This entry is part 4 of 4 in the series Newsletter Issue V - June 2011

It’s playoffs time in basketball. This is the time of year when people focus on the star of a team to propel them to the championship by scoring points and making game winning shots. Usually it is the star player who receives all the credit for leading their respective teams to the championship. Though they are important, they are only one piece to the puzzle. A team still needs role players, who are hard working players that dive for balls in the crowd, grab rebounds and defend the best players on the other team. Role players do all the little things that go underappreciated, but in the grand scheme of things they may have been the reason why you won the championship in the first place.

Just like role players, reconciliation is an underrated process, but pivotal to making a business run smoothly. So it’s time to up your game, and give more focus to the reconciliation process. Reconciliation will allow a business to elevate its upstream and downstream processes’ effectiveness. For upstream processes, reconciliation will pinpoint areas for improvement, such as reference data management and transaction processing. Meanwhile, downstream processes will benefit from increased accuracy and timeliness of data, which is required for critical end user reporting and decision making.

Custody reconciliation (reconciliations of currency cash balances, positions and transactions against bank and prime broker records) is a key control to make sure information reported by the custodian and information contained in internal records is accurate. Treasury and cash management groups rely on this data being spot on so they can accurately analyze risks, such as counterparty exposure, or to determine whether custody accounts have properly allocated cash for trade settlements.

The most effective way to enhance the process is through automation and the purchase of a third party system. For too many companies within the investment management community it remains a manual, spreadsheet based process. The reconciliation process needs to be a straight through process with little human intervention when it comes to data gathering (custodian or internally), which will allow you to focus on value added functions like analyzing issues with trades or accounts. Automation also allows for increased frequency in reconciling, whether it is daily or even intra-day (if needed). Due to technology limitations, some firms only reconcile on a weekly or monthly basis. This precludes them from performing timely and accurate reporting on assets and potentially unaware of errors internally or at the custodians’ (e.g. position, quantity and transaction amount discrepancies, cancelled trades not accounted for).

Besides automating the data collection process and increasing efficiency via exception based processing, the strength of third party systems is their matching and case management engines. Users can define matching rules to automatically reconcile assets and transactions based on numerous criteria (e.g. maturity date, quantity, currency), and can manage “cases”, which allows users to identify and investigate underlying causes of breaks. Making adjustments, aging unmatched items to minimize exposure, sending notifications to internal users or third parties to investigate the break, and having the ability to track and audit the case during and after the break is resolved are all benefits of automated reconciliation.

In summary, automating the reconciliation function is essential to achieving overall operational effectiveness. Whether it is basketball or an investment managers’ operational infrastructure, the focus has to be on the team. Just like role players on a team, reconciliation can play a critical role in raising the level of performance of all related business processes.

Some of the more prominent third party reconciliation systems include: SmartStream – TLM; SunGard – IntelliMatch; SS&C – Recon; Fiserv – Accurate and Electra – STaARS.

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