Buyside challenges : Post-trade : Reconciliations

ALL ROADS LEAD TO A SINGLE SOLUTION

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Tim Martin, SVP Product Management, SmartStream.

The quest for improved internal controls, as well as a growing body of regulation, has driven a rise in the volume of reconciliations and, in particular, an increase in the number of inter-system reconciliations. To support these, financial institutions have put in place a series of tactical solutions. While tactical fixes have clearly served an important end, I would argue that in the future, organisations should consider returning to a single, consolidated platform that is capable of meeting all their reconciliation requirements.

Five to ten years ago, the financial industry witnessed a drive amongst organisations to consolidate core reconciliations on to a single platform. Technology firms responded with appropriate solutions. Recently, the move
towards consolidation has been interrupted as regulation and more stringent internal controls have driven institutions to create a plethora of intersystem reconciliations, in addition to existing core reconciliations. Some financial institutions have brought these new reconciliations on to their main platform while others have created a series
of tactical solutions, leaving them with a core platform, as well as one or more tactical solutions – often in the form of Excel spreadsheets.

So why have financial institutions simply not brought these tactical reconciliations on to their main platform? The answer lies in the fact that requirements have moved on: existing practices and methodologies do not fit current demands, often leaving organisations with a considerable backlog of reconciliations to migrate.

Piling added pressure on financial institutions are business users, who want more control
over the configuration and operation of their reconciliations. This is largely a reaction to the
lead times users face when waiting for their reconciliations to be configured elsewhere (typically by IT departments), as well as a response to the difficulty in sourcing data. Ironically, rather than building and running their own reconciliations, end users would in fact prefer less involvement. What they actually require is a service that provides them with reconciliation results and allows them to focus solely on managing exceptions. However, until this can be achieved they will continue to require more control.

In addition to the previously mentioned pressures, banks are also experiencing a greater need for ad hoc reconciliations. These may arise as a result of a system upgrade where it is necessary to confirm a migration has occurred correctly,
or, alternatively, be as simple as providing one-
off comparisons of a pair of data sets. For these reconciliations, there is often no need to persist all the data, what is important is having a snapshot of the results.

Given these diverse requirements does consolidation on to a single reconciliation solution still remain a desirable goal? At SmartStream, we believe this still to be the case. Importantly, a single platform for all reconciliation processing allows the reduction of infrastructure costs, along with those of solution maintenance and monitoring. As a common approach can be taken towards all tasks, no specialist training is needed for different users e.g. IT staff, administrative personnel or business users, thereby also reducing overheads. A single solution makes it possible to standardise all reconciliations, create a common set of procedures and make more efficient use of resources e.g. by putting in place a core team that can easily switch between different reconciliations.

So how do organisations best consolidate
the existing core reconciliations deployed in their strategic solution with reconciliations contained
in the tactical fixes devised to satisfy new requirements? And what are the essential features the resulting system should possess?

At SmartStream, we believe that a reconciliation system must be capable of processing large data sets and have powerful matching capabilities.
In addition, it should be flexible enough to allow a wider set of users to create and manage reconciliations. It is essential that it enables faster and simpler on-boarding.

We have responded to industry demands by enhancing the loading and matching capabilities of Transaction Lifecycle Management (TLM) Reconciliations Premium, which, in turn, has enabled us to deliver the TLM SmartRecs configuration component. The new TLM SmartRecs module allows reconciliations to be built and run by business users, with the results being presented directly to users.

Not only can on-boarding times be significantly improved but a far wider group of users is able to build and manage reconciliations than traditionally possible. Additionally, the changes made have enabled us to support end-to-end in memory reconciliations where there is no need to persist the results.

Our technology allows organisations to go one step further than simply improving on-boarding times and opening up reconciliation configuration and management to a wider audience – although these are highly important goals. It provides the potential to combine individual reconciliations to form more business-focussed solutions that bring together common components.

An example of an area in which this tactic could be taken is that of ETD and OTC reconciliations. Here, organisations usually reconcile open contracts, buys/sells and cash flows independently. Drawing these together into a Total Equity Proof would be far more beneficial to business users who could then drill down from a currency to see any cash or contract breaks that would roll up into a top level currency difference.

Once an organisation had brought these
types of individual reconciliations on to TLM Reconciliations Premium, it would be a simple next step to combine them into a single proof view.
By employing this type of approach it should be possible not only to consolidate reconciliations – while providing flexibility at deployment and at run time – but to achieve further, longer-term cost- efficiency and operational benefits.

www.smartstream-stp.com

 ©BestExecution 2014