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Reconciliation: tips on timeliness, setting thresholds, expanding reporting capabilities and more...


Constructing a reliable and dependable process, whether in-house or outsourced, requires competency in each asset class and command of the flow from source to final report. Augmenting those skills with a flexible reconciliation tool capable of mapping data resources and producing customised final reports for both position and cash improves timelines- the central feature of scalable, flexible middle and back-of office operations. Timeliness is achieved by:

  • An appraisal of the quality of data and its sources
  • A quest for scalable and customisable improvements to technology
  • Deliberate addition of the best skill sets in the right time zones
  • The incorporation of robust oversight into the process

Do thresholds save time or reduce frequency of breaks?

According to the Global Custodian Reconciliation Survey, 80 percent of the funds performing daily reconciliation spend between two and six hours on the task. The survey also indicated that these managers do not consider their output comprehensive enough for their needs. Without all the requisite details, casing the breaks does not include permanent repair of the underlying issue, as effort is spent on matching rather than improvement. Unfortunately, resolution sometimes means chasing non-issues. A common practice to address such breaks is to raise the break tolerance limits.

Thresholds set the cutoff level to shield the team from immaterial breaks and the inefficiencies inherent in resolving them.

Standardisation

Expansion of global capabilities is driving the preference for customized reporting. Underlying this drive is the need for agility — making sure the operation is responsive enough to support the front office whenever and wherever an opportunity arises. With legacy systems and processes, the manual nature of servicing the front office highlights the shortcomings of disparate systems in meeting the need for normalization and the resulting effect on speed. Operations staffs perform under intense pressure and at a brisk pace; thus, reconciliation may not get the scrutiny it requires as the manager expands. While maintaining the integrity of the reconciliation during growth demands a predisposition for efficiency in a wide range of asset classes and data formats as well as swift processing across systems, the absence of standardised identifiers data formats, and seamless integration remain the biggest drags on reconciliation.

The non-standardized recording of a broad range of asset classes is one of the greatest drains on productivity. However, in their absence, and with no agreement on standards on the horizon4, teams are left to handle these manually.

The portfolio picture

Reporting breaks or matching values from various sources does not mean the data are necessarily correct. It is necessary to understand the fund’s portfolio, strategy, and policies along with current market conditions to uncover the reasons why positions break from prime broker data. If a trade is erroneously recorded in amount or in frequency, the correct picture of positions, profit or loss, and cash will lie somewhere between the onscreen positions and the unreconciled data. Timely break reporting alerts the trader to any position not reflecting all activity until resolution is completed. Reporting of unresolved breaks at the beginning of the day improves control.

Out-of-balance components

Another drag on reconciliation is the imbalance of the process components — data, systems, and people. The output is not usually an issue; it is the imbalance of these components that is the challenge, either daily or when the need for exibility arises. Although the reconciliation team’s grasp of the steps and the knowledge applied at each step are essential components to quality output, when one component has to support the shortcomings of another, the cost is unsustainable. An imperfect system fed by low-quality data, for example, must have an excellent team able and willing to make up for system deficiencies. This team already delivers a high-quality reconciliation, but at what hidden cost? Burnout, lack of scalability, and reduced timeliness are all potential results.

Skill and experience

When an excellent framework run by a team of people unfamiliar with certain asset classes and when the data handling produces output without understanding, accuracy and data integrity both suffer. Whenever trades are booked, these nuances will be incorporated into the reconciliation, whether there is a break or not.


Relationships between numbers, processes, and information sources

Market knowledge enables recognition of when a break or a sudden shift in value is reasonable and justiable or requires additional investigation. Even when a cursory review of results seems to show that market conditions might explain the shift, the team must have the expertise to recognize that the cause might, in fact, be an issue with the underlying processes or information sources.

Making the review of data a function of reconciliation departments with domain competency rather than collection clerks allows every break to be assessed for its “reasonableness” – is the break due to a business process issue or market volatility? Domain expertise enables them to intuitively recognize discrepancies and weigh market conditions, foreign exchange shifts, and realized and unrealized gains and losses, among other factors, to determine a number’s reasonableness.

Comparative distribution of breaks

The comparative distribution of breaks assembled over a decade of reconciliation activities serves as a benchmark once a system or process is in place. This distribution guides an experienced team to evaluate the frequency with which breaks occur and compare that to the normal distribution. If the frequency of a certain type of break falls outside the normal frequency, then the team will know that there is inefficiency in the process. The team can improve its ratio by explaining the phenomenon and either recommending repairs or revising the process to accommodate the abnormalities and bring them into alignment.

Robust reporting

A respectable reconciliation will produce detailed, categorized reports describing a path to resolution or other actions. It delivers post-trade position and cash accuracy in support of investment and trading decisions along with accuracy in settlement and charges that support the CFO post-execution. This level of precision insures that no corporate actions are overlooked and that interest, other fees, and accruals are rejected in the fund’s net asset value.

Whether done on trade day (T0) or pre- or post-open the next day (T1), report timing affects trading and operations to varying degrees. A late report may leave the fund exposed to unplanned risk, while an on-time report can serve as an instrument of control. A well-balanced process ensures that each component has the capacity to address a wide range of asset classes, time zones, and spikes in volume. Such a process is also able to adapt all file and data formats with ample time to build mapping tables when automation is possible. If reporting is robust, in those instances when a prime broker’s data is producing breaks or when a trader repeatedly enters erroneous details, the team will be on the alert.

All these considerations are critical to the modern manager and should be scrutinized to ensure that accurate information informs investment decisions when the market opens. For example, in the case of hard-to- borrow securities, without a high level of accuracy, any sale could lead to an excess sale, thus creating borrowing or auction charges. Alternatively, cash shortages reduce a trader’s agility to take a right-sized position if an opportunity arises, thereby increasing the occurrence of lost opportunities. From an investor’s perspective, tight protocols mitigate exposure risk. A solid reconciliation framework not only showcases high-quality operations, it also sets exposure limits for each counterparty and puts the manager in a position to negotiate every call or fee schedule. Independent calculations, along with reconciled commissions, settlements, fees, and margins, keep counter-party exposure at the forefront of risk management. Excess counter-party margins and fees are not uncommon, as these can originate from something as simple as overlooking a revision to the commission schedule. When these are left unverified, a manager may end up paying excess fees.

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