Providing FX Quotes
FX Providers are responsible for providing continuous quotes at the rate at which they are willing to swap one currency for another. Quotes can be updated as frequently (or infrequently) as the FX Provider wishes. Note that they do not provide quotes on single payments, and they are not asked to bid for specific payments.
Each quote specifies:
- the Source Currency
- the Destination Currency
- Exchange rate (where Source Currency Amount * Exchange Rate = Destination Currency Amount)
- Source Liquidity Provider ID
- Destination Liquidity Provider ID
- FX Provider ID
- Timestamp from which the rate applies
- Whether the rate is public (shown to all other Source Banks) or private (visible only to the FX Provider)
- In case of a private quote, the list of Source Banks allowed to request this quote
- Time of expiry – this is defined by Nexus. When a new quote is received which overwrites the current quote, the expiry time will be updated to the current time plus five minutes
- In case of an update to a previous quote, the preceding Quote ID
Most FX Providers want to advertise their quotes to other banks in the Nexus network so that they can provide FX to payments by customers of other banks. The quotes they provide are therefore “public” – they are shown to Source Banks when they request quotes.
FX Providers may also want to offer better rates to specific banks that it has a partnership with. This is possible by specifying a private quote and specifying the list of banks that can access that quote. One FX Provider may issue multiple quotes at the same time, for example:
In some cases, a Source Bank may be able to act as its own FX Provider. This is possible where the Source Bank holds an account with a Destination Liquidity Provider, so that it can initiate the second payment (to the Destination Bank) from its own account at the Destination Liquidity Provider. In this case, the Source Bank may want to define its own FX rate, without advertising that rate to other banks. This may be because:
- 1.It does not wish to offer FX to other banks; it only wants to provide FX for its own customers” payments, or
- 2.It does wish to offer FX rates to other banks, but it wants to offer a better rate to its own customers than it offers to the market.
In both cases, the Source Bank would post a Private quote to the Nexus Gateway, specifying its own bank ID as the only bank that can view that rate. When it sets up a payment on behalf of the Sender, it would call the Quote API specifying itself as the preferred FX Provider.
FX Providers can update their quotes as frequently as they like. A new quote overwrites the current quote, and senders are only shown the most recent quote (immediately after they have selected the Destination Country).
However, one issue is that the old quote may have been shown to some Senders who have not yet completed their payment setup. To avoid these Senders being asked to agree to a new rate, FX Providers are obliged to honour an old quote for at least five minutes after it is overwritten by a new quote.
This 5-minute limit is set deliberately to be long enough for most users to be able to complete the payment setup process. FX Providers could be asked to honour quotes for a longer period of time but may result in them offering worse rates to allow for the greater risk of market FX rates changing before the sender completes the payment.
Quotes are stored at the Source Gateway for that currency pair (at a minimum). For example, quotes for payments from Singapore to India (SGD-to-INR) will be stored at the Singapore Nexus Gateway, while quotes for payments from India to Singapore (INR-to-SGD) will be stored at the Indian Nexus Gateway. (See FX Providers update their rates for more detail.)
The Nexus Gateway will store a history of expired FX quotes, likely for up to one month. This is because (a) FX quotes need to remain valid for a number of minutes to allow for the Sender to complete the payment setup and (b) reverse payments will need to be processed against the original FX rate. (See Annex: Payment Recalls and Unhappy Flows).
IPSs allow payments to be made 24 hours per day, seven days per week. In contrast, FX markets, where financial institutions buy and sell currencies from each other, are only open during business hours from Monday-Friday. Because of the global nature of FX markets, it is usually possible to trade major currencies for 24 hours a day from Monday to Friday, but not over the weekend. This means that there is no “live” market FX rate on Saturday and Sunday.
To enable Nexus payments at weekends, FX Providers must continue to provide quotes over the weekend. They can leave these rates fixed or continue to update them through the weekend. They must also ensure they have the liquidity to meet expected payment flows over the weekend, either in their own IPS accounts or at their Liquidity Providers. But because the FX markets are closed, these FX Providers will be unable to buy or sell FX in the market until Monday morning. This means they must take a view on whether FX rates will change significantly when markets reopen on Monday.
FX Providers are likely to take one of two approaches to quoting on weekends. (1) They may acquire any additional currency in advance (for example, on Friday). In this case they can “lock in” their rate over the weekend, because they know what it cost them to acquire that currency. (2) Alternatively, they may borrow the currency needed over the weekend (perhaps from their Liquidity Provider) and then buy that currency back when the FX markets open on Monday. In this case, the FX Provider takes some risk that the rate on Monday will be worse than they expected; they will account for this risk in the rates that they quote through Nexus.