New on FinoLib · Volume III: Finance Encyclopedia
I have added a new article to FinoLib, my finance education website: Types of Reconciliation in Finance and the Right Sequence, part of Volume III: Finance Encyclopedia. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
8.2 The Six Reconciliation Types
The idea in plain words
There are six reconciliation types, one for each distinct pair of records: trade, position (the stock record), cash and nostro, client money and assets, P&L, and NAV. If you see lists that show custody or nostro/vostro as separate types, they are really sub-types of the position and cash reconciliations.
Key points
■Each type compares a different pair of records and catches a different kind of error.
■The stock record is double-entry: every security is recorded by owner and by location, and the two sides must balance.
■A one-sided check against a custodian total can let an unexplained gap hide behind a real timing item.
A closer look
Reconciliation splits into six standard types. Each compares a different pair of records, is usually run by a different team and catches a different kind of error. The table numbers them in the order they should run (Part 8.3: The Reconciliation Sequence — Why Order Matters).
Decision rule
Classify every break twice: by the pair of records that produced it, logged once under the earliest of the six steps where it appears, and by root cause (data error, timing difference, counterparty error, system problem, or a real discrepancy that must be escalated). Link later appearances (a trade error resurfacing as a cash break) to the original instead of opening a second investigation. For securities, accept no position reconciliation that compares only client holdings with a custodian total: the stock record must balance ownership against location, security by security.
The costliest mistake
Reconciling one side of the stock record and calling the rest “timing”. In the example, the 600-share fail explains 600 × $50 = $30,000 of an 800-share gap; the other 200 shares, $10,000, surface only when the fail settles and the gap remains, with the audit trail days old. Across thousands of securities, each unexamined “timing” label can hide another. Require the two-sided record to balance before any break is classified as timing.
Recap
Reconciliation has six types, one per distinct pair of records: trade, position (stock record), cash and nostro, client money and assets, P&L, and NAV; “custody” and “NOSTRO/VOSTRO” are sub-types, not extra types. The stock record is double-entry, balancing ownership against location for every security, which is what exposes gaps that a one-sided check would label as timing.
8.3 The Reconciliation Sequence — Why Order Matters
The idea in plain words
The six reconciliations should be run in dependency order: trade, position, cash and nostro, client money and assets, P&L, then NAV. Each confirmed step rules out a family of explanations for the next, like checking the foundations before looking at the roof. If an error travels downstream, it multiplies into several breaks and shrinks into a symptom too small to recognize.
Key points
■Steps 4 (client money) and 5 (P&L) depend on steps 1 to 3 but not on each other, so they can run side by side.
■One booking error of 20 shares produced four linked breaks: trade, position, cash and P&L.
■By the time it reached the P&L, a $1,000 cash error looked like a $40 difference, 25 times smaller.
A closer look
The six types are not run in arbitrary order. A mature reconciliation function sequences them deliberately, in six steps that map one-to-one onto the six types of Part 8.2: The Six Reconciliation Types: trade → position → cash and nostro → client money and assets → P&L → NAV. The logic is dependency: each step consumes records that the earlier steps have just confirmed, so every confirmed step removes a whole family of possible explanations from the next.
Decision rule
Do not sign off a step while an earlier step has an unexplained break above tolerance in the same account or security. When a P&L or NAV break appears, search steps 1 to 3 for an open break on the same instrument before investigating valuation. Two exceptions: a client money shortfall is funded the same day regardless, and a NAV is still struck on time with the open break documented and escalated.
The costliest mistake
Plugging a downstream break. A P&L team that books a $40 difference to suspense as “pricing noise” has hidden a $1,000 cash error and a 20-share position error, a symptom 25 times smaller than its cause. The plug is wrong again tomorrow by 20 × that day’s price move, so the suspense balance grows, and suspense and error accounts are where real losses hide.
What the full article covers
In the full article I take you through these sections:
■8.2 The Six Reconciliation Types
■8.3 The Reconciliation Sequence — Why Order Matters
It includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume III: Finance Encyclopedia
Read the full article on FinoLib
The complete article, Types of Reconciliation in Finance and the Right Sequence, with every worked example, diagram, quiz and source, is free to read in Volume III, Finance Encyclopedia on finolib.com.
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