In its simplest form, the aim of a derivatives “Street Side” reconciliation is to create a golden record by matching the internal records for transactions, positions, and financials with the external records of every counterparty across clearinghouses, exchanges or intermediaries. This means loading multiple internal data sources to compare to multiple external data sources, where each counterparty has its own format and naming convention.
Given that derivatives are a global product, a typical bank or broker will be active on over 20 venues through multiple counterparties with the largest ones covering all CCPs for listed and OTC derivatives. The process involves collecting and normalising data from fragmented sources and platforms often with varying symbology, processing the multiple fields of the trade, and then matching it across various functions and operations across the trade cycle. At the same time, trade breaks must be identified and addressed as promptly as possible to ensure that reports sent to clients and regulators are accurate.
This article captures the four broad reasons ETDs and OTC derivatives are more complicated to reconcile than other asset classes. We’ve called them the four D’s.
Needless to say, the nature of derivatives contracts presents a significant headache as futures and options have expiry dates – expiry dates add another layer of complexity
Derivatives tickets simply contain far more detail than other types of transactions.
Depth and daily balances
Top-level matches mask deeper exceptions. Good automated systems will do bottom-up and top-down reconciliations so that discrepancies below the top level don’t cause issues down the line.
Therefore, the relatively straightforward goal is immensely complex in a world in which even mid-sized sell-side firms can process millions of trades per day from disparate sources settling across multiple locations and time zones in multiple currencies across thousands of different instruments.
Moreover, the complexities aren’t diminishing, remaining compliant and minimising risk is always the aim. The challenge for post-trade teams is how to rapidly identify and resolve breaks.
With every break having a sequential knock-on effect, it’s easy to see why addressing these challenges is getting a lot of attention.
Recent research has highlighted some of the issues being faced. In this report, we set out to benchmark approaches being taken by different parts of the industry, to understand the drivers for investment and get insights into how much automation is currently being deployed to mitigate risk versus sheer numbers of manual operators and processes in derivatives reconciliations.
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