I. Description RMB interest rate swap refers to a financial contract in which a customer and ICBC appoint a certain term in the future for interest calculation and interest swap according to the agreed RMB principle and interest rate. It usually comes in the form of swap between fixed rates and floating rates or between floating rates. Currently, the interest rate of the floating end of RMB interest rate swap includes four categories, which are lending prime rate (LPR), fixed deposit and lending rates of the PBC, Shibor interest rate (overnight, 3-month type), and the fixing rate of inter-bank 7-day repurchases (FR007).
II. Target Customers Financial institutions with interest rate risk management demands and non-financial institutions which aim at hedging against the risk of interest rate changes are both clients of the RMB interest rate swap business.
III. Functional Features This product is the most basic interest rate derivative, which is clear and concise in the structure and flexible in the elements. With this product, customers can match the asset and liability terms, and manage the basis risk of the fixed interest rate and the floating interest rate; customers can hedge against the risk of interest rate fluctuations to some extent and cut down the financing cost of their companies; customers can make use of arbitrage opportunities existing in the financial market to increase the return on investment and wealth management with the transaction portfolio of basic product and interest rate swap.
IV. Features and Advantages 1. Competitive product quotation: ICBC, as the market maker of RMB interest rate swap transaction, has a professional transaction team, rich experience, flexible pricing mechanism, and competitiveness that is relatively strong among peers, and can offer the optimal product price. 2. Personalized product design: ICBC, flexible in design, can create flexible combinations, according to elements including product terms and structures, as well as the market demand, to meet the clients’ demands of cutting down financing cost or increasing return. 3. Continuous dynamic management: ICBC can provide customers with transaction assessment reports at regular intervals and offer follow-up dynamic management service according to the market condition and customer demands.
V. Product Price ICBC gives quotations to customers according to the price trend of the RMB interest rate swap market, and make real-time updates according to market changes.
VI. Service Channels and Hours Customers who match the acceptance criteria can apply to sub-branches or branches in the areas where this business is carried out for processing in the business hours of sub-branches or branches, or carry out self-service processing through the corporate internet banking in the Bank’s business hours.
VII. Application Process 1. Customer assessment: the customer shall first receive the due diligence investigation, credit rating and credit confirmation by ICBC and fill in the Customer Assessment Table. 2. Signing of the general agreement: after passing the assessment of ICBC, the customer shall sign the ICBC Agency Risk Management Business Agreement with ICBC. 3. Customer transaction application: the customer submits the Transaction Application Form to ICBC, and ICBC shows the customer the Customer Confirmation Letter containing a risk prompt of transaction terms, pegging indicators, scenario analysis on cash flows, market cap and influencing factors and potential loss of market cap; the customer shall confirm the risk prompt and other matters in writing. 4. Customer transaction confirmation: the branch submits the official letter of authorization to the Head Office which will be confirmed by the Head Office, and then the branch presents the Transaction Certificate to the customer as an official transaction document. Customers who handle business through the corporate internet banking can read, download and copy the Transaction Certificate in the corporate internet banking in a self-service manner.
VIII. Notice Currently, the minimum amount of notional principal of RMB interest rate swap transaction is RMB100,000; the minimum increment is RMB100,000; the transaction term shall be no less than 3 months and no longer than 10 years; ICBC can adjust the above-mentioned requirements according to the actual situation of the customer.
IX. Risk Prompt Interest rate swap transaction carried out by customers can generate floating profit and loss because of interest rate fluctuations. For example: 1. As for customers whose transaction structure is swapping fixed interest for floating interest, if interest rates rise in the lock-up period of transaction and the fixed rate at which they charge is lower than the floating rate at which they pay, they will pay for the difference and their overall cost of debt will rise. 2. As for customers whose transaction structure is swapping floating interest for fixed interest, if interest rates fall in the lock-up period of transaction and the fixed rate at which they pay is higher than the floating rate at which they charge, they will pay for the difference and their overall cost of debt will remain unchanged. When the transaction is at a loss, terminating it will subject the customer to corresponding loss; however, if the interest rate swap perfectly matches the basis of hedging assets, the floating profit and loss of interest rate swap will not impact the effectiveness of management. Interest rate swap carried out by customers can generate floating profit and loss because of interest rate fluctuations.
X. Business Cases Case 1: In September 2015, an ICBC branch, cooperating with the Head Office, successfully processed one-year RMB interest rate swap business on behalf of a quality customer of the branch, swapping the fixed interest rate of the loan for the floating interest rate pegged to the benchmark interest rate of the one-year loan, which would be reset and delivered quarterly. On October 24, 2015, the PBC cut the one-year loan benchmark interest rate by 25bp; with RMB interest rate swap transaction, the customer effectively cut financial cost and were satisfied with this product of ICBC. Case 2: In September 2016, an ICBC branch, cooperating with the Head Office, successfully processed one-year RMB interest rate swap business on behalf of a quality customer of the branch, swapping the floating interest rate pegged to one-year LPR for fixed interest rate, which would be reset and delivered quarterly. ICBC’s quotation for this interest rate swap was 4.32%, namely, customers swapping the floating interest rate pegged to LPR for a fixed rate of 4.32%, which reduced the initial floating interest rate of 4.35%, by 3bp; customers effectively lowered and locked in financial costs and were satisfied with this product of ICBC.
Note: The information provided on this page is for reference only. Specific businesses shall be subject to the announcement and provisions of the local outlet.