Avoid nostro overdrafts with effective liquidity management

March 24, 2022 • 7 Minutes

The management of liquidity in nostro accounts

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:

1. Costly Overdrafts: 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.
2. Regulatory Scrutiny: 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, which is an inefficient use of funds. In some cases, regulatory restrictions prevent firms from maintaining a balance greater than a certain value in these accounts.

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.

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, firms can easily identify which obligations or 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 profile the settlement behaviour of their counterparties, reducing reliance on manual processes and allowing for pre-emptive action where necessary. The risk of breaching nostro balances is thus vastly reduced, benefiting the firm and, ultimately, the market as a whole.

How Baton CORE can help with effective nostro management: Key features

• Monitor receipts and payments in real time
• Track nostro account balances
• Accurately forecast end-of-day balances
• Link outbound payments to inbound receipts (payment on payment)
• Easily configure rules and alerts to hold back payments and keep balances within a certain range
• Real-time tracking of obligations and receivables allows firms to identify changes in counterparty behaviour

We hope that we have explained the unique benefits of Baton CORE’s technology in managing nostro accounts more efficiently.