One of the biggest bugbears for those who trade forex internationally is exchange rates. Making a ‘winning’ trade is one thing, but then having to close your position and potentially lose profit as you exchange your currency for pound sterling is quite another.
Many traders have sought a solution to the problem; one option is using a Nostro account. You may not have heard the name before, but many banking institutions in the UK – including Barclays and HSBC – allow you to open a Nostro account which acts as your bank in the foreign country. This is perfect for forex traders.
As far as the banks are concerned, the primary function of a Nostro account is to enable their customers to send money to friends and family abroad with ease – typically with no fees for doing so. Even Martin Lewis of MoneySavingExpert fame extols the virtues of Nostro banking.
There are advantages that forex traders can also jump on as you can open a position in a foreign currency and close it for profit within the host country in your own bank account – you then simply transfer the money back to the UK. This is a much more efficient system than using some kind of trading brokerage or exchange that will apply the currency exchange rate when you close your position. If you trade at high volume or adopt strategies like scalping, where every penny counts, the exchange rate moving against you is disastrous.
As mentioned, many UK banks offer Nostro accounts, often, all you need is a traditional bank account with them to use to open your foreign currency holding, and the process is perfectly straightforward for forex traders.
What does Nostro mean?
If you’re not up with your Latin, two words of note are ‘nostro’ and ‘vostro’. Nostro means ‘ours’, and vostro means ‘yours.’ So, in this financial context, a Nostro account means being able to bank in ‘our’ country – basically, the account is in a foreign country. When receiving funds from your Nostro holding to your domestic account, that is considered a Vostro transfer, i.e., ‘yours.’
How does a Nostro account work?
As mentioned, Nostro banking brings together accounts in two countries – let’s call them A (the country you live in) and B, the country you want to bank in. You are likely to have a bank account in country A already, so to transfer funds to country B, you can easily set up a Nostro account via your current banking institution.
Your bank will have its branches within that country, or they may use a third party to facilitate the international transfer. To complete a Nostro transaction, you would use your credentials as usual – be it online banking or a cheque – and wait for the two banks in A and B to communicate and facilitate the transfer.
What are the advantages of a Nostro account?
Whatever your end goal – from sending money to loved ones living abroad or for forex trading – there are advantages to opening a Nostro account. The first is that currency exchange risk is eliminated. In an ordinary transaction, you will face the possibility of losing money if you action a money transfer and the exchange rate moves against you. Because a Nostro transaction occurs within your bank’s network, there are no such concerns.
Ordinarily, you might expect long processing times when enacting a foreign money transfer. However, with Nostro accounting, the transaction times are much quicker – after all, your bank completes the whole process on your behalf with an internationally-based ‘partner.’
One of the key considerations to remember is cost. It can be expensive to request a Nostro transaction in niche or ‘exotic’ currencies because your UK bank may be unlikely to have a partner within that specific country. However, if you want to transfer money in a common currency such as USD or EUR, the transaction may even be free of charge – it depends on your bank.
In which currencies are Nostro accounts available?
Typically speaking, the major international currencies are covered by Nostro banking. The US Dollar and the Euro are mainstays, while the likes of the Japanese Yen and the Hong Kong Dollar are also common currencies for Nostro account holders. If we take the Nostro account offered by Barclays as a guide, they have widened their net to include Scandinavian currencies (Swedish Krona, Danish Krone, etc.) plus the Canadian and Australian Dollars, South African Rand, the Swiss Franc and more.
Should I set up a Nostro account?
There are several reasons to set up a Nostro account. Suppose you are planning a luxury holiday abroad, in that case, you could set up such an account to avoid the losses caused by exchange rate risk. Rather than exchanging GBP to EUR, you could simply open a Nostro account in the European country.
If you have family or friends abroad, a Nostro account will allow you to send and receive funds without the fees associated with traditional international bank transfers. And if you are a forex trader, a Nostro account is an excellent way to ensure your gains are not lost when selling currencies and converting them back to pound sterling.
