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STEP TWO: Hands Off: Automating Reconciliation Can Dramatically Lower Costs
July 6, 2009
Reconciling the positions of buyers and sellers after trades of derivatives and other complex instruments are executed is tough.
Most firms or their fund managers and broker-dealers use largely manual means to communicate what's gone on and deal with the exceptions that don't easily match up. This means that automating the reconciliation process can dramatically lower costs, according to Richard Chapman, director of pre-sales for North America at SunGard Data Systems.
A presentation by Chapman on automating reconciliation of exchange traded derivatives drew a standing-room-only crowd of clearing executives at New York City Day, a series of events held by SunGard prior to the opening of the Securities Industry and Financial Markets Association's Technology Management Conference and Exhibit in New York.
Costs in reconciliations are high, and vary based on volume of transactions and complexities of the exchanges being traded on. However, a financial institution can expect to save 75 to 90 percent of those costs when automating the processes, according to Chapman.
Nonetheless, there could be a cost in moving to automating reconciliation. It's not going to be easy.
The challenges of automation are considerable, Chapman said. They include:
* Multiple feeds of data from any exchange that must be reconciled
* A lack of any industry standard for how exchanges should communicate information about trades and resulting positions * Rapidly increasing volumes of transactions, and volume spikes
* The complexity of transactions, particularly with customized products
* Multiple distinct but related reconciliation streams such as trades, variation margin and positions, that require easily digestible consolidation
* Little or no audit of activities performed during the reconciliation
* No physical control over the reconciliation process
* Low visibility into the rest of the reconciliation environment and the integrity of back office systems involved
Chapman said that in order to achieve automation of financial instruments such as derivatives the information from exchanges and internal systems must be standardized. Then firms need to apply specific workflows on transactions and the logic of matching purchases and sales to make a single reconciliation process possible. "Having consolidated reporting is vital when it comes to reconciliation,'' he said.
SunGard has been working toward creating a single reconciliation process for years. In 2006, SunGard got its first client for reconciling exchange-traded derivatives, Chapman said, and began to build out a system based on the flexibility of its reconciliation tool. The firm created a series of templates for the exchanges involved, such as EUREX and LIFFE, and then developed a library of event workflows to handle the transactional complexities such as Give-Ups, Flips and Position Transfers. The system also provides an equity dashboard that consolidates the streams of reconciliation data on trades, positions, cash and variation margin.
The company packaged its approach two years later. But even then, "it took four man years to build a solution that worked for two exchanges." These were LCH.Clearnet and EUREX.
The tool for reconciling exchanged-traded derivatives is part of IntelliSUITE, a SunGard product line that provides a variety of reconciliation services for different types of securities firms. "We recognize that there is value for specific markets to having pre-configured packages," said Chapman in an interview. "We give clients a tactical solution off a base platform."
