Nostro Reconciliation

Nostro reconciliation is the process by which a bank checks that its own internal record of a nostro account, the account it holds in a foreign currency at a correspondent bank, agrees with the statement the correspondent sends. Each entry the bank expects (payments out, receipts in, interest, fees) is matched against each entry the correspondent has actually posted, and any differences are investigated and resolved. Corporate treasuries and payment firms that hold accounts at foreign banks perform the same exercise.

The bank's internal copy of the account is often called the mirror or shadow account. The reconciliation is the main control over cross-border cash: it confirms that money sent really left, that money expected really arrived, and that the bank's reported foreign-currency positions are correct. It is closely tied to the bank's liquidity management, because an unreconciled nostro means the bank does not know with certainty how much of that currency it has.

Imagine you keep money in a friend's safe abroad and write down every time you ask them to pay someone or every time someone sends money to you there. Each month your friend sends a list of what actually went in and out of the safe. You lay the two lists side by side and tick off each line that appears on both.

Anything left unticked needs an explanation. Maybe your friend paid something a day later than you expected, maybe they charged a fee you did not know about, or maybe a payment you were promised never came. Nostro reconciliation is that ticking-off exercise, done every day by banks for thousands of lines in many currencies.

The correspondent sends a statement, traditionally a SWIFT MT950 or MT940 message and increasingly an ISO 20022 camt.053 statement, with intraday detail in camt.052 or camt.054 messages. The bank's reconciliation system loads the statement and the mirror ledger and runs matching rules, usually in stages:

1. Exact matches on reference, amount, currency and value date.
2. Rule-based matches allowing for small amount differences, date shifts or truncated references.
3. Many-to-one or one-to-many matches, for example one bulk debit against several payments.
4. Manual matching by operations staff for whatever remains.

Rich references help. An end-to-end transaction reference and the tracking data available through SWIFT gpi make it easier to pair a payment with its statement entry automatically.

Unmatched items fall into four classic groups, depending on which side recorded the entry and in which direction:

The relationship between the two balances can be written as:

• $B_{\text{statement}}$ and $B_{\text{ledger}}$ are the correspondent's statement balance and the bank's mirror balance.
• $C_{\text{them}}$ and $D_{\text{them}}$ are credits and debits on the statement not yet in the ledger.
• $C_{\text{us}}$ and $D_{\text{us}}$ are credits and debits in the ledger not yet on the statement.

For example, a mirror balance of 2,000,000 with an unexpected receipt of 50,000 on the statement, an unbooked correspondent fee of 150, and an outgoing payment of 300,000 not yet posted by the correspondent gives a statement balance of $2{,}000{,}000 + 50{,}000 - 150 + 300{,}000 = 2{,}349{,}850$. If the actual statement shows that figure, the difference is fully explained.

• Timing. Different cut-off times and time zones mean a payment can appear on one side a day before the other.
• Charges. Fees deducted under OUR, SHA and BEN charge codes, or periodic account fees, arrive without a matching internal entry.
• Exchange differences. Conversions at a rate different from the one booked internally leave small residuals in foreign exchange flows.
• Missing or rejected payments. A payment returned by a beneficiary bank, or never executed, needs a payment investigation.

Items not resolved quickly are often moved to a suspense account and tracked by age.

Unreconciled nostros can hide fraud, operational errors and duplicate payments, and they distort the bank's view of its foreign-currency liquidity. Supervisors expect banks to monitor intraday and end-of-day positions in each currency, and the Basel Committee's 2013 monitoring tools for intraday liquidity management assume a bank can see its correspondent balances reliably. Reconciliation results therefore feed liquidity risk management as well as operations. Banks review the mirror side of the same relationship from the other direction when they reconcile vostro accounts held for other banks; the distinction is set out in nostro, vostro and loro accounts.

• SWIFT
• ISO 20022
• Basel Committee on Banking Supervision