Reconciliation is the foundation of good accounting—and integrated systems and processes reduce operational and market risk.
Integrated reconciliation is the linchpin that ties together data from various sources and systems within a fund. By reconciling a fund’s positions, cash balances, transactions, net asset value, and profit and loss, fund managers and investors have an accurate and timely snapshot of its financial situation.
Unfortunately, fund reconciliation processes can leave a lot to be desired. Stretched teams and legacy technology can lead to operational risk and unnecessary costs. Manual or spreadsheet-based processes create errors and inefficiencies and fail to uncover the source of repeat exceptions.
The answer is an integrated, rule-based reconciliation process—one that works across reconciliation types and automates data retrieval, verification, and standardization. By using such a system, teams gain the time they need to investigate the source of persistent breaks and solve these problems.
Here are four ways an integrated approach can help resolve risks from inefficient reconciliation processes.
Risk 1: an incomplete reconciliation picture
Investment managers need daily reconciliations on positions, cash balances, and transactions to get a complete picture of their current situation. The earlier they have this information, the better. Effective trading and investor relations rely on accurate and timely reconciliations.
However, outdated workflows, legacy technology, and missing data contrive to slow this process down. It can mean in-house teams taking four or five hours to complete daily reconciliations. By then opportunities may have come and gone. In an ideal world, investment managers will have this information on their desks first thing in the morning.
An integrated reconciliation process can save a significant amount of time. It automatically scrubs, standardizes, and integrates data from all sources, and runs it through preconfigured rules. It reduces the need for inefficient and error-prone manual data handling.
This accelerated process reduces both market risk and the possibility of a compliance misstep. It’s worth noting that beginning May 2024, the U.S. Securities and Exchange Commission is reducing the settlement cycle for most securities trades from two business days after the trade date to one, requiring funds to update reconciliation processes in preparation.
Risk 2: treating the symptom instead of the cause
Finding out why, where, and when breaks happen is key to an efficient reconciliation workflow. Non-standardized manual activity makes exemption management a case of treating the symptom rather than the cause.
Finding the root cause of breaks sometimes requires manual heavy lifting, but teams may lack the time and resources to do it, or the analytical tools to find patterns in mismatched data. Instead, they resolve individual breaks without getting to the bottom of why they happen, storing up problems for the future.
An integrated reconciliation process and system automates many repeatable manual tasks, giving teams the time and analytical capabilities they need to investigate breaks properly.
Risk 3: reconciliation systems and slowing innovation
Fund management is getting more complex in terms of fund vehicles, strategies, and investor and regulator demands. Against this background, reconciliation can either help funds meet their ambitions or put a brake on them. For example, if a fund moves into a new asset class it may need new trade data, in the right format, from unfamiliar counterparties. Administrators need to be able to integrate new data sources into reconciliation systems without reinventing the wheel.
Quite simply, integrated systems manage data efficiently where legacy equivalents can’t.
It’s worth noting that an experienced outsourced reconciliation partner will have established relationships with relevant counterparties, and knowledge of the relevant files and formats for every common asset class.
Risk 4: accumulating errors
Errors in reconciliation cause inaccurate accounting and strain investor relations. They can lead to compliance challenges and reduced market agility.
Managers have to trust the figures they’re given by in-house accountants and administrators. But these are not necessarily validated and the consequences of errors can be serious. For example, if asset pricing is incorrect, it can lead to unprofitable trading decisions.
In an integrated system, a third-party specialist will have access to pricing data and can perform a reverse valuation to make sure in-house figures match up. For managers, this provides valuable insurance against the possibility of costly mistakes.
For more detail on best practices in integrated reconciliation, download our new report.
Why CSC?
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader working with funds of all sizes, we’re the trusted partner of choice for 90% of the Fortune 500® and 70% of the PEI 300. Privately held since 1899, CSC is a global company with capabilities in more than 140 jurisdictions. We’re capable of doing business wherever our clients are by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.