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FX Interest Rate Swap

I. Description
Foreign exchange interest rate swap refers to the financial agreements in which the customer and ICBC agree to calculate and exchange interest according to the agreed principal of foreign exchange and interest rate in a coming period. The counterparties don’t exchange the principal, which also serves as the basis for interest calculation. The product is generally reflected by exchange between fixed and floating interest rates.

II. Target Customers
The business is applicable to corporate customers with the purpose of hedging and avoiding the risks in interest rate fluctuation, especially those holding medium- and long-term foreign exchange loans with floating interest rate.

III. Functional Features
1. The product is the most fundamental off-exchange interest rate derivative instrument, with simple and flexible structure and fast and convenient transaction. It can be tailor-made to customers’ demands. In addition, the interest rate swap scheme with principal amortization can also be designed to meet customers’ needs, with needing any payment at the beginning of period.
2. The product can help customers to avert market risk arising from interest rate fluctuation to a certain degree and lock corporate financing cost. In addition, 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 prices: With professional and experienced traders as well as product design and quantitative analysis teams, flexible pricing mechanism and strong competitiveness among peers, ICBC can provide superior product quotations.
2. Customized product design: Flexible design of the product can meet diversified needs of customers and help reduce or lock financing cost.
3. Continuous dynamic management: ICBC can regularly provide customers with evaluation reports on foreign exchange interest rate swap, and provide continuous and dynamic management services.

V. 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
Corporate 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 evaluation: ICBC conducts due diligence on customers to evaluate the customers comprehensively based on the business nature, financial derivative trading experience and internal management controls, in order to recommend suitable products for customers.
2. Signing of the general agreement: To apply for the foreign exchange interest rate swap business, the customer must sign related business agreements with ICBC.
3. Implementation of guarantee measures: the customer needs to pay security deposit, implement other guarantee measures or may occupy special credit limit of derivative transaction.
4. Risk disclosure and signing of confirmation: ICBC provides risk disclosure for customers, covering cash flow analysis, market value and influencing factors, and potential market value losses. The customer needs to confirm risk warning contents in writing and sign the confirmation.

VIII. Risk Prompt
The customer may face risks of native net cash flow due to the possible changes in market interest rate, loss or profit in market value assessment, additional security being required in cases of negative results of market value evaluation, additional cost being incurred from squaring. 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 have nothing to do with ICBC.

IX. Business Case
Business background: In August 2011, a corporate customer has applied for a three-year USD loan with floating interest rate. The interest rate was 3-month LIBOR+250BPs (assuming the three-month LIBOR was 0.3142%) and the interest was paid once every 3 months.
Customer demand: the customer wished to avert the risk of rising interest rate due to fast rise of three-month USD LIBOR.
Solution: the customer may conduct USD interest rate swap transaction with ICBC. That is, ICBC pays three-month LIBOR+250 BPs floating USD interest to the customer every three months to hedge against the floating USD interest rate of the customer’s original loan. The customer pays fixed USD loan interest rate to ICBC every three months until such loan matures.
If LIBOR will rise in coming three months, the customer may save interest spread cost arising from loan interest rate rise through such transaction. If such LIBOR will fall in the coming three months, the customer still pays fixed loan interest. The customer locks future interest rate change risk through USD interest rate swap transaction. Thus, the financial cost management effectiveness won’t be affected as the transaction enables the customer to maintain future payment of cash flow stable.

X. Notes
Minimum amount of such transaction is USD2 million or equivalent, with the shortest term of six months.

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