Position Reconciliation Definition
Position reconciliation means comparing the number of assets held in a portfolio (fund or managed account) between the asset managers’ internal views and those of custodians or fund admins. “Assets” (or “holdings”) mean equities, bonds, options, OTC derivatives, etc – all holdings except cash.
Why reconcile holdings
In short, the main reason for conducting position reconciliation is that one participant (you, the custodian or the fund administrator) might have incorrect positions. An issue can reside in your internal records as an asset manager, but it can also be that an external party have recorded your positions incorrectly.
Duality in position-keeping ensures that discrepancies can be identified early and resolved quickly.
We recommend reconciling positions against the following:
- Fund admin. Because they set the NAV
- Custody. Because they formally hold your assets.
This 3-way investment reconciliation process also closes the loop to ensure all three primary stakeholders have the same position views (you, your admin and your custodian).
Why would there be position reconciliation breaks?
Some examples of why positions might differ between the three parties:
- A corporate action, such as a split, wasn’t recorded by one party
- A trade done just at NAV cutoff was included in today’s positions in the internal system but was included tomorrow by the fund admin
- The custodian didn’t pick up a trade file due to technical errors
- An incorrect tax lot mapping was performed by one of the systems
- Market price differs
- An FX Option got the wrong premium currency mapped by one of the parties
- Instruments booked against different identifiers (e.g. different exchanges/currencies but the same ISIN)
There are many more things that can cause positions to become incorrect; these are just some examples of what types of breaks position reconciliation will catch.
Position data to reconcile
| Data point | Description |
| Instrument |
Which asset you hold.
|
| Currency | The currency of the holding’s market value |
| Quantity or Notional |
|
| Price | The price per unit of the holding, mostly applicable for listed instruments |
| (Local) Market Value | The total value of the holding, which is calculated differently on each asset class (equities, bonds, derivatives, private assets, etc) |
| Tax lots or acquired price | Sometimes the tax lot or calculated acquisition price might be reconciled as well, to ensure the right P&L has been realised |
Other reconciliations to perform
You might want to consider performing additional fund reconciliations, such as:
- Transaction reconciliation (before the position recon) - especially useful if trade volumes are high or you’re trading in markets with many transaction-level fees/taxes.
- Cash reconciliation (can be done in parallel with positions). Ideally, both transaction date and settlement date reconciliation shall be performed. You can dive deeper in our article about cash and position reconciliation breaks.
- P&L or NAV reconciliation (after the position recon). This step is optional and not as common as the other types. The benefit of doing it is that it allows you to prove a complete shadow NAV to investors.
Step-by-Step Guide to Position Reconciliation
- Step 1
- Step 2
- Step 3
- Step 4
- Step 5
- Step 6
Pre-requisites
For a position reconciliation to make sense, you need an internal record of positions. That record can’t be a “flush and refresh” type of system – which many traditional Trade Order Management Systems are.
You can rely partly on an accounting system or some modern OMSs, but the best system is a Generation 3 Investment Book of Record (IBOR). A gen-3 IBOR can track positions and cash in any state and simultaneously from both trade and settlement date perspectives. Read more about IBORs here or book a demo of Limina’s IBOR.
Importing Data from Custodian and Fund Administrator
Begin the reconciliation process by importing data from custodians and fund administrators. There are three primary ways to do this (read about all 6 possible ways to integrate asset management data here):
- Rely on your reconciliation system vendor to build each integration
- Build the integrations yourself with code
- Utilise a configurable import-export engine
No 3 is by far the best choice. At Limina, we built an engine like this (it took two years), and when we released it, clients started to use it at a pace we’ve never seen any feature get adopted. You might not feel you need it, but once you experience it, you’ll never want to go back. Book a demo of it if you’re curious (no strings attached).
Data Matching within Tolerances
Implement auto-match rules that allow rows to auto-match based on, for example, multiple security IDs or tolerance on amounts. Tolerances can differ by market, currency, asset class, etc.
The reconciliation software should flag any differences that exceed the set tolerances as potential breaks. This step ensures that only genuine discrepancies are highlighted for further investigation.
Finding the reasons for the breaks
Once the system has flagged a set of potential breaks, the next step is finding each discrepancy’s root causes – the first step where a human enters the picture.
The most common reasons for position breaks are:
- Incorrect trade allocation (manual or automatic)
- Data not sent correctly or in time to custodian or admin
- Corporate Actions not booked or booked differently
- Price differences if the sources for prices are different or if an instrument is booked to different exchanges
Resolving Breaks
Once you’ve uncovered the reason for each break, the underlying data issue is corrected. Corrections might be updates to data in internal systems or ensuring that the custodian or fund admin changes data on their side.
Ensure that the reconciliation results and actions are documented, ideally within the reconciliation software, to ensure a clear audit trail.
Ensure the same break doesn’t occur again
Manual vs. Automated Position Reconciliation
It's easy to think automation is better than manually doing work - and it is! But it's not obvious how or what to automate.
Cons of manual reconciliation
Manual reconciliations are time-consuming, especially as transaction volumes and portfolio complexities increase. Time can be converted into a very tangible cost, which you can easily compare with what reconciliation software costs. Sometimes, reconciliation is semi-manual due to limitations in the fund reconciliation software you use. In these cases, just look for a better tool – some cover all your needs, including Limina’s IMS.
Manual reconciliation is also:
- Susceptible to human errors such as typos, miscalculations, and data entry mistakes.
- Dependent on key personnel, which introduces operational risks.
Artificial Intelligence and Machine Learning
While there has been a lot of hype around AI and ML lately, their usability within reconciliation is still limited. The main reason is that these statistical models are right less than 100% of the time. It can be 99.9% - but it will never be 100%.
Reconciliation needs precision; a break can never be missed. To achieve 100% accuracy, break identification logic must be based on exact, pre-defined rules.
That said, AI and ML can serve as a helpful layer on top. There are two main use cases within reconciliation:
- Suggest potential reasons for a break (including with what party the issue might lie)
- Suggest the likelihood that a break is true or false
These technologies are difficult to have as external add-ons to existing systems; it’s much smoother if the reconciliation software includes this functionality.
Integration with Existing Systems
There are two setups for a reconciliation system:
- An integrated part of your investment management software
- A standalone system
The first approach is superior because it can adjust data within the investment management software automatically – resolving breaks much faster. It also reduces the need to integrate the reconciliation software with the investment management software.
The only case where a standalone system is the better choice is if the investment management software doesn’t have a reconciliation module or that module isn’t powerful enough, so it forces you into workarounds or flags false breaches.
Limina’s Investment Management System contains a reconciliation module specifically designed to help you avoid workarounds.
