Nostro and vostro: two names for the same account

Nostro and vostro are the two words that confuse every new analyst in cross border payments, and the confusion disappears once the perspective is clear. Nostro means our account with you, and vostro means your account with us, and they describe the same account from opposite sides. When Bank A in India opens a US dollar account with Bank B in New York, Bank A calls that account its nostro account, because it is our account held with you. Bank B calls the same account its vostro account, because it is your account held with us. The account is one account, held on the books of Bank B, and the two names simply record which bank is speaking. Every nostro account is a vostro account for the other bank, and every vostro account is a nostro account for the other bank. The distinction matters because the accounting is different on each side, and the mirror treatment is what makes reconciliation possible. It is money that Bank A owns and holds with Bank B, and it appears as a balance that Bank A can use to make payments. On the books of Bank B, the vostro account is a liability. It is money that Bank B owes to Bank A, and it appears as a balance that Bank B must be ready to pay out when Bank A instructs a payment. When Bank A sends a payment from its nostro account, Bank A reduces its asset and Bank B reduces its liability by the same amount. When money arrives into the nostro account, Bank A increases its asset and Bank B increases its liability. The two sides must always agree, and any difference is a break. Take a concrete example with full entries. State Bank of India holds a US dollar nostro account with JPMorgan Chase in New York, and the balance is USD 10,000,000. State Bank of India records USD 10,000,000 as an asset in its own books. JPMorgan Chase records USD 10,000,000 as a liability in its books, owed to State Bank of India. Now a customer of State Bank of India wants to pay USD 1,000,000 to a supplier in the United States. State Bank of India debits the customer account USD 1,000,000 and credits its nostro control account USD 1,000,000. It then sends a payment instruction to JPMorgan Chase, a pacs.008 or an MT103, for USD 1,000,000. JPMorgan Chase receives the instruction, checks the vostro balance, and debits the vostro account USD 1,000,000, reducing its liability to USD 9,000,000. It then sends the payment through Fedwire or CHIPS to the supplier's bank, which credits the supplier USD 1,000,000. State Bank of India records its nostro balance as USD 9,000,000. The two banks must agree on the balance at the end of each day, and any difference is a reconciliation break that must be investigated. That daily agreement is the heart of nostro reconciliation, and it is covered in detail in lesson 6 of this chapter. Funding the nostro is a payment in its own right, and it must be planned. To increase the dollar balance in New York, State Bank of India must send dollars from another account or buy dollars in the foreign exchange market and settle the purchase into the nostro account. The funding payment is usually a bank to bank transfer, a pacs.009 or an MT202, and it must arrive before the correspondent's cut off time, otherwise the funds are not available until the next business day. Treasury teams forecast tomorrow's payments today and fund the account tonight, and a funding payment that misses the cut off is one of the most common causes of a failed payment the next morning. A nostro account can also be overdrawn by agreement, through an intraday credit line from the correspondent. The correspondent allows the respondent to send payments up to an agreed limit even when the balance is insufficient, on the understanding that funds will arrive later in the day. The intraday line has a limit, a price, and a hard deadline, usually the end of the correspondent's business day, by which the account must be back in credit. If the account is still overdrawn at the deadline, the correspondent charges penalty interest and may refuse further payments. The analyst must know the intraday limit for each nostro, because it decides how many payments can be sent before funding arrives. In the core banking system, a nostro account is a special class of account with one record per currency per correspondent bank. Each record holds the account number, the correspondent, the currency, the current balance, the available balance, and the intraday limits agreed with the correspondent. Every payment that uses that nostro posts a debit or credit to the account in real time, and the balance is updated in the same transaction as the payment status change, so the two can never drift apart. A large international bank may hold 200 to 500 nostro accounts across 50 or more currencies, and the system must keep every balance accurate to the cent at all times. The value date is the last piece that an analyst must get right. The value date is the date on which the funds are available to the beneficiary and on which the nostro is debited. A payment instructed on Monday with a value date of Tuesday is debited from the nostro on Tuesday, not Monday, and the beneficiary receives value on Tuesday. If Monday is a holiday in New York, the value date moves to Wednesday. The value date drives the nostro balance forecast, the reconciliation matching, and the customer promise, and a system that gets value dates wrong will produce reconciliation breaks every day.