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    Risk Management Services Combined with Gold Leasing
    Risk Management Services on Commodities
    Risk Management Services Combined with Commodity Finance
    Risk Management Services Combined with Commodity Finance
    Risk Management Services on Commodities
    Risk Management Services Combined with Gold Leasing
    Risk Management Services Combined with Gold Leasing
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  Home Page > Corporate Banking >Financial market >Products & Services >Risk management products - commodity >Risk Management Services Combined with Commodity Finance
Risk Management Services Combined with Commodity Finance
 

I. Introduction
Risk management services on commodities are global markets services where customers use financial tools (forward, swap, option) to trade commodities (base metals, precious metals, energy, agricultural produce, soft commodities and others) using prices quoted from ICBC.
Commodity finance is a structured short-term loan. ICBC appoints a third-party to monitor the commodity (stockpile, inventory, receivables) legally owned by the borrower. The value of commodity is used as the primary repayment guarantee by the borrower.
Risk management services combined with commodity finance is a service for customers to enter a forward/swap/option contract to hedge against the risk of falling commodity price when applying for commodity finance.

II. Target Client
Corporate clients with good knowledge about international commodity market and need commodity finance and manage the commodity price risk, including bulk commodity producers, processors, traders and end-user companies.

III. Features and Advantages
1. For borrower applying for commodity finance for business purpose and entering no contract to hedge against risk, the maximum loan amount is 70% of the audited value of pledged commodity according to ICBC rules. If the borrower has entered contract to hedge against risk, the maximum loan amount can be higher, but no more than 90% of the audited value of pledged commodity.
2. Settle by cash spread, no delivery of physical commodity. At maturity, both parties settle the deal using fixed price as agreed and commodity price on the pricing date.
3. Standard OTC product, no upfront fee for both parties, deal structure can be defined to meet client's need.
4. Wide range of underlying commodities, 25 commodities under 5 categories including precious metals, base metals and mineral, energy, agricultural produce and soft commodities.

IV. Cases
Company E has borrowed a loan from ICBC and signed a commodity finance contact on February 24, 2011, secured by 1000 tonnes of refined copper. Market price of spot copper was RMB 70,000 per tonne. The customer got a loan up to 70% of 1000 tonnes of copper (RMB 70,000×1000×0.7= 49,000,000), provided no contract was entered to hedge against risk. If the customer used the copper as pledge to hedge against risk, the maximum amount can be borrowed was 90% of 1000 tonnes of copper (RMB 70,000×1000×0.9= 63,000,000). The customer agreed to pay back the loan on May 13, 2011.
If no contract is entered to hedge against risk, the maximum loan amount is 70% of 1000 tonnes of copper = RMB 49,000,000. If forward contract is used to hedge against risk, the maximum loan amount is 90% of 1000 tonnes of copper = RMB 63,000,000.
If the copper price of May 13, 2011 dropped to RMB 45,000 per tonne, and if no contract entered to hedge against risk, the value of pledged commodity was RMB 45,000,000 which cannot cover normal repayment of loan. If the customer has entered contract to hedge against risk, the value of pledged commodity + forward contract was still RMB 70,000,000, which was enough to cover the loan repayment.

V. Application Conditions
Besides the conditions for commodity finance, customers must meet the following:
(I) Primary deposit A/C or general deposit A/C opened in ICBC.
(II) No bad credit record in the bank, no other material negative track-record.
(III) Credit rating of grade A (inclusive) or above.
(IV) Line of credit granted by ICBC for derivative trading.
Customers who provide full-amount margin or other low-risk guarantee are not restricted to (III) (IV) above.

VI. Steps
1. Sign master agreement: Customer who uses ICBC risk management service on commodities must sign with ICBC the ICBC Agreement on Risk Management Services.
2. Assess customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control), customer fills in Customer Evaluation Form.
(一)Submit application, risk confirmation: Depending on the requirement, customer may enter one contract at a time with ICBC by signing ICBC Customer Confirmation on Financial Derivatives for Corporate Accounts.
(二)Supply guarantee: Customer has the choice to pay margin or provide collateral, or use the credit line specially granted for trading derivatives. During the validity period of the contract, ICBC will provide dynamic management services on the margin according to the market value of the derivative trade.
5. Closing: Once the deal is closed, ICBC issues Confirmation Letter to customer.
6. Settle: On the maturity date, ICBC clears amount and posts into accounts for customer.

VII. Link
Commodity Finance Service

VIII. FAQ
ICBC offers the following types of commodities and commodity-linked indices
1. Precious metals: Gold, silver, platinum, palladium - spot prices in international precious metal markets;
2. Base metals: Copper, aluminum, zinc, lead, nickel, tin - LME settlement prices;
3. Iron ore: TSI index;
4. Pulp & paper: NBSK, BHKP index;
5. Crude oil: BRENT, WTI;
6. Oil: Fuel oil, kerosene coal oil, gas, naphtha - prices from Platts in Singapore paper market;
7. Soft commodities: Sugar, grain, coffee - NYBOT settlement price;
8. Grain: Soybean, soybean meal, soybean oil, corn, wheat - CBOT settlement price.

IX. Risk Warning
Commodity prices in international market may fluctuate depending on the international and domestic political and economic conditions and other sudden events. All risks and losses after settlement shall be borne by the customers. Under no circumstance ICBC shall be liable.

X. Definition
Hedge: A contract with the purchase or sale of a commodity and simultaneous taking of an equal and opposite position in spot market, in order to use the contract to cover or offset the gain/loss from the spot prices in the future as a way to avoid the risks due to price fluctuations.
Fixed price: Buy/sell prices stated in the contract.
Floating price: Official settlement price stated in the contract for the underlying commodity.
Example: Official settlement price of base metal forward contract refers to the second closing price quoted in the morning session in the LME ("London Metal Exchange"), which is the basis to determine the spot price and three-month forward price, and to calculate monthly average price.

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


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