5.4 NOSTRO/VOSTRO, NOP & Forward Cover

Treasury language versus the Manual’s chapter map

On a Pakistani dealing room, NOSTRO is “our account with you” in foreign currency abroad. VOSTRO is “your account with us,” typically the non-resident rupee account of an overseas branch, foreign correspondent, or non-resident exchange company (Foreign Exchange Manual Chapter 7). Net open position is the bank’s leftover FX long or short after matching spot and off-balance-sheet books — the Manual’s name is foreign exchange exposure / FEEL. Forward cover is Chapter 4. This independent OpenExamPrep section uses those current chapters. It does not invent a spread ceiling that Chapter 4 does not print.

NOSTRO accounts (Chapter 5)

Paragraph 2: ADs may open and maintain NOSTRO accounts in all convertible currencies with their branches and correspondents abroad.

Paragraph 3: foreign currency balances of ADs, whether run from head office or branches, shall at all times be held at the disposal of SBP, which may direct their ready or forward sale to SBP or to a person SBP names.

Paragraph 7: ADs may freely purchase foreign currencies (inward remittances are unrestricted). Sales to customers must be against genuine transactions approved by SBP or by the AD under delegated power.

Paragraph 8: ADs may freely buy and sell foreign currencies with other ADs in Pakistan provided they remain within their permissible exposure limit.

Paragraph 9: SBP may, at its discretion, buy and sell approved currencies ready and forward with ADs.

Paragraph 10: ADs may freely purchase ready and forward one foreign currency against another from overseas branches and correspondents to cover positions. Purchase and sale against PKR with those overseas offices follow Chapter 7.

FEEL / net open position — the latest circular controls

Paragraph 4: SBP fixes, from time to time, limits for foreign exchange exposure on an overall basis for all currencies for each AD. The limit covers all Pakistan branches of a foreign bank, and all branches (including overseas branches) of a Pakistani bank. Head offices must ensure day to day that limits are not exceeded.

Use the latest DMMD circular for the limit, then use Appendix VI-1 for the calculation mechanics. The compiled Chapter 5 Appendix VI-1 still displays the historic 20 percent of paid-up capital / PKR 3,500 million formula. DMMD Circular No. 16 of 2020 first replaced that with up to 25 percent of paid-up capital and a PKR 5,000 million cap. DMMD Circular No. 07 of 2025 then replaced the limit again, effective 4 August 2025:

• FEEL = 7.5 percent of Tier-1 Capital disclosed in the AD’s latest annual audited financial statements.
• SBP advises each AD’s revised limit separately based on that Tier-1 Capital position. The circular says all other instructions remain unchanged, so the calculation and day-to-day control mechanics below continue.
• Measure each currency as spot position plus off-balance-sheet position.
• Convert each net currency position to PKR at SBP ready mark-to-market rates; sum all PKR longs and all PKR shorts; the overall exposure is the greater of those two totals.
• Close-of-business overall position shall not exceed assigned FEEL. Intraday overall position must stay within prudent boundaries (the appendix does not print a second intraday percentage).
• Accrued interest is included; assets are marked to market; structural long-term participations are usually deducted from spot if agreed with supervisors.

A separate numeric “NOSTRO balance ceiling per correspondent” is not published in the current Chapter 5 body. Do not invent one. Currency-wise NOSTRO balances are a daily reporting line, not a substitute FEEL.

Current FXCRS reporting (DMMD Circular Letter No. 06 of 2025): SBP replaced the old Microsoft Access-only process with uploads through its Data Acquisition Portal (DAP). The three datasets are FXCRS Deals (all FX deals, daily by 9:30 a.m. on the following working day), FXCRS Balances (daily currency-wise balances, by 10:30 a.m. on the following working day), and FXCRS Asset Liability Position (monthly foreign-currency on- and off-balance-sheet assets and liabilities, by close of business on the second working day of the following month). The circular kept the existing daily email submission running until SBP separately discontinues it; it did not make the legacy email the only current channel. Deal, NOSTRO, FE-25, and other exposure data must be captured in the applicable current dataset under the unchanged substantive instructions.

VOSTRO and the trade desk

Chapter 10 paragraph 1: debit to banks’ non-resident rupee accounts constitutes an inward remittance. When a New York correspondent pays a Karachi beneficiary by authorizing a debit to its PKR vostro, the AD has purchased FX in the Chapter 10 sense even though no USD moved through the Pakistani NOSTRO that morning. Report it as inward; do not treat it as a domestic rupee transfer.

Chapter 7 (title on the current Manual hub: non-resident rupee accounts of ADs’ overseas branches, foreign correspondents, and non-resident exchange companies) is the vostro operations chapter. PKR sales to those accounts follow that chapter, not a homemade treasury policy.

FE-25 interbank placements (Chapter 6 paragraph 7, again)

FE-25 is a liability of the AD (customer FCY deposits) and a source of FCY liquidity. Current paragraph 7(iv) allows ADs to use interbank placements and interbank SWAPs, or any other FCY liquidity permitted under SBP rules, to extend trade loans. The loan currency must be the same as the underlying LC or firm trade contract. Paragraph 7(v) points to BSD Circular 18 of 2001 / Appendix VI-3 for import/export financing from FE-25 deposits.

Treasury can therefore place FE-25 with another Pakistani AD or swap PKR for USD in the interbank market to fund a USD import loan. That placement still sits inside FEEL and must be captured through the applicable FXCRS DAP datasets under DMMD Circular Letter No. 06 of 2025, while any still-required parallel email continues until SBP announces its discontinuation. It is not a customer remittance and not an ESFCA transfer.

Forward cover (Chapter 4) — genuine underlying, published tenors, no spread cap

Paragraph 1: ADs may enter forward purchase or sale contracts subject to this chapter. Before booking, satisfy yourself of bona fides and that cover is for a genuine underlying transaction. Call for offers/acceptances and/or signed contracts and/or letters of credit; keep authenticated photocopies; endorse the forward-contract number on the documents and the document particulars on the contract. Cover may be booked at another AD if the LC-opening or document-handling AD certifies that it has not provided cover.

Paragraph 2: forward cover may be provided for exports, imports, eligible PSBA project/working-capital borrowings (excluding foreign contractors and foreign-company branches), FSBA by microfinance banks/institutions as in Chapter 19, and non-resident portfolio investment in rupee shares and securities on repatriation basis, for any duration subject to later restrictions, in accordance with the conditions prevailing in the market. That last phrase is the quotation rule. Chapter 4 does not publish a maximum pip or percentage spread. If a question asks for a spread cap, the accurate answer is not published in the current chapter.

Export forwards (paragraph 3): against a firm contract, buy FCY forward for delivery up to six and a half months from the last date of shipment in the contract/LC, booked any time from/after the contract/LC date. Consignment shipments: after shipment, last delivery not after six and a half months from shipment. If SBP has allowed realization beyond six months, delivery may run fifteen days after the extended realization date. Cross-currency: the exporter may cover only the third currency versus USD and carry USD/PKR, or cover both legs, all inside FEEL.

Import forwards (paragraph 4): only against letters of credit, not against contracts. Tenor not less than one month and up to one year on rollover. Close-out cannot occur within one month of booking; if LC payment falls inside that month, apply prevailing spot selling and close the forward at the one-month point. Maturity should coincide with the LC; usance rollover rules are in paragraph 4(i)(c)–(g). Tenors over 12 months: forward is 12 months on rollover or remaining LC tenor, still not under one month. Cancelled LCs: close out on maturity at prevailing rates and report to DMMD on Appendix V-1 the same day. No forward for crude oil and POL products, or for most government/majority-government importers other than TCP and public-sector exporters of part of their output. Do not hedge more than the underlying exposure.

Other published forward types: PSBA cover (paragraph 5) minimum twelve months or remaining loan maturity, never under one month; non-resident portfolio cover (paragraph 6) maximum twelve months, not for dividends/interest/coupons, not for FDI; interbank forwards (paragraph 7) if end-of-day FEEL is respected; overseas forwards (paragraph 8) in currencies other than USD for customer deals.

Close-out (paragraph 12): contracts not taken up may be closed on maturity; the difference is between the booked forward rate and the prevailing spot rate for the counter transaction on maturity day, payable to or recoverable from the customer. SBP may, under FERA section 4(2), direct close-out at another day’s rate.

FE Circular No. 03 of 2021 added Chapter 4 paragraph 3A: ADs may enter forward purchase with exchange companies against export of permissible foreign currency notes. If booked on/after shipment, maximum maturity is the 5th working day from shipment (ECs must bring proceeds within five working days). Specific shipment; no substitution; documents required.

EPD Circular Letter No. 08 of 2026 is the home-remittance counterpart on the EC side: forward sale with ADs against home remittances up to five working days.

Paragraph 15 still lets non-individual FC-account holders sell forward to importers of the same AD against import LCs/indents, with lien on the FC account.

Treasury desk versus trade desk — Pakistani scenarios

Scenario A — FEEL breach. Trade books a large USD import forward. Treasury’s overall short USD, converted at SBP ready rates, plus other shorts, exceeds the greater of aggregate longs/shorts test versus assigned FEEL. Chapter 5: do not exceed FEEL. The trade desk cannot “ignore FEEL because the LC is genuine.” Genuine underlying is necessary; it is not sufficient if FEEL is blown.

Scenario B — import contract without LC. An importer wants a six-month USD forward against a proforma invoice. Chapter 4 paragraph 4: LC only. Offer the LC path or refuse the forward.

Scenario C — invented spread cap. A supervisor says “SBP spread is 20 paisa, so we cannot quote wider.” Current Chapter 4 paragraph 2 points to market conditions, not a printed paisa cap. Quote inside market, document the underlying, stay in FEEL.

Scenario D — vostro as “not FX.” A correspondent’s PKR vostro is debited for a customer credit. Operations skips ITRS because “no NOSTRO movement.” Chapter 10 paragraph 1 says the debit is an inward remittance.

Scenario E — FE-25 SWAP for a GBP loan against a USD LC. Paragraph 7(iv) requires the trade-loan currency to match the LC/contract. Fund USD, or change the underlying documents; do not mismatch currencies.

Scenario F — EC home-remittance hedge. An exchange company asks for a 30-day forward sale against expected worker flows. Circular Letter 08 of 2026 allows up to five working days, not 30.

Traps

• Inventing a forward spread cap that Chapter 4 does not publish
• Repeating the stale 20 percent / PKR 3,500 million Appendix VI-1 formula instead of DMMD Circular No. 07 of 2025’s 7.5 percent Tier-1 rule
• Booking import forwards against contracts instead of LCs
• Closing an import forward inside one month of booking except as paragraph 4 allows via spot
• Missing the current FXCRS DAP deadlines: deals at 9:30 a.m., balances at 10:30 a.m. on the following working day, and the monthly asset-liability dataset by close of the second working day
• Calling a vostro debit a domestic rupee payment with no inward reporting
• Mismatching FE-25 trade-loan currency and LC currency