities is withheld to pay taxes to the issuing country

International laws allow claims for a portion of the withholding tax that is paid on foreign-source dividends, interest, and American Depository Receipt (ADR) income

Processes to claim back the tax are time-consuming

Some banks lack appropriate processes to handle tax reclaims, especially for retirement accounts

One solution - outsourcing tax reclaim processing

Control over Pledged Collateral

Pledged collateral for amounts over FDIC coverage not controlled properly

Pledged collateral must be under the control of appropriate fiduciary officers or employees as required by 12 CFR 9.10(b).

Capital markets bank employees should not release pledged collateral

OCC Supervision By Risk

Transaction Reputation Strategic Compliance Credit

Transaction Risk

Inherently high Most frequent sources of losses, litigation,

and additional expenses corporate actions trade and processing errors improper reconciliation controls fraud inadequate integration of mergers/acquisitions

Reputation

Preservation of the bank’s reputation cannot be overstated.

Ability of the bank to deliver services as promised

Operations manages the highly visible transaction-based part of the bank’s business

Bank’s failure to perform a contracted service Lack of security over customer information

Strategic

Strategic risk may arise in operations Bank’s ability to manage transactions Products and services come at a price Strategic risk in operations may be in the

form of industry changes and processes that create the need for new systems to maintain a bank’s competitive position

Compliance

Bank’s management of transaction risk Records and reports Reporting examples Penalties may be assessed for late filings, failure

to file, and for inaccurate filings

Credit

Credit risk exists across operations Activities that depend on counterparty,

issuer, or borrower performance Funds extended, committed, invested, or

otherwise exposed through actual or implied contractual agreements

Regulation 12 CFR 9

12 CFR 9.8

12 CFR 9.10(b)

12 CFR 9.13, 12 USC 92a(c)

Offshoring and Outsourcing

Definitions

Offshoring - Move function to different country

Outsourcing - Move function to unaffiliated company

What Processes Do Banks Offshore?

Repetitive Limited Decision Making No Client Contact Non-Time Sensitive Imaged

What do Banks usually not Offshore?

Foreign Exchange Voluntary Corp Actions - Domestic Outgoing wires Free Deliveries

Offshoring Benefits

Lower Wages High Quality Expense Reduction Expertise 24/7 Capabilities

Offshoring Successes

Hiring, Entry Level Initial Training Cross Training Performance Client Satisfaction Work Quality Cost Savings Management Oversight

Offshoring Challenges

Hiring, Management Level Turnover Work Hours Cultural Differences Changes in responsibilities for US

employees Loss of some US employees

Offshoring Risk Considerations

Takeover/Merger/Spin-off Possibilities Country Risk IT Data Security Understanding of Trust Concept

QUESTIONS?

Comptroller of the CurrencyAdministrator of National Banks

Michael D. DruryNational Bank Examiner913-384-6005Michael.Drury@occ.treas.gov