The client money reconciliation is a daily solvency test
It compares what you owe clients against what you hold for them, and a shortfall is funded from the firm the same day. The requirement is floored per client, and that floor is the part that gets missed.
The client money reconciliation is the only calculation a broker runs that has a same-day consequence attached to being wrong. It compares what you owe clients against what you are holding for them, and any shortfall has to be funded out of the firm’s own money before the day closes. It is also, in most brokerages, assembled by hand from four systems that disagree about what time it is.
Two numbers, computed from different places
Everything reduces to a comparison between a requirement and a resource. Both are simple to state and neither is simple to produce.
requirement = Σ max( 0, balance_i + unrealised_i ) for each client iresource = segregated_bank_cleared + client_money_at_third_partiesThe requirement moves on every tick, because unrealised profit and loss is part of what you owe. The resource moves when banks and payment providers say it moves, which is on their schedule and not yours. A reconciliation is therefore always a comparison between a continuous series and a stepped one, and the discipline is entirely about choosing the same instant for both.
The per client floor is where the error lives
A client whose equity has gone negative does not reduce what you owe everybody else. You cannot use one client’s deficit to offset another client’s credit, because the deficit is a debt owed to you and the credit is money owed to them. They are different assets in different directions.
Summing equity across all clients and taking the total nets those two things together and produces a requirement that is too low by the exact amount of the negative equity on the book. On a quiet day that is a rounding error. After a gap, when a cluster of accounts has just stopped out into negative balance, it is the largest single-day error a broker can make, and it occurs on precisely the day the reconciliation matters most.
Net the book and your shortfall disappears on paper on the one morning it is genuinely there.
| Netted across clients | Floored per client | |
|---|---|---|
| Clients in credit, total equity | $41,850,000 | $41,850,000 |
| Clients in deficit, total equity | −$620,000 | excluded from requirement |
| Computed requirement | $41,230,000 | $41,850,000 |
| Segregated resource, cleared | $41,400,000 | $41,400,000 |
| Position | $170,000 excess | $450,000 shortfall |
| Action required today | withdraw excess | fund shortfall |
Illustrative figures, chosen to show the mechanism. Your own numbers will differ.
What counts as resource, and when
The resource side fails for timing reasons rather than arithmetic ones. Client money does not stop being client money when it leaves your bank account, so it has to be tracked through every place it legitimately sits.
- 01Segregated bank, clearedthe only part on a statement
- 02Card deposits authorisednot yet settled by the PSP
- 03Margin posted to providersclient money at a third party
- 04Withdrawals instructeddebited internally, not yet paid
- 05Unallocated receiptsarrived, not matched to a client
- Settlement lag. A deposit credited to a client’s tradeable balance immediately, but settling from the PSP in two or three days, increases the requirement today and the resource later. That gap is funded by the firm whether or not anybody has decided to fund it.
- Unallocated receipts. Money that has arrived without enough reference information to match to a client is resource you hold but cannot attribute. It sits in suspense, and the longer it sits the more likely it is to be the thing that makes the reconciliation not balance.
- Multi-currency. Requirement and resource in different currencies have to be converted at a consistent rate and time. Using a market rate on one side and a bank rate on the other produces a difference that recurs daily and is never the same twice.
- Cut-off mismatch. The platform closes at one time, the bank values at another, the PSP reports on a third. A reconciliation across three cut-offs is comparing three different books.
Why it is a solvency test and not a report
A shortfall means client money has been used, however briefly and however innocently, to fund something that was not client money. That is why the remedy is immediate and in cash rather than an adjusting entry. It also means the reconciliation is the earliest available indicator of several problems that would otherwise surface much later: a payment provider slowing down, a margin call funded from the wrong account, a withdrawal process that debits before it pays.
Run daily and kept as a series, the size and composition of the difference is a diagnostic. A shortfall that grows on the same weekday every week is a settlement calendar issue. One that grows with deposit volume is a lag being funded by the firm. One that appears after volatile sessions is negative equity, and it will arrive with a stop-out cascade attached.
What running it properly requires
One instant, chosen and enforced
Both sides valued at the same timestamp, with every source either reporting at that instant or explicitly adjusted to it. Most reconciliation effort is spent rediscovering that this was not done.
The floor applied at client level, always
Computed per account, floored, then summed, with the excluded deficits reported separately as a receivable rather than silently dropped. The deficits are a real asset and a real credit exposure; they are simply not a reduction in what you owe everybody else.
Expected difference, not zero
- A model of what the structural difference should be today, given known settlement lags and the calendar, so the morning question is whether the difference is the expected one rather than whether it exists.
- Ageing on unallocated receipts, with anything past a small number of days escalated, because suspense balances do not resolve themselves.
- The full working retained: both sides, every component, the rate and instant used, and the action taken. This is the record that answers an auditor, and reconstructing it afterwards from four systems is considerably harder than keeping it at the time.
The inputs are the platform’s account equity, the bank statement, the provider settlement files, the margin held at each liquidity provider and the ledger. Five sources, one instant, every day, and correct on the days they disagree most. That is the work.