For securities firms, custodian banks and service providers, reconciliation encompasses accounting and data clarification processes that are intended to prevent confusion and loss caused by the complications of securities transactions.
The financial accounting aspect of reconciliation involves the confirmation of the balance of securities and cash that will fund a financial transaction. The most frequent kind of reconciliation is between the books and records of an investment management firm and those of the firm’s custodian bank, which holds the securities and cash at the core a transaction.
The investment manager and custodian bank must be in agreement that the instructions governing the transaction have been executed according to the wishes of the investment manager’s client, which includes making certain the securities and cash are available to complete the transaction.
Reconciling securities transactions also requires the investment manager and custodian to compare the data they have about the transactions. To do so involves an effort to capture and match data, establish an exceptions list, implement exception management, and provide updates on whether or not the books and records have been reconciled.
Industry concerns over improved risk controls have been growing and there is more demand for increased transparency into the reconciliation process.
Some of the key pieces of information that have to be reconciled are the actual trade data, settlement information, security identification, the type of transaction, the number of shares and the total amount for the transaction.
Many of the reconciliation steps still require manual processes for many firms in part because the necessary information is dispersed and disconnected across a firm and/or is kept in a non-automated format such as paper-based systems.
Reconciliation is generally done at the end of a recording period, such as the end of a month or fiscal quarter.
Proper reconciliation benefits all parties as it guards against fraudulent activity and human error. Another benefit of reconciliation is that it provides firms with a clearer awareness of their spending limits.