One of the significant challenges for firms in the capital markets is the issue of account reconciliation. The underlying challenge is the fragmentation of responsibilities between investment managers and custodians. Investment managers have the responsibility for managing a portfolio of stocks and instructing brokers on which trades to make. The custodians are appointed to safeguard and keep track of the holdings.
Due to the bifuracted nature of responsibilities there is a need to compare the records of which securities the investment manager believes it is holding and the actual securities on file with the custodian. Each day (or week) the list of securities being held by a custodian is uploaded into the investment manager’s system. Software applications then attempt to reconcile the information on file with the latest data from the custodian. Invariably, discrepancies will occur which require research and analysis by the investment manager or custodian.
The process is not dissimilar to your experience balancing a check book. You have a series of cash flows in and out of a bank account. Your employer may deposit your salary every two weeks. In the meantime, you write checks, withdraw cash and use your debit card to make purchases at retailers. The records you keep on file in a check register, spreadsheet or a personal financial application such as Quicken may not match exactly what the bank has on file. Checks may take several weeks to be processed. Fees associated with ATM withdrawals from third party banks could take a few days to materialize, especially from overseas. If you wanted to perform an analysis of your spending habits to determine if you are exceeding budgeted expenses then you would need to reconcile your records with those of the banks. If you have an application such as Quicken, the program will attempt to perform reconciliation automatically. However, it is probable that there may be a few transactions which do not match requiring further research or analysis on your behalf.