In some markets it is common to use tomorrow next FX swaps to manage liquidity. Especially in some markets (eg SEK) the domestic money market is not so liquid so banks borrow eg USD and then swap to SEK often using T/N FX swaps, But in a T/N swap my understanding is that delivery of currency never takes place since spot is T+3 and T/N is T+1. Can somebody place shed so light on this?I mean assume I have USD but need SEK. I therefore enter into a T/N FX swap where I exchange USD for SEK. But I never pay out the USD and receive SEK? Does the USD stay in my account the whole time and only interest rate are exchanged at maturity or how does this work? Sorry for the unclear question but the whole concept seems a bit strange to me. Any help appreciated, links to papers etc much appreciated!

There are payments (delivery) on both days. T/N means a payment tomorrow *and* a payment on the next day (ie on the day after tomorrow). Usually, spot is T+2 , so at T+1 in your example the bank receives USD and pays out SEK, then the following day (T+2), the USD are paid back out and the SEK is returned (along with some interest implied by the FX Fwd points). The payments are made to the nostro accounts that each bank hold in that currency.