Solving for the

Operational Risk
Challenge

Reconciliation Applications
Market Update

January 2016

CEB TowerGroup™
Capital Markets
 EXECUTIVE SUMMARY
Many firms are still struggling with outdated and manual reconciliation systems that cannot meet the
demands of complex trading operations and are putting their organizations at risk. Without an automated
reconciliation system, capital markets firms may lack accurate cash and security balance information prior
to the start of the trading day, have inaccurate account valuations when generating client reports at month-
end, or end up with multiple reconciliation processes that create redundancy and inefficiency. To realize
the most value out of their reconciliation technology strategy, we recommend that firms:
1. Integrate operational reconciliation with financial close workflows. Automating the reconciliation
process promotes a more robust internal control environment and financial close workflow by ensuring
accurate account valuations and cash/security balance information.
2. Adapt to an intraday environment. Real-time reconciliation is growing in importance, partially due to
the increased frequency of client and regulatory reporting demands and the shortening of settlement
cycles in Europe and the US.
3. Evaluate strategic partnerships with service providers. Service providers are well-positioned to
offer turnkey compliance and reporting solutions that can help financial institutions meet direct and
indirect consequences of regulatory change.

KEY MARKET TRENDS

RECONCILIATION REMAINS A TOP OPERATIONAL PRIORITY
Across all segments of capital markets, the watchwords for the current wave of process and technology
improvements are transparency, financial control, and regulation. Without a continually renewed and updated
reconciliations function, neither front-office functions, like pricing and trading, nor back-office functions, like
valuation and risk management, can be conducted with sufficient speed, accuracy, and confidence.
Technology for reconciliation—the matching of internal balances, transactions, and holdings with the external
records of brokers and custodians—can guarantee that trade details captured on portfolio managers',
traders', and accountants' trade blotters and ledgers match the real world. As a result, the challenge for
institutions is not just to find the right reconciliation tools, but also to create a middle-office process focused
on reconciliation.
The reconciliation process has always been cross-asset and close to the accounting and financial reporting
function. These are critical attributes in a risk-averse and reporting-focused world. However, the growing
influence of financial and product control officers is not only contributing to a stronger focus on transparency,
financial control, and regulation, but also elevating the profile of the reconciliation function above the purely
operational concerns of settlement and client reporting. This attention means that firms consider reconciliation
an integral part of the financial close process and are aligning it with financial reporting at the sub-ledger and
general ledger level (Figure 1).

Figure 1: High Confidence in Completing General Ledger and Balance Sheet Reconciliations
Percentage of Respondents, 2013

General Ledger Balance Sheet Broker Custody

95% 95% 76% 75%

Indicates function is completed via one of the following: a) Manual/Ad-hoc, Using Spreadsheets; b) Automated, Using In-House
Developed Reconciliation Tool; c) Automated, Using Vendor Supplied Reconciliation Tool; d) Automated, Using Reconciliation
Function in Broader Business Function

n = 117.
Source: CEB / SunGard Enterprise Reconciliation Survey, October 2013.

© 2016 CEB. All Rights Reserved. 2 cebglobal.com

ASSET MANAGERS STILL RELIANT ON MANUAL PROCESSES
For all its efficiency and cost-effectiveness, the reconciliation function still suffers from the dominant reactive
operating model within institutions. It is a tool used to identify what has gone wrong rather than a tool to
prevent adverse events. With a greater focus being placed on real-time matching, leading vendors are
orienting their solutions toward proactive diagnostics and repair. Preventing trade breaks before they occur is
an entrenched business practice and a vital part of the post-trade processing infrastructure.
Standardizing reconciliations is not an easy task, and there is a clear realization that firms understand the
nature of the challenge. Unfortunately, some asset managers still rely on manual reconciliation processes,
such as Microsoft Excel (Figure 2). This not only exposes their firms to serious reputational and regulatory
risks, but will also likely be unable to meet the demands of complex trading operations. Firms that use manual
tools are limited to a basic matching engine with minimal data validation and no audit functionality to track
changes to the data within back-office operations. In this case, the likelihood of an oversight is amplified,
given the substantial human error factor.

Figure 2: Technology Environment for Trade Lifecycle Functions

Percentage of Respondents, Could Select Multiple Options, 2013

10%
7% 8%
9% 8% 6%
25%

44%
59% 50% 73%
21%
68%
72%

47% 50%
28% 36%
30%
26%
21%
21% 18% 13% 11% 10% 14% 14%

Reconciliation Fund Accounting Trade Performance Post-Trade Institutional Fee Billing

Processing Attribution Compliance Client Reporting

Manual Processes Custom In-House Applications Third-Party Applications Third-Party Outsourced Solutions

n = 22-39.
Source: Ernst & Young, Managing Complexity and Change in a New Landscape, 2013.
Note: “Unsure” responses not shown.

Capital markets firms must rapidly configure and automate new reconciliations in order to adapt to the
changing regulatory environment and scale their reconciliation processes. Regulation particularly impacts
reconciliation processes by expanding the scope of reconciliation to OTC derivatives and across internal
enterprise systems. Regulatory requirements are also increasing the frequency at which reconciliations are
performed, stimulating demand for intra-day and real-time reconciliations. Two key methods can be used to
simplify and expedite the implementation and production of new reconciliations. Either firms can automate as
much of the configuration process as possible, or they can move the production support burden to a third-
party by licensing a SaaS, managed service, or business process outsourcing (BPO) reconciliation solution.

© 2016 CEB. All Rights Reserved. 3 cebglobal.com

RECONCILIATION TECHNOLOGY IS KEY FOR PROCESS IMPROVEMENT
Although it was once largely applied to the task of matching cash accounts, reconciliation technology has
increasingly become essential to the support of numerous other processes across the trade lifecycle.
However, without an automated reconciliation system, buy-side firms face a number of operational risks,
exacerbated by the significant amount of data involved in reconciliations. Regulators and stakeholders are
becoming more cognizant of operational risks, and are demanding that firms implement rigorous controls to
ensure client assets are fully protected.
By enhancing reconciliation processes, managers can improve efficiency, promote transparency, and
minimize operational risk, and these advantages are the main reasons for investment in reconciliation
technology (Figure 3). Automating the reconciliation process also helps facilitate a sounder monthly financial
close workflow that helps establish key performance indicators (KPIs) around all participants, including
custodians and prime brokers. For firms looking to improve reconciliation performance, a reconciliations
inventory is a critical tool. This inventory describes all reconciliation processes, and includes key data about
ownership, data sources, as well as frequency and performance indicators. In order to be meaningful, the
inventory should be an actively managed and automated tool, updated in a systematic way by all
stakeholders.
The point of having a centralized reconciliations inventory is to actively use it to monitor and optimize all
reconciliation tasks. If this inventory does not exist at an enterprise level or is not part of a systematic and
scheduled optimization effort, firms’ ability to measure how they are doing is compromised. Improving
performance across more reconciliation types and asset classes is an extremely useful and realistic first step.
By adopting higher levels of rigor and discipline in their efforts to use a comprehensive reconciliations
inventory to measure and optimize performance, firms can derive additional value from their existing teams
and platforms. Much of this is achievable with straightforward organizational improvements and does not
require a wholesale re-think of systems or operating models.

Figure 3: Value Drivers for Investment in Reconciliation Applications

Percentage of Capital Markets Respondents

50%

40%

32%

24%

6%
4% 4%
1%

Reduce Risk Process Improve Comply with Keep up with Increase Sales Improve Differentiate
Improvement Service and Regulations Competitors' to Existing Acquisition of with New
Experience Capabilities Customers New Capabilities
Drivers Customers

n = 82.
Source: CEB 2014-2015 Adoption and Investment Survey.

© 2016 CEB. All Rights Reserved. 4 cebglobal.com

FIRMS CAN BUILD OUT CAPACITY TO SUPPORT OTC DERIVATIVES
Extracting data out of trading platforms, reformatting to a common format suitable to send across to other
market participants, and connecting to clearing and settlement venues are the stock in trade tools of post-
trade automation. Yet the financial and IT burden of meeting regulatory compliance goals for OTC swaps has
institutions looking to leverage investments across multiple asset classes by using fewer teams and systems
to handle common post-trade functions, such as reconciliation.
The move to mandate the central clearing of derivatives instruments has had direct implications on a firm’s
back-office services. Effectively managing the operational complexity that arises out of back-office functions
is not only a problem of scale, but also one of traditional straight-through-processing mechanisms, in terms of
data extraction, message transformation, and smart routing. A prerequisite for central clearing is pre-
matching—to be certain that a transaction is accepted for clearing, all of the financials and static data need to
match up. Although many clearing platforms include matching functionality, there is a larger requirement to be
able to match transactions and reconcile portfolios across bilateral and cleared business. Much of this
functionality is being footed by matching algorithms at the level of a swap execution facility or central
counterparty clearinghouse, but there is still a requirement to match trade details for all bilateral business as
part of an internal reconciliation process pre- and post-trade. To this end, firms should extend the use of
reconciliation technology to match the entire terms and conditions segments of these complex messages to
avoid unmatched exposure to long-dated transactions.

© 2016 CEB. All Rights Reserved. 5 cebglobal.com

FEATURE AUDIT

London Stock London Stock

Technology Provider Technology Provider
Exchange Exchange

Product UnaVista Product UnaVista

Data Tools Tactical Operational Tools continued

Security Type Support  Integrated Accounting Framework 

Data Format Support  Related Transaction Linking 
Data Capture Module  Exception Age Linking 
Standard Reporting Formats  Trend and Risk Analysis 
User Experience Tools Audit Trail 
Automatic Notification  Pre-Configured Messaging Interfaces 
Pre-Configured Templates  Multi-Level Matching 
Workflow and Sign-off Functionality  Asynchronous Matching 
Automatic Prioritization  Service and Delivery Options

Configurable Rules Engine  All-Inclusive Pricing Model 

Interactive Management Dashboard  SaaS 
Tactical Operational Tools Installed 
Ad-Hoc/Event-Driven Reconciliation  BPO 

 Standard Native: Contained in the base package of the solution provided

solely by the firm.
 Plan to Offer in 12 Months
 Premium Native: Only available at an additional cost or as an addition to the
base package of the solution, and is provided solely by the firm.
 Plan to Offer in 24 Months
 Third-Party Premium: Only available at an additional cost or as an addition to
the base package of the solution, and is provided by a third-party firm.
 Not Currently Offered

Source: CEB analysis, Participating technology providers

© 2016 CEB. All Rights Reserved. 6 cebglobal.com

FEATURE AUDIT DEFINITIONS
Feature
Data Tools
Security Type Support
Data Format Support
Data Capture Module
Standard Reporting
Formats
User Experience Tools
Automatic Notification
Pre-Configured Templates
Workflow and Sign-off
Functionality
Automatic Prioritization
Configurable Rules Engine
Interactive Management
Dashboard
Tactical Operational Tools
Ad-Hoc / Event-Driven
Reconciliation
Integrated Accounting
Framework
Related Transaction
Linking
Exception Age Linking
Trend and Risk Analysis
Audit Trail
Pre-Configured Messaging The solution supports a wide variety of file and message formats, including
Interfaces SWIFT.
Multi-Level Matching
Asynchronous Matching
© 2016 CEB. All Rights Reserved.
Definition
The solution supports commonly used financial instruments.
The solution supports all widely used data formats such as CSV, XML, and
SWIFT.
The solution offers integrated data extraction, mapping, and integration tools.
The solution can output reports in multiple standard formats.
The solution can automatically send notifications to end users and
intermediaries.
The solution has preconfigured matching templates for the most widely used
reconciliation types.
The solution allows the configuration of processing and authorization
workflows.
The system can be configured to automatically prioritize exceptions based
on value, risk, or customer profile.
The solution can be configured by the user to allow for automatic validation
and matching.
The solution offers an intuitive and event-driven visual display of
reconciliation statuses and outcomes.
The solution can run matching processes triggered by system events or user
requests.
The solution offers interfaces and workflows for easy integration with
accounting platforms.
The solution can identify linked transactions and positions.
The solution tracks the duration and status of unmatched items over time.
The solution helps the user identify trends and analyze matching outcomes.
The solution records all system and user actions according to configurable
compliance policies.
The solution can match items at multiple levels of aggregation/pooling.
The solution can match items received out-of-sequence from multiple
sources.
7 cebglobal.com
FEATURE AUDIT DEFINITIONS

Feature Definition

Service and Delivery Options

The solution offers a subscription pricing model which includes maintenance
All-Inclusive Pricing Model
and support charges.
SaaS The solution can be deployed using a software-as-a-service model.
The solution can be installed on premises on the user's own hardware and
Installed
software platforms.
The solution can be deployed as a full business process outsourcing solution
BPO
or a managed service.

© 2016 CEB. All Rights Reserved. 8 cebglobal.com

 UNAVISTA — LONDON STOCK EXCHANGE (LSE)

KEY STATISTICS CUSTOMER SUCCESS STORY

Founded: 1801
Company Type: Public (LON: LSE) Due to an increase in transaction volumes and
Headquarters: London, UK complex financial products, LSE’s Tier 1
Dedicated FTEs for Reconciliation Solution: 70 investment banking client required a move away
from T+1 reporting within their existing
FIRM OVERVIEW reconciliation applications to a real-time
The London Stock Exchange Group is a diversified reconciliation and control service to monitor and
international market infrastructure and capital help optimize its use of global execution venues
markets business, operating a broad range of and CCP’s.
international equity, bond, and derivatives markets,
The client put a tender out to the market to select
including LSE, Borsa Italiana, MTS, and Turquoise,
a new reconciliation provider and UnaVista was
a pan-European equities multilateral trading facility.
chosen as the preferred vendor due to the ease of
In addition to majority ownership of LCH.Clearnet
implementation, the team’s internal expertise of
Group, LSEG also operates CC&G, an Italian
financial services and complex reconciliation
clearinghouse, Monte Titoli, a T2S-ready European
processing, and the platform’s proven ability to
settlement business, and globeSettle, a newly
scale and handle large volumes of multi-asset
established CSD based in Luxembourg. Through
class transactions.
MillenniumIT, the firm manages an in-house IT
development capability to provide trading, Since implementation, the UnaVista reconciliation
surveillance, and post-trade technology. solution has been processing 5-6 million trades in
real-time on a daily basis for the bank. The
PRODUCT OVERVIEW
reconciliation incorporates over 50 complex
UnaVista is a global hosted platform for all
matching algorithms as well as advanced
matching, validation, and reconciliation needs.
exception management and user and
Using the UnaVista Rules Engine, the system takes
departmental workflow. The bank can now get a
in raw data from multiple internal sources and
real-time view of its market risk through UnaVista’s
validates it using proprietary reference data and rule
business intelligence dashboards and reports.
logic. The rules engine will then normalize, convert,
and format imported information as desired. It can
also process data in any format, which makes CLIENT DISTRIBUTION BY REGION
importing quick and easy. UnaVista's Rules Engine
has the logic built in to address multiple regulations,
offering a central hub for managing and routing
data. Furthermore, LSEG and Wipro have partnered
to offer reconciliation-as-a-service, whereby the
UnaVista platform is contracted on a subscription
basis based on usage.
RECENT UPDATES
 Added support for both MQ WebSphere and
ActiveMQ environments to allow firms to send
data through their existing connectivity channels.
 Templatized “three-way” MiFID regulatory
reconciliations to reconcile trade/position-level None 20-39% 60-79%
data.
5-9% 40-59% 80-100%
CEB View
Over the past three years, UnaVista has made Source: London Stock Exchange.
significant strides in increasing its market visibility
and maturing its offering thanks to improved
operational and regulatory risk tools.

© 2015 CEB. All Rights Reserved. 9 cebglobal.com

 A Special Thanks to Participating Technology
Providers

Related Resources
2013 Reconciliation
Applications Technology
Analysis
 Market Drivers
 Case Study
 Emerging Technology
 Diagnostic Anatomy
 Feature Audit
 Vendor Profiles
 Product Rankings
Technology Spending Forecast
Technology Adoption and
Investment Survey

CEB TOWERGROUP VENDOR ASSESSMENT

CAPITAL MARKETS TEAM
About CEB
Executive Director Practice Leader
CEB is a best practice insight and Matt Dixon Anne Marie Houston
technology company. In partnership with
leading organizations around the globe, Managing Director Operations Consultant
we develop innovative solutions to drive Jaime Roca Karen Fay
corporate performance. CEB equips
leaders at more than 10,000 companies Practice Manager Operations Analyst
with the intelligence to effectively Magda Rolfes Rachel Griffin
manage talent, customers, and
operations. CEB is a trusted partner to Principal Executive Advisor Research Associate
90% of the Fortune 500, nearly 75% of Gert Raeves Colin Gibbons
the Dow Jones Asian Titans, and more
Senior Analyst
than 85% of the FTSE 100. More at
cebglobal.com.
Daniel Wessler

© 2016 CEB. All Rights Reserved. 10 cebglobal.com