FX Interest Rate Swap under Remittance Payment Link
I. Introduction Convert floating rate FX loan in "Remittance Payment Link" into fixed rate loan using the difference between 1-year FX swap rate and 12-month LIBOR rate under interest rate swap. The purpose is to lock down and reduce FX financing cost.
II. Target Clients Import companies who have signed up ICBC "Remittance Payment Link" service and need to hedge against interest rate fluctuations in order to hedge risk and reduce financing cost.
III. Functions and Features No fee in early period, flexible structure, financing cost savings depending on the difference between 1-year FX swap rate and 12-month LIBOR rate. Customer uses the swap to convert floating rate loan into fixed rate loan to hedge against market risk due to interest rate volatility, lock down the financial cost of a company.
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, 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 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. Considerations A minimum of USD 2 million (or equivalent in other foreign currencies) is required, shortest period is 6 months.
IX. 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.
X. Example A company needs to pay in US dollar. To reduce the cost of buying US dollar, the company signs up ICBC "Remittance Payment Link" service for a period of one year. If the company only signs up conventional "Remittance Payment Link" service, the cost is 12-month LIBOR + 125 BP = 2.0245%. The company wishes to choose the best term for loan interest payments in order to lower the cost of buying US dollar further. Since the fixed rate of USD 1-year interest rate swap (3-month LIBOR in exchange of fixed rate) is lower than 1-year LIBOR rate, the customer applies from ICBC a 1-year USD floating rate loan at 3-month LIBOR rate and enters an USD interest rate swap contract (under "Remittance Payment Link") with ICBC. ICBC pays customer 3-month LIBOR + 250 BP floating interest to hedge against the floating rate of the customer's loan. Customer pays fixed rate (1.7525%) to ICBC. In this way, customer locks down financial cost and averts the risk of surging rate under a lower financing cost.
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.