Smart Reconciliation and What's Next for Buy-Side Investment Managers

A Q&A discussion with Electra’s SVP of Client Services, Paul Chung

How can buy-side investment managers best leverage technology to build a smart and collaborative reconciliation function in the face of unprecedented market volatility and volume? Electra’s Paul Chung explains the increasing importance of reconciliation to reduce risk and improve overall operations, and the technology and outsourcing capabilities that are positioning buy-side firms to conquer the next big operations challenges.

Q: What are some of the key challenges buy-side investment management firms are facing today in terms of reconciliation and post-trade operations?

Paul Chung:  Of course, the biggest recent challenge was communication when firms moved to working remotely. Now that challenge has shifted to Zoom fatigue, working from home fatigue, and staying engaged with their colleagues. In some cases, it’s the lack of collaboration that is missing. Firms with a close-knit, collaborative culture really miss interacting face-to-face and working together in small teams. That’s especially the case in middle- and back-office operations.

Operational risk mitigation and reconciliation became key themes in the COVID era, as firms witnessed unprecedented market volatility. Many firms reported trade volumes of three to four times the norm. Luckily, many had invested in technology over the last couple of years, so they were well prepared operationally and were able to adjust smoothly to the changing dynamics. Most had some level of business continuity plans in place and could scale up their processes as needed.

Q: There were obviously high volumes of reconciliation going on in 2020. Did that spawn more conversations with firms about how to efficiently streamline reconciliation?

Chung: Yes, and going remote during this high-volume period underscored various process gaps that had not yet been addressed in many firms’ reconciliation. We have been able to help firms bridge those gaps through efficient workflows and an integrated reconciliation process to make sure breaks are researched effectively. What’s interesting is the accelerated timescale of technology implementations once we were in lockdown. Firms who had normally planned on an 18-month project were able to compress the timeline dramatically during the pandemic. To us, that underscored the urgency and value firms placed on technology when dealing with uncertain economic, industry and work environments.

We also helped firms find more ways to save time and ensure their staff is focused on the right exceptions in the reconciliation process. Firms are always looking to help their teams become more efficient by reducing or eliminating unnecessary manual work. Reconciliation is one of those areas that has far-reaching tentacles throughout the firm. Therefore, the impact we can have on helping firms achieve these efficiencies can benefit the entire post-trade operations lifecycle and function. We’re helping firms implement machine learning and application programming interfaces (APIs) to match information and integrate systems, and increase efficiencies.

Q: There is an increased focus on making reconciliation smarter. What is “smart reconciliation?”

Chung: Smart reconciliation is ensuring a high percentage of non-value-add reconciliations are handled efficiently by automation and within a more collaborative, centralized reconciliation function. There are many legacy reconciliation processes being handled in multiple silos within a firm, which results in work being repeated across multiple departments. That is not only inefficient, but a serious resource drain.

Smart reconciliation ensures more transparency across the firm, and a greater ability to focus only on true breaks rather than routine reconciliations and false positives. When reconciliation is “smarter,” firms can increase the value of the function with greater cross-departmental collaboration. For example, a smart reconciliation solution would automatically suggest possible reasons for a break by incorporating external data sources (such as failed trades, collateral held, pending trades, securities lending and corporate actions) while eliminating the need for staff to manually access information residing in different systems when researching an exception. Greater collaboration results in higher productivity and scalability since work is not repeated across teams.

Q: The reconciliation process and operations overall are highly reliant on external data. How are firms handling the increased pressure of high volumes of trades and reconciliations?

Chung: Data is a real pain point for many asset managers. As firms continue to face fee pressures, their operations teams must acquire, normalize, validate, and reconcile data from custodians and other external sources. The process includes managing numerous feeds, or manually accessing or researching data on websites to feed the reconciliation process, which is inefficient and rife with errors.

Data drives the reconciliation process, and if that data is not complete, accurate and timely, the impact is increased risk. Sometimes data is delayed coming in from custodians and other sources, or it is incomplete or missing. Someone has to track it down and find out when it’s coming through – which takes time away from other tasks. Then preparing the data is a challenge. What’s the value-add of doing all that work in-house?

There’s also a growing need to reconcile different types of data outside of just the cash, positions and transactions, and client meta data. Corporate actions is a big struggle from a back-office operations point of view, as are collateral management and securities lending – areas where firms are seeing increased complexity and scope of relevant data points to manage.

We’ve seen a consistent uptick in interest and adoption of our data aggregation service – which is a completely outsourced service for collecting, normalizing, validating and enriching data from all the major custodians, brokers, banks and other sources around the world.

Whenever you’re talking about reconciliation, you’re talking about data and the quality of data. You might not have so much control over the data quality – in terms of formatting, availability, timing and what actions you can take on it. At the end of the day, teams need to be focusing their time on the most value-added tasks – researching true breaks and exceptions, and getting to the root cause of issues – not spending time on more tasks created by an incorrect price, a missing trade date, or formatting. They just want to drive processes and take action wherever they can.

Q: What other types of value are firms looking to get from their reconciliation workflow?

Chung: Many firms make investment decisions coming from the data they’re reconciling, and are constantly evaluating what they’re getting out of the reconciliation. They want to be able to get the most meaningful information to the teams that need it as quickly as possible. But most firms run very lean from an operational perspective, so they have an interest in improving efficiencies and reducing the burden on their teams. Many firms are also experiencing more staff turnover than ever, so they worry about losing critical system and process knowledge when someone leaves the firm.

There are also more conversations going on around managed services to extend a firm’s operations team and alleviate routine tasks from their staff so they can focus on higher value work. A highly skilled managed services team can provide the value-add input to identify more ways of looking at breaks, do a first pass on reconciliations, and maintain the ecosystem as a power user – while the firm still owns the information. They can also offer best practices, guidance, and many pairs of eyes looking at particular issues.

Q: What is the outlook for reconciliation technology for buy-side firms going forward?

Chung: Buy-side firms know that reconciliation is a necessary control. Increasingly, they are embracing technology and new ideas, with the singular focus of creating more of a central repository of reconciliation. Identifying non-value reconciliation processes, making post-trade operations more efficient, and staying scalable are key factors to growing the business and reducing risk. There’s an increased appetite for firms to get more output and value from reconciliation to address other problems across operations, either downstream or upstream. The right combination of smart reconciliation, quality data aggregation, and managed services are key to ensuring firms have a solid foundation for success going forward.

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Paul Chung is senior vice president of Electra's client services and support. 


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