Reconciliation
Reconciliation is the regular comparison of two sets of records that should agree, such as a firm's securities positions and the custodian's statement, cash ledgers and bank statements, or trade details with a counterparty, followed by investigation of differences (breaks). It is a key control in operations and finance.
Roles that need it
What it is
A reconciliation compares records of the same items held in two places and explains every difference. In securities operations the main types are position reconciliation (holdings against custodian or CSD statements), cash reconciliation (cash ledgers against bank or nostro statements), trade reconciliation (internal trades against counterparty confirmations or broker data) and portfolio reconciliation of derivatives with counterparties.
Each reconciliation has a source, a target, matching rules and tolerances. Items that match are cleared automatically. Items that do not match are breaks, which are assigned an owner, a cause and an age, and are tracked until fixed.
Why it matters
Reconciliation is how a firm knows its records are true. A position the firm thinks it holds but the custodian does not can lead to a short sale by mistake, a settlement fail or a wrong net asset value. Unreconciled cash can hide errors or fraud.
Several EU rules require it. The Central Securities Depositories Regulation (CSDR) requires CSDs to reconcile issues daily so that no securities are created or deleted. The UCITS depositary rules require depositaries to reconcile cash flows and custody records. EMIR requires counterparties to reconcile uncleared derivative portfolios at set frequencies. Auditors test reconciliations as part of the control environment.
Worked example
Illustrative numbers. An asset manager compares its end-of-day positions with its custodian’s statement for 2,000 lines. 1,960 lines match exactly. 40 lines break.
Analysis shows 25 breaks are timing differences: trades that settled at the custodian after the firm’s cut-off, which clear the next day. 10 are corporate action differences: a stock split of 2 for 1 booked by the custodian but not yet in the firm’s system, so the firm shows 50,000 shares against the custodian’s 100,000. 5 are real errors, such as a trade booked to the wrong fund.
The team fixes the 15 non-timing breaks at source and monitors the 25 timing items. The match rate is 1,960 / 2,000 = 98%, and the key indicator is the number of breaks older than 3 days.
Who uses it
Reconciliations Analysts run daily reconciliations and drive breaks to resolution. Fund Accountants reconcile fund positions and cash before signing off the net asset value. Custody Operations Analysts reconcile with sub-custodians and CSDs. Investment Operations Analysts reconcile the investment book of record with the accounting records. Depositary Oversight Analysts review reconciliation results as part of oversight. Collateral Management Analysts reconcile margin and collateral balances with counterparties.
Common confusions
Reconciliation is different from validation: validation checks that a record is complete and plausible on its own, while reconciliation checks it against another record. Matching is only the first step; reconciliation also includes investigation and correction. Finally, a high match rate can hide risk if old or large breaks stay open, so ageing and value matter more than counts.