Financial Markets Operations Management (55 page)

Traditionally, reconciliations were performed with the internal ledger balances on the one hand and the external statement on the other. The reconciler then ticked off one position in the ledger against its corresponding entry on the statement. Once this had been completed, the reconciler prepared a schedule of reconciliation breaks; these were circulated to the appropriate departments for action to be taken. It was the job of the reconciliation clerk to ensure that investigations were completed without undue delay. Reconciliation was, therefore, a paper-based process that was both manually intensive and time-consuming.

Today, we rely on automation to make the initial comparison of ledger vs. statement and to prepare the reconciliation break report. It is at this stage that human intervention takes place.

Reconciliation software is designed to track any transaction throughout its lifecycle, from confirmation through settlement to custody and asset servicing and beyond. This means that at any point in the lifecycle, a reconciliation “match” can be automatically made in real time and with automated exception processing, investigation and follow-ups. This helps to reduce operational costs and operational risk. Ideally, the reconciliation software should form part of an overall system that automates, tracks and controls financial transactions and internal processes within the firm and beyond (e.g. between a fund manager and its global custodian).

Reconciliation of all asset classes is important so that “what you think you have” is actually “what you know you have” and the “assets are located in the right place”. Not only does a completed reconciliation give you this confidence, but it also ensures that you are complying with regulatory rules.

In a reconciliation, we compare two sets of records. These can be our
internal
records (the ledger positions) and
external
records (bank statements, custody balances, counterparty statements, etc.). We could also compare internal records, e.g. our dealing records (blotter) with our settlement records; in other words, Front Office vs. Back Office.

Operations reconciliation staff perform reconciliations from a settlement date perspective, as they are concerned with what has (or should have) happened. This contrasts with the Front Office, which considers its activities from a trade date perspective. This results in Operations staff having to be aware of assets which have been traded but not yet settled (open trades) or those which have failed to settle.

Keith Dickinson is Director of The Settlement & Management Research Consultancy Limited and Principal of Financial Markets Training Limited. After 20 years working in Operations in the City of London, Keith runs training courses for investment firms around the world and, more recently, teaches within academia.

For seven years, Keith was a Visiting Fellow at the University of Reading/ICMA Centre and a Programme Director at the ICMA Executive Education/ICMA Centre. Currently, he is a Senior Teaching Fellow at the International Business School Suzhou/Xi'an Jiaotong-Liverpool University, Suzhou.

Keith has written three workbooks published by the Securities Institute, London (now known as the Chartered Institute for Securities & Investment) as part of its Investment Administration Qualification (IAQ) and International Capital Markets Qualification (ICMQ):

• IAQ
  Global Custody
  (1994/2001);
  
• IAQ
  Bond Settlements
  (1995);
  
• ICMQ Module 4
  Settlement & Custody of Securities
  (1995).
  

• accounting
  
  • corporate actions
    
  • for derivatives
    
  • equation
    
  • investment companies
    
  • lifecycle
    
  • need for
    
  • reconciliation
    
  • for securities
    
• accrual instruments
  
• accrued interest, bonds
  
• ACG (Asia-Pacific CSD Group)
  
• ACSDA (America's Central Securities Depositories Association)
  
• action required
  
  • cash forecasting
    
  • FRAs
    
  • interest rate swaps
    
  • OTC options
    
  • settlement failure
    
  • see also
    corporate actions
    
• active management
  
• administration, companies in
  
• ADR (American depository receipts)
  
• AECSD (Association of Eurasian Central Securities Depositories)
  
• AFD (available for delivery) securities
  
• affirmation of trade
  
• Africa and Middle East Depositories Association (AMEDA)
  
• AFS (available-for-sale) investments
  
• agent banks
  see
  sub-custodians
  
• agent intermediaries
  
• AGMs (Annual General Meetings)
  
• agricultural products
  
• allocation of trade
  
• alternative investments breakdown
  
• alternative trading systems (ATSs)
  
• alternative trading venues
  
• AMEDA (Africa and Middle East Depositories Association)
  
• American depository receipts (ADR)
  
• America's Central Securities Depositories Association (ACSDA)
  
• AML (anti-money-laundering) requirements
  
• amortised cost, securities accounting
  
• analytical approach, data management
  
• announced events, corporate actions
  
• Annual General Meetings (AGMs)
  
• annuity insurance
  
• anti-money-laundering (AML) requirements
  
• approved reporting mechanisms (ARMs)
  
• arbitrage, derivatives usage
  
• arbitrage trading
  
• ARMs (approved reporting mechanisms)
  
• Asia, settlement cycles
  
• Asia-Pacific CSD Group (ACG)
  
• ASL (Automated Securities Lending and Borrowing)
  
• ASLplus (Securities Lending Services)
  
• assets
  
  • accounting equation
    
  • accounting lifecycle
    
  • allocation for derivatives usage
    
  • classes
    
  • HNWIs
    
  • initial margin
    
  • insurance companies
    
  • management
    
  • optimisation
    
  • ownership vs. location
    
  • servicing, CBL
    
• assets under custody (AUC)
  
• Association of Eurasian Central Securities Depositories (AECSD)
  
• at-the-money (ATM) options
  
• ATSs (alternative trading systems)
  
• AUC (assets under custody)
  
• audit function, investment companies
  
• authorities/operations relationships
  
• Automated Securities Lending and Borrowing (ASL)
  
• automation, reconciliation
  
• available for delivery (AFD) securities
  
• available-for-sale (AFS) investments
  

• back office
  
• Balance Sheets
  
• bank accounts, retail clients
  
• bank balance, cash forecasting
  
• bank reconciliation
  see
  nostro reconciliation
  
• bank statements
  
• bankruptcy of company
  
• banks/banking
  
  • custody
    
  • foreign CSDs
    
  • world's largest banks
    
• Barclays Bank
  
• barriers, Giovannini Group
  
• batch process settlement
  
• BCS (broker crossing system)
  
• bearer bonds
  
• bearer securities
  
• beneficial ownership
  
• best practice, securities financing
  
• bid price, securities
  
• bilateral loans
  
• bilateral netting
  
• bondholder relationships
  
• bonds
  
  • accounting lifecycle
    
  • accrued interest
    
  • calculations
    
  • collateral
    
  • conversion
    
  • corporate actions
    
  • definition
    
  • deliverable bonds
    
  • drop-lock bonds
    
  • equity and
    
  • features
    
  • first short/long coupon
    
  • fixed-income bond coupons
    
  • form of
    
  • futures contracts
    
  • interest payment
    
  • issuance
    
  • key characteristics
    
  • key dates for
    
  • maturity
    
  • nominal amount required
    
  • prices using yields
    
  • purchased at a discount
    
  • purchased at par
    
  • purchased at a premium
    
  • reconciled position
    
  • redemption
    
  • reference data
    
  • types
    
  • usage
    
  • see also
    Eurobonds
    
• bonus issue
  
• book-entry settlement
  
• books, event creation in
  
• books close date
  see
  record date
  
• borrowers/borrowing
  
  • approaching lender
    
  • banks
    
  • cash to finance inventory
    
  • choices for
    
  • costs through WHT
    
  • haircut
    
  • lender relationship
    
  • securities
    
  • short positions cover
    
  • terms
    
• broker crossing system (BCS)
  
• brokers
  
• business banking
  
• business functions
  
  • see also
    organisational structure
    
• buy-ins
  
• buy side
  
  • see also
    sell/buy-backs
    
• buyers, securities accounting
  

• calculation conventions, securities
  
• call options
  
• Canada, settlement cycles
  
• capital changes, corporate actions
  
• capital gains tax
  
• capital market
  
• capital requirements, derivatives
  
• capitalisation issue
  
• capped FRNs
  
• cash
  
  • accounting lifecycle
    
  • bearer securities
    
  • forecasting
    
  • haircut
    
  • scrip dividend arbitrage
    
• cash asset reconciliation
  
• cash collateral, securities financing
  
• cash currency analysis
  
• cash-driven repos
  
• cash dividends
  
• cash instruments
  
• cash per share amount
  
• cash position reconciliation
  
• cash-related positions
  
• cash reconciliation
  
  • see also
    nostro reconciliation
    
• cash value, shares
  
• CBL
  see
  Clearstream Banking Luxembourg
  
• CCPs
  see
  central counterparties
  
• CDs (certificates of deposit)
  
• CDS (credit default swaps)
  
• Cedel
  see
  Clearstream Banking Luxembourg
  
• central banks
  
• central clearing
  
• central counterparties (CCPs)
  
  • clearing house differentiation
    
  • definition
    
  • derivatives
    
  • features
    
  • instructions
    
  • model
    
  • securities financing
    
• central operating unit, GLEIS
  
• central securities depositories (CSDs)
  
  • associations
    
  • changing world of
    
  • communication
    
  • corporate actions participation
    
  • definitions
    
  • Euro Market custody
    
  • features
    
  • functions
    
  • industry initiatives
    
  • interoperability
    
  • linkages
    
  • local markets
    
  • nominee
    
  • participation
    
  • settlement at
    
  • settlement failure
    
  • T2S
    
• certificates, securities
  
• certificates of deposit (CDs)
  
• CFI (Classification of Financial Instruments) codes
  
• cheapest to deliver (CTD) futures
  
• cheques
  
• China, regulatory authorities
  
• Chinese Wall
  
• claims, corporate actions
  
• classic repos
  
• Classification of Financial Instruments (CFI) codes
  
• clean price
  
  • bonds
    
  • repos
    
  • securities
    
• clean value, bonds
  
• clearing
  
  • CSD linkages
    
  • definition
    
  • derivatives
    
  • instructions
    
  • OTCDs
    
  • overview
    
  • process
    
  • securities
    
• clearing houses
  
  • CCP differentiation
    
  • definition
    
  • derivatives
    
  • features
    
  • instructions
    
  • model
    
• clearing members (CMs)
  
• Clearstream Banking Luxembourg (CBL)
  
• clients
  
  • classification, banks
    
  • corporate actions impact
    
  • custody
    
  • operations relationships
    
• clipping coupons
  
• close-out provisions, securities
  
• closing prices, equity
  
• CME group
  
• CMs (clearing members)
  
• code of guidance, securities financing
  
• collared FRNs
  
• collateral
  
  • CME
    
  • management
    
  • OTCDs
    
  • receipt of
    
  • securities financing
    
  • types
    
  • value, loaned securities
    
• collective investment schemes
  
• commercial paper (CP)
  
• Committee for Payment and Settlement Systems' Statistics (CPSS)
  
• commodity swaps
  
• communication chains, issuer/investor
  
• communication problems, corporate actions
  
• compensation process, corporate actions
  
• compliance function, investment companies
  
• computer-to-computer-based applications
  
• confirmation of trade
  
  • non-cleared OTCDs
    
  • securities clearing
    
• confirmation of transaction, securities financing
  
• connectivity
  
  • CBL
    
  • EB
    
• contract specifications
  
  • ETDs
    
  • MTFs
    
  • options
    
• control function, back office
  
• conversion factors, futures
  
• convertibility, preference shareholders
  
• convertible bonds
  
• convertible-rate FRNs
  
• corporate actions
  
  • CSDs
    
  • event processing
    
  • event types
    
  • income
    
  • industry initiatives
    
  • information flows
    
  • participation in
    
  • risks
    
  • types
    
• corporate banking
  
• corporate finance, front office
  
• corporate governance
  
• corporation tax
  
• corrective actions, reconciliation
  
• costs
  
  • amortised
    
  • to borrower, WHT
    
• counterparties
  
  • accounting lifecycle
    
  • clearing instructions
    
  • data requirements
    
  • operations relationships
    
  • securities clearing
    
• counterparty risk, clearing house model
  
• country usage, ETDs
  
• coupons
  
  • fixed-income bond coupons
    
  • floating-rate notes
    
  • key dates for
    
  • payment
    
  • see also
    interest rate bonds
    
• CP (commercial paper)
  
• CPSS (Committee for Payment and Settlement Systems' Statistics)
  
• credit default swaps (CDS)
  
• credit facilities, EB
  
• credit OTCDs
  
• credit ratings, securities financing
  
• creditor repayment priority order
  
• cross-currency repos
  
• CSDs
  see
  central securities depositories
  
• CTD (cheapest to deliver) futures
  
• cum-dividend timeline
  
• cum-entitlement period, corporate actions
  
• currency forwards
  
• currency swaps
  
• custodian banking
  
• custodians
  
  • communication
    
  • corporate actions participation
    
  • holding securities
    
  • registered securities
    
• custody
  
  • definition
    
  • EB services
    
  • HIC repos
    
  • national rules
    
  • see also
    safekeeping
    
• customer data requirements
  

• data capture risk
  
• data formats, proxy voting
  
• data management
  
  • approaches to
    
  • defining
    
  • standardisation
    
• data processing
  
• data services, CSDs
  
• data vendors
  
• databases
  
• day-basis accrued interest
  
• DBV
  see
  delivery by value
  
• DCMs (designated contract markets)
  
• dealers
  
• dealer's blotter
  
• dealing in derivatives
  
• dealing sheet
  
• dealing tickets
  
• debt finance, corporate banking
  
• debt instruments
  
• debt security haircuts
  
• decision-making risk
  
• decision timeline, corporate actions
  
• default provisions, securities financing
  
• defined benefits pension scheme
  
• defined contribution pension scheme
  
• definitive certificates, CSDs
  
• deliverable bonds
  
• delivery
  
  • channels, banks
    
  • corporate actions
    
  • repos
    
  • securities
    
  • settlement failure
    
• delivery by value (DBV)
  
• delivery versus payment (DVP)
  
  • clearing
    
  • definition
    
  • message type selection
    
  • models
    
  • repos
    
  • settlement instructions
    
• dematerialised-form securities
  
• depositories
  see
  securities depositories
  
• Depository Trust & Clearing Corporation (DTCC)
  
• depot reconciliation
  
• derivative exchanges
  
  • examples
    
  • major exchanges
    
  • role of
    
• derivatives
  
  • accounting lifecycle for
    
  • clearing
    
  • definition
    
  • exchange/clearing system
    
  • forecasting
    
  • industry sector usage
    
  • markets
    
  • non-trading
    
  • regulatory changes
    
  • securities distinction
    
  • securities financing
    
  • settlement
    
  • usage
    
  • see also
    exchange-traded derivatives; over-the-counter derivatives
    
• designated account, holding securities
  
• designated contract markets (DCMs)
  
• direct investment, retail clients
  
• direct links, CSDs
  
• directional managers
  
• dirty price, repos
  
• dirty value, bonds
  
• disclosure
  
  • cash market instruments
    
  • equity instruments
    
  • reporting
    
• discount, bonds purchased at
  
• discount instruments
  
• discount window, central banks
  
• dividend arbitrage
  
• dividend tax
  
• dividends, corporate actions
  
• documentation
  
  • non-cleared OTCDs
    
  • securities financing
    
• domestic bonds
  
• domestic CSDs
  
  • see also
    local CSDs
    
• domicile bonds
  
• double taxation treaties (DTTs)
  
• drop-lock bonds
  
• DTCC (Depository Trust & Clearing Corporation)
  
• DTTs (double taxation treaties)
  
• DVP
  see
  delivery versus payment