Cash and positions are the two components of an investment portfolio. Cash and position reconciliation, therefore, ensures that two representations of a portfolio are the same. The portfolio is represented in 3 places:
1. In an internal system or spreadsheet (this can be multiple systems and spreadsheets)
2. At the fund administrator
3. At the custodian
Reconciliation is comparing the portfolio (or, more commonly, parts of it) at these 3 “places”.
Position reconciliation compares trade date (T or T-1) holdings to the fund administrator. Asset held, currency, price, and market value are the most critical data points to reconcile.
Cash reconciliation compares trade date cash to the fund administrator and settlement date cash to the custodian. The information compared is currency and cash amount.
Positions are reconciled per trade date, meaning the position includes orders executed today. Parameters to reconcile on positions include:
| Data to compare | Description |
| Asset identifier |
The position’s instrument, e.g. ticker, cusip, etc. - or a combination of parameters (for OTC). |
| Currency | The currency of the holding’s market value. |
| Quantity or Notional | Quantity for futures, equities, funds, etc. Notional for fixed income. |
| Price |
For listed instruments, this is the quoted price in the market. Example:
|
| Market Value | The total value of the holding, e.g. price * quantity for an equity. |
| Tax lots or acquired price | The calculated cost basis of the position. |
On the other hand, cash reconciliation is much simpler in terms of what data to compare: just cash amount per account. There are two effective dates to keep in mind:
If your internal system can differentiate between trade and settle date cash (not all can), these two recommendations are straightforward. The main challenge with cash reconciliation is understanding the source of any difference. Many things affect cash balances: subscriptions, fees, taxes, coupon payments, dividends, trading, etc., making it hard to investigate the source of a difference. For this reason, it might be a good idea to perform other reconciliations ahead of the cash reconciliation.
There are 4 more things to consider as part of your investment reconciliation process. All are optional and not always conducted; it depends on your trade volumes, markets you invest in, your asset classes, etc.
Control trade quantities, prices, fees, and taxes – avoiding issues in settlement. If you perform trade recon, you’ll ensure that a cash and position reconciliation break isn’t due to transaction data errors. With fewer possible reasons for breaks, you simplify the break investigation process.
You isolate one area of potential breaks by doing a corporate action check, even if it’s not until pay-date. With the corporate action recon, you can be confident that any break in the position and cash reconciliation isn’t due to corporate actions.
(step 3 and 4 are position and cash recon)
Confirm the P&L on all holdings and non-trading related P&L, such as accruals. You only need to reconcile the P&L against the fund administrator since they are responsible for the NAV. At this stage, you’ve already confirmed that the fund administrator has all the information it needs to calculate P&L. Most investment managers don’t reconcile P&L for this reason.
This final step in the reconciliation chain verifies the total value of each portfolio and share class. While NAV reconciliation might seem crucial (it’s what your investors care most about, after all), it’s usually not required. If your P&L, Positions and Cash balances match, then the NAV will match.
We recommend reconciling positions before cash. The reason is to simplify break investigation.
A position influences cash, but not vice versa. For example, the amount paid from a dividend or coupon is affected by the size of a position.
By doing position reconciliation first, you’ve removed a reason for cash to break. When you start investigating cash differences, you have fewer possible reasons to check, making the cash break resolution process much faster and simpler.
There are two main ways position and cash software can fit into your operating model:
1. Integrated within your investment management software
2. As a standalone system
The integrated approach is generally the best choice. It allows for automatic data adjustments within the investment management software, enabling faster discrepancy resolution. Additionally, an integrated solution minimises the need for separate integration efforts between the reconciliation system and the investment management software.
A standalone system may be preferable if the integrated recon module is inferior, making your workflow inefficient. Signs for inefficient recon are:
Limina’s Investment Management System includes a reconciliation module designed to eliminate the need for such workarounds. If you want to see it, check out a demo today.
There are a few ways to automate reconciliation. We touch on all of these in our article about fund reconciliation software. Here is the top way to reduce manual work in the reconciliation process, a built-in data import tool.
For example, assume you get an accruals file in CSV format on an sFTP from the fund administrator. The best software can pick the file up automatically and transform it to the format you need to begin the data matching. You should be able to configure the data transformation through a simple user interface. Under no circumstance should you have to transform data in Excel or depend on the vendor to import a new dataset.