A client says your position does not match their custodian statement. How do you work out who is right, and what does a corporate action do to that answer?

Two numbers, both correct

Your books say the client is long a quantity of a stock. The custodian's statement of holdings says something different. Before anyone investigates, establish which question each number answers, because in most cases neither is wrong.

Your trading system's position is trade-dated: it moves the instant a fill is booked. The custodian's holding is settlement-dated: it moves when the security is actually delivered on the books of the depository. Between those two moments the difference is the unsettled trade, and it is expected. A buy executed yesterday in a T+1 market is in your position today and in the custodian's holding tomorrow morning. Any reconciliation that does not model this will report a break every single day.

There is a third number that matters more than either in practice, which is available quantity: what you may deliver or sell without failing. That is the settled holding less anything already committed. Stock lent out and not yet recalled is in the holding but is not available. Stock pledged as collateral is in the holding but is not available. Stock sold and not yet delivered is a commitment against it. A firm that reconciles only the total and never the availability discovers the difference on a settlement date, which is the expensive way.

So the reconciliation is a three-way one, not a two-way one: your trade-dated position, your own settlement-projected position, and the custodian's statement, with every difference explained by a named item.

What the custodian actually sends you

Custodians report positions and activity as statements rather than as a queryable balance, and the reconciliation is built around them. A statement of holdings gives the quantity per security per safekeeping account at a point in time. A statement of transactions gives the movements over a period, which is what lets you explain why the holding changed. A statement of pending transactions gives the instructions that have not settled, which is exactly the population that should explain the gap between your position and their holding. Cash is a separate statement and a separate reconciliation, and it must tie back to the securities movements or you have a booking error rather than a timing one.

In the SWIFT world these are the MT535, MT536 and MT537 respectively, with corporate actions carried on the MT564 notification, MT565 instruction and MT566 confirmation; the ISO 20022 securities messages carry the same semantics in XML. Knowing that the pending-transactions statement is the designed answer to "why do our numbers differ" is worth more in an interview than knowing the message numbers.

Corporate actions are where the reconciliation earns its keep

A corporate action changes the holding without anyone trading. Processing it has a shape that is worth stating precisely.

The issuer announces the event, and you receive a notification from the custodian, often more than one as terms are confirmed. The event has key dates: the record date determines who is entitled, the ex-date is the first date the security trades without the entitlement, and the payment or distribution date is when the proceeds or new securities arrive. Entitlement is calculated from the holding as at the record date, applying the ratio in the terms, which immediately raises the rounding question because a ratio applied to an arbitrary quantity produces fractions the market will handle by its own convention rather than yours.

Events split into three kinds, and the distinction drives everything:

• Mandatory events happen to you: a cash dividend, a stock split, a bonus issue. You calculate, you post, you reconcile. There is nothing to decide.
• Voluntary events require you to decide whether to participate: a tender offer, a buy-back, an exchange offer. Doing nothing means not participating.
• Mandatory with options events happen to you but let you choose the form: a dividend payable in cash or shares, for example. Doing nothing means you get the default option in the terms, which may not be the one you wanted.

The last two carry the deadline risk. Your custodian's response deadline is always earlier than the market deadline set by the issuer's agent, because the custodian needs time to aggregate its clients' elections and pass them up the chain. If you hold through more than one intermediary, every layer takes its own cut of that time, and the effective deadline for the end client can be materially earlier than the date printed in the offer document. An operations team that quotes the market deadline to a client has mispriced the client's decision window.

Missing it is not an administrative slip. On a rights issue, a missed election means the rights lapse and the client's stake is diluted; on a tender at a premium, it means the client keeps the shares at market instead of receiving the offer price. The loss is real, it is measurable, and it is a claim against whoever missed the deadline.

Reading the break register properly

Given a break, work the causes in order of likelihood rather than order of severity. Unsettled trades and pending instructions come first, because they explain most of them. Then event-driven differences: an entitlement you have accrued and the custodian has not yet paid, or paid at a different rate because tax was withheld at source. Then position encumbrance, which is lending and collateral. Then the corporate action itself: a ratio applied differently, a rounding convention, or an event you have processed against your trade-dated position when entitlement was determined on the settled holding at record date.

Only after all of those do you have a genuine error. And when you do, the useful question is not "which number is right" but "which system's version of the world produced this number", because the fix is in the process that generated it, not in an adjustment posting that makes today's report tie.

The distinction that separates a strong answer

A weak answer treats the custodian statement as ground truth and your position as an approximation of it. That is backwards in a subtle way. The custodian is authoritative about what has settled and about what it holds in your name; it is not authoritative about what you have agreed to do, which is your record. Reconciliation is not a search for the true number. It is the discipline of proving that two legitimately different views of the same asset differ only by items you can name, and of noticing on the day when one appears that you cannot.