Reconciliation

 We did Reconciliation when we discussed Trade Life Cycle, as a buyer of shares, you reconcile if
you received the correct quantity of shares and as a seller of shares, you reconcile if you
received the correct Cash.
 Reconciliation can be done at various stages in TLC, Post Settlements Reconciliation in the TLC is
the last step in every product to ensure we received what was expected and paid out what was
expected to be paid out. Pre Reconciliation is the one where we compare our and clients trade
economic details to ensure they are correct.
 Is comparing two or more sets of data to ensure there is no discrepancy or mis match.
 Based on the data we have two types of Recon. Internal and External

Internal Reconciliation – where we reconcile internal set of data e.g. feed between 2 internal systems.
External Reconciliation – where one of the set of data is from external sources.

External Reconciliation –

1) Broker Reconciliation –
 We compare the trade details with the counterparty, affirmation/confirmation stage in OTC and
confirmation stage in Exchange TLC.
 In Exchange what do we do in confirmation stage? We receive electronic file with status of
matched/unmatched.
 If OTC what do we do at affirmation stage? We refer to external platform like OASYS and ensure
the economic details match else change client or middle office to rectify it before settlement
date to ensure trade settles.
 This recon is done to ensure the trade details match completely from the TD to the SSIs so that
the trade settles on settlement date when the market opens.

2) Custodian Reconciliation –
 Here we compare the number of positions and cash we see for our clients vs the
number of positions and cash that we see at the custodian for the same client.
 When we reconcile the number of positions we call it as Depot Recon and when we
reconcile the cash we call it as Nostro Recon.
 If there is a miss-match in the number of securities or cash it is called as a Break.
 Here if IB is acting as a broker booking trades on behalf of the client, they can’t act as
Custodian for the same client. This is prohibited by regulators.

IB : GS Custodian : BONY
Client A Client A
Position Position GS managing Client A BONY
100 Google Depot Recon 100 Google Client A Buyer Custodian A Custodian B Client B Seller
300 Amazon 300 Amazon
500 GE 500 GE
Cash Cash Transfers Funds to Seller's Transfers Shares to Buyer's
1 Custodian a/c Depository a/c
$10,000,000 $10,000,000
€ 50,000,000 Nostro Break € 50,000,000 2 Receive Shares Receive Cash
£ 15000000 £ 15000000
Let’s look at an example of break;

 Depot Breaks -
Google and GE shares match between Client and Custodian, hence no break received for the same.
Amazon, Client reflects 300 shares, wherein Custodian reflects 350 shares, so this needs to be further
investigated.
System does reconciliation and auto matches if no difference. Where there is difference it would
generate an exception for us to investigate further.
We would reach out to Custodian to understand why is there a difference?
 Missed to transfer shares - we instructed sell of 50 shares but they were not delivered by Custodian.
Custodian would look to deliver it again.
 Return of shares – The shares were returned back by counterparty in error. We would instruct
Custodian to repay back to client.
 Incorrect Depository account – The counterparty’s depository account was incorrect. We would
chase client to provide correct depository account and get Custodian to repay.
 Custodian deposited in error - Custodian deposited shares in our account incorrectly which was
meant for another client. We would get Custodian to remove those shares.

Ledger Statement

IB : GS Custodian : BONY
Client A Client A
Position Position
100 Google Depot Recon 100 Google Auto-matched
300 Amazon 350 Amazon Depot Break
500 GE 500 GE Auto-matched
Cash Cash
$10,000,000 $9,500,000 Nostro Break
€ 50,000,000 Nostro Break € 50,000,000 Auto-matched
£ 15,000,000 £ 15,000,000 Auto-matched

Nostro Breaks –

What is Nostro bank?

 Nostro bank / Correspondent Bank/ agent bank is the bank where client maintains account,
global clients would usually have accounts in each country/currency as they do global
transactions. Client can use GS or any other bank to maintain these accounts.

 Let’s assume client maintains Nostro accounts for $, €, £ with BONY. Here Nostro account with
BONY reflects balance of $9.5M and balance in clients account reflects as $10M. We would get
break for this to investigate, it could be due to;
 Share purchase trade settled, where BONY paid out $500kand received equivalent shares, but
we don’t have that trade reflecting in our books or we see it as unsettled hence we did not
expect that amount to be debited.
 Our book of transactions is referred to as Ledger and custodian book of transactions will be
referred to as Statement.
 Below we take a look at how the securities and Cash is reflected in Ledger and Statement for a
buy and sell.
  If we instructed a buy of 100 shares, so the securities in Our Ledger would reflect as Credit of
100 shares and on the Custodian as well it will reflect as 100 shares.
 If it’s a sell Our Ledger would reflect as Debit of 100 shares and Custodian Statement will also
reflect Debit of 100 shares.
 However when it comes to Cash, Ledger posting is Opposite as we follow rules of accounts
which is Debit what comes in and credit what goes out. Which means below Cash payment of
$1000 would reflect as Credit in our Ledger books and Debit in Custodian’s Statement book.
 If it’s Cash receipt of $1000 would reflect as Debit in our Ledger books and Credit in Custian’s
Statement book.

IB : GS Custodian : BONY
Client A Client A
Stock Ledger Stock Statement
Buy 100 shares
Pay $1000 Cr 100 Shares Cr 100 Shares
Sell 500 shares
Rec $5000 Dr 500 Shares Dr 500 Shares
Cash Ledger Cash Statement
Buy 100 shares
Pay $1000 Cr $1000 Dr $1000
Sell 500 shares
Rec $5000 Dr $1000 Cr $1000

Internal Recon –

Also called as FO-MO-BO recon

1) Trade Recon
Here we reconcile the number of trades the FO booked is the same the MO and BO see.

  Scenario 1 Scenario 2 Scenario 3 Scenario 4

FO 100 100 100 100
MO 100 100 100 100
BO 100 101 99 100+1

Scenario 1: no discrepancy in the number of trades

Scenario 2: 1 extra trade we see in BO system.
When the trades flow from FO&MO to the BO, what are the likely scenarios? Duplicate trade as
extra trade cancelled in RMS but the cancellation did not feed down to BO system. Here MS
would not match us on OASIS or during affirmation stage and hence we would qry to MO about
this extra trade as a potential duplicate trade. MO would come back stating ohh! we see it
cancelled in RMS, and they would raise this to tech team to cancel the extra trade.

TD SD Dir Asset Qty Px TV Cpty

30-Nov 2-Dec Buy Google 1000 $53 $53,000 MS
30-Nov 2-Dec Buy Google 1000 $53 $53,000 MS Duplicate trade
 Scenario 3: 1 less trade in BO system
When the trades flow from FO&MO, one trade was not validated by MO hence it did not feed
down to BO system. Cpty contacted us and said they have a trade with us which is not being
confirmed by us. Hence we would check with MO and MO would validate and push the trade
down to BO system. Also possible Trader must have missed booking the trade which would later
be booked by trader and that’s when we would see the trade in BO system.

Scenario 4: CPTY sees 1 extra trade facing us.

Cpty is facing us incorrectly. So we see an allege confirmation from them in OASYS, we contact
them for more details, cpty checks with their MO and later realizes that trade should have been
booked facing some other client and not us. So they cancel the trade facing us and that
confirmation disappears from OASYS.

2) Position Reconciliation –
Here we reconcile the number of securities.

Client A's a/c

100 Google
300 Amazon
TD SD Dir Asset Qty Px TV Cpty
1-Feb 8-Feb Sell Google 150 $40 $6,000 MS
1-Feb 8-Feb Sell Amazon 500 $30 $15,000 HSBC
7-Feb Buy Google 300
8-Feb Buy Amazon 400

 Let’s take the above example of Client A, in the account as of today there are 100
Google, 300 Amazon and 500 GE shares and trader books the following sell trades on
Client A’s account.
 Sell 150 Google and Sell 500 Amazon, are there enough shares in the account? No, as
Client A’s account has 100 Google shares and 300 Amazon shares, but trader has
booked settlement of 150 Google shares and 500 Amazon shares, now there is shortfall
of 50 Google shares and 200 Amazon shares.
 What the MO will do first is check to see if there are any buys on Google and Amazon
that will settle on or before the settlement of the Sells which would be sufficient to
deliver the sell trades. Hence it is important for buy trades to settle.
 If not MO would inform trader to buy more shares to allow sufficient balance in our
account. Else we would fail to settle the shares and client would issue Buy-in notice to
us.

3) Cash Recon -
 Here we reconcile the amount of cash is sufficient to settle buy trades that will settle on
a given day.
 Again lets look at the example of Client A that has the below cash in the account.
 Client A's a/c
USD 10,000,000
EUR 12,000,000
GBP 5,000,000
TD SD Dir Asset Qty Px TV Cpty
1-Feb 8-Feb Buy Berkshire Hathway50 $ 470,500 $ 23,525,000
8-Feb Sell Berkshire Hathway $10,000,000
8-Feb Sell Berkshire Hathway $25,000,000
8-Feb Sell Berkshire Hathway $14,000,000

 The trader books a buy of 50 Berkshire Hathway @ $470,500 for SD 8-Feb, is there
enough money in the account to buy? No as a/c balance is USD 10M and payment is of
USD 23M.
 The MO will check to see if any sell of shares settle on 8Feb that would bring in enough
cash to settle the buy of 50 Berkshire Hathway shares.
 If not we would ask MO to check with FO and fund the account by selling shares.