As usual lets start with an intro, in the traditional style. In this hub you would be reading on FX interest compensation on delayed reciepts.

This topic comes into picture when a counterparty on a FX deal falters on his side of the promise and delays the payment to the counterparty. FX compensaiton is mostly only found on the corporate FX transactions as the the amounts involved have to be huge enough to result in substantial losses to either counterparty for the defaulter to make good the loss that has been incurred. The rate losses are not being taken into account here, rather its the OD charges or the overnight interests gained by the holder of the funds that are compensated to the counterparty who was supposed to receive the amount in the first place.

Interest compensation is illustrated below:

Principal * OD Rate * Number of days Delayed / 36500

Principal ==> is either the buy or sell part that has been received late.

OD Rate ==> is the rate Over draft charged on your account.

Interest compensation takes on this much prominence, because most trading houses insist on maintaining zero balances on their main accounts. And when there's a delayed payment coming in, there is a OD that has to be made on a outgoing payment.

How do you decide on the OD rate?

When you are overdrawn on a NOSTRO account, the OD rate would be the OD charged on your account, which can be calculated from the monthly statement. But when your currency is your home currency, or when the onus of the delay lies with the receiveing party, the OD rate is set to the overnight rate decided by the central bank of the country or the concerned agency.

Overnight rates of the US Dollar(Fed Rate) is pegged by the Federal Reserve Bank of New York. And, that of EURO is the EONIA.