Can you outline the main operational issues in the industry at the moment? Has reconciliation become a more prominent part of the industry?
From a back-office perspective, we are a very simple driver: organisations need to do more for less. There is more to be done in the back office but they can’t increase their head-counts or budgets. There is more to be reconciled because volumes are increasing, and at the same time, there are things that need to be properly controlled that perhaps haven’t been in the past.
Some of our clients have had up to 2,000 ad-hoc solutions, mainly performing very similar reconciliations, and now they need to standardise. They are also dealing with more volumes, which are not being controlled or managed properly.
With asset-based reconciliations, there are interest rate swaps, credit default swaps, and many more. There is more variety. More asset classes are coming to the forefront now, and they were once all the typical candidates for ad-hoc solutions.
There is also the control aspect. Management is much more focused on knowing what’s going on and having better control over that. In real-time they need to have a better understanding of where they are in their processes, and what the issues are. Obviously, there have been headlines and stories of things going wrong for large finance organisations, and I think managers are very aware of this. They want better visibility, better controls, and all for less than they are spending today.
Reconciliation is just something that had to be done. Firms were interested in trading, and the processing in the back office, in terms of settlement, was just an afterthought. The reconciliations also fitted into this category. Now firms are demanding more, they want to get processes automated and standardised, and they don’t want a backlog of 18 months worth of work. It needs to be done and it needs to be done quickly.
What can firms do to reduce risk and increase efficiency? How important is automation?
You can compare the back office to a production line. You need everything to be streamlined so that things come out of the front office, hit the back office, and get processed smoothly as standard. But, at the same time, there are many models and variations of the product, so while we don’t want multiple production lines we do require branches to address the differences.
It’s about balancing flexibility and standardisation, and organisations are starting to build centres of excellence to achieve this. They’re standardising wherever possible so that all reconciliations can follow a single path and deliver a consistent result without making it 100 percent rigid. Some teams will need more flexibility than others, and some will need a lot of flexibility with only one common mark at the end of the process.
The bottom line is that without automation, nothing happens. If you have clients uploading 5,000 to 10,000 files a day, it won’t work if things aren’t automated. It has to run on an exception basis, so that the vast majority, say 97 or 98 percent, gets processed without ever being touched by a human. You will still have a full audit trail of everything that has gone on, but you will only look closely at what has broken and needs to be investigated.
It is just about switching things around to be more proactive. We shouldn’t get used to things being not quite right, those issues should be solved before anyone notices them.
How much has regulation affected the approach to reconciliations, and what solutions are you offering?
One way of looking at it is that there is a need to increase the scope of reconciliation because regulations have introduced new requirements, for example, with the introduction of central counterparties and trade repositories into the process. The more parties involved in the process, the more reconciliation points there are. And we will see more regulations, which equals more parties and processes, which means more reconciliation to be done.
As well as external regulations, the internal drivers are that ad-hoc solutions aren’t going to be accepted anymore. Spreadsheets, databases and one-off reconciliations solutions will be decommissioned in favour of a standard approach, and that changes the market for our clients.
At SmartStream, our focus has always been a single-enterprise solution for all reconciliation processes. With TLM Reconciliations Premium, we want a single solution that delivers the reconciliations for all our clients’ needs, whether it’s a small hedge fund manager wanting to operate in a hosted environment, or a tier-one organisation wanting a common utility across a global roll-out, we will use the same technology to deliver everything.
We also look at the business aspects. Reconciliations could just be boiled down to a simple bit of matching, but that’s over-simplifying it, and that doesn’t benefit clients. We need to understand the business context of what we are reconciling.
Our mission is to consolidate multiple reconciliations and bring as many aspects as possible under a single reconciliation solution. It isn’t just a monolithic matching engine, we need to understand the regulations that apply to each client, and all these aspects are just as important as having this flexibility solution.
For onboarding, we are also looking at providing other tools to go with TLM Reconciliations Premium. We recently introduced SmartRecs into our tool set, and that enables organisations to onboard their reconciliations faster.
It’s the same solution, but we’re also providing tools to address the IT issues and allowing users to get their hands on those tools so they can start building and preparing the reconciliation.
Where do you see software going from here? Are single solutions the way to go?
The short answer is ‘yes’. At the end of the day, I don’t think anyone wants to go back a siloed system where you have different departments doing different things, or when you would have a fixed-income back office and an equities back office, and so on.
You used to see separate reconciliations for each of these siloes, and I don’t think that anyone wants to go back to having multiple reconciliation solutions. We believe in consolidation, and are looking to draw up the most intuitive single-solution model.
If you do reconcile using independent solutions, you will often find that the exception side of things is dealt with by a common team. The last thing you want is for your investigators to have to log into three different solutions to access their work. If there is a single solution for all the reconciliations, then the back office investigative team can use that too.
Going forward, I think we will see more organisations consolidating on to a single platform, keeping their focus on automation, and on the exception side of things. I also hope that we will see a move towards helping organisations to deploy their reconciliations solutions quicker.
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