Liquidity Providers
If an FX Provider is only a member of one IPS (ie the Source or Destination IPS), or a member of neither IPS, they can instead access the IPS through accounts held at Liquidity Providers. Liquidity Providers are existing IPS members (including other banks and PSPs) who are willing to accept or pay out funds on behalf of the FX Provider:
- The Source Liquidity Provider is a member of the Source IPS. The Source Bank sends funds (in the Source Currency) to the FX Provider’s account at the Source Liquidity Provider. This payment is processed through the Source IPS.
- The Destination Liquidity Provider is a member of the Destination IPS. It pays out funds from its own IPS account to the account of the Source Bank.
A Liquidity Provider would act as Source LP for payments leaving the country and Destination LP for payments into the country.
Liquidity Providers must be members of an IPS. The Liquidity Provider acts as a direct (settlement) Participant in the local IPS and as such, needs to adhere to the local IPS system rules and admission criteria. It is not involved in the operational processing of payments, which flows through Nexus.
Nexus needs to be authorised as an “Instructing Party” (or Technical Service Provider) for the Liquidity Provider within the IPS. This means that the Nexus Gateway will act as the primary contact for the IPS for Nexus payments. The Nexus Gateway will be able to acknowledge receipt of a payment in the role as Beneficiary, as well as having the authority to initiate payments on behalf of the Liquidity Provider.
The Nexus Gateway will initiate payments in two scenarios:
- For a normal payment, the Nexus Gateway will initiate a payment from the Destination Liquidity Provider to the Destination Bank; this will complete the second stage of the Nexus payment.
- For a payment which needs to be reversed, the Nexus Gateway will initiate a payment from the Source Liquidity Provider to the Source Bank. (See Unhappy Flows).
FX Providers are required to play a similar role to a market maker; this means that they are obliged to always provide a quote for the payment corridors that they provide. If they do not wish to be committed for new payments, they can set a quote that is below the rest of the market, but they are not allowed to “exit” the market (ie provide no quote at all).
This requirement is necessary to ensure that there is always liquidity available for Nexus payments and to avoid a situation where all FX Providers for a currency channel choose to “sit out” of the market (making payments through that channel impossible). The obligation to always quote also helps to ensure that FX rates will be dynamic and are likely to be broadly in line with other FX markets.
The Liquidity Provider only deals in its own “domestic” currency. It does not swap one currency for another and therefore is not an FX Provider (although it does provide services to the FX Provider).
For a single Nexus payment, the Source Liquidity Provider:
- Accepts a payment from the Source Bank, increasing the LP's assets.
- Simultaneously credits the vostro account that the FX Provider holds with them, increasing the LP's liabilities.
- Both entries are made in the same Source Currency.
- The balance sheet expands.
For the same payment, the Destination Liquidity Provider:
- Debits the vostro account that the FX Provider holds with them (reducing the LP's liabilities).
- Simultaneously makes a payment to the Destination Bank via the IPS (reducing their assets).
- Both entries are made in the Destination Currency.
- The balance sheet contracts.