Clearing, Settlement and Custody

The LIBOR rate was higher than the fixed rate so the buyer (the

manufacturer) receives this amount from the seller. There is no

exchange of the £5 million, the manufacturer will borrow the

money from a lending source and the money received from the

FRA will offset the higher borrowing costs of around 7.5%. Had

the LIBOR been lower than the fixed rate, the manufacturer would

have paid the difference to the seller but, of course, would borrow

the money at a lower rate. The manufacturer ‘locked’ in a rate of

7.25% for their planned future borrowing. As far as settlement is

concerned, the amount due is known on the settlement date, the

date at which the FRA ...