“plus ça change, plus c’est la même chose “ – the more things change, the more they stay the same – Jean-Baptiste Alphonse Karr
Over 28 years ago, I had my foray into the world of Banking Operations as a consultant on a project reconciling cash and asset breaks. The reports were in Excel format, and the research was mostly manual. Flash forward to 2023, and in large part, for many organizations, not much has changed regarding aged break reporting and the reconciliation process.
It is important to make the distinction between the various interpretations and definitions of reconciliation. There is a broader view encompassing numerous defined daily functions: producing daily break reports, processing auto-matches, running a User Developed Technology (UDT) or Macro to identify pair-offs, and preparing various MIS reports. But what seems to be becoming a “lost art”, and what we are focusing on here, is the ability to perform a true reconciliation, research, reconcile and resolve a break or event that does not balance.
As technology and automation advance, there appears to be an unfounded belief that either breaks should no longer exist or that there should be a systemic solution to resolve the breaks. Like it or not, there is still a need for traditional reconciliation techniques and certainly the expertise. While systems can auto match and resolve breaks in certain scenarios, there will always be complex or exceptional situations that require a deeper understanding, hence a need for human intervention and tried and true reconciliation skills. In its simplest form, a reconciliation should demonstrate what should have happened versus what actually happened. Any variation between the two represents the break(s) or out-of-balance.
WHY DO WE HAVE BREAKS?
There are a myriad of reasons cash and asset breaks resulting from Corporate Action and Income processing exist. “Post Payment” is exactly that, the very end of the processing Lifecycle, meaning that if anything goes wrong upstream (incorrect elections, bad feeds/rates, fails, erroneous loan tracking, system limitations, human error, lack of oversight, etc.) there is the potential that it will result in a break. Even as processing efficiency rates improve, we must consider how much event volumes continue to grow, exacerbated by new event types, more complex securities products, and more complicated processing requirements. In the 2000s alone, there was a greater than 40% spike in the number of companies listed on stock exchanges, which resulted in a significant increase in the volume of corporate actions (). So, while a 1.7% error rate might sound impressive, there will still be a large population of resultant breaks.
I believe that the reason many organizations find themselves in perilous situations with, sometimes, enormous (both value and count) break populations is the lack of focus or even the existence of a proper reconciliation team. At times, there is a borderline denial of the existence of breaks. That is, of course, until the issue becomes too large and the risk is undeniable. It is uncanny how many times the same scenarios have repeated themselves:
- There is turnover or reduction of staff, and the break count slowly begins to creep up.
- Other issues take priority, and the numbers continue to increase. Now, there are 1,000+, 5,000+, and in some cases, 10,000+ breaks, which can easily equate to hundreds of thousands of dollars in aged open balances.
- Outside resources are brought in to assist and management sets unrealistic expectations for the rate at which items can be resolved.
- The resources are dismissed, and a large-scale write-off/escheatment plan is implemented.
It is always reactive rather than proactive.
HOW CAN YOU BE MORE PROACTIVE?
ACCEPT THE FACT THAT THERE WILL BE BREAKS AND EXCEPTIONS AND ADDRESS THEM ACCORDINGLY BY INSTITUTING A PERMANENT RECONCILIATION TEAM.
While the simple idea that event processors and analysts should be responsible for their own breaks is sound at the most intrinsic level, there are many reasons it often does not work in practice. The largest obstacle to this approach is that the staff members are often already stretched thin. It is difficult to rationalize tasking a processor with prioritizing researching an aged break over other daily “critical” responsibilities (i.e., processing an event that pays today, entering elections for a voluntary event prior to cutoff, assessing risks and escalating concerns for complex high value events). This lack of prioritizing the reconciliation of aging breaks by an individual is a microcosm of how organizations generally address the reconciliation process. Perhaps because breaks are referred to as exceptions, management does not deem it necessary to implement a permanent, dedicated reconciliation team. This reluctance may be penny wise dollar foolish as a proper reconciliation team mitigates the risk of large losses, not only by resolving breaks in a timely fashion but also by performing root cause analysis and communicating those findings upstream to improve processing efficiency.
If you are interested in learning more about our corporate actions & post-payment, please get in touch with us.