The Need for a Continuous Approach in Reconciliation Operations

The investment management industry confronts data challenges each trading day, whether industry driven or legacy decisions internally that has led to structural problems for operations, including reconciliation.

Nonetheless, one thing everyone agrees on is that resolving reconciliation is a challenge – both in individual breaks and with systemic patterns (especially across different data sets and technologies). In confronting the reconciliation challenge, consensus within a firm on the problem itself, its scope, and alternative solutions are questions that impact operations in the immediate and long term and affect cost, productivity, workflow, and reporting.  Any approach must be adaptable and scalable for the long term. EZOPS has observed that as the investment management industry shifts towards the adoption of AI and Machine Learning capabilities, it may be running short on time to overhaul reconciliation fundamentals.

At the heart of solving the problem is the Venn diagram of data, technology, and operations.

That brings to question how firms define a reconciliation, and reconciliation itself. The obvious answer is the way a firm reconciles trade, cash, and position to external systems - the textbook definition of the investment industry reconciliation problem. But there is more to that hiding behind the wall. Firms are committed to bringing in more robust trading platforms, data warehouses, risk attribution systems, IBOR, and accounting platforms. These are guaranteed to bring in operational efficiency, standardize workflows, and reduce risk when meeting regulatory and compliance requirements. But all of this assumes the data is: validated, reconciled and accurate; and able to deliver to clients, regulators, and other internal & external reporting. All advanced platform onboarding will not yield the expected results if data is still an issue and data is not trusted.

So, regardless of current reconciliation approaches -  spreadsheets and macros;  a hybrid  of an aged reconciliation platform and spreadsheet with manual workarounds; or vendor outsourcing; or a combination of all these -  reconciliation is a daily and constant problem requiring a comprehensive and automated approach if it is to be successfully addressed.

EZOPS strongly believes that Investment management is a very sophisticated industry and any transformation required will need to be vetted through professional as well as experienced vendor resources.

What Drives Reconciliation Initiatives?

With technological innovation seen across each stage of the trade life cycle, firms continuously transform their technology architecture to take advantage of the best available, most current options. While large transformation programs may take from months to years to come into effect, it is important to build a solid foundation with an optimal operating model and workflows that starts with keeping data in sync including middle and back-office technology landscape. Firms need to be ready to start from data migration tools having to run ad-hoc reconciliation to more formal data validation checks on a day-to-day basis, and more frequently than just end-of-day, especially when reconciling across multiple data sources.

While some firms get so focused on what is next to come, they lose sight of transitioning from one platform to another and often struggle with questions such as how to know whether a new platform is in sync with a legacy platform. Considerations include what happens: on the first day of transition; when a new complex asset class is going to be introduced in next few months; the time internal teams will spend troubleshooting and explaining a data set to the front office team; with the granularity of recon; to any risks in meeting SLAs.

Optimal reconciliation workflows will not just help answer these questions but also help organizations meet data management goals - increasing the odds of successful transformation by reducing risk and increasing productivity.

Staying in sync across cash, position and transactions with external parties has never been more critical, especially when regulatory and compliance drive technology and operational transformation. If anything, having trust in the firm’s data gives additional validation of the service provider processes and data quality, with reduced dependence on the external systems, where possible.

That said, there are always factors such as resources and subject matter expertise contention, budgetary disciplines, vendor landscape, and the level of automation expected across organizations. All play a vital role in deciding reconciliation initiatives.

Is not doing anything an option?

More frequently  EZOPS comes across clients asking what if we continue as-is with existing reconciliation operating models with manual controls, fractured vendor solution or just using Excel as a solution. Firms tell us we already have a higher match rate, so why do we need to spend time and money going through a transformation?

The answer depends upon a number of scenarios and short & long-term automation goals of an organization. Certainly, doing nothing is going to restrict expected outcomes of future transformation programs as well as make it more complex to adopt new technologies including AI and Machine Learning.

Investment management firms will need to establish reconciliation processes that can tackle new regulations, market changes, ESG initiatives, digital assets and other unexpected challenges. Standing up reconciliation with complex data acquisition processes, to running reconciliation across multiple sources, to automated exception management to reporting - all need to be streamlined to meet any “ask” without having to take steps back before moving forward

When the rubber meets the road

Implementation, implementation, implementation! Investment management firms that are thriving with new initiatives and are committed to achieving reconciliation goals have as the most common denominator successful implementation.

Reconciliation tools for investment management firms cannot be just glorified Excel V-lookups that match two sources but will actually need to have investment management capabilities that help transform operations and technology goals including increased efficiency and reduced operational risk. While time to market during implementation is a key factor, having the right skill set to be able to understand firms’ unique requirements, technical architecture and organizational capability are also key components that define operational success.

In our experience, if execution is not with end goals in mind, reconciliation goes back to spreadsheets, which is one of the most hands-on options.

EZOPS has a much-tailored approach to deliver a reconciliation solution end to end starting from data acquisition including internal/external systems to reporting that focuses on unique use cases of cash. Our implementation approach provides industry hands-on knowledge that will help clients resolve their operating model challenges along with having a seamless product experience.

Currently there are options available to firms that automate, validate data across systems in real time and scale and adapt to market, technology and regulatory developments.  These are the drivers that operations executives must be attuned to in the implementation of reconciliation approaches.

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