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Is it time to rip off the derivatives reconciliations band-aid?

Existing reconciliations solutions are buckling under the twin challenges of higher volumes and additional counterparty types, but how easy is it to change?

Trade values in the futures and options industry recently hit an all-time record and do not look to be slowing down soon with listed derivatives trading rising 36% in the first six months of 2021. These levels have increased the scrutiny on the solutions being used for reconciliations and compliance and questions around the efficiency and fitness for purpose are inevitably being asked.

Depending on size, type of organisation, and asset classes being traded, players across the listed derivatives ecosystem take different approaches.The resulting patchwork, while functional, is complex, costly and inefficient”.

There are broadly three options available to the derivatives industry. Manual solutions, end-to-end non-specialist solutions and fully automated platforms.  

The first two have been the traditional choice for years and cater for different budgets, sizes of organisations and appetites for risk. However, managing risk and compliance along with growth and efficiency has made more organisations look at automation as a solution.  

There are pros and cons to all three options. End-to-end non-specialist solutions are the most widely adopted systems by larger organisations, but they require a big initial capital outlay, and the ongoing total cost of ownership (TCO) throughout their lifecycle is high. Implementing, upgrading or adapting these systems takes time and resulting downtime can be disruptive. They can lack the agility to cope rapidly with new counterparties or products and frustration among users is widely reported. 

Manual solutions may seem like the ‘light touch’ option, but they are complex, resource-heavy, time-consuming, notoriously difficult to deliver and inherently prone to human error. As the Bank of England report observed, this approach is basically a collection of  “manual or outdated technological processes, using systems and data definitions that can vary widely between and often even within firms” 

Automated reconciliation platforms are evolving to resolve this. Solutions that involve overnight automated ingestion of data, automated processes to normalise data and achieve the manna of golden source and repeatable logic to find and manage exceptions fast are changing the pace of reconciliations.  

More organisations are adopting point solutions that can be implemented quickly, sit alongside, and integrate with existing end-to-end solutions to augment the functionality and carry out reconciliations specifically for exchanged-traded (ETD), listed and over the counter (OTC) derivatives.    

Three platforms, three very different ways of reconciling derivatives yet, the only one which tackles previous system limitations at its core. Automated reconciliation platforms are the only way forward to achieving consistency, accuracy, and uniformity. Those who have not made the shift to an automated system, need to do so before, it becomes too difficult and painful to remove the existing ‘band-aid’.

All square by 9am Rubiks cube

A recent research report commissioned by Kynetix has concluded that ‘Good enough’ is no longer good enough and that there are at least three key benefits to automation, namely cost-saving, efficiency and time to complete.

The research was carried out by Acuiti, market intelligence specialists for the derivatives industry and concluded: “Investment in automation is by far the driver of change and efficiency for reconciliations.” 
 
The reconciliations process for derivatives which used to be the best part of a day’s work for a whole team is rapidly becoming a more streamlined automated process. Perhaps more organisations should take the plunge, rip off the band-aid and consider specialist automated point solutions to solve their derivatives reconciliations challenge.
Acuiti report
Derivatives reconciliations: “Good enough” is no longer good enough

This report by Acuiti has been commissioned by financial software provider Kynetix.  Get your copy here.