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I. Business Description
During the cooperative forward FX settlement and sale business, the domestic banks without the forward FX settlement and sale business qualification and their branches cooperate with ICBC in handling the forward FX settlement and sale business for the customers.
II. Target Customers
It is applicable to the banking financial institutions that are established within the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) with approval of the State Administration of Foreign Exchange, has acquired the spot FX settlement and sale business qualification from the State Administration of Foreign Exchange and opened the spot FX settlement and sale for more than two (inclusive) years, as well as their branches.
III. Features and Advantages
i. Main Features of the Forward FX Settlement and Sale Business
1. Forward FX settlement and sale is the most fundamental tool of exchange rate derivatives, and it has a simple, explicit and easy-to-understand trade structure.
2. Forward FX settlement and sale is a relatively mature product. It allows the customers to avoid the exchange rate risks based on the future FX income and expenditures and expectations about the exchange rate market.
3. Forward FX settlement and sale can be easily combined with other products of the ICBC, to help the customers boost their revenue or reduce their financial cost.
ii. ICBC’s Advantage in the Forward FX Settlement and Sale Business
1. Rich Product Line
ICBC has leading capabilities in product R&D and designing and risk management across the industry. It is able to provide the customers with a comprehensive range of forward exchange rate risk hedging tools, such as the forward FX settlement and sales products including fixed-term forwards, options, par forwards, super forwards and remittance financing express, as well as their portfolios, to fully meet the customers’ needs on all fronts.
2. Individualized Product Designing
The forward FX settlement and sale service of ICBC supports the forward settlement and sale of eight major currencies including the US dollar, Japanese Yen and Euro etc. with different maturities. In addition, the customers may handle special forms of deliveries such as roll-back, rollover, partial delivery and delivery in batches etc., to match their unique operating cash flow needs.
IV. Case Illustration
In January 2011, a corporate customer of the cooperative bank inquired about the price quotation regarding a 8-month USD20 million worth of forward FX settlement transaction to the cooperative bank; and the cooperative bank inquired about the prices to ICBC based on its customer’s entrustment. ICBC quoted the 8-month forward exchange rate of US dollar relative to RMB at 6.53 to the cooperative bank, and the cooperative bank quoted it at 6.52 to its customer. The transaction was normally delivered in September 2011, and the customer sold its US dollar income based on the specified forward exchange rate (6.52) and bought RMB.
Should the spot exchange rate of US dollar relative to RMB is 6.50 on the maturity date, the customer would benefit from lockup of the exchange rate and save financial cost totaling RMB400,000 (“20,000,000×(6.52-6.50)=400,000”). And should the spot exchange rate of US dollar relative to RMB is 6.54 on the maturity date, the customer would bear the brunt from lockup of the exchange rate and suffer financial cost increase totaling RMB400,000 (“20,000,000×(6.55-6.52)=400,000”), but as the customer has locked up the exchange rate risk through the FX settlement and sale transaction, its future cash flow would remain stable and the effectiveness of financial cost management won’t be dampened. The cooperative bank earned stable price spread income of RMB200,000 (“20,000,000×(6.53-6.52)=200,000”) from the forward FX settlement and sale business.
V. Conditions for Application
The cooperative bank shall meet the following conditions:
1. The legal banking financial institutions that are approved by the State Administration of Foreign Exchange and certified by the Bank, and their branches;
2. Having been offering the spot FX settlement and sale business with approval of the State Administration of Foreign Exchange for more than two (inclusive) years;
3. Legal and compliant operation, stable operating conditions, relatively strong risk control ability, and absence of significant incompliant events or behaviors over the past three years;
4. Sound cooperation relationship with ICBC and great cooperation potentials.
VI. Sign-up
1. Business examination: the cooperative bank shall examine compliance of the customers’ transaction entrustment based on the pertinent FX management rules after signing the forward FX settlement and sale contract with the customer and fulfilling the transaction entrustment. For the approved transaction entrustment, the cooperative bank shall issue the power of attorney that bears signature of the authorized person and official seal to ICBC.
2. Fulfillment of the guarantee measures: ICBC has the rights to request the cooperative bank to deposit a certain sum of risk margin deposits or fulfill other low-risk guarantee measures after receiving the forward FX settlement and sale entrustment from the cooperative bank. If ICBC issues the margin deposit notice to the cooperative bank, the cooperative bank shall pay the margin deposits to ICBC in time.
3. Knockdown: during the effective term of the entrustment, ICBC will knock down the deals based on entrustment of the cooperative bank when the entrustment conditions are met. After the deal is completed, ICBC will inform the cooperative bank and issue the transaction confirmation letter to it.
4. Follow-up management: during the existence period of the cooperation, ICBC regularly provides market information and market value assessment report to the cooperative bank, adopts measures such as supplementation of margin deposit or adjustment of credit line occupation to dynamically manage the transaction, and keep a close watch on changes in the unrealized gains and losses. When the unrealized gains or losses reaches a certain proportion of the initial margin deposits, the cooperative bank shall supplement the margin deposits based on agreements of relative transaction agreement.
5. Delivery on the delivery date: on the delivery date, the cooperative bank shall complete the fund delivery with ICBC based on contents in the transaction confirmation letter. The RMB or foreign exchange funds needed by the cooperative bank during the forward FX settlement and sale business shall be cleared by ICBC based on the cooperative bank’s account at ICBC or other methods agreed by both parties.
6. Special delivery: the cooperative bank shall apply for special treatments such as rollover, rollback, partial delivery upon maturity and delivery in batches to ICBC regarding the forward FX settlement and sale business should customers of the cooperative bank can’t deliver funds on time due to failure to provide the effective certificates or complexity of trade.
7. Default: the cooperative bank shall apply to ICBC for default prior to maturity date of the deal, should customers of the cooperative bank can’t normally perform the transaction due to failure to meet requirements of the agreement. Should default causes any losses to ICBC, the loss shall be borne by the cooperative bank; and should the default causes any gains, the gains shall be handled based on the commercial terms.
VII. Service Channel and Time
The eligible customers may apply for handling the forward FX settlement and sale business to the tier-1 or tier-2 branches that have the rights to operate forward FX settlement and sale business during office hours.
VIII. Operation Guide
Please refer to the forward FX settlement and sale business.
IX. FAQ
1. Examination of the access qualification: ICBC examines the access qualification of the Head Office of the cooperative bank or its branches.
2. Filing the application with the State Administration of Foreign Exchange: the cooperative bank shall submit the application materials, including the application report, the relevant management systems of the cooperative FX settlement and sale business and the sample cooperation agreement to be signed with the qualified banks, to the local office of the State Administration of Foreign Exchange, in order to apply for the qualification of cooperative forward FX settlement and sale business. Should the applicant is a branch institution, it shall also present the authorization document issued by its Head Office (or headquarters); and other documents and materials required by the local office of the State Administration of Foreign Exchange.
3. Examination of the business qualification: after the cooperative bank signs the initial intent on cooperative forward FX settlement and sale business with ICBC, it shall submit relevant materials to the Bank for examination, including originals of the cooperative bank’s business license and operating permit etc., application report and relevant management systems that the cooperative bank submitted to the State Administration of Foreign Exchange for handling the cooperative forward FX settlement and sale business, other documents and materials required by the State Administration of Foreign Exchange, and the Notification on Filing of the Cooperative Forward FX Settlement and Sale Business issued by local office of the State Administration of Foreign Exchange to the cooperative bank. Should the cooperative bank is a branch institution, it shall also provide the authorization document issued by its Head Office (or headquarters).
4. Signing of the agreement: prior to conducting the forward FX settlement and sale business, the cooperative bank shall sign with ICBC the Cooperation Agreement on the Forward FX Settlement and Sale Business of Industrial and Commercial Bank of China. When handling the business, the cooperative bank, the customer and ICBC shall also sign the Third-Party Cooperation Agreement on the Forward FX Settlement and Sale Business of Industrial and Commercial Bank of China.
X. Risk Warning
Cooperative forward FX settlement and sale business is exposed to risks such as policy risk, price risk, exchange rate risk, telecommunication system safety and Network system safety etc. The cooperative bank shall fully introduce the features and structures of the forward FX settlement and sale business to the customer, reveal the potential risks of the product and make sure the customer is fully aware of the potential risks and losses in the forward FX settlement and sale business and voluntarily agrees to assume the abovementioned risks and losses.
XI. Matters Meriting Attention
Forward FX settlement and sale has high requirements on the time effectiveness, and customers shall avoid losses arising from market price fluctuation during the operations.
XII. Definitions
1. Fixed-term forward FX settlement and sale refers to the transaction that the customer agrees to handle the fund delivery on a specific working date in the future based on the agreed exchange rate when signing the forward FX settlement and sale agreement with ICBC.
2. Option refers to the transaction that the customer agrees that it has the rights to request the Bank to handle the fund delivery on any working day in the future (the customer shall inform the Bank one working day in advance) based on the agreed exchange rate when signing the forward FX settlement and sale agreement with ICBC.
3. Par forward FX settlement and sale refers to the transaction that the customer agrees to handle fund delivery during a certain period of time in the future based on the same exchange rate when signing the forward FX settlement and sale agreement with ICBC.
4. Super forward FX settlement and sale refers to the forward FX settlement and sale transaction whose value date is more than 1 years later.
5. Remittance financing express is a portfolio product of the forward FX settlement and sale, RMB deposit and foreign currency financing. The customer concurrently handles the RMB deposits and forward FX settlement and sale business with the same term when handling the foreign currency financing business, and delivers the principals and interests of the RMB deposits based on the forward FX settlement and sale agreement upon maturity to repay interests and principals of the foreign currency financing project.
Note: Information herein is for reference only. Please refer to announcements and regulations of local branches of ICBC for further details. ICBC retains the ultimate interpretation rights.
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