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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >RMB/FX Currency Swap
RMB/FX Currency Swap
 

I. Business Description
During the RMB-foreign currency swap, ICBC and the customer agree to exchange of a sum of RMB and foreign currency principals on the front delivery date, and exchange the same amount of principals in an inverse direction on the same exchange rate on the forward delivery date. During the period of the agreement, the transaction parties regularly pay the interests on its borrowed money to the other party.
Forms of the principal exchange include: a) exchanging a sum of RMB and foreign currency principals on the effective date of the agreement based on a certain exchange rate and exchanging the same amount of funds in an inverse direction based on the same exchange rate on a future day, b) not really exchanging the principals on the effective day of the agreement and exchanging or not really exchanging the principals on the maturity date, and c) other forms specified by the State Administration of Foreign Exchange.

II. Target Customers
The product is applicable to the corporate customers such as the corporate and public institutions, government agencies, and social organizations that are established within the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) and wish to avoid the exchange rate risk, interest rate risk and reduce the financing cost.

III. Features and Advantages
i. Main Features of the RMB-Foreign Currency Swap:
1. The customer is able to swap the currency of existing liabilities (or assets) to reduce its financing cost (or boosting its asset returns).
2. The interest rate of swap agreements can be fixed or floating interest rates. Of it, the referential interest rate of RMB can be either the inter-bank offering rate or the benchmark deposit/lending interest rate published by the People’s Bank of China. The interest rate shall be set within the scope permitted by the People’s Bank of China.
3. It helps avoid the medium to long term exchange rate risks.
ii. ICBC’s Advantage in the RMB-Foreign Currency Swap Business
1. Competitive Market Quotation
ICBC has the first professional quantitative analysis team among the Chinese peer banks, has realized ground-breaking progress in techniques such as pricing of derivatives and quantitative analysis of risk management, and has independent pricing power and relatively strong competitiveness among the peers. Additionally, ICBC is the most influential market maker in the inter-bank RMB-foreign exchange market, and is able to hedge the transaction risks at relatively low cost and provide competitive price quotation to the customers.
2. Individualized Product Designing
The RMB-foreign currency swap transaction of ICBC supports currencies such as US dollar, Japanese Yen, euro, British Pound and Hong Kong dollar etc. Besides, the customer may apply for special treatment such as grace period and reversing trade to meet their individualized operating needs.
3. Experienced Staff Team
ICBC has been continuously enlarging its trader team over recent years, upgrading the traders’ technological level through multiple ways of trainings, and broadening their perspectives through exchanges at all levels. It has cultivated and established a team of experienced traders.
4. High-Quality and Efficient Services
ICBC offers solid support to the RMB-foreign currency swap business in aspects such as marketing, system maintenance and development, business management and product R&D etc.. It provides efficient and expedite services as well as constant dynamic management to the customers, timely releases the relevant market information, and regularly provides the market value assessment report of existing transactions to the customers on a monthly basis.

IV. Case Illustration
A subsidiary of ICBC’s customer received a USD-denominated loan from the overseas market at the end of 2013. With a principal of USD1 million and a term of 3 years, the loan bore a floating interest rate of 3M Libor + 180bp. Interest payment dates of the loan are March 20, June 30, September 20 and December 20 of each year. The loan fund was disbursed and paid into the customer’s account on December 20, 2013 and should be fully repaid on December 20, 2016 upon maturity. After the customer got the loan, it converted the US dollar funds into RMB funds to purchase raw materials. The principal and interests of the customer’s USD-denominated loan are subject to both interest rate risk and exchange rate risk. To be specific, during the loan term, the customer needs to pay the loan interest every quarter. If the 3M Libor of US dollar rises, the customer will need to pay an extra amount of interests, thus being exposed to the interest rate risk. Upon maturity of the loan, the customer needs to repay the principal in US dollar. If RMB depreciates by then, the customer will need to covert more RMB funds into US dollar to repay the loans, thus being exposed to the exchange rate risk. In order to control the interest rate risk and exchange rate risk, the customer decided to conduct a RMB-foreign currency swap transaction with ICBC. Both parties agree that the transaction would take effect starting December 20, 2013 and expire on December 20, 2016, the exchange rate of principals would be USD1=RMB6.1, and the customer would collect interest on the US dollar funds based on floating rate every quarter while pay interests for the RMB funds based on fixed interest rate. During the currency swap agreement:
1. On the effective date of the transaction (December 20, 2013), the customer exchanges the USD1 million with ICBC. The customer withdrew the loan principal from its subsidiary and paid it to ICBC; in turn ICBC paid the customer RMB6.10 million based on the exchange rate specified in the agreement (6.1).
2. On the interest payment date (i.e. March 20, June 30, September 20 and December 20 of each year), the customer exchanges the interests with ICBC. In other words, ICBC pays the customer interest in US dollar based on the floating interest rate of US dollar; and the customer collects it and pays to its subsidiary, and pays interest in RMB to ICBC based on the fixed RMB interest rate specified in the agreement.
3. On the loan maturity date (December 20, 2016), ICBC and the customer exchange the principals again. In other words, ICBC pays the customer the principal of USD1 million; and the customer collects it and pays to its subsidiary, and pays the principal of RMB6.10 million to ICBC based on the exchange rate specified in the agreement (USD1=RMB6.1).
From the above transaction, it shows that the customer and ICBC exchange the principal based on the same exchange rate (USD1=RMB6.1) on both the beginning and the end of the period. As the customer only needs to pay the RMB interest based on a fixed interest rate during the loan term but collect the USD interest to repay the interests and loans of USD loans, thus the customer can completely avoid the risks arising from fluctuation of the interest rate and exchange rate.

V. Conditions for Application
i. The customer needs to carefully read the Risk Warning of Corporate Financial Derivative Business of Industrial and Commercial Bank of China Limited provided by ICBC, and shall completely understand the transaction articles and the potential risks in the derivative transaction.
ii. The customer shall actively support ICBC in completing the due diligence work.

VI. Sign-up
1. Customer assessment: the customer shall accept risk assessment of ICBC and fill in the Customer Assessment Table; so that ICBC can comprehensively assess the customer based on its operating nature and experience in the financial derivative transactions.
2. Signing of the general agreement: the customer shall sign the General Agreement on FX Settlement and Sale Business of Industrial and Commercial Bank of China Limited with ICBC.
3. Transaction application: the customer shall submit the business application after passing the assessment of ICBC and confirming the Bank’s quotation. After the transaction is completed, ICBC will issue the transaction confirmation letter to the customer.
4. Reversing trade prior to the maturity date: should the customer needs to carry out any reversing trade prior to the maturity due to any reasons, it shall submit the alternation materials and commitment letter, and submit the business application to ICBC after confirming the Bank’s quotation.
5. Swap of interests and principal: ICBC issues the Interest Swap Advice to the customer on every working date prior to the principal/interest swap date, and the interest swap is not subject to any grace period. On the swap date, the customer shall submit the Application for Delivery of RMB-Foreign Currency Swap and relevant transaction background materials to the handling bank for delivery; and ICBC will issue the transaction confirmation letter to the customer after the business is handled.
6. Special Treatment
Transaction rollover: should the customer can’t deliver the agreement on time due to some reasons, it may apply for rollover prior to the delivery date or deadline of the grace period, and pay an adequate amount of margin deposit or fulfill other guarantee measures. ICBC will clear the original transaction and then conduct the rollover transaction with the customer.
Other special delivery: should the customer need to adjust the timing or manner of delivery, it may pay an adequate amount of margin deposit or fulfill other guarantee measures, and apply for rollback, rollover prior to the maturity date, partial delivery prior to the maturity date or delivery in batches etc..
VII. Service Channel and Time
Eligible customers may apply for handling this business to the tier-1 or tier-1 branches that have the RMB-foreign currency swap operating rights during office hour.s Please refer to the working hours of the inter-bank market for the specific service time.

VIII. Operation Guidelines

IX. FAQ
i. Forms of principal exchange include a) exchanging a sum of RMB and foreign currency principals based on a certain exchange rate on the effective date of the agreement, and exchanging the same amount of funds in an inverted direction based on the same exchange rate on the maturity date, or b) other forms provided by the State Administration of Foreign Exchange.
ii. The customer shall submit official transaction entrustment to ICBC. After it, the branch will submit entrustment to the Head Office, and issue the transaction confirmation letter as the official business voucher to the customer after completion of the deal is confirmed by the Head Office.
The entrustment is an important document during the derivative transactions, and the customer shall carefully deal with it. Contents of the entrustment shall include but without limitation to the following:
1. Purpose of the derivative transaction, and information on the structure, maturity, currency and amount etc. of the proposed derivative transaction etc.;
2. Information and authenticity of the underlying assets or liabilities (including income or expenditures, the same below) that the customer wishes to hedge through the derivative transaction, and the existing and unclosed derivative transitions handled based on such underlying assets or liabilities (in terms of hedging transactions);
3. Weather ICBC has any bad marketing behavior during the marketing process.
iii. On the interest swap date or the fund delivery date, ICBC will exchange the interests and deliver the funds based on the transaction commitment. ICBC will regularly provide market value assessment report of the currency swap transaction to the customer to help the latter dynamically manage the transactions.

X. Risk Warning
i. Exchange Rate Risk
This product involves the delivery of RMB and foreign currency. The customer may be exposed to unrealized gains or losses due to fluctuation of the exchange rate.
ii. Interest Rate Risk
This product involves interest rate swap of different currencies. Regardless whether funds under the swap agreement will be swapped based on a fixed or a floating interest rate, fluctuation of interest rate of different currencies will lead to unrealized gains or losses to the customers.
iii. Legal Risk
The customer shall completely understand all provisions of the text, and independently make decisions based on its own conditions. The customer shall take into account the force majeure and unexpected incidents, and shall independently assume the losses arising therefrom. ICBC will not assume any responsibility for the force majeure and unexpected incidents.

XI. Matters Meriting Attention
RMB-foreign currency swap has high requirements on the time effectiveness of transactions. The customers shall avoid losses arising from market price fluctuation during the operation.

XII. Definitions
RMB-foreign currency swap refers to the business that on the transaction date, ICBC and the customer agree to exchange a sum of RMB and foreign currency principals on the front delivery date based on a given exchange rate and exchange the same amount of principals in an inverted direction based on the same exchange rate on the forward delivery date; during the term of the transactions, both parties regularly pay the interests for the borrowed money to other party.

Note: Information herein is for reference only. Please refer to announcements and regulations of local branches of ICBC for further details. ICBC retains the ultimate interpretation rights.


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