Every firm should reconcile expected versus actual cashflows. Cash breaks in this reconciliation show many underlying complex causes.

Every firm should reconcile expected versus actual cashflows. Cash breaks in this reconciliation show many underlying complex causes. Resolving these leads to greater efficiency throughout your processing environment.

The cash reconciliation is a fundamental control for your books and records. A break in the reconciliation, is not an isolated piece of noise. It shines a spotlight on a failure in an upstream process.

This case study gives the reader an insight into the broader causes, solutions and benefits of using a total quality management approach to this problem.

Typical causes of cash breaks can include:

• Valuation errors
• Errors in your own cash balances on the book of record
• Errors in your forward cashflow forecasting
• Trade booking errors

Working with one of our clients we spent a month reviewing the causes of their breaks. The main causes (in this instance) were:

• Reprocessing of equity dividend settlements
• Fixed income coupon payments
• The incorrect settlement of trades

For each of these findings we then carried out a root cause analysis.

Issue 1: Equity dividend settlements

We found that dividend reprocessing was failing due to incorrect tax rates being applied.

We agreed with our client to correct and enhance the tax tables in their books and records system in a volume weighted order. First to be corrected were dividends from G7 countries, followed by other lower volume jurisdictions.

The benefits of correcting the tax rates are:

• Correct accruals and settlement
• Correct cash forecasts
• Decreased breaks in the cash reconciliation

Issue 2. Fixed income coupon payments

These cash breaks were caused by errors in setup of securities in the master database. Corrections included:

• New procedures to guide the setup of securities
• Monitoring tools to spot mistakes in the database
• Identification and correction of prior mistakes

By correcting the security master database our client saw:

• Correct interest accruals
• Correct settlement
• Corrected cash forecasts
• Reduced breaks in the cash reconciliation

Issue 3. Incorrect trade settlement

The causes of failed trades included incorrect setup of brokers and securities at the point of entry. This was detected as differences between trades received from the portfolio manager and those settling on the custody account. We also discovered that differences in reconciliations were being over-ridden with the errors being settled downstream.

We worked with the client to:

• Update the fees and charges in the upstream systems
• Change the tolerance for matches on the cash reconciliations

By improving the causes of these errors our client saw:

• A corrected cash forecast
• Increased trade processing rates
• Reduced asset inventory breaks
• Reduced cashflow breaks
• Reduced re-processing

Outcome

We worked with this client for a year, we saw a 90% reduction in breaks by intelligently prioritising the remediation. An indirect benefit was a 20% reduction in the number of staff required to work on resolving cash breaks. Their cash break rates have remained at lower levels leading to an efficiency gain in their post trade processing teams.

If you need help with cash breaks, reconciliations and finding the underlying causes – visit Prodktr's Contact page and get in touch.

Photo by Matt Artz on Unsplash