I. Definition of Functions Centralized clearing of RMB interest rate swaps refers to the mechanism that the Inter-bank Market Clearing House Co., Ltd. (hereafter “Shanghai Clearing House”) substitutes the interest rate swap contracts entered into by market participants, inherits both parties’ rights and obligations as the central counterparty, calculates net interest receiving/payment of each clearing member on the same settlement date based on a netting method, and sets up a corresponding risk control mechanism to guarantee fulfillment of the contract obligations and completion of net interest settlement. Based on classification of the Shanghai Clearing House, participants of RMB interest rate swap transactions in the inter-bank market are divided into comprehensive clearing members, general clearing members and non-clearing members. Non-clearing members need to appoint the comprehensive clearing members as their agencies before participating in the interest rate swap business. On 3 June 2014, Shanghai Clearing House released an announcement, declaring ICBC became one of its first comprehensive clearing members and may accept entrustment of the non-clearing members to provide agency clearing services for their interest rate swap transactions. The Bank’s functions and powers in agency clearing of interest rate swaps include: 1. Assisting the principal customer in handling the deposit & withdrawal formalities, manage and deliver margin deposits, settlement funds and service fee with Shanghai Clearing House. 2. Carrying out risk trials and control, and transferring margin deposits for the transaction contracts that the principal customer has reached. 3. Performing the clearing and delivery responsibility associated with the principal customer’s interest rate swap contracts that are confirmed effective by the Bank. 4. Handling risks in the contracts if the principal customer defaults.
II. Target Customers Non-clearing members of centralized clearing of RMB interest rate swap transactions.
III. Characteristics and Advantages Compared with the traditional bilateral clearing mode, the centralized clearing mode helps to increase transparency of the risk exposure, avoid spreading of default risks, reduce the counterparty risks and increate market efficiency.
IV. Process of Application 1. The non-clearing member of inter-bank RMB interest rate swap transactions reaches intent of cooperation with the Bank over agency clearing service, and signs the Agency Clearing agreement. 2. The customer predicts its future business development and declares risk exposure limits. 3. The customer opens an agency clearing fund settlement account with the Bank. 4. The Bank collects the minimum margin deposit from the customer. 5. The Bank reports its cooperation relationship with the customer to Shanghai Clearing House. 6. The Bank completes setting of relevant customer parameters. 7. Both parties carry out business.