Reconciliation of Foreign Currency Bank Accounts

SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications, a member-owned cooperative that offers safe and secure financial transactions for its members. With the transfer complete, GTBank receives the dollar-denominated funds, converts them into the local currency (i.e., the naira), and deposits them to the local accounts of the recipients. Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank.

Computerized accounting allows for easily reconciling nostro and vostro accounts just by using “+” or “-” signs in the banks’ respective accounting systems. Nostro accounts differ from demand deposit accounts, which are held in the currency of the bank where they are located. Nostro accounts hold their balances in a foreign currency, that of the other country where the bank’s nostro account is based.

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.

  1. A bank counts a nostro account with a debit balance as a cash asset in its balance sheet.
  2. 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.
  3. 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.
  4. If C does not have an account directly with FNBA’s corresponding bank, the funds may be transferred within the banking system of country B by cheque or some form of electronic funds transfer (EFT).

6) For BUY trade you will get statement credit and ledger credit in your system and similarly you have to match them manually or it might be auto matched by the system. 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) In Nostro reconciliation we have to match two entry one that we receive from custodian generally know as statement entry (S) and other we receive from internal trade it is knows as Ledger entry(L).In your reconciliation tool like Intellimatch or TLM you will see them as “S” And “L”. StarNOSTRO is a web based comprehensive N-ways Reconciliation system, it seeks data from the Bank’s Treasury ledger entries and matches the same with the corresponding NOSTRO – VOSTRO Statement file coming from NOSTRO – VOSTRO Banks. Thus, the reconciliation is done between one source of data coming from the Bank Treasury system and the other coming from SWIFT Remittance. For these accounts, the domestic bank is acting like a custodian or managing the accounts of a foreign counterpart.

Benefits of Automated Nostro Reconciliation :

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.

European Central Bank

“The PoC went extremely well, proving the fantastic progress that has been made with DLT and the Hyperledger Fabric 1.0 in particular”, said Damien Vanderveken, Head of Research and Development at Swift. This is correct matching process in such scenario never match off entries else it will create break in P/L. These three entries cannot be matched, in order to correct them you have to inform front office or trader and below steps can be followed to correct and match them. On the settlement date, Bank B must deliver pounds from its nostro account in the U.K. On the same day, Bank A must pay dollars in the U.S. to the nostro account of Bank B.

ATM Reconciliation: Boosting Efficiency With Technology…

Nostro accounts differ from standard demand deposit bank accounts in that they are usually held by financial institutions, and they are denominated in foreign currencies. A nostro/vostro account is a bank account where one bank has another bank’s money on deposit, typically on behalf of a foreign bank in relation to international trade or other financial transactions. This also involves deposit overdrafts, whereby depositors are authorised to obtain funding in the form of an overdraft.[1] The terms “nostro” and “vostro” are used to indicate which bank has money on deposit. Nostro accounts are usually held by banks and large corporations that are involved in international trade. By holding funds in another bank in a foreign currency, the bank can conduct international trade transactions and foreign exchange without having to convert its local currency into foreign currency.

The significance of outstanding entries here is not necessarily based on the amount and age of the entry. Understanding the process of reconciliation of Nostro account entries and the significance of outstanding entries is essential for those who handle these accounts and who audit treasuries of banks. A nostro account refers to an account that a bank holds in a foreign currency at another bank. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange and trade transactions. The opposite term “vostro accounts”—derived from the Latin word for “yours”—is how a bank refers to the accounts that other banks have on their books denominated in the holding bank’s home currency.

A bank counts a nostro account with a debit balance as a cash asset in its balance sheet. Conversely, a vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance (a loan) is an asset. Thus in many banks a credit entry on an account (“CR”) is regarded as negative movement, and a debit (“DR”) is positive – the reverse of usual commercial accounting conventions.

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.

Nostro Account vs. Vostro Account

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.

A nostro account and a vostro account actually refer to the same entity but from a different perspective. To Bank X, that is a nostro, meaning “our account on your books,” while to Bank Y, it is a vostro, meaning “your account on our books.” There is also the notion of a loro account (“theirs”), which is a record of an account held by a second bank on behalf of a third party; that is, my record of their account with you. In practice this is rarely used, the main exception being complex syndicated financing. A Nostro account is a reference used by Bank A to refer to “our” account held by Bank B. Nostro is a shorthand way of talking about “our money that is on deposit at your bank.” If a United States resident wants to open a euro account, they do not necessarily have to travel to Europe to open the account.

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.

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.

Nostro and vostro are variations on the Latin words that mean “ours” and “yours,” respectively. Modern retail banking is derived from 13th and 14th century Italy, where both depositors and retail banks maintained ledgers of their account balances. The ledger kept by the depositing customer called it a nostro ledger; the bank kept the corresponding vostro ledger. On the other hand, a Vostro account is a reference used by Bank B, which holds Bank A’s funds. From Bank A’s perspective, a Nostro account is denominated in foreign currencies, whereas a Vostro account is denominated in the home 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.

Because it is an additional feature, banks with nostro facilities usually charge maintenance fees that may be expensive. When a bank needs to make a payment in a country where it doesn’t hold a nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf. A vostro account is a record of money held by a bank or owed to a bank by a third party (an individual, company or bank). The facilitator bank uses its clearing network with the central bank to carry out the transaction. If the facilitator bank does not have access to the primary clearing arrangements with the central bank, it can facilitate the payments for the transaction through another bank in the same country that is a primary clearing member of the central bank. 5) For SELL trade you will get statement debit and ledger debit entry in your system and you have to match them manually or it might be auto matched by the system.

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