An FXP must be able to send and receive payments in a specific IPS in order to offer rates on payments to/from that IPS and currency.
There are two options for the FX Provider to access an IPS: membership, or use of a Settlement Account Provider.
Option 1: IPS Membership
In this model, the FXP is a member of the IPS. This means that:
the FXP already holds a settlement account at the IPS, which is currently used for processing domestic instant payments. They act as a Settlement Account Provider (SAP) to themselves
the funds in this settlement account can also be used for processing Nexus payments
the FXP is able to directly initiate payments through the IPS
This option is only available to banks and non-bank PSPs who are eligible for membership of the IPS.
Option 2: Indirect access via Settlement Account Providers
FX Providers who are not eligible for membership of an IPS will need to access the IPS indirectly via a Settlement Account Provider. In this model an FXP holds an account at an existing IPS member. This means that:
The SAP provides an account in which the FXP can holds funds, denominated in the IPS’s currency. (The FXP's account holds bank deposits, not central bank money.)
The SAP makes and receives payments on behalf of the FXP.
Choosing between IPS Membership and Indirect Access via SAPs
An FXP is able to combine both options, ie have direct membership in 1 IPS and indirect access in another IPS to facilitate an FX corridor. For each FXP, the choice of access model may differ depending on the country:
An FXP may not be eligible for membership of the IPS. In some countries, only banks (licensed credit institutions) are eligible to join the IPS, so non-bank PSPs who act as FXPs would need to use indirect access via an SAP. Other non-banks, such as non-bank FX dealers, are usually not eligible for access in any IPS.
An FXP may be eligible for IPS membership, but the cost of membership may outweigh the benefits. Typically IPS membership is geared towards institutions that will process significant volumes of domestic payments, and so there are significant requirements around the security and resilience of an IPS member’s technology and a lengthy onboarding process. However, for Nexus an FXP only really needs the ability to hold funds in that IPS. If they do not intend to process significant volumes of domestic payments on behalf of customers in a specific country, the costs of becoming a member of that country's IPS may be prohibitive. In this case, it would be easier and cheaper for the FXP to use an SAP.
An FX Provider is likely to use direct access to an IPS for countries where they are already established (for example as a domestic PSP), and indirect access for other countries.
In the diagram below, FXP-A is a major international bank. It is a member of both the Source and Destination IPSs, as it has a significant presence in both those countries. It can accept funds in the Source IPS and pay out funds in the Destination IPS (and vice versa for payments in the opposite direction). It therefore acts as an SAP to itself in both the Source and Destination Countries. The obligations that apply to SAPs (as defined in the Nexus Scheme Rulebook) also apply to FXP-A.
FXP-B is a regional bank. It is a member of the Source IPS, in the country where it is headquartered and so acts as Source SAP to itself. It does not have a significant presence in the Destination Country, so cannot justify the expense of joining the Destination IPS. Instead, it uses an SAP to get access to the Destination IPS. The obligations that apply to SAPs (as defined in the Nexus Scheme Rulebook) also apply to FXP-B.
FXP-C is a non-bank FX dealer, and therefore not eligible for access to any IPS. It uses SAPs for every IPS that it wishes to access. It must comply with the obligations upon FXPs, but not the obligations for SAPs.
Three different models of access to instant payment systems