Home > Global Market > Products & Services > Risk management products - exchange rate > RMB-Foreign Exchange Swap
RMB-Foreign Exchange Swap
I. Description
RMB-foreign exchange swap is a swap business where ICBC and a customer sign an RMB-foreign currency swap contract to agree on a buying transaction and a selling transaction between RMB and the same foreign currency in the same amount but with different delivery dates and rates, which ICBC handles the exchange purchase or sale as per currency, amount and exchange rate agreed upon in the swap contract on the delivery dates of the two transactions, including spot-forward swap and forward-forward swap.

II. Target Customers
It is applicable to legal persons of companies and enterprises 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 their own needs and for the purpose of hedging.

III. Functional Features
1. RMB-foreign exchange swap is an underlying exchange rate derivative with a simple and clear trading structure, which is easy to understand.
2. RMB-foreign exchange swap is a relatively mature product, enabling customers to hedge against exchange risk according to their current and future foreign exchange receipt & payment and expectations for the foreign exchange market.
3. RMB-foreign exchange swap can be easily combined with other products to form a portfolio, helping customers increase returns or lower financial costs.

IV. ICBC Advantages
1. Customized product design
ICBC’s RMB-foreign exchange swap business supports swaps between RMB and 11 currencies, namely, USD, JPY, EUR, GBP, HKD, AUD, CAD, CHF, DKK, SGD and RUB, which support different terms. Meanwhile, customers have access to special delivery treatments including in-advance delivery, extension, partial delivery and delivery in lots, which satisfy their individualized business demands.
2. Competitive product price
As one of the most influential market makers on the inter-bank RMB-foreign exchange market, ICBC is able to hedge against trading risks at lower costs and thereby offer preferential RMB-foreign exchange swap price.
3. Flexible credit extension mechanism
Under ICBC’s flexible credit extension mechanism for RMB-foreign exchange swap, customers can choose either use of derivatives-dedicated credit line or payment of security deposit on their own.

V. Qualification
Customers can apply to ICBC for RMB-foreign exchange swap for funds under foreign exchange receipt & payment:
1. Customers can apply to ICBC for RMB-foreign exchange swap for foreign exchange receipt & payment under current accounts.
2. Customers can apply to ICBC for RMB-foreign exchange swap for funds of the following kinds and foreign exchange receipt & payment under financial accounts: repayment of banks’ proprietary foreign exchange loans, repayment of overseas borrowings registered with (SAFE), foreign exchange receipt & payment under overseas direct investments registered with SAFE, foreign exchange receipt of foreign-invested enterprises registered with SAFE, foreign exchange receipt of domestic institutions listed on overseas markets registered with SAFE and other foreign exchange receipts & payments approved by SAFE.

VI. Application Process
1. Business preparations
(1) Customer assessment: before customers’ application, ICBC needs to assess derivative transaction assessment on them. They should meet ICBC’s access conditions and are confirmed to be capable of bearing RMB-foreign exchange swap risk based on its suitability assessment.
(2) Signing a master agreement: After passing suitability assessment, the customer signs the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale with ICBC.
2. Business processing
(1) Application: The customer fills out all items in the Power of Attorney for RMB-Foreign Exchange Swap Transaction. Only after the customer pays in security deposit in full amount or provides other adequate guarantees could the transaction be carried on with ICBC.
(2) Settlement, amendment and cancellation: After the deal is stricken, ICBC issues a Letter of Confirmation on RMB-Foreign Exchange Swap Transaction to the customer. Within the validity of the Power of Attorney, the customer can apply for amending or canceling the Power of Attorney. In case the transaction has been settled when the cancellation application is made, such application will become invalid automatically.
3. Business delivery
(1) Delivery on delivery date: Customers handle delivery through presenting effective vouchers and/or commercial bills on delivery date. ICBC defines three working days following expiry date as grace period for handling delivery, during which delivery handled will be deemed as due completion of delivery.
(2) Special delivery treatments: Customers can apply for special delivery treatments including in-advance delivery, extension prior to expiry, partial delivery upon expiry and delivery in lots. If any loss incurred by special delivery, it shall be compensated by the customer; if any profit gained from special delivery, it shall be temporarily saved into the security account of the customer, and paid to the customer after due performance of the agreement.
4. Extension
Customers can apply to ICBC for extension on expiry date or prior to the end of grace period on the condition that a full amount of security deposit is paid in or other effective guarantees are implemented. When extension is handled, the customer shall first close positions of the original transaction at current exchange rates. Only after the customer compensates losses arising therefrom in full should extension be made; gains arising therefrom will be deposited into the customer’s security deposit account first, and be returned to the customer after it fulfills its obligation upon expiry.

VII. Service Channels and Hours
Except for public holidays, general counter-based channels: Monday-Friday (9:30-18:00, Beijing time); e-banking (currently only including the Internet banking): Monday-Friday (9:30-23:30, Beijing time). Trading hours can be adjusted according to regulatory or business requirements.

VIII.Operation Guide

IX. Business Case
One of ICBC’s customers is an export-oriented processing plant. It needed to pay USD50 million for buying machinery and equipment in July 2016 and meanwhile expected export proceeds of about USD50 million in July 2017. The customer had ample RMB funds but was short of US dollars. To address the mismatched time of USD receipt and payment, the customer conducted an RMB-foreign exchange swap with ICBC on July 1, 2016. The trading direction is roll-over of RMB into USD50 million at the near end, and roll-over of USD50 million to RMB on the expiry date, July 1, 2017. According to the contract, the customer had to pay RMB332,450,000 for the US dollars at the exchange rate of 6.6490 at the near end; in addition, according to ICBC’s then quotation of 750BP for 12-month swap, the customer could have (6.6490+0.075)x50,000,000=RMB336,200,000 on the expiry date.
Supposing the customer hadn’t conducted the swap with ICBC but had managed its USD positions through purchasing exchanges at spot price on the transaction date and selling the exchanges at spot price on the expiry date, the customer would have got RMB334,000,000 back in roll-over of USD50 million at the spot rate of 6.6800 on the expiry date. Thus, this swap not only satisfied the customer’s need for reallocation of home-currency and foreign-currency positions, but also brought it exchange income of 336,200,000-334,000,000=RMB2.2 million.

i. Customers can apply to ICBC for RMB-foreign exchange swap for funds under foreign exchange receipt & payment:
1. Customers can apply to ICBC for RMB-foreign exchange swap for foreign exchange receipt & payment under current accounts.
2. Customers can apply to ICBC for RMB-foreign exchange swap for funds of the following kinds and foreign exchange receipt & payment under financial accounts:
(1) For repaying the Bank’s self-operated foreign exchange loans;
(2) For repaying the overseas loans registered in SAFE;
(3) Foreign exchange receipts and disbursements of ODI registered in SAFE;
(4) Foreign exchange capital income of foreign-invested enterprises registered in SAFE;
(5) Foreign exchange receipts of domestic institutions publicly listed abroad registered in SAFE;
(6) Other foreign exchange receipts and disbursements as approved by SAFE.
ii. When handling RMB-foreign exchange swap, customers shall abide by the following rules:
1. Foreign exchanges to be converted out at the near end of the swap must be foreign exchanges that are allowed for spot exchange sale as per foreign exchange administration provisions; foreign exchanges to be converted out at the far end of the swap must be foreign exchanges obtained from the near-end conversion.
2. Customers can directly convert RMB into foreign exchange through swap, but payment and use of foreign exchanges obtained in this way should conform to certain foreign exchange administration provisions.
3. Incoming foreign exchanges from the far-end conversion shall go into the original outgoing foreign exchange account in principle. Foreign exchanges coming from capital account, dedicated foreign debt account or dedicated foreign debt-loan conversion account of foreign-invested enterprises in the near-end conversion will go into the foreign exchange account under current accounts, instead of flowing back to the aforementioned three types of foreign accounts under capital accounts.
4. Customers shall furnish relevant qualification certificates and compliant and effective certifying documents, assist the Bank in due diligence, and sign relevant agreement and confirmation letter.
5. On the premise of signing related agreements and confirmation letters, the customers can submit an official letter of authorization to corresponding branches, which will then transfer it to the Head Office for confirmation; upon receipt of the confirmation from the Head Office, the corresponding branches will issue transaction certificates to the customers, which will serve as the official transaction documents.
6. Upon expiry, the customer shall perform its delivery obligation according to the agreement. In case delivery time or mode needs to be adjusted due to the complicacy of trade or any other reasons, the customer may apply to the Bank for early delivery, extension prior to expiry, partial delivery upon expiry or delivery in lots.

XI. Risk Prompt
Risk of RMB-foreign exchange swap is mainly market risk, that is, swap transactions may have floating gains or losses as a result of exchange rate fluctuations. In case of losses, the customer has to assume losses eventually. However, if the far end of the swap completely matches with the hedged underlying assets, the floating gains/losses won’t have any impact on management effectiveness.

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

XIII. Definitions
1. Spot-forward swap is a swap transaction where the near-end delivery date is the value date of the spot transaction, while the far-end delivery date is the expiry date agreed upon in the contract.
2. Forward-forward swap is a swap transaction where the near-end and far-end delivery dates are two different days in the future agreed upon in contract, such as swap between 6-month forward and 9-month forward.

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.

Global Market