Every firm should understand common causes of cash and position breaks and reconcile expected versus actual cashflows. Breaks in this reconciliation show many underlying complex causes. Resolving these leads to greater efficiency throughout your investment processing environment.
Oversight and control teams should perform a daily IBOR, fund admin and middle office (street) position reconciliation to mitigate internal and external daily operating platform risks. Coupled with strict policy control tolerances at fund, strategy, instrument types, price, and P/L levels.
The cash reconciliation is a fundamental control for your books and records. A break in the reconciliation, is not an isolated piece of noise. It shines a spotlight on a failure in an upstream process.
This case study gives the reader an insight into the broader causes, solutions, and benefits of using a total quality management control to this industry problem.
Typical causes of cash breaks can include.
- Valuation errors
- Errors in your own cash balances on the book of record
- Errors in your forward cashflow forecasting.
- Trade booking errors
Working with one of our clients we spent a month reviewing the causes of their breaks. The main causes (in this instance) were:
- Reprocessing of equity dividend settlements
- Fixed income coupon payments
- The incorrect settlement of trades
For each of these findings we then carried out a root cause analysis.
Common causes of cash and position breaks
Issue 1: Equity dividend settlements
We found that dividend reprocessing was failing due to incorrect tax rates being applied.
We agreed with our client to correct and enhance the tax tables in their books and records system in a volume weighted order. First to be corrected were dividends from G7 countries, followed by other lower volume jurisdictions.
The benefits of correcting the tax rates are:
- Correct accruals and settlement
- Correct cash forecasts
- Decreased breaks in the cash reconciliation
Issue 2. Fixed income coupon payments
These cash breaks were caused by errors in setup of securities in the master database. Corrections included:
- New procedures to guide the setup of securities.
- Monitoring tools to spot mistakes in the database.
- Identification and correction of prior mistakes
By correcting the security master database our client saw:
- Correct interest accruals
- Correct settlement
- Corrected cash forecasts
- Reduced breaks in the cash reconciliation
Issue 3. Incorrect trade settlement
The causes of failed trades included incorrect setup of brokers and securities at the point of entry. This was detected as differences between trades received from the portfolio manager and those settling on the custody account. We also discovered that differences in reconciliations were being over-ridden or forced matched with the errors being settled downstream.
We worked with the client to:
- Update the fees and charges in the upstream systems.
- Change the tolerance for matches on the cash reconciliations.
By improving the causes of these errors our client saw:
- A corrected cash forecast.
- Increased trade processing rates
- Reduced asset inventory breaks
- Reduced cashflow breaks.
- Reduced re-processing.
Issue 4. Lack of daily IBOR, fund admin and middle office (street) trade/position reconciliation
We found a mix bag of fund admin to outsourced middle office position reconciliation frequencies performed by oversight teams ranging from daily, weekly to monthly. Add in the IBOR source, we discovered the challenge is not only the ability to perform a daily 3-way source position reconciliation, but which operating unit owns and performs the task. Or even rely upon outsource providers to perform this critical firm oversight control process.
We worked with the client to:
- Consolidate multi-way trade and position reconciliation of IBOR, Fund Admin and Middle Office (street)
- Perform daily frequency.
Issue 5. Inability to apply fund, data, price, and P/L tolerances at an instrument level.
The causes of daily cash and position breaks are often due to the inability of the firm to perform and review daily reconciliations with varied and multiple tolerance levels across key fund, instrument, price, and P/Ls. We discovered two-way cash reconciliations performed on excel with out-of-date tolerance levels, due to a key person risk who no longer is employed by the firm.
By deploying the flexible tolerance levels at instrument levels our client saw:
- Consolidated 3-way position, data, price, and P/L reconciliation with applied tolerance rules per asset class.
- Reduce position and cashflow breaks.
- Reduce aged breaks.
- Reduced error rate
Outcome
We worked with this client for a year, we saw a 90% reduction in position and cash breaks by intelligently prioritising the remediation. An indirect benefit was a 20% reduction in the number of staff required to work on resolving cash breaks. Their cash break rates have remained at lower levels leading to an efficiency gain in their post trade processing teams.
Our Segue technology platform provides consolidated multi-way reconciliation of IBOR, Fund Admin and Middle Office Providers. Lightweight, No SQL required and cost effective with lots of system generative checks and user controls.
If you need help with cash and position breaks, reconciliations and finding the underlying causes – visit our Contact page and get in touch.
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