I. Description Incremental foreign exchange interest rate swap refers to the financial agreements in which customers and ICBC commit to calculate and exchange interest according to the agreed principal of foreign exchange and interest rate in a coming period. The customer pays incremental fixed interest rate of each issue to ICBC and collects floating interest rate from it. The counterparties don’t exchange the principal, which also serves as the basis for interest calculation. At present, the floating interest rate of foreign exchange interest rate swap includes 1-month LIBOR, 3-month LIBOR and 6-month LIBOR.
II. Target Customers The business is applicable to domestic and overseas corporate customers with the purpose of hedging and avoiding risks in interest rate fluctuation, especially those holding medium- and long-term foreign exchange loans with floating interest rates and wishing to reduce fixed interest rate expenditure at an early stage.
III. Functional Features The product has clear and simple structure and flexible transaction elements. Customers pays low fixed interest rate at the early stage, which increases progressively each issue thereafter. In addition, there is no need to pay fees at an early stage. By using this product, customers can circumvent the market risk of interest rate fluctuations and fix the financing costs of enterprises. At the same time, the customers may, based on market prices for interest rate swaps of different terms, select the most favorable loan interest payment structure to reduce corporate financing costs.
IV. Features and Advantages 1. Competitive product quotation: ICBC can offer better product quotation thanks to its professional and experienced traders and product design and quantitative analysis teams, flexible pricing mechanism and strong competitiveness. 2. Customized design: the product is flexible to meet customers’ different needs through combination of product period and structure. 3. Continuous dynamic management: ICBC can regularly provide customers with transaction evaluation reports, and provide subsequent dynamic management services according to the market quotations and their demands.
V. Product Price The Bank will provide quotations to the customers according to the price trend of foreign exchange interest rate swap market, and make real-time updates based on market changes.
VI. Service Channels and Hours Customers meeting access conditions may apply to sub-branches or tier-2 branches with the derivative business operation right during trading hours for corporate business.
VII. Application Process 1. Customer assessment: ICBC carries out due diligence of the customer, comprehensively assesses it based on its business nature, financial derivative trading experience and internal management & control, and recommends suitable product varieties to it. 2. Signing of the master agreement: To apply for the incremental foreign exchange interest rate swap business, customers must sign related business agreements with ICBC. 3. Implementing guarantee measures: customers need to pay security deposit or hand over collateral or may occupy special credit limit of derivative transaction. 4. Risk disclosure and confirmation signing: ICBC gives risk warning to customers in terms of cash flow analysis, market capitalization, influence factors and potential market capitalization loss. Customers needs to confirm risk warning contents in writing and sign the confirmation.
VIII. Risk Prompt Customers may face risks of negative net cash flow due to possible changes in market interest rate, loss or profit in market value assessment, additional security deposit being required in cases of negative results of market value evaluation, additional cost being incurred from squaring. Customers shall completely understand every article in the agreement and make independent decision based on their own judgment. Customers shall take into account force majeure and possible accidents, losses arising from which have nothing to do with ICBC.
IX. Business Case Business background: a customer has a three-year USD loan with floating interest rates. The interest rate is 3-month LIBOR+250BPs and the interest is paid once every 3 months. The U.S. economy is still relatively weak in the short term, but in the future, with the clear improvement of the economy, the interest rates will gradually increase and the period of low interest rate will end. Customer need: the customer worries about too fast increase in the medium and long term, wants to avoid risks of rising interest rates in the future, while enjoying the benefits of low interest rate market at present. From the perspective of the customer, if conducting standard USD interest rate swap under current market conditions, it needs to pay higher fixed interest rate than the same-period floating one at an early stage of transaction, which is reflected by negative spread, i.e., net cash expenditure. The customer wishes to cut fixed interest rate payment and short-term hedging cost in the environment with short-term low interest rate . Solution: The customer may conduct incremental fixed interest rate sway at ICBC. The customer pays low fixed interest rate in the first issue. Thereafter, fixed interest rate to be paid each issue increases progressively. A series of incremental fixed interest rate is agreed at an early stage of the transaction, so as to help the customer to avert uncertainty of future interest rate fluctuations. This can reduce the customer’s cash flow expenditure due to negative spread at an early stage while locking interest rate risk, which is more likely to be recognized by the customer.
X. Notes The business has the lower limit of USD2 million or equivalent and the shortest term of 6 months (delivery once every month).
Note: the information provided on the page is for reference only. Specific businesses are subject to announcements and rules of local outlets.