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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >Progressive FX Interest Rate Swap
Progressive FX Interest Rate Swap
 

I. Introduction
A financial agreement between customer and ICBC when one stream of future interest payments is exchanged for another based on a specific principal amount (in foreign currency) with interest calculated on the rate agreed. Customer pays fixed rate (increased in every period) to ICBC, in exchange for floating payments from ICBC. No principal is exchanged between the parties. Principal is only used as the basis for interest calculation. The swap is linked to the floating rate: 1 month LIBOR, 3 months LIBOR, 6 months LIBOR and so on.

II. Target Clients
Corporate clients in and outside China who wish to hedge against currency fluctuation to preserve the value, especially those who have floating rate FX loans of mid-to-long term and wish to reduce fixed rate expense in early period.

III. Functions and Features
Progressive FX interest rate swaps are with simple structure and flexible factors. During the period, customer pays low fixed rate which is higher every period later. No upfront fee. Customer can hedge against interest rate fluctuation to lock down financing cost. Besides, cheaper debt can be secured using swaps of different periods to choose the most appropriate term for loan interest payments.

IV. Advantages
1. Competitive product pricing: In terms of exchange rate quotes, ICBC has a team of experienced and professional traders, product designers and quantitative analysts, flexible pricing mechanism and strong competitive advantages against the peers.

2. Tailored product design: Very flexible product design, the term and structure, depending on the requirement of customers.

3. Ongoing dynamic management: ICBC provides regular valuation report on the product, and dynamic management services in line with the market movement and customer requirement.

V. Price
ICBC prices quoted to customers are based on the latest trend in FX interest rate swap market, and updated in real-time in line with the market changes.

VI. Service Channel and Hours
Eligible corporate clients are welcomed to apply within ICBC banking hours for corporate services at any sub-branch or tier-2 branch authorized to trade derivatives.

VII. Steps
1. Assess the customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control) and recommend suitable products.
2. Sign master agreement: Customer has to sign necessary agreements with ICBC first.

3. Supply guarantee: Customer must pay margin or provide collateral to cover the obligation, or use the credit line specially granted for trading derivatives.

4. Risk disclosure and sign confirmation letter: ICBC will make a statement on the risk involved (cash flow analysis, market value and factors, potential loss in market value). Customer must confirm in written and sign the confirmation letter.

VIII. Risk Warning
Risks can be negative cash flow on a future trade date if there is a change in market interest rate, gain or loss depending on market value assessment, extra fee for margin calls or reverse close-out due to difference in market value assessment. You should fully understand the terms and conditions in the agreement and make independent decision. Under no circumstance ICBC shall be liable for any loss due to force majeure or accidental events.

IX. Example
A customer has a USD loan of floating rate, 3-year tenure. Interest is three months LIBOR + 250 BP, interest payment in every three months. If entering a standard USD interest rate swap contract, in early period customer has to pay a fixed rate higher than the floating rate of the same term under the current market rate, which means negative spread or net cash expense. In this case, progressive swap is a good solution, since hedging cost in near term can be reduced by paying fixed rate now: Customer receives floating rate as before, but pays low fixed rate in the first period and higher rate later in every period. The incremental rate is agreed between ICBC and customer in the beginning to help customer avoid any uncertainty about interest rate fluctuation in the future. Customers welcome the service since there is less negative spread or net cash expense in early period while locking down the interest rate risk.

Note: Information herein is for reference only. Refer to the announcements and regulations of local outlets for further details. Industrial and Commercial Bank of China Limited reserves the final right of interpretation.


(2012-08-30)
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