While there has been significant technological innovation in the financial industry, which has helped move the category forward, it’s also created some complexities. One such complexity is post-trade reconciliation.
I have been in financial services for many years — building and leading various post-trade infrastructure areas in operations, settlement, treasury, and collateral management – and one of my reasons for joining a fintech firm was to think about new ways to tackle old problems. In this article, I’ll discuss why reconciliation is still a challenge and how Distributed Ledger Technology (DLT), offers a new and more comprehensive solution for financial institutions to tackle an old problem.
In financial services post-trade infrastructure, reconciliation is evident everywhere. It occurs across various areas of the firm as well as between enterprises. There are reconciliations of trade positions and activities, settlement positions and activities, reference data, deal terms, etc.
In fact, some organizations can have over a thousand people reconciling their data. The cost implications of this are huge! But even beyond that, errors or unresolved exceptions also have significant consequences, including missed derivative trades that have had funding, capital, and fee implications, settlement reconciliations that have required many hours of investigation, fraud undiscovered for weeks and inaccurate client reporting leading to lost business.
With these significant challenges in mind, firms have tried many solutions. They’ve outsourced to groups who specialize in processing, purchased new tools to help, created groups within their organization to focus solely on these issues, etc. But while there has been progress, reconciliation still remains a fundamental problem, so why is that? There are a number of factors:
- Scale — the ability to perform bilateral and multilateral reconciliations on vast amounts of data both within an enterprise and across organizations. Most reconciliation solutions are local; limited to specific use cases.
- Timeliness — the need to reconcile data and resolve exceptions in real-time. Many reconciliations still occur the day after an event. The longer the lag between the initiation of the event and the reconciliation of its data, the greater the cost and risk to the firm.
- Aggregation — the ability to seamlessly obtain and aggregate data from multiple parts of the organization; both vertical product silos and horizontal utilities across the organization. For example, trade data is used across the enterprise and organizations. The more localized the reconciliation solution, the greater the risk of data integrity issues across the enterprise. This often negatively impacts “back-end” functions such as regulatory reporting.
- Lineage — front to back visibility of changes to data for processes. Without lineage, the research and resolution of exception items requires substantial investigative work. Firms spend significant time auditing their processes across the organization.
- Security — protection and confidentiality of data. Data being reconciled is often critical for the firm and cannot be shared with various areas within a firm or across organizations. There are many incidents of data leakage that occur today.
DLT provides profound benefits and key features that specifically solve reconciliation challenges, including:
- Exception Processing — With real-time exception processing, reconciliation happens perpetually, as transactions flow through a firm’s infrastructure. Firms can drastically simplify their reconciliation landscape, redeploy resources engaged in manual reconciliations and achieve better resource utilization, and reduce build-out times for new reconciliations from months to minutes, reducing operational risk.
- Transaction Lifecycle — DLT provides the ability to view the end-to-end lineage for a transaction from its source to its final destination, thereby providing transparency across multiple systems in real-time while still securing the data.
- Insights & Reporting — DLT provides a real time view of exceptions to allow users to quickly rectify outstanding issues and reduce operational risk.
- Multiparty workflow — Reconciliation across an enterprise is valuable, but multiparty workflows are where the benefits of DLT are maximized.
- A single source of truth — The real-time ingestion of databanks, reconciliation, and exception processing are not enough to create a single source of truth. There are a number of other key capabilities that are required from a DLT platform. They include user defined rules and workflows to identify and correct anomalies with the data, the ability to secure information at the data element level of a transaction (private vs public blockchain), and the real-time distribution of this “single source of truth” to other areas of the enterprise or across organizations.
I hope this helps shed new light on an old problem and offers some new solutions. And while we recognize DLT’s potential to eliminate reconciliations, it also is an extraordinarily effective tool for the journey towards a providing a “single source of truth” for enterprises and multi-parties.
DLT offers a new paradigm to addressing reconciliation challenges and a great opportunity to leverage a firm’s key asset – the integrity of its data.