The basics and Australian specific commentary

Set out below are the following:

  • "What is a FRA?";
  • "Preliminary issues";
  • "Market Conventions"; and
  • "What are the FRA Addendums and are they relevant?".


What is a FRA?

A FRA is an agreement between two parties which requires one party to pay an amount to the other party on a certain future date. The amount to be paid and the party who must make the payment are determined by the difference between the contract rate and the interest settlement rate (ie the prevailing market rate at the time of settlement). There is no commitment by either party to lend or borrow the contract amount.

The commentary on FRAs is divided into two parts   "A$ FRAs" and "Non-A$ FRAs".


Preliminary issues

To document FRAs under Australian law using the ISDA Master Agreement participants should ensure that they have executed an ISDA Master Agreement with their counterparty. 

Has the participant used ISDA documents before? If a participant is not familiar with the ISDA documents, it is recommended that they:

  • read the User's Guide and the ISDA Master Agreement;
  • read the 2.1 "ISDA" commentary set out in the Guide; 
  • read this part of the Guide, "FRAs".

If a participant is familiar with the ISDA documents, it is recommended that they start by reading this part and refer to the other portions of the Guide as necessary.

Unless otherwise stated, this commentary on FRAs is prepared on the assumption that participants use the 2006 Definitions and the 2002 ISDA Master Agreement.

A number of important changes were made to the hard-copy version of the Guide on 1 January 2002. Updates 1 to 8 in 6.1.2 "Updates as at June 30 2007" which can be found in 6.2.1 "History", explain these changes. It is recommended that participants carefully read these items. Take particular care in relation to the comments at the February 2005 Update to Part 5 in 6.1.2 "Updates as at June 30 2007" (ISDA Definitions booklets). 

The issues discussed in 4 "Issues", such as regulation, tax/stamp duty, netting, investment managers, novation and collateral, may also be relevant to FRA transactions.


Market conventions

FRAs are governed by various Australian market conventions published from time to time by organisations such as AFMA and Australian Treasury Operations Association (ATOA). Participants are expected to comply with those conventions.


What are the FRA Addendums and are they relevant?

Until 1 January 2002 AFMA recommended using Australian Addendum No. 6 - A$ Forward Rate Agreements for A$ FRAs and Australian Addendum No. 12 - Non-A$ Forward Rate Agreements for non-A$ FRAs. These are no longer recommended.  The reasons for this together with a copy of the Addendum and commentary on it are in 6 "History" (see pre-February 2005 version of the Guide). See also Update 1 in 6.1.2 "Updates as at June 30 2007".

Last Update Date 04 Jul 2011