Last month we held our annual global client event in Hamburg, with over 600 delegates from 130 asset managers present. In the product roadmap presentation by Marc Schröter, a live poll was taken asking the audience to identify which product they expected to get most value out of in the current and future SimCorp Dimension releases.
For me personally, it was nice to see that Reconciliation came out top, followed closely by Data Warehouse and Alternative Investments.
Good reconciliation practices, which include a fully integrated Reconciliation architecture, can contribute to the core business objectives of investment managers. Minimizing the cost and inefficiencies of maintaining multiple systems has a direct bearing on the profitability of the organization and the cost of service to its stakeholders.
Furthermore, knowing your positions/balances with confidence can free up people and assets to seek alternative profits in the shape of growing securities lending, repo, and other money markets.
Having an investment book of record (IBOR) means knowing with confidence, that whatever your view or role within the investment management firm, you are looking at the same up-to-date figures. Your IBOR should reflect, among other things, the new investable cash arising from a Corporate Action, and provide warning of an impending failed trade. This transparency and insight ensures that you make the best investment choices, intraday.
The IBOR also saves the time that your Portfolio Managers spend reconciling positions every morning and ensures that your front and back office view of the world is perfectly aligned.
Reconciliation and the IBOR are natural bedfellows. IBOR provides the trusted figures throughout, and Reconciliation the verification that these figures are consistent with external partners, including global custodians.
Can reconciliation work without an IBOR? Yes, but it just won’t be nearly as effective, accurate, cost efficient, nor will it minimize risks.
TABB Group recently published a report on front office trading technology, Breaking Down Buy-Side Barriers: Achieving Alpha Through Agility, in which there were two interesting takeaways for me.
Firstly, the report states that the “largest barrier to an error-free trading environment, as well as trading agility, is the reflection of incorrect share positions and cash balances in front-office systems.” Quite simply, if you don’t know how much you have (e.g. how much stock or cash), then you are in no position to make intelligent, and accurate investment decisions. Reconciliation is the mechanism to inform – inform how much you have, so that decisions can be made with confidence, and profits maximized.
Secondly, the report also found that, “Front- and middle-office staff spend an average of one hour per day manually identifying, investigating, and resolving discrepancies and errors.” This is the operational cost, a shared cost, of bad reconciliation (rather than the equally important lost opportunity).
Traditionally, it was the back office that spent the time investigating bad valuations and reconciliation breaks, but no longer. This task has spread to the front office, and therefore gained greater prominence. It has taken away the ability of the front office to concentrate on their traditional value-adding tasks i.e. making investment decisions. Because the front office is much better placed to get the funding they want for project initiatives, the probability of Reconciliation projects actually materializing has gone up.
Over 25% of delegates at this year’s IUCM signed up for the Reconciliation hot-topic session and I was lucky to share the stage with one of our largest clients (and Development Partner) who was also the first client live with our Reconciliation Manager solution. Although only live for a short period of time the client has already experienced substantial decreases in their processing time for their Reconciliation (from over 4 hours to under half an hour), as well as an increase in their auto-matching rates (from 86% to 95%).
During the session I asked attendees via a poll to consider how long they spent on identifying and resolving exceptions across different reconciliation systems. The majority stated that it was between 1-10 minutes per exception, and a significant minority stated that it was over 1 hour! Quite a cost, when considering the volumes of breaks that are experienced by some organizations.
Although scratching the surface of the cost side of the Reconciliation equation, I thought this was a useful exercise as a first step in helping delegates work towards a business case for Reconciliation. Of course, as I have stated, it was not all dry talk of inefficiencies, but also of opportunity. It is the opportunities that good Reconciliation provides that I would like to leave as a final consideration.
To read more about Reconciliation, read my previous blog post about it.
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