Common causes that fall into the multiple systems category are disparities in the handling of asset class, processing capability, and integration to multiple upstream and downstream reporting systems. Furthermore, managers are often forced to resolve breaks by recording complex securities in ways that work with the current technology infrastructure. Without a standard method for dealing with such situations, these work-arounds lead to processing and reporting disparities. The moment one system feeds into another, breaks occur because these securities either are not recognized or are recognized as a different asset class.
The multitude of systems: OMS, PMS, Reporting Systems, Risk Systems, Accounting, results in outputs in various formats. To add fuel to the fire, manually handling these to accord with what a manager wants to view adds to the complexity and generates process inef ciencies. Other common issues result from the vendor source used in computation of output data. This is more common in pricing and valuation breaks.
Benefits of a Rule Based Process
A common base makes possible business intelligence in the form of robust management information reports to indicate where, when, and why breaks occur, including, for example: reporting breaks by traders; prime broker; asset classes; and value.
Reporting aging of breaks and uncovering the sources of the errors can help to improve ef ciency. This level of reporting is almost impossible to achieve in silos. A global view across prime brokers, administrators, and other interested (and often multiple) parties is the common base that moves a rm towards an advanced view of reconciliation that enables managers to analyze patterns.
Outsourcers are especially adept at uniformity, managing information reporting that captures trends, and nding permanent resolutions via best practices and checklists. If a disproportionate number of breaks from one source require time to resolve day-to-day, the outsourcer will collaborate with their client and the source to eliminate the cause. Eliminating wasteful trends uncovered through robust reporting improves capacity utilization of their operations across clients. Their endgame is to maximize productivity without having to add headcount. Automating as much as possible and continually seeking ways to improve current processes is passed along to clients via technological and intellectual capital.
A global view driven by automation is a more ef cient scenario. Here, individuals supporting reconciliation shift from being strictly data clerks to reviewers enabled by a common base of reporting in one process. They track and resolve outstanding items to reduce aging, increase accounting exibility to cover all asset types, and unearth patterns to deal with systemic problems.
- Uniformity of output reflecting a common base: Having established the differences, the focus is then to resolve the breaks and arrive at a common base for the data. This homogeneity of information strengthens operational controls.
- Health check: Ef ciency suffers when the reconciliation framework is ill-equipped to highlight trends and instead simply focuses on resolving issues such as incorrect trade information, missed corporate actions, erroneous settlement amounts, and mistaken commission charges. Incorporating a checklist of necessary actions helps de ne when a particular type of break is trending as a result of the system setup and will uncover the cause the rst time a break is resolved. It will also prevent the same breaks from occurring in the future. If a commission break occurs with a particular broker whenever a certain security is traded, for example, a robust process will do more than simply resolve the break. Instead, it will follow a standard course of action that
- results in an audit of the written commission schedule and its electronic setup; this audit will help reveal the fault in the system so that it can be recti ed. Similarly, breaks that occur whenever speci c securities are traded between two particular parties may be due to a difference in the security masters as set up in each party’s system.
- Data synchronization: This rst step corrals mismatches into a group that is arranged and prioritized in a manner intended to ef ciently bring the various data sets into harmony once each mismatch is addressed or resolved. A robust reconciliation ensures that all the data are in sync.
- Risk and control: A reconciliation system that can provide pinpoint accuracy on daily positions, cash balances, fees, commissions, settlements, and other charges is a highly credible process that CFOs will appreciate.
- Transparency: An independent reconciliation process that describes the nature of breaks and their materiality and reduces resolution time accentuates the precision of a manager’s back-of ce operation.
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