Trade Reconciliation
What you need to know about reconciliation process in Investment Banking!
Reconciliation is a process in operations in banks or we can say a control team who can control the
incorrect matching of settled trades or incorrect bookings..
Reconciliation process is usually divided as per product type like securities and derivatives in all
organizations. Here in this post I will cover securities reconciliation process.
Securities reconciliation is divided into two parts 1) Nostro reconciliation 2) Depot reconciliation.
What is Nostro reconciliation?
Nostro reconciliation is also known as cash reconciliation. In this reconciliation we perform the
below activity.
1) Nostro reconciliation is performed when trade is settled in market that is post value date or
VD+1 activity.
2) In Nostro reconciliation we have to match two entry one that we receive from custodian
generally know as statement entry (S) and other we receive from internal trade it is knows as
Ledger entry(L).In your reconciliation tool like Intellimatch or TLM you will see them as "S" And "L".
3) For every settled trade you will receive two entries "S" And "L" as credit and debit which
depends on the direction of the trade instructions i.e buy or sell.
4) If trade instruction was settled on value date then you will receive the feeds means statement
and ledger entry next day, it is always reflected with one day lag means VD+1.
5) For SELL trade you will get statement debit and ledger debit entry in your system and you have
to match them manually or it might be auto matched by the system.
6) For BUY trade you will get statement credit and ledger credit in your system and similarly you
have to match them manually or it might be auto matched by the system.
7) Entries cannot be matched if there is difference in statement entry or ledger entry, difference
can be seen as below.
a) Difference in cash because of incorrect cash received from counterpart or paid
from our end.
b) Difference in cash because trade settled post VD and cash paid or received based
on current market price instead of agreed price.
c) Difference in cash because of late settlement and charges may be applied on them
like fail cost charges.
d) Difference in cash due to partial settlement of trade, so in this situation entries
cannot be matched till it get fully settled or need to be partially settled internally.
8) In case a trade settles post cancellation you will receive three entries (e.g SELL trade)
a) one cancellation ledger entry (credit ledger) as it was cancelled in your
Internal system but failed to reflect at custodian side and in the meantime
the trade got settled in market.
b) one statement entry (debit statement) from custodian side for settled
trade because cancellation did not feed down.
c) one ledger debit entry will be there which was initially booked.
These three entries cannot be matched, in order to correct them you have to inform front office or
trader and below steps can be followed to correct and match them.
1. Once informed front office they might accept it as valid deal and they will inform counterpart
about this. If counterpart agrees to keep it valid then front office will book a Sell trade internally
and then you can match the new ledger entry which you will receive post trade booked by trading
desk with and match them with statement debit entry which you received for settled trade.
2. Cancelled credit ledger (point a) and original ledger entry (point c) can be matched.
This is correct matching process in such scenario never match off entries else it will create break in
P/L.
What is Depot reconciliation?
Depot reconciliation is also known as stock reconciliation. The process for Depot reconciliation is
similar to Nostro reconciliation. Instead of cash you will be focusing on stock. The below scenarios
are the differences you usually would face while performing Depot recon.
a) Difference in stock due to partial settlement of trade, so in this situation entries
cannot be matched till it get fully settled or need to partially settle internally.
b) Difference in VD and TD then it will not get auto match, it need to match manually.
