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Randor
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Joined: October 8th, 2005, 8:33 am

cleared FRA settlement: in advance or in arrears?

December 27th, 2017, 8:16 am

basic q, please confirm!

for FRAs that are cleared , i guess that they must be settled in arrears?

(eg for a 1x4 FRA, in contrast to the old world where it would have been setteled in 1 month and the payout was (F-K)*0.25/(1+F*0.25)  ,  i suppose for cleared the payout would be in 4 months of (F-K)*0.25 ? )
 
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mathmarc
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Joined: March 18th, 2003, 6:50 am

Re: cleared FRA settlement: in advance or in arrears?

January 12th, 2018, 2:04 pm

for FRAs that are cleared , i guess that they must be settled in arrears?

(eg for a 1x4 FRA, in contrast to the old world where it would have been setteled in 1 month and the payout was (F-K)*0.25/(1+F*0.25)  ,  i suppose for cleared the payout would be in 4 months of (F-K)*0.25 ? )
To the best of my knowledge, the ISDA definition have not been changed for cleared trades. Most FRA are settled using the ISDA "FRA Discounting" method that you described (except for the exact value of the accrual factor) for both bilateral and cleared trades.
You still need to compute (convexity/timing) adjustments between FRA rates and vanilla swap Ibor coupon rates.
In general, clearing and VM generalisation have not changed the instruments term sheet, even if there is room for improvements.
Marc
 
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RiskUser
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Joined: July 19th, 2006, 4:30 pm

Re: cleared FRA settlement: in advance or in arrears?

February 21st, 2018, 11:28 am

Cumulative VM accrued over the life of the trade up to expiry and paid daily (same as any deal).
On expiry cumulative VM is reversed and a settlement instruction is made (net effect is that there is little / no cashflow move - there is a subtle nuisance around discounted PV up to the irrevocable commitment versus actual settlement but nothing worth thinking too hard about).
Interesting edge case is GBP FRA, as this is a same-day fix / same-day settlement then this results in all of the above happening intra-day on the date of expiry.