JPMorgan Network Management: Subcustodian Selection, Monitoring, Due Diligence and Risk

Transcription

1 October 2007 WORLDWIDE SECURITIES SERVICES S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L JPMorgan Network Management: Subcustodian Selection, Monitoring, Due Diligence and Risk

2 Subcustodian and Market Management Network Management Approach Subcustodian Management Performance Measurement On-Site Visits Alternative Vendor Reviews Credit Reviews Product Development Network Expansion Identify a Need Perform Market Research Select an Agent Perform Due Diligence Manage Risk Client Consulting and Network Product Management Consultation Market Information Products Market Management Active Involvement with Local Market Participants Regulators, Stock Exchanges, Depositories White Papers and Presentations In-Country Visits Risk Management SSMPA sm, DSA sm Subcustodian Agreement Risk Mitigation Efforts Analysis of Questionnaires Financial Review 1

3 Market Opening Process Criteria for entering new markets Client driven Foreign investment availability Adequate securities law / regulation for investor protection Capital market infrastructure in evidence Adequate local settlement system Qualified provider of custody services available Country (political / economic) risk 20+ markets currently under research Markets opened in 2007: UAE - ADSM Markets currently under investigation: Bosnia, Tanzania, Uganda, Costa Rica 2

4 New Market Opening Market Opening Timeline and Tasks Passive Market Management (Research/Monitoring Phase) Active Market Management Market Activation Process Activities Conduct basic market research Economic/political environment Capital markets Legal infrastructure Maintain contact with, and monitor activities of, international aid agencies, e.g., USAID, EBRD and IMF/World Bank Develop contacts with trade attaché or other relevant bodies at embassy in U.S. and London Perform detailed review of market, regulatory & legislative infrastructure. Provide recommendations to relevant authorities. Develop contacts in local government and with other influential bodies (Stock Exchange, International Aid Agencies) Facilitate securities training programs for local banks and other participants Create/sponsor/support forums focused on enhancing market institutions and procedures Includes site visit Continue all active market management functions Select subcustodian Use traditional approach; otherwise asist provider with development of local product, including staff training Perform detailed risk assessment Develop risk mitigation procedures Finalize detailed legal review Includes site visit Output Database of information regarding status of market developments in potential new markets Monthly summary reports provided to key clients Decision reached with clients as to when active market management process initiated Research paper/preliminary market report Findings discussed with key emerging market clients Decision reached with clients as to when market activation process initiated 3 New market added Market report Securities Settlement Market Practices Assessment

5 Subcustodian Selection A viable subcustodian is a critical requirement in considering opening a new market for custody services. RFIs may be issued to benchmark curent subcustodian s product and service offerings against alternate providers. Subcustodian withdrawal from provision of custody services may initiate an RFP or a decision to temporarily or permanently withdraw a market from the network if no other viable providers and no client assets safekept in the market. On-site and off-site due diligence is performed to monitor subcustodians. Agent relationship plans and agent service agreements are used to monitor performance. Agent performance measurement may identify weaknesses in service. Subcustodians are placed in tiers according to asset levels and transaction volumes and compared against minimum and peer group average performance targets. RFPs will be issued in markets where JPMorgan wishes to fully evaluate subcustodian candidates services and capabilities in detail. 4

6 Subcustodian Selection Criteria JPMorgan has a fiduciary / regulatory obligation to ensure that its subcustodian banks provide the appropriate levels of support to our clients. As a result, JPMorgan applies a stringent selection criteria to all potential providers. Management and the operational infrastructure assessment Understanding and accountability for compliance with regulatory policies Staffing and expertise of the custody operation Custody volume capacity Sophistication of technology/telecommunications Financial strength Links with the institution s Foreign Exchange and Treasury units Internal control, and related risk management infrastructure Vault capacity and security (where applicable) External linkages to settlement and registration processes, depositories, exchanges and clearing entities Assessment of value-added products (investment vehicles, lending, other contractual services) Income processing, corporate actions and proxy voting services and capabilities Contingency plans Results of external/internal audits Insurance coverage Tax related expertise Business strategy/commitment (short-term and long-term) Pricing Contractual arrangements 5

7 Subcustodian Selection Criteria: Financial Strength Key criteria used in JPMorgan s determination that a bank has the financial strength required to provide reasonable care for Fund assets are as follows: Profitability, including Return on Assets (ROA) and Return on Equity (ROE) Capitalization, including Tier 1 & Net Worth/Total Assets Asset Quality Liquidity and Funding Management (structure and experience) Public Debt Rating (if available) Local accounting standards and regulatory environment Credit / Economic research conducted Country / Subcustodian Risk issues discussed Legal counsel reviews the subcustodian agreement Subcustodian RFP responses are analyzed Parental guarantees reviewed Local government support considered Summary of financial strength prepared by JPMorgan Risk Management Approval granted by JPMorgan Risk, Network, and WSS Senior Management If a new relationship for JPMorgan, additional approval required by JPMorgan Global Credit Risk Management. 6

8 Subcustodian Selection Approval RFP summary of high level findings and recommendations is sent to Worldwide Securities Services Senior Management. Executive Sign-off Memorandum completed for opening new market/selecting new subcustodian: Agent Bank Selection Legal Opinion (new market) Subcustodian Agreement Fee Schedule Country Risk Approval (new market) Secondary NOSTRO line Restricted Market Decision (new market) Vault and Insurance Standard of Care Agent Service Agreement Market Brief to Operations Custody Product Operational Nuances Information Products 7

9 Subcustodian Management: Continual Monitoring Process Risk Credit Network Service Mgmt Operations Legal Risk Network Financial Strength: Quantitative Meas urement & Daily Monitoring by Risk & Credit Annual Attestation Review Monitoring of Sub-Custodians Performance Analysis: Agent Service Agreement, Performance Measurement Insurance Review Risk Legal Network 17f-5 Annual Review: Audit/Security Control Systems Risk Network 8 Due Diligence: On-Site, Remote, Conference Calls, Continuous.. Network Operations NSM

10 Subcustodian Bank Monitoring: Performance Measurement Performance Measurement: Agent Service Agreement documents key service standards for the following service categories: Account Opening Transaction Capture Foreign Exchange International Trade Management Securities Lending Asset Reconciliation Cash Management Income Processing Corporate Actions Taxation Proxy Voting Network Service Management Contingency Operational Staff works with the subcustodians on a day to basis and in conjunction with Network Management to review the above standards. Monthly reviews of operational data (NSMKPI s, Assets under Custody, trade volumes, etc.) Monthly Performance Measurement Trend Analysis highlights the following: Market level issues Agent performance concerns Internal processing improvements Client trends Seasonal impact 9

11 Subcustodian Bank Monitoring: Financial Strength Daily on line research via Factiva Network Management updates (via the agents) Public Credit Agency ratings updates (twice daily) Proprietary internal risk ratings for financial institutions and country risk Annual analysis of: Global Markets Credit internal credit opinions Financial Statements Formal reports by Fitch Research from JPMorgan Investment Management Daily reviews of cash positions with subcustodians to quickly focus on abnormally high balances and/or high risk banks 10

12 Subcustodian Bank Monitoring Annual Attestation: Subcustodian banks on an annual basis must submit written confirmation of certain information related to the safekeeping of our clients' assets as well as certain undertakings. Subcustodians are required to promptly notify JPMorgan of any material adverse change in their financial condition as well as any changes in legal structure. In addition, subcustodians must advise JPMorgan of any material operational changes expected to have an adverse impact on their ability to provide routine subcustodial and related services to JPMorgan. Security and Control: Subcustodians are requested to provide JPMorgan with detailed descriptions of access control mechanisms that prevent unauthorized entry into data processing areas and vaults. They are also asked to document contingency back-up procedures and controls. These procedures are validated as part of the due diligence process. Insurance Confirmation: JPMorgan requires all subcustodians to confirm their insurance arrangements annually to ensure that there is adequate coverage for the loss, theft or destruction of securities held in their custody. Audits: JPMorgan verifies that our subcustodians have been professionally audited. The audit opinions are included in the subcustodian public financial statements (annual reports) which JPMorgan receives each year. 17f-5 Annual Review: JPMorgan provides clients with a package containing information relating to the foreign subcustodians in the JPMorgan custodial network, including foreign counsel legal surveys and the Global Custody Network Management and Monitoring Process procedures. 11

13 Due Diligence: On-Site Visits On-site reviews are conducted generally within each calendar year. Occasionally, in instances where there has been no client investment, no significant market developments and/or where there are security concerns, visits may be less frequent and the due diligence may be performed remotely. For emerging markets and markets under significant change or where JPMorgan feels there are operational issues, JPMorgan Network Management performs in-country visits more frequently to monitor and influence market developments. A due diligence review incorporates: Subcustodian service/performance review Market developments or issues Market lobbying with market participants (Exchange, CSD, SEC, Central Bank) Product development initiatives Meetings with local regulators and market participants lead to a greater understanding of market practice and enhance JPMorgan s ability to represent clients interests. Meetings with other local providers of custody services to validate information from current subcustodian and benchmark capabilities/services. 12

14 Focus on Settlement Risk Settlement System Market Practice Assessment sm JPMorgan developed the Settlement System Market Practice Assessments sm (SSMPA sm ), a proprietary risk analysis tool, to assist clients with identifying and measuring the risks inherent in settling securities transactions in global markets The SSMPA sm outline best practices relative to securities settlement, thus providing clients with value-added information for assessing counterparty credit risk and operational risks Both market practice and JPMorgan practice are evaluated in the following categories following the G-30 recommendations: Efficiency (Pre-settlement) - Mark-to-market exposure Finality (Settlement) - Mark-to-market exposure - Principal exposure 13

15 English_General This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client s subsidiaries, the Company ) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. JPMorgan s opinions and estimates constitute JPMorgan s judgmentand should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P.Morgan Europe Limited, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing entities. This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services. 14