The case for daily reconciliation of credit portfolios

Ask an operations team when it reconciles its records to the trustee or the custodian, and the answer is often month end. Ask why, and the answer is that the reconciliation takes too long to perform more frequently. Both statements are accurate, and the second identifies the underlying problem: the monthly schedule is a consequence of a slow process.

Why monthly reconciliation is harder

A break is easiest to explain on the day it appears. There is only one day of activity to review, the people involved remember what happened, and the correction is usually a single entry. After three weeks, the same break is buried under hundreds of later transactions and may have been joined by other breaks that partly offset it. Identifying it then requires a lengthy investigation.

Loans are harder to reconcile in arrears than most asset classes. Settlement is slow, so a trade can remain unsettled across a month end. Interest accrues at rates that change with each reset. Agents sometimes send notices late or correct them afterwards. Each of these creates timing differences that are legitimate but must be identified as such, which is far simpler when they are reviewed as they arise.

What daily reconciliation requires

Three conditions must be met before a team can reconcile every day without adding headcount.

• Data arrives automatically. If someone has to log in to a portal and download a file, the reconciliation will be performed only when that person has time.
• Matching is automated. Staff should review only the differences, not the thousands of lines that agree.
• Every break has an owner. Each difference should be assigned to a named person, show how long it has been open and carry a recorded explanation, so that resolving it does not depend on anyone’s memory.

What changes with daily reconciliation

Month end becomes a confirmation of reconciliations already completed. The reconciliation you sign off is the previous day’s reconciliation, extended by one day. Reporting can begin from data that has already been agreed with the trustee or custodian. Auditors receive a history of each break and its resolution, recorded at the time the break was investigated.

Total effort also falls. Clearing a small number of new breaks each morning takes less time over a month than investigating the same breaks together at the end of it. In our experience, teams that move to daily reconciliation rarely describe it as additional work. They describe a reconciliation process that is finally under control.