Every cross-border, cross-currency payment requires an actor who is willing and able to swap one currency for another. This entity providing this service plays the role of FX Provider.
The FX Provider sets a rate (the FX Rate) at which they are willing swap the Source Currency for the Destination Currency. At the end of the payment, they hold more of the Source Currency and less of the Destination Currency on their balance sheet.
There are three prerequisites to act as an FX Provider in Nexus:
- 1.Willingness to quote FX rates for specific currency pairs, which will be shown to Source Banks when initiating payments.
- 2.Ability to receive payments through the Source IPS (and vice versa in the case of returned payment).
- 3.Ability to pay out funds via the Destination IPS (and vice versa in the case of returned payments).
The FX Provider may or may not be a member of the Source and/or Destination IPS. In the case that they are not a member of one (or both) IPS, they can access the IPS by using a “vostro/nostro” account held at an existing IPS member. This IPS member plays the role of Liquidity Provider (LP) to the FX Provider. Liquidity Providers are described in detail below.
This means that FX Providers could be:
- Banks or non-bank PSPs who are members of at least one IPS and are active in FX markets, or
- Non-bank financial institutions who are not IPS members but access IPSs through Liquidity Providers (who are IPS members)
In a payment, the FX Provider:
- Accepts the Source Currency (increasing their assets)
- Pays out the Destination Currency (reducing their assets)
Because the FX Provider is swapping one asset for another, it gets to decide the “price” or FX rate at which it is willing to swap those assets.