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Lesson 33 of 39 · Part N · Level 2 · Explained

Ending an FRA early, documents and reporting

What happens when an importer wants out of an FRA before it matures, which papers a bank must sign and keep, who checks the bank, and what it reports to Bangladesh Bank every week and every month.

N-3N-4N-5

Six months ago, Tahmid fixed the interest on his machinery credit. In Lesson 32, Forward rate agreements: hedging the interest on import credit, Mithu helped him see why a floating rate kept him awake at night, and Sadia's team set up a forward rate agreement (FRA) with him.

Now Tahmid is back at the import desk, a little embarrassed. "Rates have gone down," he says. "My neighbour's floating rate is now lower than my fixed one. Can I just tear up the FRA, like returning a shirt that doesn't fit?"

Rakib looks at Sadia. Sadia smiles. "An FRA is not a shirt, and our shop has rules for returns too. Shirin is in the building today. Let's ask her."

Shirin has spent 35 years in banking and once headed trade and foreign exchange at a large bank. She pulls up a chair. "You can end it early," she tells Tahmid, "but not for free, and not without a paper trail. In fact, this lesson is all about paper: how an FRA ends, how it is written, how the bank watches it every day, and how it is reported to Bangladesh Bank." She uncaps her pen. "Let's start with your question." Tahmid nods, and Rakib opens a fresh page in his notebook.

Para N-3New to the master circular

Early termination or cancellation of FRA

In plain words

Sometimes an importer wants to end an FRA before its maturity. Plans change, or rates move the wrong way for him. The circular allows this, with clear steps:

  1. The FRA is closed at the prevailing market rate, that is, the market rate on the day it is closed.
  2. The net difference between the contracted FRA rate and that prevailing market rate, for the remaining period, is settled. The circular says "the importer or ADs" settle it. In plain words, whichever side the difference goes against pays the other.
  3. The AD keeps full records of three things:
  • the market rate used;
  • the calculation of the close-out amount;
  • the importer's written consent.

A pretend example, with made-up numbers: Tahmid's FRA fixed 5% a year on a notional USD 300,000 (no more than his credit), with 6 months left. On the closing day, the market rate for those 6 months is 4%. He locked in a higher rate than the market now offers, so, roughly, he owes the gap: 1% for half a year on USD 300,000, about USD 1,500. If rates had risen instead, the AD would owe him. The exact way to calculate is set by the settlement mechanics and calculation standards in the term sheet (see N-4).

Note that the circular does not list allowed reasons for ending early, and it does not say how the "prevailing market rate" is chosen. It only asks the AD to record the rate it used.

At the desk

Shirin works through the close-out with Tahmid using pretend numbers, then asks Rakib to print the calculation sheet. Before anything is settled, Sadia gets Tahmid's written consent to close the FRA. Rakib files the market rate used, the calculation and the signed consent together, because the circular asks the AD to keep all three.

Key words
Early termination
Ending a contract before its maturity date.
Prevailing market rate
The market rate on the day a deal is closed or priced.
Close-out amount
The net sum paid when an FRA is ended early: the difference between the contracted FRA rate and the prevailing market rate for the remaining period.
Read the rule as written (Para N-3)

In the event that an importer intends to terminate an FRA prior to its maturity, the contract shall be closed at the prevailing market rate, and the importer or ADs shall settle the net difference between the contracted FRA rate and the prevailing market rate for the remaining period. ADs shall keep full records of the market rate used, the calculation of the close-out amount, and the importer’s written consent.

Source: Bangladesh Bank, FEPD-1 Circular No. 30, 13 August 2026, Part N, paragraph 3 (page 38). The original circular is the authority.

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Para N-4New to the master circular

Documentation and compliance

In plain words

N-4 is the paperwork and safety paragraph. It has nine parts, (a) to (i).

(a) The contract papers. The AD signs the FRA under ISDA or equivalent documentation, plus a transaction-specific term sheet that clearly refers to the underlying imports. The term sheet must state:

  • the underlying exposure being hedged;
  • the agreed FRA rate, tenor and notional;
  • risk disclosures;
  • settlement mechanics and calculation standards.

The ISDA or equivalent papers should be suitably modified to fit the existing laws and regulations of Bangladesh.

(b) Daily check-up. The AD values every outstanding FRA every day at market prices: mark-to-market (MTM). This follows IFRS or international market practices, so the bank can watch interest rate and foreign currency risk in real time.

(c) Full files. The AD keeps full records for supervisory inspection: ISDA schedules, confirmations, executed term sheets, computation sheets, MTM valuations, settlement records, and documents proving the underlying exposure.

(d) The customer signs. By signing the term sheet, the customer acknowledges and accepts the FRA's structure, risks and MTM implications. The term sheet is an integral part of the deal papers.

(e) No selling to the wrong people. An AD must not offer or encourage FRAs to importers without genuine underlying exposure. If misrepresentation, misleading advice or poor risk disclosure by an AD leads to an importer's loss, regulatory action may follow against the AD and its officials.

(f) Internal audit reviews FRA deals periodically, including counter-hedging, for compliance.

(g) The AD needs Board approved policies and procedures on derivatives, with a risk management framework to identify, quantify and evaluate exposures, manage risk and monitor performance.

(h) The AD must have the right expertise and capacity building in place.

(i) Every FRA must follow KYC, AML/CFT, tax regulations and the AD's internal risk management policies.

At the desk

A walk-in customer asks Rakib for "one of those FRAs everyone is talking about", but he has no supplier's or buyer's credit at all. Shirin shakes her head kindly: N-4(e) says an AD must not offer or encourage an FRA without genuine underlying exposure. For Tahmid's original deal, Sadia shows Rakib the file: the ISDA-based agreement, the term sheet Tahmid signed, the daily MTM sheets and the proof of his machinery import.

Key words
Term sheet
A short document setting out the key terms of a deal. Under N-4, it states the exposure hedged, the FRA rate, tenor and notional, risk disclosures and settlement mechanics, and the customer signs it.
ISDA documentation
Standard documentation for derivative deals. Under N-4, it (or an equivalent) must be suitably modified for Bangladesh's laws and regulations.
Mark-to-market (MTM)
Valuing an open contract at today's market prices to see what it is worth now. Under N-4, ADs do this every day for all outstanding FRAs.
Derivative
A contract whose value comes from something else, such as an interest rate or an exchange rate. An FRA is one.
Read the rule as written (Para N-4)

(a) ADs shall execute the FRA under appropriate ISDA or equivalent documentation together with a transaction-specific term sheet, clearly referencing the underlying imports. The term sheet shall specify:

(i) the underlying exposure being hedged,

(ii) the agreed FRA rate, tenor, and notional,

(iii)risk disclosures,

(iv) settlement mechanics and calculation standards.

The ISDA or equivalent documents should be suitably modified as per existing laws and regulations of Bangladesh.

(b) ADs shall perform daily mark-to-market (MTM) valuations of all outstanding FRA positions consistent with IFRS or international market practices to monitor interest rate and foreign currency risk in real time.

(c) ADs shall maintain full records of all FRA transactions, including ISDA schedules, confirmations, executed term sheets, computation sheets, MTM valuations, settlement records, and documents evidencing the underlying exposure, for supervisory inspection.

(d) Customers shall acknowledge and accept the structure, risks, and MTM implications of the FRA by signing the term sheet, which shall form an integral part of the transaction documentation.

(e) ADs shall not offer or encourage FRAs to importers without genuine underlying exposure. Misrepresentation, misleading advice, or inadequate risk disclosure by ADs leading to importers’ loss may result in regulatory action against the respective ADs and officials.

(f) Internal audit department of ADs shall periodically review FRA transactions, including counter-hedging, for compliance.

(g) ADs shall have Board approved policies and procedures on derivative transactions and risk management framework to identify, quantify and evaluate the exposures, manage risk and monitor performances related to derivative transactions.

(h) ADs shall ensure that appropriate expertise and capacity building are in place to engage in financial derivative transactions.

(i) All FRAs shall comply with KYC, AML/CFT, regulations on taxes and internal risk management policies of ADs.

Source: Bangladesh Bank, FEPD-1 Circular No. 30, 13 August 2026, Part N, paragraph 4 (page 39). The original circular is the authority.

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Para N-5New to the master circular

ADs are required to report each FRA transaction to …

In plain words

Bangladesh Bank wants to see every FRA, so the AD sends two kinds of reports to Bangladesh Bank, FEPD-1:

  • Weekly: each FRA transaction is reported on the last day of the week concerned, using the format in Appendix-12.
  • Monthly: a consolidated regular monthly return is submitted at the end of each month, as set out in Appendix-13.

Think of it like a school diary and a report card. The weekly report shows each deal as it happens; the monthly return pulls everything together. The circular gives the formats in the two appendices; this lesson doesn't reproduce them.

At the desk

Another importer's FRA is booked on a Tuesday. Rakib asks whether it can wait for the monthly return. Sadia says no: each FRA transaction goes to Bangladesh Bank, FEPD-1, on the last day of that week in the Appendix-12 format, and the month-end consolidated return under Appendix-13 comes on top.

Key words
Appendix
A section at the end of a circular that holds forms, formats or instructions.
Reporting requirements
The returns and information a bank must regularly send to Bangladesh Bank.
Consolidated return
A single report that gathers all of a bank's deals of one kind for a period, such as a month.
Read the rule as written (Para N-5)

ADs are required to report each FRA transaction to Bangladesh Bank, FEPD-1 on the last day of the concern week using the format specified in Appendix-12. Additionally, a consolidated regular monthly return must be submitted at the end of each month as specified in Appendix-13.

Source: Bangladesh Bank, FEPD-1 Circular No. 30, 13 August 2026, Part N, paragraph 5 (page 39). The original circular is the authority.

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Putting it together

So far: an importer may end an FRA before maturity, but it is closed at the prevailing market rate, the net difference for the remaining period is settled, and the AD keeps the rate used, the calculation and the importer's written consent. Every FRA rests on ISDA or equivalent papers and a signed term sheet, is valued daily (MTM), is backed by full records, audits, Board approved policies and skilled staff, and is never sold without genuine underlying exposure. Each deal is reported weekly to Bangladesh Bank, FEPD-1, under Appendix-12, with a monthly consolidated return under Appendix-13.

Next: Lesson 34, Gold and silver: what they are and who may bring them in, opens Part O: importing gold, silver, jewellery and currency notes.

Check yourself

30 questions, in 3 sets of up to 10. Nobody sees your answers but you.

Set 1 of 3

1. An importer wants to end his FRA before maturity. At what rate is the contract closed?
2. When an FRA ends early, what is settled between the importer and the AD?
3. Which of these must an AD keep on record after closing an FRA early?
4. True or false: under N-3, the importer's verbal agreement over the phone is enough record for closing an FRA early.
5. Tahmid closes his FRA early. Rakib has the calculation sheet and the market rate, but Tahmid has not yet signed anything. What should Sadia do first?
6. In a pretend example, an importer fixed a higher FRA rate than the market rate on the day he closes early. Under the net-difference rule, who most likely pays the gap?
7. Rakib asks which period the close-out amount on an early-ended FRA covers. What does Shirin tell him?
8. Under what documents must an AD execute an FRA?
9. Which of these is NOT listed in N-4(a) as something the term sheet must specify?
10. What must the term sheet clearly refer to?

Set 2 of 3

11. True or false: the ISDA or equivalent documents should be suitably modified as per the existing laws and regulations of Bangladesh.
12. How often must an AD do mark-to-market (MTM) valuations of outstanding FRA positions?
13. Daily MTM valuations must be consistent with which standards?
14. What is the stated purpose of daily MTM under N-4(b)?
15. Rakib is told to tidy the FRA files for supervisory inspection. Which item does N-4(c) NOT list?
16. How does a customer show that he accepts an FRA's structure, risks and MTM implications?
17. True or false: the signed term sheet is just a courtesy note and does not form part of the FRA documentation.
18. A customer with no supplier's or buyer's credit asks Rakib for an FRA "to make some money if rates rise". What should the desk do?
19. An AD's officer gives misleading advice about an FRA and the importer suffers a loss. What may follow under N-4(e)?
20. Sadia is preparing for the bank's internal audit. Which FRA work does N-4(f) say internal audit reviews?

Set 3 of 3

21. Who must approve an AD's policies and procedures on derivative transactions?
22. True or false: under N-4(h), an AD must have appropriate expertise and capacity building in place before engaging in financial derivative transactions.
23. A new branch wants to start offering FRAs next week, but nobody there has been trained on derivatives and the bank has no derivatives policy. What does Shirin advise?
24. Which set of rules must every FRA comply with under N-4(i)?
25. Tahmid's term sheet is ready but leaves out the FRA tenor and notional. Rakib wonders if it can go for signature. What is the right answer?
26. To which office do ADs report each FRA transaction?
27. When must each FRA transaction be reported?
28. Which appendix gives the format for reporting each FRA transaction?
29. True or false: besides reporting each FRA deal, an AD must also submit a consolidated monthly return under Appendix-13.
30. Rakib books an FRA on a Tuesday and plans to mention it only in the month-end return. What does Sadia tell him?
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