Fund Managers Win Improved Messaging for Tax Lot Reconciliations
November 7, 2011
The International Securities Association for Institutional Trade Communication, has come up with improved standardized messages which will help fund managers and their custodian banks reconcile information concerning the accounting details of the fund managers' investment portfolios.
Reconciliation can now occur at what is called the “tax lot level” so the fund manager can have a more detailed view of a portfolio’s holdings. Those details are the specifics of which securities or financial contracts the fund manager has purchased, when and for how much. Those securities will now include not only equities but all holdings such as currency positions, corporate bonds, foreign exchange contracts and swap contracts.
A complete copy of the details can be found on the ISITC's website at http://www.isitc.org. The trade group represents buy and sell-side firms involved in middle and back-office operations .
Tax lot information is far more granular than that provided in a standard custody statement which only explains the total position in the security held and its value. "Knowing the tax lots purchased and sold helps the fund manager calculate the portfolio's capital gain or loss and plan its investment strategy," says Ken Ayvazian, assistant vice president at Brown Brothers Harriman in Boston. "The investment strategy -- how many shares to buy and when depends on whether the fund manager wants to incur a capital gain or loss and by how much."
The message formats which follow protocols established by the International Organization for Standardization (ISO), were created by a reconciliation working group co-chaired by Ayvazian, Judy Ottignon from Bank of New York Mellon and Niyoms Cokley from State Street.
The goal is to eliminate the need for fund managers to contact either their custodian bank or accounting agent separately for the information after receiving their custody reports -- a process which involves a delay of several hours. Doing so using standardized protocols also reduces the potential for error in misinterpreting information.
The ISITC typically endorses ISO compliant message formats which can be sent through the network operated by SWIFT. In the case of the accounting reconciliation holdings statement, the message can be either ISO 15022 or ISO 20022 compliant.
The message sent by the custodian bank or accounting agent to the fund manager contains over 50 required and optional data fields. The mandatory data fields include the date on which the reconciliation applies -- either the date the trades were made or the date on which the trades were settled, a description of the financial attributes of the securities involved and the identification code of the account manager and individual account involved.
