Collateral reconciliation is the control process in which a firm checks its own records of collateral against external records. It has two parts. The first compares collateral balances, that is the cash and securities the firm believes it has posted and received under each agreement, with statements from the counterparty, the custodian or the tri-party agent. The second compares the underlying trades and their valuations with the counterparty's view, which is portfolio reconciliation.
Differences, known as breaks, typically come from unsettled deliveries, substitutions recorded on one side only, corporate actions on securities held as collateral, and trades missing from one party's books. Finding them early prevents an incorrect margin call or a collateral dispute. Regulations on uncleared derivatives require portfolio reconciliation at a frequency that rises with the number of trades between the parties. The work is a routine part of collateral management, is largely automated in tri-party collateral management, and resembles custody account reconciliation.