Chapter 3: Reconciliation 

1. An investment firm should be in a position to demonstrate, upon request, evidence of a reconciliation and the date upon which such reconciliation was prepared; this evidence can be maintained in electronic form.
2. An investment firm should ensure that each reconciliation has relevant supporting backup material to validate the figures in the reconciliation. The backup material should include statements received from third parties and/or those entities responsible for maintaining the record of legal entitlement to client financial instruments. Such statements may be accessed electronically, provided that an investment firm maintains a copy and can produce these statements without delay.

   Client funds reconciliation

3. The purpose of the client funds reconciliation required under Regulations 57(1) and 57(2) of the Client Asset Requirements (CAR) is to ensure the accuracy of an investment firm’s own records of the client funds it has deposited in third party client asset accounts against the records of the third parties with whom those client funds are deposited.
4. An investment firm should reconcile all client asset accounts where client funds are deposited, including dormant accounts and accounts with nil balances. In order to perform the client funds reconciliation, an investment firm should, where applicable, reconcile the balance of client funds deposited in each third party client asset account as recorded by the investment firm with the balance on that account as set out in the statement or other form of confirmation provided by the third party with which those client asset accounts are held.
5. Where relevant, the investment firm should, as part of the reconciliation process, reconcile the balance of client funds held as cash collateral in respect of clients’ margined transactions, as recorded by the investment firm, with the balance set out in the statement, or other form of confirmation, provided by the relevant party with whom the collateral is maintained.
6. For the avoidance of doubt, Regulation 57(2) makes provision for client funds in the form of fixed term deposits to be reconciled on a monthly basis. All other third party client asset accounts where client funds are deposited should be reconciled on a daily basis in accordance with Regulation 57(1).
7. An investment firm should ensure that the reconciliations are performed using client asset records that are accurate and compiled in a timely manner, and that the reconciliation itself is performed accurately.
8. Investment firms should also ensure that the output from the reconciliation is subject to thorough review and oversight.
9. Investment firms should reconcile third party client asset accounts on a currency-by-currency basis.
10. An investment firm should establish policies and procedures in relation to:
    • The frequency and method of client fund reconciliations;
    • The monitoring of transactions through its third party client asset accounts;
    • The investigation, identification and resolution of reconciliation differences; and
    • Its record keeping obligations under Regulation 75(2)(d) of the CAR.

    Client financial instrument reconciliation

    Client financial instruments deposited with a third party

11. The purpose of the client financial instrument reconciliation required under Regulation 57(3) of the CAR is to ensure the accuracy of an investment firm’s own records of client financial instruments deposited in third party client asset accounts against the records of those third parties with whom client financial instruments are deposited.
12. In order to perform the client financial instruments reconciliation, an investment firm should reconcile the balance of financial instruments on each third party client asset account as recorded by the investment firm with the balance on each third party client asset account as set out in the statement or other form of confirmation provided by the third party, on at least a monthly basis.
13. The investment firm should ensure that the third party provides the investment firm with adequate information to perform the reconciliation accurately, as at a date specified by the investment firm. The information provided by the third party should include a description and the balance of the client financial instruments credited to the relevant third party client asset account and should be provided as at a date specified by the investment firm.
14. An investment firm entering into Securities Financing Transactions (SFT) or otherwise using client financial instruments for its own account should ensure that the internal records it uses for the purpose of the client financial instrument reconciliation include:
    • Details of the client on whose instructions the SFT has been entered into; and
    • The balance of client financial instruments belonging to each client which have been used, with the client’s consent, by the investment firm to enter into a SFT, so as to enable the correct allocation of any loss or gain.

    Client financial instruments not deposited with a third party

15. Where an investment firm holds dematerialised client financial instruments and does not deposit them with a third party (i.e. where the investment firm holds the client financial instrument in custody itself), that investment firm must perform a reconciliation in respect of those client financial instruments in accordance with Regulation 57(4) of the CAR, to ensure the accuracy of the investment firm’s own records of client financial instruments against an external record.
16. For the purposes of performing this reconciliation, the investment firm should obtain an external record from the entity responsible for maintaining the record of legal entitlement to the relevant client financial instruments.
17. The investment firm should ensure that the entity responsible for maintaining the record of legal entitlement to the client financial instrument provides the investment firm with adequate information (e.g. in the form of a statement) as at a date specified by the investment firm.
18. The information provided by the entity responsible for maintaining the record of legal entitlement should detail the balance (i.e. number of units) of each client financial instrument to which the investment firm has legal entitlement (i.e. holds on behalf of a client who has beneficial ownership of the financial instrument) and should be provided in sufficient time to allow the investment firm to perform the client financial instrument reconciliation.
19. Examples of entities responsible for maintaining the record of legal entitlement to client financial instruments for the purposes of Regulation 57(4) of the CAR may include, but are not limited to:
    • Share registrars;
    • Transfer agents;
    • Issuers;
    • Central securities depositaries;
    • Operators of collective investment schemes; and
    • Administrators of offshore funds.

    Physical client financial instruments

20. The purpose of the client financial instrument reconciliation required under Regulations 57(5) and 57(6) of the CAR is to ensure the accuracy of an investment firm’s records of the physical client financial instruments it holds against the count of client financial instruments in its physical possession.
21. The physical client financial instrument reconciliation is an essential control in the mitigation of loss and/or misallocation of client assets.
22. The reconciliation process should be adequately designed to mitigate risks to the holding of physical client financial instruments, including:
    • The risk of the investment firm’s records being manipulated or falsified; and
    • The risk of loss of or damage to physical client financial instruments.
23. Investment firms should develop a procedure for the physical client financial instrument reconciliation process. At a minimum, the procedure should detail the following:
    • The teams/individuals involved in performing the reconciliation;
    • The systems used in the process; and
    • The controls the investment firm has in place to mitigate the risk of loss of physical client financial instruments.

    Frequency of reconciliations

24. The frequency of client asset reconciliations required under Regulation 57 of the CAR represents a minimum standard that must be applied by an investment firm. An investment firm may elect to perform reconciliations on a more frequent basis.
25. When determining the appropriate frequency at which a client asset reconciliation should be performed, an investment firm should give consideration to the following criteria:
    • The frequency, number and value of transactions that operate through the client asset account(s);
    • The risks to client assets associated with the nature, scale and complexity of the investment firm’s business;
    • The third party with whom client assets are deposited;
    • The regularity with which the third party is able to provide information required for the performance of the reconciliation; and
    • Its client asset arrangements more broadly.
26. To support the consideration and determination of the appropriate frequency of client asset reconciliations, an investment firm should have procedures in place to monitor, on an ongoing basis, the frequency of transactions processed through third party client asset accounts and/or the movement in physical client financial instruments.
27. An investment firm should document its consideration and determination of the frequency of client asset reconciliations, along with a rationale for any subsequent changes to the frequency, in the Client Asset Management Plan (CAMP).

    Outsourcing the performance of reconciliations

28. Where an investment firm outsources the performance of reconciliations, it should maintain appropriate oversight to ensure that the outsourced service provider has appropriate processes, systems and controls for the performance of this activity. This would also apply where the outsourced service provider is part of the same group as the investment firm.  An investment firm that outsources the performance of any critical or important function related to the safeguarding of client assets should have regard to the Cross-Industry Guidance on Outsourcing, available on the Central Bank website here.
29. The investment firm should maintain a written record to evidence its oversight of the outsourced reconciliation process.
30. The manner in which the investment firm exercises oversight should be documented in the investment firm’s CAMP.

    Reconciliation differences

31. Applying to both client funds and client financial instruments, a client asset reconciliation difference is a difference between an investment firm’s internal client asset records (e.g. the bank ledger) and those records of either the third party with whom client assets are deposited or the entity that maintains the record of legal entitlement to client financial instruments, identified through the performance of a client asset reconciliation.
32. The Central Bank expects investment firms to take a pro-active approach to investigating and resolving reconciliation differences to ensure the number of outstanding reconciliation differences is minimised.
33. Once a reconciliation difference is resolved, the investment firm should review and consider whether its processes and procedures require updating to prevent a similar reconciliation difference arising.
34. It is important that investment firms recognise that while the reconciliation and calculation are distinct processes, they are interlinked. Investment firms should therefore consider whether a reconciliation difference gives rise to an obligation to address a shortfall or excess.  Investment firms should refer to the guidance on adjustments in the Calculation chapters of this Guidance.

    Examples of how reconciliation differences may arise

    While not an exhaustive list, reconciliation differences may arise as a result of:

    Timing differences

35. There may be differences in timing between an investment firm and a third party recognising the same transaction. By their nature, most reconciliation differences associated with timing differences should clear within a relatively short space of time once both parties have recognised the transaction.
36. For example, a reconciliation difference may arise where an investment firm’s bank ledger has not been updated to reflect a client trade, but the associated funds have been credited to or debited from the client asset account (and are reflected in the third party bank statement).

     

    Inaccurate external records

37. Reconciliation differences may arise where the investment firm has relied on a record received from either a third party or an entity responsible for maintaining the record of legal entitlement that contains inaccuracies.
38. Such inaccuracies may be due to the third party/entity responsible for maintaining the record of legal entitlement incorrectly processing an amount within their own records, and this incorrect amount being reflected in external record (e.g. statement) being relied upon by the investment firm.
39. The difference in records should be identified as a reconciliation difference until such time as it is remediated.
40. It is an investment firm’s responsibility to contact the third party/entity responsible for maintaining the record of legal entitlement in order to resolve any reconciliation differences that arise as a result of inaccurate external records.  
41. Reconciliation differences may arise as a result of discrepancies in an investment firm’s accounts or records which have not been corrected/remediated at the time of performing a client asset reconciliation. An investment firm may process an amount incorrectly, leading to a reconciliation difference arising between its own records and those of a third party.
42. The Central Bank expects investment firms to take a pro-active approach to investigating and resolving discrepancies in internal records.

    Resolving a reconciliation difference or discrepancy

43. A reconciliation difference or discrepancy should not be considered to be resolved until it has been fully investigated and rectified, and the investment firm ensures that:
    • It is holding the correct balance of client assets that it should be holding on behalf of each client; and
    • Its records and the records of the third party with whom client assets are deposited/entity that maintains the record of legal entitlement, accurately correspond to the position above.

    Notification to clients

44. Until such time as the reconciliation difference or discrepancy is resolved, the investment firm should consider whether it would be appropriate to notify the affected client(s) of the situation. In considering whether the affected client(s) should be notified, the investment firm should have regard to its duty to act in the interests of clients, and in particular the requirement in Regulation 31(1)(a) of the MiFID Regulations to act honestly, fairly and professionally in accordance with the best interests of its clients.

    Reporting reconciliation differences to the Central Bank

45. Investment firms are required under Regulation 76(1)(c) of the CAR to report any material reconciliation differences identified. The Central Bank has not defined materiality thresholds for reconciliation differences, these should be determined by the investment firm.
46. In determining whether a reconciliation difference can be considered to be material, an investment firm should take into account both quantitative and qualitative factors. If an investment firm bases its materiality threshold for reconciliation differences on the monetary value alone, this may result in lower value reconciliation differences being ignored when in aggregate these issues may prove to be material to a firm.
47. Low value differences by virtue of their nature, age or number of occurrences may be indicative of significant underlying issues within an investment firm which should be reported to the Central Bank.
48. Therefore, when considering whether a reconciliation difference is material, the Central Bank expects investment firms to take into account both quantitative and qualitative criteria, including but not limited to the following:
    • The monetary value of the reconciliation difference;
    • The number of reconciliation differences arising within reconciliations over time;
    • The length of time that a reconciliation difference remains unresolved;
    • The root cause of the reconciliation difference (e.g. human error or an IT issue); and
    • The reoccurrence of reconciliation differences of the same nature.
49. The basis and criteria for determining materiality should be documented in the investment firm’s CAMP.
50. At a minimum, the Central Bank expects an investment firm to determine materiality for each of the following (non-exhaustive) categories of reconciliation differences:
    • Timing differences;
    • Inaccurate external records; and
    • Inaccurate internal records.
51. As referenced in paragraph 50, a reconciliation difference may be deemed material based on the period of time that it remains outstanding. Investment firms should determine the period of time after which each category of reconciliation difference would be considered to be material were it to remain outstanding, and document this determination in the CAMP.
52. An investment firm should review its criteria for determining materiality thresholds for client asset reconciliation differences on a regular basis and maintain a written record of such reviews.

Calculation and reconciliation of client funds deposited with a third party

Calculation and reconciliation of client financial instruments deposited with a third party

Examples: Reconciliation

Table 1: Reconciliation of client funds deposited with a third party

Should any reconciliation difference be identified, an investment firm should consider the need for adjustments to its client funds resource and/or client funds requirement.

Table 2: Reconciliation of client financial instruments deposited with a third party

Should any reconciliation difference be identified, an investment firm should consider the need for adjustments to its client financial instrument resource and/or client financial instrument requirement.

Issued: 4 July 2023

Last revision: 4 July 2023