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RECONCILIATION
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DISCLAIMER
The training content and delivery of this presentation is confidential, and cannot be
recorded, or copied and distributed to any third party, without the written consent
of Imarticus Learning Pvt. Ltd.
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YOU ARE GOING TO LEARN…

• What is Reconciliation?
• Purpose of Reconciliation
• Importance of Recon
• Recon Process
• Types of Recon
• Internal
• External

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WHAT IS RECON?

• Reconciliation is the Control Process by which 2 or more sets of data are compared and any
discrepancies are investigated and documented through to resolution, including formal reporting and
escalation.

• Reconciliation of positions and trades within internal books and records with the outside world is of
utmost importance in ensuring that any Bank remains in Control of its assets and liabilities

• The primary purpose of reconciliation is to identify and resolve any differences between the two
sets of records, which may arise due to various factors such as errors, omissions, or timing
differences.

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WHY RECON?

• Irrespective of what part of the company you are involved with, you will always need to know what
your positions are, whether they are securities-related or cash-related. A problem arises when the
position that you think you have either does not exist or indicates a different amount to what you
actually have. In other words, you need to be sure that the position you think you have does actually
exist

• Total Position for securities total balance for cash can go wrong, if the individual transaction for cash
and securities goes wrong.

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PURPOSE OF RECONCILIATION

Here are some key aspects and purposes of reconciliation:

• Verification of Accuracy: Reconciliation is used to verify that the data or transactions in one set of
records match those in another set. This is done to ensure that all information is accurately recorded
and accounted for.
• Identification of Discrepancies: During the reconciliation process, any discrepancies or
differences between the two sets of records are identified. These discrepancies could be in the form
of missing items, incorrect amounts, or other inconsistencies.
• Resolution of Differences: Once discrepancies are identified, the reconciliation process typically
involves investigating the root causes of the differences and taking corrective actions to resolve
them. This may involve making adjustments, corrections, or further investigations to rectify the
issues.
• Enhanced Transparency: Reconciliation enhances transparency by providing a clear and
documented record of the steps taken to ensure data accuracy. This is important for audit and
compliance purposes.

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PURPOSE OF RECONCILIATION

• Risk Management: Reconciliation is an essential part of risk management. It helps mitigate

operational and financial risks by identifying and rectifying errors and discrepancies before they can
have a significant impact.
• Financial Reporting: In accounting, reconciliation is crucial for producing accurate financial
statements. It involves comparing the general ledger with subsidiary ledgers, bank statements, and
other financial records to ensure that the figures match.
• Overall, reconciliation is a systematic and methodical process that contributes to the accuracy,
transparency, and integrity of financial and operational data. It is essential in various business
contexts to maintain trust, meet regulatory requirements, and ensure the proper functioning of
financial and operational systems.

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EXAMPLE OF WHY RECON?

• As an example of a potential problem, your records show that you have USD 1,000.00 in your bank
account. You receive a bank statement showing a credit balance of USD 1,000.00. You then make a
payment of USD 900.00 on the assumption that you have sufficient funds in your account.
• Thinking that you have a credit balance of USD 1,000.00, you are surprised when you receive a
subsequent statement stating that you are several hundred US dollars overdrawn. In addition to
being overdrawn, you will be liable for overdraft interest. Why are you overdrawn? What has gone
wrong on your bank account?
• This is where a reconciliation would have been helpful. A thorough investigation would have shown,
for example, that you had recently issued a cheque for USD 350.00 but failed to book it into your
records. Had you done so, your records would have shown a balance of USD 650.00 (not USD
1,000.00), and it would have been clear that making the payment of USD 900.00 would have taken
your account into debit (i.e. overdrawn).
• The fact that the cheque had not cleared only made the situation worse, as you looked at the bank
balance before deciding to pay the USD 900.00.

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IMPORTANCE OF RECON

It serves several critical purposes that contribute to the accuracy, transparency, and efficiency of an
organization's activities. Here are some key reasons why reconciliation is important:
• Accuracy and Data Integrity: Reconciliation helps ensure that financial and operational data is
accurate and reliable. By comparing and verifying records, discrepancies, errors, and omissions can
be identified and corrected, preventing inaccuracies in financial statements and reports.
• Risk Mitigation: Reconciliation is a key component of risk management. It helps identify and
address errors and discrepancies before they can lead to financial losses, compliance issues, or
other operational risks.
• Compliance: In many industries, organizations are subject to regulatory and compliance
requirements that mandate reconciliation processes. Compliance with these regulations is essential
to avoid legal penalties and maintain the trust of stakeholders.
• Transparency: Reconciliation enhances transparency by providing a documented trail of actions
taken to ensure data accuracy. This transparency is essential for audits, regulatory reporting, and
building trust with stakeholders.

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IMPORTANCE OF RECON

• Operational Efficiency: Accurate reconciliation processes lead to greater operational efficiency.

They reduce the time and effort required to identify and rectify errors, resulting in a smoother and
more efficient workflow.
• Financial Reporting: In accounting, reconciliation is vital for producing accurate financial
statements. It involves comparing general ledger accounts with subsidiary ledgers, bank
statements, and other financial records to ensure that the figures match. Accurate financial reporting
is essential for making informed business decisions and maintaining investor confidence.
• Prevention of Fraud: Reconciliation can help identify discrepancies that may be indicative of
fraudulent activities. When discrepancies are spotted and investigated, it becomes more difficult for
fraudulent transactions to go unnoticed.

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IMPORTANCE OF RECON

A fundamental loss of control … not knowing if …

• The Settlement system has the full population of trades
• Stock or Cash has been moved from the Bank’s account without one’s knowledge …
• leading to …
• Actual loss arising from Human/ Systemic error or Delays and Fraudulent activity (E.g. – Mis-posted
failing trade; Inaccurate Redemption posting)
• Poor Decision making arising from inaccurate information (E.g. – depot of delivery not having
adequate quantity of a multi-listed security)
• Inaccurate/ Mis-stated Financial Reporting (and subsequent SOX consequences) arising from Human/
Systemic error or Delays and Fraudulent activity (E.g. – Finance/ Product/ Trading Book control teams
reconcile P/L on a daily basis)
• Regulatory Censure/ Fines and subsequent Reputational impact (E.g. – breach of Client Money rules
of the FSA)
• Strained Client Relationships and/ or Loss of Client Revenue through Inaccurate reporting (E.g. - a
Broken trade-by-trade reconciliation could lead to Inaccurate reporting of open trades to a Tier 1 client)

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TYPES OF RECON

Accurate and timely reconciliation will ensure that both the Front Office and Operations will know, with a
high degree of confidence, what their asset balances are and, just as importantly, where these assets
are being held.

We can consider the concept of reconciliation from two points of view:

• Comparing our internal records (our ledger) with those of an external entity (e.g. a bank statement,
depot statement, broker statement etc.); - EXTERNAL RECON

• Comparing within our own internal books between different departments/ different subsidiaries –
INTERNAL RECON – Intra and Inter

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RECON PROCESS

Reconciliation is a Control Process wherein:

1. 2 or more INDEPENDENT sets of data elements are compared and matched.
2. The data elements need to be from 2 different sources.
3. If the data elements do not match, the differences are referred to as a ‘BREAK’ or discrepancy.
4. Breaks need to be investigated and Resolved.
5. Unresolved Breaks require Escalation to Management for attention and resolution.
6. The Breaks identified and the resolution process needs to be documented and reported.
7. Ageing of Breaks is a key RISK Management metric to monitor the progress of Break resolution.
Breaks can be matched even though there is not an exact match as long as the break values are within
the established Tolerance levels. E.g. an accepted tolerance level for currency could be 5 USD.

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TYPES OF RECON

Internal Recon External Recon

1. Intra System Recs 1. Depot Recs –

• FO V/S MO, MO V/S /BO AND FO • Internal System with external

V/S MO parties

• It’s a pre recon • It’s a post recon of Stock

2. Inter System Recs 2. Nostro / cash Recs –

• Our books with subsidiaries • Internal System with external

parties

• It’s a post recon of Cash

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TYPES OF RECONCILIATION

Type Involves Comments

1. Trade-by-trade Individual trades Front Office positions vs. Operations' positions

Internal
Recon Totals of trades recorded
2. Traded position within a trading book/for a Front Office positions vs. Operations' positions
client

Operations' positions vs.

3. Open trades Individual trades
custodian/broker/counterparty

Totals of securities positions

External
4. Depot position held within a trading book/for Operations' positions vs. custodian
Recon
a client

Cash balances and

5. Cash position movements within a nostro Operations' positions vs. custodian/bank
account

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TYPES OF RECONCILIATION

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TYPES OF RECONCILIATION

• Types 1 and 2 are internal reconciliations that ensure the dealers' blotters agree with the settlement systems
in the Operations Department.

• Types 3, 4 and 5 are external reconciliations:

• Type 3 handles both the asset and the cash counter-value;

• Type 4 handles non-cash assets only;

• Type 5 handles cash only.

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INTERNAL RECONCILIATION - INTRA

• Internal reconciliation is very important to any investment bank to resolve breaks that arise due to
feed issues between the front-office and back-office systems

Sales support trade reconciliation (FO-FO)

• Reconciliation between order management (sales system) and front office trading system

Front Office Trading to Risk Management system (FO-FO)

• Automated reconciliation of data between both the systems to make sure risk system has captured
all the trades. Any missing trades have to be escalated to respective Tech department, who would
make sure all the trades are captured
Front Office Trading to Operation Systems (Intra) (FO-MO-Core Ops)
• Reconciliation of data between front office and operations system is necessary to make sure all the
trades are accurately captured in these systems.

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INTERNAL RECONCILIATION - INTRA
Position Reconciliation

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INTERNAL RECONCILIATION - INTER

Inter companies transactions are the movement of positions between two Internal IB
Subsidiaries that are on the back of Financial Transactions. For e.g: ABN Amro Frankfurt
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agrees an FX trade with BAML NY. However, the ABN Amro Trader has his Profit Centre with
ABN Amro Frankfurt. This will create an Intercompany Transaction.

The Intercompany reconciliations will cover all the trades between multiple subsidiaries to
02 ensure that the positions between them are accurate. For E.g. ABN Amro Frankfurt agrees an
FX trade with BAML NY.

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EXTERNAL RECONCILIATION WITH CUSTODIAN
Position Reconciliation

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EXTERNAL RECONCILIATION WITH CUSTODIAN – NOSTRO 2

ACCOUNT
In order to deal in the Foreign Exchange Market and transact in foreign currencies, banks
maintain accounts with other banks globally. This is known as a Nostro Account. The Nostro
reconciliations are an accounting process used to compare two sets of records to ensure that
the figures are in agreement and are accurate, and is commonly used for currency settlement.
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Banks maintain accounts with other banks (Nostro Accounts) and it is necessary for them to
reconcile Ledger account Statements with the Nostro Account Statements. The replica of Nostro
account is maintained by the bank in its books or operational purposes and is known as a Nostro
mirror account.

Ledgers: Entries generated internally

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(Nostro Mirror Account)

03 Statements: Entries from Nostro banks

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EXTERNAL RECONCILIATION WITH CUSTODIAN – NOSTRO 3

ACCOUNT
Through the process of reconciliation, banks can track the status of:
• Cash received/receivable
• Amount paid/payable
• Track unsettled transactions either in mirror or in actual Nostro accounts
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• For instance, banks can ensure that their interbank cash flows from FX Spot, FX Forward, FX
, Swaps, borrowings, placements, derivative have settled
• Reconciliation helps in identifying unsettled/ discrepancy and transactions and helps in quick
remedial action

Nostro Credit entries/Statement Credit are reconciled against internal debit entries/Ledger debit.
Nostro Credit may arise due to:
05 • Payments received on behalf of customers
• Interest amount credited to nostro account
• Receipts from interbank deals

Ensure that all the receipt settlements are acted upon by the correspondent bank and are
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reflected in the Nostro statement accordingly

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EXTERNAL RECONCILIATION WITH CUSTODIAN – NOSTRO 4

ACCOUNT
Nostro debit entries are reconciled against the internal credit entries/Ledger credit. Nostro debits
may arise due to:
07 • Honoring the payment messages sent by the bank/payment of draft issued by the bank
• Charges debited in the Nostro accounts
• Payments on account of interbank deals

Nostro Breaks Reasons –

• Investment bank makes a payment to the client but the Nostro bank does not debit the
08 account for the payment due to insufficient cash balance in the account.
• Client pays incorrectly to the IB’s Nostro account which does not match any transactions that
the IB has entered into.

Nostro Breaks Example – Ledger and Statement Breaks examples

Ledger Statement
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(+) $1,000,000 NO ENTRIES

NO ENTRIES (+) $7,000,000

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EXTERNAL RECONCILIATION WITH CUSTODIAN – DEPOT 5

ACCOUNT

Positions are reconciled to ensure positions/holdings are matching Internally (Trading system,
01 accounting system and risk system) and Externally (Accounting vs Custodian books) on a daily
basis.

Risk of Not Performing Reconciliations Failure to perform position recon can lead to:
• Missed trade: Either the Investment manager or the custodian can miss recording trade or
02 other transaction like dividend, interest etc. If this situation is not resolved the market value of
the fund is not correct and the NAV of the portfolio can be misrepresented to clients,
participants and portfolio managers.
• Booking error: Trade incorrectly booked by custodian/Investment manager (Buy v/s Sell,
Incorrect quantity, price etc.).

Financial and reputational issues: As the price of the security would have moved with the moving
03 market, fixing the error at a later point in time could lead to losses and sometimes could damage
the reputation.

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EXTERNAL RECONCILIATION WITH CUSTODIAN – DEPOT 6

ACCOUNT

Depot Beaks Reasons –

04 • Securities not released to CP/Client due to insufficient shares in the depot account.
• Securities received without trade being booked into the system.

Depot Breaks Example –

Ledger Statement

05 10,000 shrs of Tesla Cr. 9,500 shrs of Tesla Dr.

NO ENTRIES 5,150 shrs of Apple Cr.

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EXCHANGE AND OTC RECONCILIATION
Exchange Reconciliation
• This type of reconciliation is done between Middle Office
and stock exchange systems. This is to ensure that no
order (parent or child order) is missing in the bank’s
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internal system. If orders are missing - this reconciliation
will highlight any missing orders and the MO team has to
work with FO Tech to ensure all trades have flown down
into the systems.

OTC Reconciliation
• There are several reconciliations done when an IB enters
into a OTC transaction.
02 • First the trade needs to be reported to the CCP within
15 - 30 mins. of entering into the transaction.
• At EOD all transactions that were reported at BOD are
reconciled to ensure that no transactions are missing.

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WHY RECONCILIATION?

As we have discussed, a large financial institution does numerous types of reconciliation from Front
Office to Back Office. Now let’s look at the reasons why Reconciliation is so important:
• Avoiding Fraud - at all steps in the trade life cycle.
• Accuracy of cash and stock movements.
• Balancing investment positions.
• Portfolio Management
• Ensuring accuracy of Trades throughout the life cycle of a trade.
• Managing Settlement and Reconciliation Risks
• Matching Bank Statements with Internal Records
• Detecting Errors and Unaccounted Transactions

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