Bangladesh Bank recently permitted authorised dealer banks to offer forward rate agreements (FRAs) to importers, introducing a new derivative instrument to protect businesses from fluctuations in international interest rates on foreign currency import financing.
The move is expected to deepen Bangladesh’s foreign exchange and derivatives market while strengthening financial risk management.
The move is expected to deepen Bangladesh’s foreign exchange and derivatives market while strengthening financial risk management.
A circular from the central bank said the instrument is intended solely for hedging genuine underlying import credit exposures. Speculative, leveraged or uncovered transactions have been prohibited to safeguard financial stability, according to domestic media reports.
Settlement under the agreements will be based on the difference between the contracted FRA rate and the prevailing secured overnight financing rate (SOFR).
The notional principal will not be exchanged, while settlement will be made either in Bangladeshi taka for domestic obligations or in the relevant foreign currency for international obligations.
The notional amount of an FRA must not exceed the outstanding amount of the underlying import credit, and repayment of the original loan will remain separate from the FRA settlement.
Only importers availing permissible usance imports financed through floating-rate suppliers’ or buyers’ credit will be eligible for the facility.
The tenor of each FRA must correspond to the remaining interest period of the underlying borrowing and remain within the limits prescribed under existing foreign exchange regulations.
The circular capped the pricing spread that banks may charge at a maximum of 10 basis points and limited each bank’s outstanding FRA exposure to 25 per cent of its average foreign exchange inflows over the previous 12 months.
Fibre2Fashion News Desk (DS)
