Watson Wheatley: The Role of Reconciliation in Managing Operational Risk
Posted: 14 February 2017 | Source: Watson Wheatley
Operational risk and its mitigation is a pertinent topic right now. The new regulatory environment is forcing asset managers to adhere to strict operating and reporting standards; investors are demanding tight operational controls to protect their assets; managers are seeking to minimise middle and back office costs whilst delivering against these growing demands. Superimpose a growing instrument complexity, activity spread across multiple service providers and increased trading frequency and it soon becomes apparent that a new approach is required to manage operational risk and keep costs low.
Given the fragmentation of the trading process both in terms of service providers and systems and often weak information exchange between investment manager, counterparty, prime broker and administrator, one of the primary tools in the armoury of the operations function is inter-system reconciliation. Simply, is the data our traders see in the order management system actually what is held by us at the bank? Do the reports we send to our clients tie back to the equivalent sent by the administrator; will they question us as to why they are different?
Whilst failings in some areas are embarrassing, in other areas it can be responsible for a loss of hard earned P&L, an irreversibly damaged reputation or even for attracting the attention of the regulatory authorities. Timely reconciliation between all systems involved in the process and effective management of the differences is vital. Systems to match data, identify breaks and support remedial activity have been available for many years and are a base requirement for all firms involved in the trading process. However, in our view, what is available falls far short of the goal of full automation, fails to deliver the risk information needed to properly manage the process, and neglects the opportunity presented by the system’s privileged position within the operational infrastructure.
This paper reviews developments in reconciliation beyond matching and workflow and references the work of Watson Wheatley in delivering value-added products to this critical area.