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RMB/FX Currency Swap

I. Description
RMB-foreign exchange currency swap means ICBC and the customer determine RMB and foreign currency principals based on agreed exchange rate and foreign currency amount, exchange principals according to a certain mode, and regularly exchange interest based on the size of RMB and foreign currency principals and agreed interest rate during the period of agreement. Forms of the principal exchange include: exchanging principal on the effective date of agreement and maturity date, and not really exchanging the principal on the two dates, and exchanging the principal on only one of the two dates.

II. Target Customers
It is applicable to the legal persons of companies, enterprises, public institutions and social groups incorporated under the laws of and in the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) and overseas legal person financial institutions (such as commercial banks, insurance companies, securities companies and fund management companies) incorporated according to the law overseas for which ICBC acts as an agency to conduct RMB bond investment in China’s inter-bank market, with a view to avert exchange and interest rate risks and reduce financing cost.

III. Functional Features
1. The customer may conduct currency exchange for some existing liability (or asset) to reduce financing cost (or improve asset yield).
2. The interest rate for exchange could be either fixed or floating. Reference RMB interest rate could be either inter-bank borrowing/lending interest rate or benchmark deposit and loan interest rate published by the PBOC. Set interest rate shall be within the range approved by the PBOC.
3. Avert risks of medium- and long-term exchange and interest rates.

IV. ICBC Advantages
1. Competitive quotations
As the first domestic bank to set up a professional quantitative analysis team, ICBC has made breakthroughs in quantitative analysis technologies for independent pricing and risk management of derivatives. It is capable of independent pricing and highly competitive in the industry. Besides, as ICBC is one of the most influential market makers on the inter-bank RMB-foreign exchange market, it can hedge again transaction risks at a lower cost. Thus, it can offer customers competitive quotations.
2. Customized product design
ICBC’s RMB-foreign exchange currency swap supports listed currencies such as USD. Meanwhile, customers can apply for special treatments including reversed position close to satisfy customers’ individualized business demands.
3. An experienced team
In recent years, ICBC has continuously increased the number of traders and improved their skills through training and broadened their vision through multi-level exchanges. It has cultivated an experienced trader team.
4. Quality and efficient service
ICBC boasts supportive teams specializing in marketing, system maintenance and development, business management and product R&D, which work jointly to provide efficient and quick services for customers. They also continuously provide dynamic management, promptly provide relevant market information, and existing transaction market valuation results to customers on a monthly basis.

V. Business Case
A customer has one-year foreign currency loan of USD100 million and pays interest as per Libor 3M floating interest rate on a quarterly basis. To avert exchange and interest rate fluctuation risks, the customer conducted RMB-foreign exchange currency swap at ICBC on December 31, 2014, with the principal of USD100 million and in the direction of Sell/Buy. It is agreed that, the principal should be paid at both the beginning and end of period, at the exchange rate of 6.2000. Interest rate should be exchanged every quarter. ICBC pays Libor 3M floating interest to the customer which pays fixed RMB interest rate of 2.5% to ICBC.
1. On the transaction effectiveness day (December 31, 2014), the customer and ICBC exchanged the principal of USD100 million. The customer withdrew the loan principal and paid it to ICBC. ICBC paid RMB620 million to the customer as per agreed exchange rate of 6.2.
2. On interest paying days (March 31, June 30, September 30 and December 31 of each year), the customer and ICBC exchanged interest. That is, ICBC paid USD interest to the customer based on floating USD interest rate, and the customer paid USD interest to the loan bank. In addition, it paid RMB interest to ICBC as per specified fixed RMB interest rate.
3. On the expiry day (December 31, 2015), ICBC and the customer exchanged the principal again. ICBC paid the principal of USD100 million to the customer. The customer paid the USD principal to the loan bank, and paid RMB620 million to ICBC at the agreed exchange rate (USD1=RMB6.2).
Cash flow of the transaction interest exchange is as follows:


Customer’s receipt interest (USD10,000)

Customer’s payment interest (RMB10,000)

March 31, 2015



June 30, 2015



September 30, 2015



December 31, 2015



In the currency swap, the customer paid a total interest of RMB15.5 million and received the interest of USD373,150. According to the exchange rate dated December 31, 2015, the customer actually paid net interest of about RMB13.08 million. Without such swap, the exchange rate fluctuation in 2015 would make the customer make additional payment of nearly RMB30 million for USD100 million debt due to exchange rate fluctuations. The swap can help the customer to completely avert exchange and interest rate fluctuation risks at a low cost.

VI. Qualification
i. Customers shall carefully read the Risk Warning Letter of ICBC for Financial Derivative Business of Legal Person Customers furnished by ICBC to gain complete understanding of transaction articles and potential risks.
ii. Customers shall assist ICBC in due diligence.

VII. Application Process
1. Customer assessment: the customer should firstly receive derivative transaction suitability assessment by ICBC which conducts comprehensive assessment of it based on its operation nature and experience in financial derivative transaction.
2. Signing of a master agreement: the customer should sign the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale with ICBC.
3. Transaction application: the customer should pass ICBC’s transaction review and confirm its quotation before application. After closing of transaction, ICBC will issue a transaction confirmation to the customer.
4. Reversed position close before expiry day: if the customer has to close position early for some reason, it should provide change evidencing documents and commitment, and then submit a business application to ICBC after confirming the ICBC’s quotations.
5. Interest and principal exchange: one the working day prior to each principal and interest exchange day, ICBC issues the designated principal or interest exchange notification to the customer. No grace period is set for interest exchanges. On the principal or interest exchange day, an operating institution should conduct principal or interest exchange for the customer.
6. Special treatment process: for reversed position close, if it is specified in the master agreement, supplementary agreement or transaction contract signed by ICBC and the customer that, both parties or either party may exercise the right to early reversed position close, the initiator can submit an application for reversed position close.

VIII. 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 currency swap business for such business during business hours. Except for statutory holidays, general counter-based channels: Monday-Friday (9:30-18:00, Beijing time). Trading hours can be adjusted according to regulatory or business requirements.

IX. Operation Guide

i. Principal exchange modes: exchange RMB and foreign currency principals as per some exchange rate on the effective date of the agreement; both parties conduct reversed exchange at the same exchange rate and in the same amount on the expiry day; and other modes specified by SAFE.
ii. Customers submit an official power of attorney for transaction, which will be subsequently forwarded by the branch to the Head Office. After the Head Office confirms the transaction, the branch will issue a confirmation letter as an official transaction voucher returned to the customer.
The power of attorney is an important document to derivative trading, so customers shall take good care of it. The power of attorney includes but is not limited to:
1. The customer’s purpose of derivative trading and main information about the proposed derivative transaction including trading structure, term, currency, amount, etc.;
2. Conditions and the authenticity of the customer’s underlying assets or liabilities to be hedged in the proposed derivative trading (including receipt or payment, the same below), and conditions of any other derivative transactions based on such underlying assets or liabilities that have been rolled out but not yet completed (in case of hedging transactions);
3. Whether there is any bad sales behavior of ICBC in the marketing process.
iii. On interest exchange and fund delivery days, ICBC will conduct interest exchange and fund delivery with the customer according to the power of attorney. ICBC will regularly furnish the customer with market capitalization assessment results of the currency swap to facilitate its dynamic management of the transaction.

XI. Risk Prompt
i. Exchange rate risk
The product includes RMB-foreign exchange delivery. The customer may experience floating profit/loss due to exchange rate fluctuation.
ii. Interest rate risk
The product includes interest rate exchange of different transaction currencies (no matter whether the exchange mode set forth in the agreement is fixed or floating interest rate). Interest rate fluctuations of different currencies may cause floating profit/loss to the customer.
iii. Legal risk
Customers shall completely understand every article in texts and make independent decision based on their own judgment. Customers shall take into account force majeure and possible accidents, losses arising from which should be borne by customers and have nothing to do with ICBC.

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

XIII. Definitions
RMB-foreign exchange currency swap means on the trading day, ICBC and the customer agree to exchange RMB and foreign currency principals as per agreed exchange rate on the delivery day of near end, and reversely exchange principles at the same exchange rate and in the same amount on the delivery day of far end. During the period, both parties regularly pay converted currency interest to each other.

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

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