Nostro account: What is it and why should I set one up?
For beginners looking to get started in the online trading and investment world, one of the biggest barriers to entry is the sheer volume of technical jargon you have to get used to. From ‘pips’ and ‘exotic’ currencies to technical analysis and candlestick charts, it can often seem like traders speak a unique language that is utterly incomprehensible to the outside observer.
Two of the terms that often confuse newbie traders are ‘nostro’ and ‘vostro’ accounts. But what is a nostro account? And, more importantly, what does it do?
A nostro account is, essentially, a type of bank account used to hold foreign currency in another bank. Derived from the Latin word meaning “ours”, nostro accounts are most often used to facilitate forex exchange transactions. Nostro accounts are contrasted with vostro accounts which are used to refer to the bank accounts that other banks have on their books in a home currency. Vostro is derived from the Latin word for “yours.”
Nostro accounts are always denominated in foreign currencies, while vostro accounts always store a home currency. This is the main distinction between them to keep in mind.
An example of when you might use a nostro account would be if you live in the United Kingdom and ask your local bank to set up a Euro account for you. To do so, your local bank would more than likely set up a nostro account with an agent bank in the EU who they generally have an existing relationship with and that facilitate this kind of function.
The Euro bank will then set up the account, although either bank will not treat them as a traditional checking or current account. Transactions to your nostro account will be by wire transfer only and will go through special identity verification checks to ensure they comply with special handling rules.
Nostro accounts are often used by companies when they do business in a foreign country where they are established but do not have a physical presence in that territory or region. That allows companies to simplify payment settlements of trade and foreign exchange and protects them from the risk of fluctuating currency exchange rates more generally.
Similarly, vostro accounts are also popular with forex traders as it allows them to store volumes of money in specific currencies without exchanging them. That enables traders to take advantage of changing forex currency rates and to hold funds until the exchange rates are favourable to them. Holding currency in this manner allows forex traders to hedge (i.e. protect) themselves against the risk that currency exchange rates will change.
It’s also important that whether or not an account is a ‘nostro’ or ‘vostro’ account will depend on the perspective from which you are making the transfer.
