Avoid nostro overdrafts with effective liquidity management

 The management of liquidity in nostro accounts presents a number of operational challenges. Baton CORE™ technology allows firms to monitor receipts, payments and obligations in real time in order to maintain appropriate account balances.  

Nostro accounts: why effective liquidity management is so critical  

In the absence of the appropriate technology and processes to effectively manage liquidity, nostro accounts can easily become overdrawn.

In most cases, accounts are funded by a regional cash management team. However, for certain currencies it falls to the trading desk at the bank to ensure that outflows (sales) of a given currency are offset by incoming funds. There is not always a good match, so in this situation the desk can find itself short of that currency and unable to easily source the funds to meet their obligations. 

An overdrawn nostro account is undesirable for several reasons.

Firstly, overdrafts are expensive. As global interest rates rise, and in the current environment where liquidity is at a premium for many currencies, fees on overdrawn balances are becoming ever higher.

Secondly, overdrafts are not permitted on certain accounts in emerging market currencies. Firms which allow these accounts to become overdrawn will find themselves subject to regulatory scrutiny which may lead to the imposition of additional fees.

To guard against this, firms may leave very large cash buffers in their nostro accounts. Not only is this an inefficient use of funds, but, in the case of some emerging markets currencies, firms are not permitted by regulators to maintain a long balance greater than a certain value.

“An overdrawn account may mean that, in some cases, a bank is unable to meet its obligations to pay out to a counterparty. This creates a whole swathe of reputational and regulatory risk issues, and could in extreme situations bring the market to a standstill.”         

Tracking receipts and payments in real time   

“Baton CORE™ monitors, in real time, a firm’s inbound receipts, outbound payments and outstanding obligations.”   

By performing continuously updated calculations based on these elements, Baton’s technology can also keep track of a firm’s account balances and accurately forecast the end-of-day balance for each account so that appropriate funding can be secured in advance. With this functionality firms can more easily position appropriate balances at their accounts, eliminating uncertainty and avoiding the need for last minute operationally intensive (and often expensive) adjustments.     

Baton’s netting and sequencing logic is designed to reduce the amplitude of the swings in the funding position for any currency. Baton runs rules and alerts that allow payments to be held back, pending sufficient funding in the relevant accounts. Outbound payments can also be linked to inbound receipts (Payment on Payment).

The closer to the cut-off time, the more expensive it becomes to source funds because most banks have already squared their positions and moved their funds to the central bank. Using Baton’s technology, a firm can ensure that alerts are triggered when an account balance is outside a projected range. This allows for forward planning as decisions can be made in good time regarding whether the buffer funds in a given nostro account will be sufficient if one or more counterparties fails to deliver on their obligations.

Profiling counterparties’ settlement behaviour

“Baton CORE allows firms to manage their nostro balances with the benefit of accurate real-time and historic information.” 

The appropriate funding and sequencing of payments using logical rules eliminates the risk of overdrafts whilst also reducing the costs associated with holding large defensive buffers.

By using Baton’s technology, a firm is able easily to identify which obligations or real receivables have not been met. Baton’s Core FX™ and Core Payments™ solutions reconcile inbound payments at a counterparty level in real time, making it simple to identify counterparties which have not yet met their obligations.

“By tracking and storing obligations and receivables in real-time, firms can build a profile of the settlement behaviour of their counterparties.” Because Baton is capturing data at a time-stamped level intraday and reconciling it on a real time basis, firms are able to be predictive and to easily identify changes in counterparty behaviour. This reduces the reliance of a firm’s cash management team on manual processes and allows pre-emptive action to be taken where necessary. The risk of breaching nostro balances is thus vastly reduced, benefiting the firm and, ultimately, the market as a whole. 

We hope that we have explained the unique benefits of Baton CORE’s technology in managing nostro accounts more efficiently.  Please reach out if you have any questions or would like further information by emailing [email protected]