Comptroller of the Currency Administrator of National Banks

Comptroller of the Currency Administrator of National Banks OCC Operations Update Michael D. Drury Asset Management Policy Group Office of the Comptroller of the Currency October 16, 2007

OCC and Asset Management Group n n n 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 n Issues n Risks n Regulations n Outsourcing and Offshoring n Handbook n

Operations Examinations Request Letter n Upfront Meeting n Discussions n Walkthroughs n Updates n Exit Meeting n

AM Operations Issues n n n n 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 n 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. n Automated vs. Manual Dual Control

Reconciliation Monitoring n n n n Reconciling Item Identification Status Standards Aging of Items Trend Analysis and identification of weaknesses Management Escalation Solutions and changes to procedures

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

Manual Process - Workarounds n Hard copy forms ¨ Asset and money movement Data bases for reporting purposes n Tracking systems n Check for change of name and address n

System Access and Administration n n 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 n n n 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 n n n 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 timeconsuming 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 n Pledged collateral must be under the control of appropriate fiduciary officers or employees as required by 12 CFR 9. 10(b). n Capital markets bank employees should not release pledged collateral n

OCC Supervision By Risk Transaction n Reputation n Strategic n Compliance n Credit n

Transaction Risk Inherently high n Most frequent sources of losses, litigation, and additional expenses n ¨ corporate actions ¨ trade and processing errors ¨ improper reconciliation controls ¨ fraud ¨ inadequate integration of mergers/acquisitions

Reputation n n 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 risk may arise in operations n Bank’s ability to manage transactions n Products and services come at a price n 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 n

Compliance n n 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 risk exists across operations n Activities that depend on counterparty, issuer, or borrower performance n Funds extended, committed, invested, or otherwise exposed through actual or implied contractual agreements n

Regulation 12 CFR 9. 8 n 12 CFR 9. 10(b) n 12 CFR 9. 13, 12 USC 92 a(c)

Offshoring and Outsourcing Definitions Offshoring - Move function to different country Outsourcing - Move function to unaffiliated company

What Processes Do Banks Offshore? Repetitive n Limited Decision Making n No Client Contact n Non-Time Sensitive n Imaged n

What do Banks usually not Offshore? Foreign Exchange n Voluntary Corp Actions - Domestic n Outgoing wires n Free Deliveries n

Offshoring Benefits Lower Wages n High Quality n Expense Reduction n Expertise n 24/7 Capabilities n

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

Offshoring Challenges Hiring, Management Level n Turnover n Work Hours n Cultural Differences n Changes in responsibilities for US employees n Loss of some US employees n

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

QUESTIONS?

Comptroller of the Currency Administrator of National Banks Michael D. Drury National Bank Examiner 913 -384 -6005 Michael. Drury@occ. treas. gov