Reconciliation of transactions is one of the critical operations in every financial institution and the effective management of this activity is essential for the success of an organization. The main objective of performing reconciliation is to identify incompatibilities in data and achieve resolution Reconciliation is an important function in the areas of Cash Management, Payment Processing, GL Accounting, pre and post Trade Settlement, Position Management, Confirmations and Risk & Compliance Management. Banking Operations Cash Management: Timely bank reconciliation would allow effective management of payables and receivables thereby enabling timely management for optimum utilization of cash. This includes identification of suitable opportunities to capture revenue and more efficient use of cash resources.

• Validating Financial Statements: Uniform Commercial Code regulates all the activities between the client and the business institution. It expects the business clients to notify their banks of any statement discrepancies that may point to an error or fraud. The account holder / client loses the right to claim in case of any errors in their financial statement. Proper reconciliation management might help identify possible process gaps and rectify the same.
  
  
• Risk Management: Reconciliation acts as one of the means in achieving the goal of risk management that is protection of corporate assets and minimization of losses. Highest priority is given to exceptions arising out of the reconciliation process, which could lead to cash loss by the organization. Effective recon process also avoids any unwanted reputation loss to the organization by way of timely settlement.
  
  
• Compliance risk : Proper bank reconciliation helps banks in spotting unusual and suspicious banking activities like deposits recurring at a particular period of time in the customer accounts, wire transfers in huge sums from overseas accounts, etc. With a prior knowledge about customers with KYC policy, banks may be able to spot fraudulent activity.

Trading operations

• Front office: Front office operations include trade order management, capture and execution, deal structuring, data reception & distribution, pre-trade compliance, portfolio analytics etc. Scope for reconciliation comes in the trade validation process wherein the structure of the agreed trade is checked against the corresponding booking into the front office system. Daily recon process is executed to ensure the matching of front and back office records to sort discrepancies arising out of manual error during input.
  
  
• Middle office: Middle Office operations include risk management, position management, post-trade compliance, settlement and trade matching.
  
  
Funds reconciliation : Cash management prepares day to day reports of the cash balance at the close of business. Reconciliation solution compares the actual receivables and payables with those positioned to be paid / received for the particular value date. This effectively sorts out any likelihood of overdraft positions in the nostro account and also identifies any unutilized funds lying in non-interest bearing accounts, which could be invested elsewhere to reap benefits to the organization.

Pre & Post Settlements: Pre-settlement involves confirming and reconciling future deal coupon flow projections of the bank with those of the counterpart bankers. This is the initial process wherein possible differences in the settlement are identified. Post settlement process identifies real time exceptions arising out of reconciliation process and thereby continues with the aid of an exception management system for effective analysis and resolution of the discrepancy.


• Back office: Back office operations include confirmation, P&L calculation, trade inventory, custodian services, collateral management, transfer agency, client reporting, etc.
  
  
P&L Calculation: Profit and loss statement (P&L), in general, refers to the income, expenses and the net profit of the organization. This acts as an indicator of trading floor performance in capital markets. It is calculated on a daily basis to measure and validate the results of daily transactions done and to realize and allocate the profits arising out the deals, to the corresponding trading area / network. Reconciliation requirements exist in P&L calculation at following levels:


• Perform daily P&L verification between official P&L and General ledger
• Perform daily balance sheet verification and management
  
  
Confirmation matching: Confirmations department is responsible for the preparation, execution and delivery of the document framed as per ISDA rules, and also the matching of the document received from the counterpart, reconcile them and sort out any possible discrepancy arising out of the terms of the trade. Effective confirmation reconciliation would help resolve any possible discrepancy or erroneous booking of the trade at its infancy.

Key Challenges in Reconciliation

• Managing Increasing Trade Volumes: Currently, financial institutions and investment banks are up against the challenge of ever increasing volumes of trade transactions to be reconciled and complexity of day to day new instruments coupled with regulatory compliance demands and also the need to reduce the inefficiencies in their operations.
  

• Reducing Manual Reconciliation Errors: The need to reduce manual errors during reconciliation is of utmost importance to reduce potential operational risk and thereby minimize operational cost without hindrance to the normal processes.
  
  
• Achieving Data Consistency: Achievement of consistency in trade processing, data management, accounting to comply with standards, clearance and settlement, control and compliance should be able to define an integrated process flow management within an organization.
  
  
• Diversified Environment: Another major challenge facing the reconciliation analysis is the emergence of new asset types and structured deals with more complex technicalities and calculations involved, which would require the modification/improvement of existing systems to accommodate reconciliation of such complex & diversified deals.

Reconciliation Solution

Traditional Approach, that is manual reconciliation, is still being followed in many financial institutions. In this approach, the records are manually entered, compared, analyzed and the exceptions are stored separately. Manual process is more tiresome because of increasing volumes of the data. This may also be prone to more errors.

Tool based approach overcomes important challenges and the drawbacks of the traditional reconciliation approach. As this pertains to automation process so the errors occur due to manual reconciliation are reduced to a great extent. The outcomes will be more efficient and faster with an integrated exception handling. For instance, the ideal reconciliation process should be able to link the order management system and payment system to automate reconciliation process and engage manpower for exception handling, which would require analytical skills according to the type of discrepancy involved. This situation provides the ideal platform for financial institutions, to engage skilled staff in resolving complex discrepancies and real-time reporting of cash flow positions and appropriate actions to minimize operational losses.

In tool based approach exceptions can automatically generate queries and correspondence to be passed to internal/ external counterparties, via SWIFT, mail and fax and subsequent chasers and overdue reports prompts processors and management to keep effective control of the process.

BENEFITS OF Tool based approach over Traditional approach

• Control of Data: Automation Reconciliation workflow derives process convergence, resolution and reduction of errors and redundancies, increases productivity and compliance adherence.
• Faster Analysis: Saves effort of 90 % processes associated with manual reconciliation.
• Business Rules: Automated matching process based on preset business matching rules. Automatic exception case creation for unmatched data.
• Integrated Tool: An integrated business solution provides better collaboration between vendors, banks and customers. This tool has a fully integration exception processing.
• Report Generation: Automatic report generation highlighting mismatches and helps in manual analysis of predefined business rules.
• Automated Workflow: Automation workflow derives process convergence, resolution and reduction of errors and redundancies, increases productivity and compliance adherence.

Conclusion

Financial institutions processes, whether related to banking or trading, are undergoing new changes with unprecedented increase of transaction volumes and a corresponding expansion in market information. This brings the need of effective data management solutions in the areas of reconciliation in order to have smooth ongoing operations. Demand for reconciliation solutions with optimum speed and performance coupled with uncompromising levels of accuracy, controls and data management is the foremost requirement for customer satisfaction. Financial institutions envision to have automated and integrated approach rather than a Traditional approach.