BB allows FRAs to hedge import financing risks

The Bangladesh Bank has allowed the use of Forward Rate Agreements (FRAs) for imports under suppliers’ and buyers’ credit in its move to strengthen interest rate risk management in trade finance.

In a circular issued on Thursday the central bank permitted Authorized Dealers (ADs) to offer FRAs to importers availing foreign currency import loans. The measure is aimed at protecting importers from volatility in global benchmark rates, particularly SOFR.

Under the framework, FRAs are strictly limited to hedging purposes and will be backed by genuine underlying import transactions. Speculative or uncovered positions have been expressly prohibited. The instrument allows importers to lock in an interest rate for a future period, with settlement based on the difference between the agreed rate and the prevailing benchmark.

To ensure prudential discipline, banks are required to fully offset their FRA exposures on a same-day, back-to-back basis, without taking market risk onto their own books. The pricing spread has been capped at 10 basis points, and overall exposure is restricted to 25% of a bank’s average monthly foreign exchange inflows.

The circular also emphasises strong governance, including mandatory ISDA-based documentation, daily mark-to-market valuation, and robust internal risk management practices. Early termination of contracts must be settled at market rates with proper documentation.

Industry insiders say the move is expected to provide greater certainty to importers, while gradually advancing the country’s derivatives market within a well-regulated framework.