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Bangladesh Bank (BB) has approved the use of Forward Rate Agreements (FRAs) in import trade, allowing local businesses to hedge against fluctuations in international interest rates, particularly those linked to the Secured Overnight Financing Rate (SOFR).
In a circular issued on Thursday, the central bank authorised Authorised Dealer (AD) banks to enter into FRA contracts with local importers and borrowers using supplier’s credit and buyer’s credit facilities for usance imports.
A Forward Rate Agreement is a financial derivative that enables two parties to lock in an interest rate for a future period, protecting borrowers from unexpected increases in global benchmark interest rates. Under usance import arrangements, importers are allowed to defer payment for goods for an agreed period after receiving the shipment.
According to the circular, FRA contracts may only be used for genuine risk management related to actual import transactions. The central bank has prohibited their use for speculative purposes or for maintaining uncovered market positions.
Under the arrangement, settlements will be made based on the difference between the interest rate agreed in the contract and the prevailing benchmark rate at the time of settlement.
To safeguard financial stability, Bangladesh Bank has introduced a series of risk management measures for participating banks.
Authorised Dealer banks will be required to fully hedge every FRA exposure through matching transactions executed on the same day, preventing them from carrying open interest rate risks on their balance sheets.
The central bank has also capped the maximum pricing margin that banks can charge at 10 basis points.
In addition, the total value of FRA transactions undertaken by an individual bank cannot exceed 25 percent of its average monthly foreign exchange inflows over the previous 12 months.
The new guidelines also require banks to comply with internationally accepted contract standards, conduct daily mark-to-market valuations, maintain robust internal risk management systems and preserve all relevant documentation.
In cases where an agreement is terminated before maturity, the contract must be settled based on prevailing market rates.
The introduction of FRAs is expected to provide Bangladeshi importers with greater certainty over borrowing costs, reduce exposure to global interest rate volatility and facilitate more effective financial planning for businesses relying on deferred payment import financing.