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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >RMB-Foreign Exchange Swap
RMB-Foreign Exchange Swap
 
I. Description
RMB-foreign exchange swap is a swap business where ICBC and a customer sign an RMB-foreign exchange swap contract to agree on a buying transaction and a selling transaction between RMB and the same foreign currency in the same amount but with different delivery dates, and then ICBC handles the exchange purchase or sale as per currency, amount and exchange rate agreed upon in the swap contract on the delivery dates of the two transactions, including spot-forward swap and forward-forward swap.

II. Target Customers
It is applicable to legal entities including enterprises, public institutions, state organs, social groups, the army, foreign-invested enterprises etc. incorporated in the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan), with demands for home-currency and foreign-currency funds management and for the purpose of hedging.

III. Features and Advantages
i. Main characteristics of RMB-foreign exchange swap
1. RMB-foreign exchange swap is an underlying exchange rate derivative with a simple and clear trading structure, which is easy to understand.
2. RMB-foreign exchange swap is a relatively mature product, enabling customers to hedge against exchange risk according to their current and future foreign exchange receipt & payment and expectations for the foreign exchange market.
3. RMB-foreign exchange swap can be easily combined with other products to form a portfolio, helping customers increase returns or lower financial costs.
ii. Main advantages of ICBC’s RMB-foreign exchange swap
1. Individualized product design
ICBC’s RMB-foreign exchange swap business supports swaps between RMB and 11 currencies, namely, USD, JPY, euro, GBP, HKD, AUD, CAD, CHF, DKK, SGD and RUB. Eight currencies including GBP, HKD, CAD, AUD and CHF support different terms. Meanwhile, customers have access to special delivery treatments including in-advance delivery, extension, partial delivery and delivery in lots, which satisfy their individualized business demands.
2. Competitive product price
As one of the most influential market makers on the inter-bank RMB-foreign exchange market, ICBC is able to hedge against trading risks at lower costs and thereby offer preferential RMB-foreign exchange swap price.
3. Flexible credit extension mechanism
Under ICBC’s flexible credit extension mechanism for RMB-foreign exchange swap, customers can choose either use of derivatives-dedicated credit line or payment of margin deposit on their own.

IV. Case Study
One of ICBC’s customers is an export-oriented processing plant. It needed to pay USD45 million for buying machinery and equipment in July 2009 and meanwhile expected export proceeds of about USD45 million in November 2009. The customer had ample RMB funds but was short of US dollars. To address the mismatched time of USD receipt and payment, the customer conducted an RMB-foreign exchange swap with ICBC on July 1, 2009. The trading direction is conversion of RMB into USD45 million at the near end, and conversion of USD45 million to RMB on the expiry date, November 24, 2009. According to the contract, the customer had to pay RMB307,485,000 for the US dollars at the exchange rate of 6.8330 at the near end; in addition, according to ICBC’s then quotation of 51BP for five-month swap, the customer could have (6.8330+0.0051)×45,000,000=RMB 307,714,500 on the expiry date.
Supposing the customer hadn’t conducted the swap with ICBC but had managed its USD positions through purchasing exchanges at spot price on the transaction date and selling the exchanges at spot price on the expiry date, the customer would have got RMB307,242,000 back in conversion of USD45 million at the spot rate of 6.8276 on the expiry date. Thus, this swap not only satisfied the customer’s need for reallocation of home-currency and foreign-currency positions, but also brought it exchange income of 307,714,500-307,242,000=RMB472,500.

V. Qualification
Customers can apply to ICBC for RMB-foreign exchange swap for funds under foreign exchange receipt & payment:
1. Customers can apply to ICBC for RMB-foreign exchange swap for foreign exchange receipt & payment under current accounts.
2. Customers can apply to ICBC for RMB-foreign exchange swap for funds of the following kinds and foreign exchange receipt & payment under financial accounts: repayment of banks’ proprietary foreign exchange loans, repayment of overseas borrowings registered with (SAFE), foreign exchange receipt & payment under overseas direct investments registered with SAFE, foreign exchange receipt of foreign-invested enterprises registered with SAFE, foreign exchange receipt of domestic institutions listed on overseas markets registered with SAFE and other foreign exchange receipts & payments approved by SAFE.

VI. Application Process
1. Preparations
(1) Customer assessment: Before a customer applies for the business, ICBC will conduct a risk assessment on such customer and furnish it a written risk prompt. The customer confirms in writing the risk prompt item by item.
(2) Sign a master agreement: After being approved, the customer signs the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale with ICBC.
2. Business processing
(1) Application: The customer fills out all items in the Power of Attorney for RMB-Foreign Exchange Swap Transaction. Only after the customer pays in margin deposit in full amount or provides other adequate guarantee means could the transaction be carried on with ICBC.
(2) Settlement, amendment and cancellation: After the deal is stricken, ICBC issues a Letter of Confirmation on RMB-Foreign Exchange Swap Transaction to the customer. Within the validity of the Power of Attorney, the customer can apply for amending or canceling the Power of Attorney. In case the transaction has been settled when the cancellation application is made, such application will become invalid automatically.
3. Delivery
(1) Delivery on delivery date: Customers handle delivery through presenting effective vouchers and/or commercial bills on delivery date. ICBC defines three working days following expiry date as grace period for handling delivery, during which delivery handled will be deemed as due completion of delivery.
(2) Special delivery treatments: Customers can apply for special delivery treatments including in-advance delivery, extension prior to expiry, partial delivery upon expiry and delivery in lots. Losses arising from special delivery treatments should be borne by customers; gains arising therefrom will be deposited into the customer’s margin deposit account first, and be returned to the customer after it fulfils its obligation upon expiry.
4. Extension
Customers can apply to ICBC for extension on expiry date or prior to the end of grace period on the condition that a full amount of margin deposit is paid in or other effective guarantee means are implemented. When extension is handled, the customer shall first close positions of the original transaction at the current exchange rate. Only after the customer compensates losses arising therefrom in full account should extension be made; gains arising therefrom will be deposited into the customer’s margin deposit account first, and be returned to the customer after it fulfils its obligation upon expiry.

VII. Service Channels and Hours
Customers meeting access conditions can apply to tier-1 branches or tier-2 branches with authority to run RMB-foreign exchange swap business for such business during business hours.

IX. FAQs
i. Customers can apply to ICBC for RMB-foreign exchange swap for funds under foreign exchange receipt & payment:
1. Customers can apply to ICBC for RMB-foreign exchange swap for foreign exchange receipt & payment under current accounts.
2. Customers can apply to ICBC for RMB-foreign exchange swap for funds of the following kinds and foreign exchange receipt & payment under financial accounts:
(1) repayment of banks’ proprietary foreign exchange loans;
(2) repayment of overseas borrowings registered with SAFE;
(3) foreign exchange receipt & payment under overseas direct investments registered with SAFE;
(4) foreign exchange receipt of foreign-invested enterprises registered with SAFE;
(5) foreign exchange receipt of domestic institutions listed on overseas markets registered with SAFE;
(6) other foreign exchange receipts & payments approved by SAFE.
ii. When handling RMB-foreign exchange swap, customers shall abide by the following rules:
1. Foreign exchanges to be converted out at the near end of the swap must be foreign exchanges that are allowed for spot exchange sale as per foreign exchange administration provisions; foreign exchanges to be converted out at the far end of the swap must be foreign exchanges obtained from the near-end conversion.
2. Customers can directly convert RMB into foreign exchange through swap, but payment and use of foreign exchanges obtained in this way should conform with certain foreign exchange administration provisions.
3. Incoming foreign exchanges from the far-end conversion shall go into the original outgoing foreign exchange account in principle. Foreign exchanges coming from capital account, dedicated foreign debt account or dedicated foreign debt-loan conversion account of foreign-invested enterprises in the near-end conversion will go into the foreign exchange account under current accounts, instead of flowing back to the aforementioned three types of foreign accounts under capital accounts.
4. Customers shall furnish relevant qualification certificates and compliant and effective certifying documents, assist the Bank with due diligence, and sign relevant agreement and confirmation letter.
5. Only after the agreement and the confirmation statement have been signed can customers submit an official Power of Attorney to the Bank, which will be subsequently forwarded by the branch to the Head Office. After the Head Office confirms the transaction, the branch issues a letter of confirmation on the transaction to the customer as the official voucher.
6. Upon expiry, the customer shall perform its delivery obligation according to the agreement. In case delivery time or mode needs to be adjusted due to the complicacy of trade or any other reasons, the customer may apply to the Bank for in-advance delivery, extension prior to expiry, partial delivery upon expiry or delivery in lots.

X. Risk Prompt
Risk of RMB-foreign exchange swap is mainly market risk, that is, swap transactions may have floating gains or losses as a result of exchange rate fluctuations.In case of losses, the customer has to assume according losses eventually.However, if the far end of the swap completely matches with the hedged underlying assets, the floating gains/losses won’t have any impact on the effectiveness of funds management.

XI. Notes
RMB-foreign exchange swap requires high timeliness so as to avoid losses incurred from fluctuating market prices in operation.

XII. Definitions
1. Spot-forward swap is a swap transaction where the near-end delivery date is the value date of the spot transaction while the far-end delivery date is the expiry date agreed upon in the contract.
2. Forward-forward swap is a swap transaction where the near-end and far-end delivery dates are two different days in the future agreed upon in contract, such as swap between 6-month forward and 9-month forward.

Note: The information provided on this page is for reference only. Concrete business shall be subject to the announcement and provisions of the local outlet.


(2016-05-06)
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