NOSTRO Account Reconciliation For Banks

MT 940 is generally received daily and is fed into the reconciliation module of the bank’s software, where the mirror account is already uploaded [at the time of every day EOD] and is waiting to reconcile. Once the reconciliation process is run, all the above said outputs are available. A Nostro account is a reference that Bank A uses to refer to its account that is on deposit in Bank B, in the local currency of the country where Bank B is located. It is simply a record that Bank A’s money is held in Bank B to facilitate foreign exchange transactions and settlement of international trade.

  1. 3) For every settled trade you will receive two entries “S” And “L” as credit and debit which depends on the direction of the trade instructions i.e buy or sell.
  2. Modern retail banking is derived from 13th and 14th century Italy, where both depositors and retail banks maintained ledgers of their account balances.
  3. For these accounts, the domestic bank is acting like a custodian or managing the accounts of a foreign counterpart.
  4. This way, money received by U.S. customers and businesses sending money to GTBank account holders in Nigeria will be deposited in the account that GTBank has with Citibank.

The opposite term, vostro account, is the way in which a bank refers to the accounts that foreign banks have on their books that are denominated in the holding bank’s home currency. The bank holding a nostro or vostro account may be called the “facilitator” bank. Nostro accounts differ from standard demand deposit accounts because they are denominated in foreign currencies. Also, only businesses or governments have nostro or vostro accounts, they aren’t offered in the same way to individual account holders. The Nostro account is the record of the bank that has money on deposit at another bank. These accounts are often used to simplify settlements of trade and foreign exchange transactions.

The operational work involved and lack of visibility on available funds resulting in overfunding the account represents a significant portion of the cost of making cross-border payments. The facilitator bank will assist the client bank in making payments in its country’s currency, usually using its own access to primary clearing arrangements (generally with the central bank in the country where the currency is considered a local currency). In some cases, the facilitator bank may not be a primary clearing member but they will have the ability to make payments in local currency, possibly through another bank in the same country. Nostro and vostro (from Italian, nostro and vostro; English, ‘ours’ and ‘yours’) are accounting terms used to distinguish an account held for another entity from an account another entity holds.

Overall importance of Bank relationships

These accounts are utilized for facilitating the settlements of forex and foreign trades. The facilitator bank will open a euro account, but the account will be different from the typical checking account for residents of the eurozone. The account holder will have the ability to buy or sell in the eurozone using the euro currency. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

E.g. Indian rupee account maintained by Barclays Bank London with SBI Mumbai. As a good customer service, SBI should send bank statements to Barclays Bank by MT 940 every day [or as per agreed frequency]. SBI here should get a confirmation from Barclays that the balances match to ensure that there are no wrong entries made by SBI.

What are the responsibilities of a person working in front office & client support?

The central banks of many developing countries limit the buying and selling of their currencies, which is usually to control imports and exports and to control the exchange rate. Banks generally nostro reconciliation don’t hold nostro accounts in those countries, as there is little or no foreign exchange business. Contrarily, vostro accounts with a credit balance are considered liabilities.

Questions on Trade Settlement

Banks in the United States and the eurozone often hold Vostro accounts on behalf of other foreign banks, and the funds are held in the currency of the home currency of the country where they are on deposit. Reconciliation of accounts is basic knowledge; every finance professional possesses. Accounts that are denominated in a foreign currency will have an extra feature of INR equivalent for every entry and for the balance. However, for the reconciliation process, the rupee equivalent numbers are not relevant [as they are relevant for valuation].

The following Nostro entities capture the above information and faciliatate automatic reconciliation. 1) is performed when trade is settled in market that is post value date or VD+1 activity. Reconciliation process is usually divided as per product type like securities and derivatives in all organizations. In the complex world of banking, the term ‘Nostro Reconciliation’ may sound complicated to the layman, but its importance resonates strongly within the financial industry. In the complex world of banking, the term ‘Nostro Reconciliation’ may sound complicated to the layman, but its importance resonates strongly within the financial industry.

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit. As the balance of a nostro/vostro account can change from one reporting reference date to another – changing, for example, from “nostro” to “vostro” and back again – the account is not subject to AnaCredit reporting on all reporting reference dates. If, however, the account’s balance on the reporting reference date is such that the other institution has a claim on the reporting agent – i.e. it is the other institution’s money that is on deposit in the account (“vostro”) – the account is not subject to AnaCredit reporting. Please refer to Section 4.6.1 of Part I of the AnaCredit Manual for more information about instruments recorded on the liabilities side of the balance sheet. To facilitate improvements in the Nostro process, Swift will continue helping its community migrate towards real-time liquidity reporting and processing through Swift GPI, and establish a roll-out plan for the community-wide adoption of the UETR. Similarly, as the PoC underscored, the ISO data model is a pre-requisite to deliver the required structure and data richness to support real-time liquidity monitoring and reconciliation.

Vostro is a reference to “yours” and refers to “your money that is on deposit at our bank.” A vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual. A Vostro account is a bank account that other foreign banks hold with “our” bank in the domestic currency.

The terms nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank. Most large commercial banks worldwide hold nostro accounts in every country with a convertible currency. Prior to the advent of the euro as a currency for financial settlements on Jan. 1, 1999, banks needed to hold nostro accounts in all the countries that now use the euro. Under the current correspondent banking model, banks need to monitor the funds in their overseas accounts via daily debit and credit updates, and end-of-day statements.

Hence reconciliation of foreign currency accounts should not pose any additional challenge. Reconciliation in a corporate’s books e.g. of EEFC account will be therefore very similar to that of any routine bank account in INR. Accountants and auditors generally attribute the seriousness of any unreconciled entry to the amount and its age. Banks in the United Kingdom or the United States often hold a vostro account on behalf of a foreign bank. The vostro account is held in the currency of the country where the money is on deposit. A Nostro account is a mechanism that banks use to keep track of all funds being held in other banks in the currency of the country where the funds are held.

Both types of accounts are used to differentiate the different types of accounts that banks hold for other banks. The reconciliation module helps prevent overfunding of Nostro accounts or excessive use of credit lines for payments settled in a different time zone by providing visibility and predictability on IN and OUT transactions on a day-to-day basis. Once informed front office they might accept it as valid deal and they will inform counterpart about this. If counterpart agrees to keep it valid then front office will book a Sell trade internally and then you can match the new ledger entry which you will receive post trade booked by trading desk with and match them with statement debit entry which you received for settled trade. Reconciliation is a critical step in international banking that ensures cross-border financial transactions go off without a hitch.

Headquartered in Belgium, Swift’s international governance and oversight reinforces the neutral, global character of its cooperative structure. Swift’s global office network ensures an active presence in all the major financial centres. Mirror account is the accounting head in the local bank’s books to capture all transactions that have or will appear in that Nostro account. The mirror account has both FC and INR entries and as earlier said, INR entries are ignored for reconciliation purpose.

Banks in India maintain several foreign currency accounts with banks abroad in different foreign currencies. These accounts are used to make payments for imports, to receive export bill proceeds and make & receive other remittances on account of customers, trade and treasury transactions. In most banks, the reconciliation of such statements is automated based on the matching of amount, transaction reference number, date, etc. The system output includes reconciled entries, forced matched or possible match-able entries and all types of unreconciled entries.

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