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Trade recs: on the fast track or stuck in the sidings?

The average tier one investment bank today is dealing with a very complex trade processing infrastructure.  You’d expect the infrastructure to resemble a high speed rail line fully optimised to deliver trades from execution venue to settlement in the shortest possible time. The reality is that most banks are dealing with multiple branch lines, sidings and frequent level crossings which all serve to provide significant obstacles to the journey of the average trade. 

It is not unusual for trades to go through 80 or more applications from execution to settlement and along the way be subject to reformatting, reshaping and netting whilst also being amended and cancelled through a variety of bespoke processes. Faced with this complexity, and the inevitable loss events that it creates, banks have sought to minimise their operational risk by running many reconciliations between multiple systems, covering different asset-classes and divisions across the organisation. Some have tried to shoe-horn complex transactions into nostro recs systems which are simply not fit for purpose in non-standardised areas, and have created multiple add-ons and work-arounds on top in applications such as Microsoft Excel and Access.

Many of the tier one investment banks we speak to estimate that they use Microsoft applications to handle up to 70-80% of their reconciliations – making Microsoft the leading reconciliations vendor by far. Invariably the banks also have other vendor reconciliation solutions in place, but they simply can’t on-board reconciliations to these platforms fast enough.

But implementing these work-arounds means the banks are not addressing the root of the problem. Working in this way is like fighting fire with fire. It only adds to the scale of the problem. These add-ons, or ‘gizmos’ as one bank calls them, are also prone to breaking – either when a member of staff leaves, when requirements change, or simply for no reason at all.

At the same time the regulatory environment keeps on changing. Banks need to be able to fulfil reporting requirements as efficiently and accurately as possible and need robust and effective and reconciliation tools in place to achieve this.

Recognising the need to overhaul their reconciliation processes so they can regain control, many banks today are engaged in large scale re-engineering projects designed to simplify their processes. These are often big five year projects. But in this time the world doesn’t stand still. The bank’s trading operations will continue to look for ways to innovate and create new financial products designed to attract and retain investors. And the back-office will continue to create new add-ons and work-arounds on top. As a result banks don’t ever get rid of the complexity. They are always playing catch up.

Banks need to take a new approach – implementing an environment designed to allow rapid on-boarding of reconciliations not only for new, non-standardised transactions, but also to help them overcome the all-too-common reconciliations backlog. Only then can they rid themselves of all the complex work-arounds in place and reduce Microsoft’s strangle-hold over the world of reconciliations.


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