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     -  FX Interest Rate Swap under Remittance Payment Link
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  Home Page > Corporate Banking >Financial market >Products & Services >Risk management products - interest rate >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. At present, FX interest rate swap is linked to the floating rate: 1-month LIBOR, 3-months LIBOR, 6-months LIBOR. 

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 flexible and easy to swap. 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 quotes: 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. Customers 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
Background: A customer has a USD loan of floating rate, 3-year tenure. Interest is 3-months LIBOR + 250 BP, interest payment in every three months. Economy in the United States may remains for the next few quarters. However, interest rates have hit bottom and will keep climbing given the increasing rosy economic conditions.
Customer's Requirement: The customer is worrying the sudden surge over mid-to-long term, wishes to hedge against rising rates at the same time can still enjoy the benefit of the low interest rate currently. The customer believes that, if entering a USD interest swap contract under current market condition, the fixed interest rate in early period will be higher than floating rate as negative interest spread or net cash expense. The customer wishes to pay less fixed interest given the low rate currently to reduce arbitrage cost.
Solution: Customer enters a progressive fixed interest swap contract with ICBC. In the first period, customer pays low fixed rate 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.

X. Consideration
A minimum of USD 2 million (or equivalent in other foreign currencies) is required, shortest period is 6 months (settlement in every month).

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