If you and I do OTC (over-the-counter) trading, you’ll enter key parameters of trade in your book and I’ll make entry in my book. It would be good for both of us to match our books for key parameters of trade to ensure that both of us recognize that trade was done and on the key parameters of the trade. This matching of books for the complete portfolio of trades is called Portfolio Reconciliation.
Now question is who will do reconciliation, you, I or both of us?
There are two types of parties in a trade portfolio: “Sending” and “Receiving”. At least one party has to be “sending” in reconciliation process. This means that both can be “sending” but both cannot be “receiving” parties. Based on your overall size of pocket (money) EMIR will categorize us into FC, NFC+ or NFC-. Big players (FC and NFC+) are by default “sending”.
“Sending” party take the ownership of reconciliation and share results with other party.
“Receiving” party have to just share the book of transactions which “sending” party will use to do reconciliation. “Receiving” party after receiving reconciliation results, must raise concern if something unexpected is found. It’s like checking your grocery bill before leaving the shop.
Huge volume of data needs to be reconciled in short span of time with least resources. Big banks reconcile, thousands of trades each day effectively using only one or two employees. So, you need a damn good tool to do that. I’ve seen few tools in my life to do reconciliation, but no other tool is as good as TriOptima’s tools like TriResolve. You will normally share your book of entries via email with excel sheets attached, or via uploading it to TriOptima’s free tool called QuickPort, or if you are subscriber of TriOptima you will directly upload your portfolio to TriResolve. Once “sending” party have both side of books it will do the reconciliation manually or using tool like TriResolve.
Then comes the dispute management. If any party find issues in reconciliation, it informs the other party and both agree to get it corrected. Regulations like EMIR and Dodd-Frank have set certain thresholds. If dispute crosses that threshold parties are required to inform regulators. This way risk is caught at an early stage and corrective measures are imposed.