Nostro accounts

As there is no dollar cleraing and settlement system outside the USA, all eurodoolar transactions must take place through banks in New York using their clearing house system. Therefore all banks operating outside the USA and dealing in eurodollars must hold demand deposit accounts with US-based banks in New York through which receipts and payments can be effected.

These accounts, known as Nostro accounts, are also used to settle banks' foreign exchange transactions and to enable them to conduct normal correspondent banking relationships. Just as you hold an account with a bank to effect cheque payments in sterling in the UK, a British bank which makes and receives payments in US dollars on behalf of its customers must hold an account in a bank in the USA.

Banks hold nostro accounts in various currencies with corresponding banks around the world to enable them to participate fully in international trade and investment transactions. Nostro acounts are also essential for conduction business in the eurocurrency market in London or elsewhere