Circular No. 01/2015/TT-NHNN dated January 06, 2014 of the State Bank of Vietnam stipulating trading and provision of interest rate derivative products of commercial banks, foreign bank branches

THE STATE BANK OF VIETNAM

Circular No.01/2015/TT-NHNN dated January 06, 2014 of the State Bank of Vietnam stipulatingtrading and provision of interest rate derivative products of commercial banks, foreign bank branches

Pursuant to the Law on the State Bank of Vietnam No. 46/2010/QH12 dated June 16, 2010;

Pursuant to the Law on Credit Institutions No. 47/2010/QH12 dated June 16, 2014;

Pursuant to the Government s Decree No. 156/2013/ND-CP dated November 11, 2013 defining the functions, tasks, powers and organizational structure of the State Bank of Vietnam;

At the proposal of the director of the Monetary Policy Department;

The State Bank Governor promulgates the Circular stipulating trading and provision of interest rate derivative products of commercial banks, foreign bank branches.

Article 1.Scope of application

This Circular stipulates trading and provision of interest rate derivative products of commercial banks, foreign bank branches.

Article 2. Subjects of application

1. Commercial banks, foreign bank branches that trade and provide interest rate derivative products;

2. Customers using interest rate derivative products that are traded and provided by commercial banks, foreign bank branches in domestic market including:

a) Credit institutions, foreign bank branches under the Law on credit institutions;

b) Legal entity (excluding credits, foreign bank branches) that is established and operated under Vietnamese law;

c) Organizations, individuals related to trading and provision of interest rate derivative products of commercial banks, foreign bank branches as stipulated under this Circular.

Article 3. Interpretation of terms

Under this Circular, the following terms are construed as follows:

1. Interest rate derivative products are financial instruments that are estimated based on the predictable fluctuations of interest rate.

2. Trading and providing interest rate derivative products means the entry into an interest rate derivative contract by commercial banks , foreign bank branches and foreign financial organizations in the international market to prevent and minimize interest rate risk of commercial banks, foreign bank branches or means the entry into an interest rate derivative contract by commercial banks, foreign bank branches and customers in the domestic market to prevent and minimize the interest rate risk of customers;

3. Principal transaction means a transaction which bears interest rate risk, including: deposit, receive deposit; issue, buying and selling, investment in valuable papers, lending, leasing and financial leasing and other legal transactions bearing interest rate risk excluding interest rate derivative papers.

4. Counterpart transaction means commercial banks and foreign bank branches enter an interest rate derivative contract with commercial banks, foreign bank branches providing interest rate derivative products in the domestic market or with foreign financial organizations to prevent, minimize interest rate risk for interest rate derivative contracts that signed with customers.

5. Principal means a sum of money of principal transaction or a sum of money that bears interest rate risk arising from the balance sheet that commercial banks, foreign bank branches that need to prevent and minimize interest rate risk.

6. Value of the nominal capital means a sum of money that parties enter interest rate derivative contract agreed as a basis to calculate received/paid interests, net interest or charge (if any); value of nominal amount may be equal or lower than the principal.

7. Net interest amount or net loss in each period of interest rate derivative contract means the difference between the receivable interest amount and the payable interest amount in each payment period.

8. Net interest amount or net loss of interest rate derivative contract of commercial banks, foreign bank branches means net interest amount or net loss of all periods that are paid of that interest rate derivative contract.

9. Reference interest is the interest rate agreed by parties entering interest rate derivative contract as a basis to implement the interest rate derivative contract;

10. Interest rate option – cap is the highest interest rate that parties entering in the interest rate derivative contract agree to prevent, minimize interest rate risk when the market fluctuations increase.

11. Interest rate option – floor is the lowest interest rate that parties entering in the interest rate derivative contract agree to prevent, minimize interest rate risk when the market fluctuations decrease.

12. Foreign financial banks include commercial banks, investment banks, credit institutions and other financial organizations that operate under foreign laws.

Article 4. Principles of trading and providing interest rate derivation products

1. Trading and providing interest rate derivation products of commercial banks, foreign bank branches shall be implemented as agreed by parties entering the interest rate derivative contract and be in accordance with this Circular and related laws.

2. Commercial banks, foreign bank branches shall only trade and provide interest rate derivative products in the following cases:

a) Being approved by the Vietnam State Bank in trading and providing interest rate derivative products under the establishment license or in a specific document as stipulated by the law.

b) Having promulgated internal regulations on trading, providing interest rate derivative products in accordance with regulations under this Circular and other related laws, ensuring to have mechanism of internal control and audit, risk management on trading and provision of interest rate derivative products.

3. Commercial banks and foreign bank branches trading and providing interest rate derivative products related to foreign exchange shall have to comply with Vietnamese law on foreign exchange.

4. Commercial banks, foreign bank branches trading interest rate derivative products related to foreign exchange shall have to comply with Vietnamese law on trading foreign exchange in international market.

5. Credit institutions, foreign bank branches shall use interest rate derivative products provided by commercial banks, foreign bank branches in the domestic market as legal entity as stipulated under this Circular and related laws.

Chapter II

TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS

Section I: TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS IN THE DOMESTIC MARKET

Article 5. Purpose of trading and providing interest rate derivative products in the domestic market

1. Interest rate derivative products provided by commercial banks, foreign bank branches are to prevent, minimize interest rate risk for the principal transactions of that legal entity;

2. Interest rate derivative products traded and provided by commercial banks, foreign bank branches for credit institutions, foreign bank branches are to prevent, minimize interest rate risk for the principal transactions or to prevent, minimize interest rate risk arising from the balance sheet of that credit institution, foreign bank branch;

Article 6. Scope of trading and providing interest rate derivative products in the domestic market

Commercial banks, foreign bank branches are permitted trading and providing interest rate derivative products including:

1. Forward rate agreement: commercial banks, foreign bank branches enter an interest rate derivative contract with customers; accordingly, on the date of signing the contract, parties shall determine the interest rate to be applied on a notional amount. On the expired date of interest rate derivative contract, commercial banks, foreign bank branches or customers shall pay an amount that is the difference between the rate specified in the interest rate derivative contract and the reference rate on a nominal amount.

2. Interest rate swap:

a) Interest rate swap: commercial banks, foreign bank branches enter an interest rate derivative contract with customers, whereby parties commit to pay the other an interest sum in the same currency (in Vietnam dong or foreign currency) on received/paid interest as agreed (fixed interest rate or floating interest rate) on a nominal amount;

b) Accrual interest rate swap: is a interest rate swap product, whereby commercial banks, foreign bank branches and customers agree on a received/paid interest amount calculated according to interest rates attached with conditions based on foreign currency fluctuations, market rate and it is accumulated by payment terms as agreed on nominal amounts;

3. Cross currency swap:

a) Cross currency swap: commercial banks, foreign bank branches enter an interest rate derivative contract with customers, whereby parties commit to pay the other by two different currencies on a nominal amount. Exchange or non-exchange of nominal amount shall be agreed by two parties. If there is an exchange of the principals or each part in the period or at the end of period, it shall be applied the fixed foreign exchange rate in line with regulations as specified by the State Bank on the foreign exchange rate at the time of signing interest rate derivative contract;

b) Accrual interest rate swap means interest rate swap in two different currencies, whereby commercial banks, foreign bank branches and customers shall agree on received/paid interest amount that is calculated from the interest rate with conditions on foreign exchange fluctuations, market rate and accrued in each payment period as agreed on nominal amount. Exchange or non-exchange of the nominal amount or each part shall be agreed by two parties. If there is an exchange of the principal nominal amount or each part in the period or at the end of period, it shall be applied the fixed foreign exchange rate in line with regulations as specified by the State Bank on the foreign exchange rate at the time of signing interest rate derivative contract;

4. Interest rate option:

a) Interest rate option – cap: commercial banks, foreign bank branches enter an interest rate derivative contract with customers, whereby commercial banks, foreign bank branches sell the rights (not compulsory obligations) of buying interest rate option cap on nominal amount before the due date or at the due date of interest rate derivative contract to prevent, minimize the risk that interest rate increases. During the effective time of interest rate derivative contract, when the reference rate increases and is higher than the interest rate option cap, if it is requested by customers, commercial banks, foreign bank branches shall pay customers an interest amount that is the difference between reference rate and interest rate option and value of nominal amount. If reference rate is lower than the interest rate option cap, no payment is arising between commercial banks, foreign bank branches with customers on the difference between reference rate and interest rate; customers shall have to pay charges for commercial banks, foreign bank branches as agreed in interest rate derivative contract to buy interest rate option floor. This charge shall be paid one time at the transaction day or many times in payment periods during the effective time of interest rate derivative contract as agreed in interest rate derivative contract.

b) Interest rate option – floor: commercial banks, foreign bank branches enter an interest rate derivative contract with customers, whereby commercial banks, foreign bank branches sell the rights (not compulsory obligations) of buying interest rate option floor on nominal amount before the due date or at the due date of interest rate derivative contract to prevent, minimize the risk that interest rate decreases. During the effective time of interest rate derivative contract, when the reference rate decreases and is lower than the interest rate option floor, if it is requested by customers, commercial banks, foreign bank branches shall pay customers the interest amount that is the difference between reference rate and interest rate option floor and value of nominal amount. If reference rate is higher than the interest rate option floor, no payment is arising between commercial banks, foreign bank branches with customers on the difference between reference rate and interest rate floor. Customers shall have to pay charges for commercial banks, foreign bank branches as agreed in interest rate derivative contract to buy interest rate option floor; this charge may be paid one time at the transaction day or many times in payment periods during the effective time of interest rate derivative contract as agreed in interest rate derivative contract.

c) Interest rate option – collar: commercial banks, foreign bank branches enter an interest rate derivative contract with customers, whereby commercial banks, foreign bank branches sell the rights (not compulsory obligations) of buying interest rate option cap on nominal amount before the due date or at the due date of interest rate derivative contract to prevent, minimize the risk that interest rate decreases. During the effective time of interest rate derivative contract, when the reference rate increases and is higher than the interest rate option cap, if it is requested by customers, commercial banks, foreign bank branches shall pay customers the interest amount that is the difference between reference rate and interest rate option cap and value of nominal amount. If reference rate decreases and is lower than the interest rate option floor, if it is requested by commercial banks, foreign bank branches, customers shall pay commercial banks, foreign bank branches the interest amount that is the difference between reference rate and interest rate option floor and value of nominal amount; if reference rate fluctuates, it still ranges from interest rate option cap and interest rate option floor, there is no payment between commercial banks, foreign bank branches with customers on the difference between reference rate and interest rate cap or with interest rate floor; customers shall have to pay charges for commercial banks, foreign bank branches as agreed in interest rate derivative contract to buy interest rate option floor; customers, commercial banks and foreign bank branches shall agree on the charges and charge rate in interest rate derivative contracts.

Article 7. Conditions for customers using interest rate derivative products provided by commercial banks, foreign bank branches in the domestic market

1. For legal entity using interest rate derivative products:

a) Purpose of using interest rate derivative products is to prevent, minimize interest rate risk for the principal transactions of that legal entity;

b) Having the principal transactions that are effective and in line with the scope of business and regulations;

c) Having financial capacity judged by commercial banks, foreign bank branches providing interest rate derivative products to fulfill its payment obligations when performing interest rate derivative contracts;

d) Performing security as agreed with commercial banks, foreign bank branches trading, providing interest rate derivative products;

2. For credit institutions, foreign bank branches using interest rate derivative products:

a) Purpose of using interest rate derivative products is to prevent, minimize interest rate risk for the principal transactions or to prevent, minimize interest rate risk arising from the balance sheet of credit institutions, foreign bank branches;

b) Having the principal transactions that are effective and in line with contents and business scope of the law on credit institutions and related regulations. If arising from the balance sheet, credit institutions, foreign bank branches must have measures to prevent and limit interest rate risk that are approved by the legal representative of credit institutions, foreign bank branches;

c) Having financial capacity recognized by commercial banks, foreign bank branches providing interest rate derivative products to fulfill its payment obligations when performing interest rate derivative contracts;

d) Performing security as agreed with commercial banks, foreign bank branches trading, providing interest rate derivative products;

Article 8. Counterpart transactions

1. Commercial banks, foreign bank branches are permitted performing counterpart transactions with commercial banks, foreign bank branches providing interest rate derivative products in the domestic market or foreign financial organizations in order to prevent, minimize interest rate risks for interest rate derivative contracts in the domestic market.

2. Kinds of interest rate derivative products that commercial banks, foreign bank branches perform counterpart transactions are interest rate derivative products as stipulated under Article 6 of this Circular.

3. Validity term and value of counterpart transactions:

a) For performing counterpart transactions for an interest rate derivative contract that commercial banks, foreign bank branches have provided customers, validity term and value of counterpart transactions mustn’t exceed the remaining time and value of nominal capital of interest rate derivative contract.

b) For performing counterpart transactions for two interest rate derivative contracts or more, validity and value of counterpart transactions must not exceed the longest remaining time of interest rate derivative contracts and total value of nominal capital of interest rate derivative contracts.

4. When performing counterpart transactions with foreign financial organizations, in addition to regulations at Clause 2 and 3 of this Article, commercial banks, foreign bank branches shall have to implement the following regulations:

a) Complying with regulations on foreign exchange activities in the international market;

b) Working with foreign financial organizations that are ranked at a rating of Baa/P-3 by Moody’s Investors Service or at a rating of BBB-/A-3 by Standard & Poor’s or BBB-/F3 by Fitch Ratings at the time of signing the interest rate derivative contract excluding the case that foreign bank branches perform counterpart transactions with the head bank or branches of the head bank in another countries;

Section II: TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS IN THE INTERNATIONAL MARKET

Article 9. Purpose of trading and providing interest rate derivative products in the international market

1. Commercial banks, foreign bank branches trade interest rate derivative product in the international market on the basis of entering an interest rate derivative contract with foreign financial organizations in order to:

a) Prevent, limit interest rate risk for the principal transactions that are effective. The principal transaction must be in line with contents and scope of operation of commercial banks, foreign bank branches as stipulated under the law on credit institutions and related laws.

b) Prevent, limit interest rate risk arising from the balance sheet of commercial banks, foreign bank branches.

2. Commercial banks, foreign bank branches are not permitted trading interest rate derivative products with foreign financial organizations in the international market in contradiction with Clause 1 of this Article.

Article 10. Scope of trading and providing interest rate derivative products in the international market

Commercial banks, foreign bank branches are entitled to trade interest rate derivative products in the international market as stipulated under Article 6 of this Circular.

Article 11. Conditions for choosing financial organizations and commercial banks, foreign bank branches trading and providing interest rate derivative products

When trading interest rate derivative products in the international market, commercial banks, foreign bank branches shall have to work with foreign financial organizations that are ranked at a rating of Baa/P-3 by Moody’s Investors Service or at a rating of BBB-/A-3 by Standard & Poor’s or BBB-/F3 by Fitch Ratings at the time of signing the interest rate derivative contract excluding the case that foreign bank branches trade interest rate derivative products in the international market with the head bank or branches in another countries of the head bank.

Section III: LIMIT OF TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS

Article 12. Limit of trading and providing interest rate derivative products

1. Credit institutions, foreign bank branches are entitled to trade, provide and use interest rate derivative products when limit of net loss on trading, providing and using interest rate derivative products doesn’t exceed 5% of working capital, allocated capital of credit institutions, foreign bank branches. If net loss is over 5% of working capital, allocated capital, credit institutions, foreign bank branches shall cease the transactions on the entry of new interest rate derivative contract, report to the State Bank (Banking Inspection and Supervision Agency) causes, measures and remedies.

2. When having the demand of entering a new interest rate derivative contract, credit institutions, and foreign bank branches shall have to determine the limit of net loss on trading, providing and using interest rate derivative products as a basis to implement in line with Clause 1 of this Article. The limit of net loss on trading, providing and using interest rate derivative products is determined by sum of net interest rate and net loss of interest rate derivative contracts that are effective plus net interest rate and net loss of interest rate derivative contracts that are finalized in a fiscal year.

Section IV: INTEREST RATE, INTEREST RATE DERIVATIVE CONTRACT AND DOSSIERS OF TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS

Article 13. Interest rate applicable to interest rate derivative contract

Parties shall reach an agreement and commit in the interest rate derivative contract on interest rate to implement interest rate derivative products in line with regulations as stipulated by the State Bank on interest rate of the principal transactions at the time of signing the contract.

Article 14. Interest rate derivative contract

1. Interest rate derivative contract shall be made in writing and agreed by parties in line with regulations under this Circular and related regulations, of which it must contain the following contents:

a) Name, address of the legal representative of parties;

b) Principal transactions, value of the principal, interest rate applied in the principal transaction, time of principal payment and interest rate payment;

c) Interest rates to implementinterest rate derivative products;

d) Payment terms, date of payment and method of payment of net interest rate/net loss;

dd) Effective time of the contract;

e) Responsibilities and obligations of parties;

g) Cases if there is a change, amendment or termination of the contract before the due date;

h) Handling with disputes and contract liquidation;

2. Parties may reach an agreement on applying the contract form provided by the International Swaps and Derivatives Association if contents of interest rate derivative contract are not against regulations under this Circular and related regulations;

Article 15. Dossiers of trading and providing interest rate derivative products

When trading and providing interest rate derivative products, commercial banks, foreign bank branches shall make and store dossier of trading and providing interest rate derivative products, including:

1. Interest rate derivative contract;

2. Other documents related to the entry into an interest rate derivative contract as stipulated under the internal regulations of commercial banks, foreign bank branches and in accordance with this Circular.

Section V: RISK PROVISIONING, ACCOUNTING AND REPORTING

Article 16. Risk provisioning

Credit institutions, foreign bank branches shall set up and use the provisions to handle with risks in trading and provision of interest rate derivative products as stipulated by the Vietnam State Bank.

Article 17. Accounting

Credit institutions, foreign bank branches shall make accounting for interest rate derivative products as stipulated under the Vietnamese Accounting Standards and regulations stipulated by the Vietnam State Bank on the accounting system of credit institutions, foreign bank branches.

Article 18. Reporting

No later than the 12^thof the month after the reporting month, credit institutions, foreign bank branches shall report to the State Bank (Department of Monetary Policy) on trading, provision and use of interest rate derivative products according to Form 01 and 02 promulgated together with this Circular.

Chapter III: RESPONSIBILITIES OF COMMERCIAL BANK, FOREIGN BANK BRANCHES TRADING AND PROVIDING INTEREST RATE DERIVATIVE PRODUCTS, AND CUSTOMERS USING INTEREST RATE DERIVATIVE PRODUCTS

Article 19. Responsibilities of commercial bank, foreign bank branches trading and providing interest rate derivative products

1. Trading, providing interest rate derivative products in accordance with regulations under this Circular;

2. Promulgating internal documents on trading, providing interest rate derivative products in accordance with regulations under this Circular, related regulations and policies on trading, providing interest rate derivative products of commercial banks, foreign bank branches. Internal documents of commercial banks, foreign bank branches must contain the following contents:

a) Conditions for customers using interest rate derivative products in the domestic market; necessary documents sending to commercial banks, foreign bank branches;

b) Conditions for financial organizations that commercial banks, foreign bank branches enter the contract with in the international market;

c) Decentralizing functions, tasks and responsibilities of individuals, divisions in appraising, approving, deciding and providing interest rate derivative products;

d) Recognizing, measuring possible risks when trading and providing interest rate derivative products; building procedures and supervising and examining arising risks; measures of preventing and handling with risks, including total limit of trading and providing interest rate derivative products provided bycommercial banks, foreign bank branches, limit of trading and providing interest rate derivative products for a customer and for individuals, organizations approved, decision of trading and providing interest rate derivative products provided by commercial banks, foreign bank branches.

dd) Dossiers and information, documents related to trading, provision of interest rate derivative products;

e) Other contents at the request of internal managers of commercial banks, foreign bank branches in order to ensure the safety, efficiency of trading and provision of interest rate derivative products;

3. Commercial bank trading and providing interest rate derivative products shall have to manage and control risk at its head office. Foreign bank branches trading and providing interest rate derivative products shall have to control and manage risk as stipulated by its head bank or authorized in risk management by the head bank;

4. Requesting customers to provide information, documents proving that they are eligible to use interest rate derivative products as stipulated under the Circular and internal regulations of commercial banks, foreign bank branches on trading and provision of interest rate derivative products;

5. Providing customers with information on contents of interest rate derivative products and risks arising when using interest rate derivative products and measures;

6. Understanding foreign regulations and operations in the international market related to trading interest rate derivative products, information on ranking for making decision on entering the contract with foreign financial organizations in the international market to ensure the safety, efficiency of trading interest rate derivative products of commercial banks, foreign bank branches;

7. If commercial banks, foreign bank branches trade interest rate derivative products in the international market to prevent, minimize interest rate risk arising from the balance sheet, they must set up measures of preventing, limiting risks that analyze interest rate risks arising from the balance sheet; they must be approved by the legal representatives of commercial banks, foreign bank branches.

8. Storing dossiers of trading, providing interest rate derivative products in accordance with the law;

Article 20. Responsibilities of customers using interest rate derivative products.

1. Using interest rate derivative products as stipulated under this Circular;

2. For legal entity using interest rate derivative products:

a) Providing commercial banks, foreign bank branches: original paper or notarized copy of the contract of principal transactions; other information, documents as stipulated by commercial banks, foreign bank branches providing interest rate derivative products to prove the eligibility of using interest rate derivative products as stipulated under this Circular; taking responsible for the law on the accuracy, reliability of information, documents provided for commercial banks, foreign bank branches;

b) Promptly notifying to commercial banks, foreign bank branches on the changes related to principal transactions for consideration and settlement of issues related to interest rate derivative products;

c) Understanding regulations and operation of market related to interest rate derivative products for making decision to use interest rate derivative products provided by commercial banks, foreign bank branches to prevent and minimize interest rate risk;

3. For commercial banks, foreign bank branches using interest rate derivative products:

a) Making commitments with commercial banks, foreign bank branches in interest rate derivative contract or specific document about: using interest rate derivative products in order to prevent and minimize interest rate risk, willing to provide the principal or copies of the contract of principal transactions or measures of preventing and minimizing interest rate risk arising from the balance sheet at the request of the State Bank, relevant agencies;

b) Providing information, documents as stipulated by commercial banks, foreign bank branches providing interest rate derivative products to prove that it is eligible for using interest rate derivative products as stipulated under this Circular; taking responsible before the law on the accuracy, reliability of documents provided;

c) Building and approving measures of preventing, minimizing interest rate arising from the balance sheet, of which analyzing interest rate risk;

d) Building the internal control and regulations system on risk management, of which it must contain contents on controlling and management of risk for using interest rate derivative products;

e) Implementing responsibilities as specified under Point b and c Clause 1 of this Article;

Chapter IV

IMPLEMENTATION ORGANIZATION

Article 21. Effect

1. This Circular shall take effect on March 02, 2015.

2. The Decision No. 62/2006/QD-NHNN dated December 29, 2006 on regulations on execution of interest rate swap transactions shall be annulled.

3. For interest rate derivative contracts signed before the effective day of this Circular, commercial banks, foreign bank branches shall continue to implement contents stated in the interest rate derivative contract in accordance with the law that takes effect at the time of signing that interest rate derivative contract or reach an agreement on amending, supplementing interest rate derivative contract in accordance with regulations under this Circular.

Article 22. Implementation organization

The director of the Office, the director of the Monetary Policy Department and heads of units under the State Bank, directors of the State Bank s provincial/municipal branches, chairmen of management boards, chairmen of Board of Members and general directors (directors) of credit institutions, foreign bank branches shall implement this Circular.

For Governor

Deputy Governor

Nguyen Thi Hong