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Custody Services ... Asset Management Custody Services Comptroller’s Handbook January 2002. CS-AM Comptroller of the Currency Administrator of National Banks AM As of May 17, 2012,

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  • Asset Management

    Custody Services

    Comptroller’s Handbook

    January 2002.

    CS-AM

    Comptroller of the Currency Administrator of National Banks

    AM

    As of May 17, 2012, this guidance applies to federal savings associations in addition to national banks.*

    jennifer.hales Text Box *References in this guidance to national banks or banks generally should be read to include federal savings associations (FSA). If statutes, regulations, or other OCC guidance is referenced herein, please consult those sources to determine applicability to FSAs. If you have questions about how to apply this guidance, please contact your OCC supervisory office.

  • Comptroller’s Handbook Custody Services i

    Custody Services Table of Contents OVERVIEW ............................................................................................................ 1

    Background .................................................................................................. 1 The Custody Services Industry ............................................................ 1 Services Provided by a Custodian ....................................................... 1

    Risks Associated with Custody Services ........................................................ 2 Transaction Risk ................................................................................. 3 Compliance Risk ................................................................................ 3 Credit Risk.......................................................................................... 4 Strategic Risk ...................................................................................... 5 Reputation Risk .................................................................................. 5

    Risk Management ......................................................................................... 6 Operational Controls .......................................................................... 6 Account Acceptance and Monitoring.................................................. 7 Management Information Systems ...................................................... 8

    Board and Management Supervision............................................................. 9 Staffing ............................................................................................... 9 Compliance........................................................................................ 9

    Global Sub-Custodian Network .................................................................. 13 Due Diligence - Markets ................................................................... 13 Due Diligence - Sub-Custodian banks............................................... 13

    Safekeeping and Settlement ........................................................................ 14 Safekeeping of Custody Assets .......................................................... 15 Settlement of Securities Transactions ................................................ 17 Reporting and Recordkeeping........................................................... 21 Cash Management ............................................................................ 22 Foreign Exchange ............................................................................. 22

    Securities Servicing..................................................................................... 23 Income Collection ............................................................................ 23 Corporate Actions............................................................................. 24 Tax Reclaims .................................................................................... 25

    Securities Lending ...................................................................................... 26 The Evolution of Securities Lending Markets ..................................... 27 The Role of Bank Custodians ............................................................ 27 The Securities Lending Transaction................................................... 28 Due Diligence Considerations .......................................................... 29 Law and Taxation Matters ................................................................. 32

    As of May 17, 2012, this guidance applies to federal savings associations in addition to national banks.*

  • Custody Services Comptroller’s Handbook ii

    Collateral Management..................................................................... 33 Securities Lending Operations .......................................................... 35 International Securities Lending ........................................................ 36

    Other Value-Added Services....................................................................... 36 Risk Measurement and Management ................................................ 37 Compliance Monitoring.................................................................... 37 Performance Measurement ............................................................... 37

    Banks as Users of Custody Services............................................................. 37 Document Custody Services ....................................................................... 38

    EXAMINATION PROCEDURES General Procedures .....................................................................................41 Quantity of Risk...........................................................................................43 Quality of Risk Management........................................................................47 Conclusions ................................................................................................65

    APPENDICES A. Glossary ............................................................................................69 B. Corporate Actions..............................................................................87 C. Investment Company Act of 1940 Custody Rules...............................91 D. New York Stock Exchange Rule 387 ..................................................98

    REFERENCES .......................................................................................................103

    As of May 17, 2012, this guidance applies to federal savings associations in addition to national banks.*

  • Comptroller’s Handbook Custody Services 1

    Custody Services Overview

    Background This booklet addresses the fundamentals of securities custody and related services, and provides guidance for examining those activities in national banks. One of a series of specialized asset management booklets in the Comptroller’s Handbook, the booklet supplements the overall guidance in the “Asset Management Supervision” booklet as well as the “Large Bank Supervision” and “Community Bank Fiduciary Activities” booklets. For additional guidance on general asset management operations and controls, please refer to the Comptroller’s Handbook for Asset Management. Please refer to this booklet’s glossary for definitions of terms used in this handbook.

    The Custody Services Industry The ability to gather assets, effectively employ technology, and efficiently process huge volumes of transactions is essential in the custody business today. With the growth of the investment industry during the past two decades, particularly in the mutual fund arena, the level of assets under custody has increased significantly. Competition for custody of those assets has been fierce, causing profit margins to shrink. At the same time, the industry has focused on using technology to improve efficiency. As a result, a handful of large banks now dominate the custody services industry.

    Services Provided by a Custodian Services provided by a bank custodian are typically the settlement, safekeeping, and reporting of customers’ marketable securities and cash. A custody relationship is contractual, and services performed for a customer may vary. Banks provide custody services to a variety of customers, including mutual funds and investment managers, retirement plans, bank fiduciary and agency accounts, bank marketable securities accounts, insurance companies, corporations, endowments and foundations, and private banking clients. Banks that are not major custodians may provide custody services for their customers through an arrangement with a large custodian bank.

    As of May 17, 2012, this guidance applies to federal savings associations in addition to national banks.*

  • Custody Services Comptroller’s Handbook 2

    Core Custody Services A custodian providing core domestic custody services typically settles trades, invests cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides recordkeeping and reporting services. Global Custody Services A global custodian provides custody services for cross-border securities transactions. In addition to providing core custody services in a number of foreign markets, a global custodian typically provides services such as executing foreign exchange transactions and processing tax reclaims. A global custodian typically has a sub-custodian, or agent bank, in each local market to help provide custody services in the foreign country. The volume of global assets under custody has grown rapidly in recent years as investors have looked to foreign countries for additional investment opportunities. Securities Lending and Other Value-Added Servic