Circular 25/2021/TT-NHNN amending Circular No. 01/2015/TT-NHNN interest rate derivative products of commercial banks and foreign bank branches

CIRCULAR

Amending and supplementing a number of articles of the Circular No. 01/2015/TT-NHNN dated January 06, 2015, stipulating trading and provision of interest rate derivative products of commercial banks and foreign bank branches

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Pursuant to the Law on the State bank of Vietnam dated June 16, 2010;

Pursuant to the Law on Credit Institutions dated June 16, 2010 and the Law Amending and Supplementing a Number of Articles of the Law on Credit Institutions dated November 20, 2017;

Pursuant to the Government’s Decree No. 16/2017/ND-CP dated February 17, 2017, 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 Governor of the State Bank of Vietnam hereby promulgates the Circular amending and supplementing a number of articles of the Circular No. 01/2015/TT-NHNN dated January 06, 2015, stipulating trading and provision of interest rate derivative products of commercial banks and foreign bank branches.

Article 1. To amend and supplement a number of articles of the Circular No. 01/2015/TT-NHNN

1. To add Point c to Clause 2 of Article 2 as follows:

 “c) Foreign investors mean organization owning Government bonds which are issued in Vietnam dong in domestic market.”

2. To amend and supplement Clauses 8 and add Clauses 13, 14, 15 and 16 to Article 3 as follows:

a) To amend and supplement Clause 8 as follows:

“8. Net interest or net loss of an interest rate derivative contract of a commercial bank, or foreign bank branch at a certain time means net interest or net loss of all periods that are paid of that interest rate derivative contract up to that time.”

b) To add Clauses 13, 14, 15 and 16 to Article 3 as follows:

 “13. Date of conclusion of an interest rate derivative contract means the date on which both parties conclude the interest rate derivative contract.

14. Effective date of an interest rate derivative contract as agreed by both parties means the date on which both parties start performing the interest rate derivative contract; it may be the same date as the date of concluding the interest rate derivative contract or the following date.

15. Performance duration of an interest rate derivative contract means a duration from the effective date of such contract to its completion date. Performance duration of an interest rate derivative contract shall be equal to the remaining performance duration of the principal transaction, or shorter than that.

16. Net settlement means the determination and payment of a net amount calculated according to the current market value or value calculated according to the price model of interest rate derivative contracts that terminate before or at their completion date as agreed by both parties, after offsetting payable amounts of interest rate derivative contracts between parties concluding the contract to determine the receivable or payable amount of one party at the contract completion date or the date of terminating the contract before its completion date.”

3. To add Clauses 6 and 7 to Article 4 as follows:

“6. In case clients do not have foreign currencies or have insufficient foreign currencies to perform payment obligations arising when performing interest rate derivative contracts, they shall be entitled to buy foreign currencies at the commercial banks, foreign bank branches trading and providing interest rate derivative products or at other credit institutions licensed to engage in foreign exchange transactions. The trading of foreign currencies shall comply with the State Bank of Vietnam's regulations on guiding on foreign exchange transactions of credit institutions licensed to engage in foreign exchange transactions. In case clients buy foreign currencies with a specific term (forward transaction), this transaction term shall be equal to the remaining performance duration of the interest rate derivative contract or shorter than that.

7. Commercial banks and foreign bank branches may reach an agreement on net settlement of interest rate derivative contracts concluded with clients, reciprocal transactions conducted with other commercial banks, foreign bank branches or foreign financial institutions.”

4. To add Article 4a as follows:

“Article 4a. Trading and provision of interest rate derivative products by electronic means

1. Commercial banks and foreign bank branches trading and providing interest rate derivative products by electronic means must develop procedures for trading and providing interest rate derivative products by electronic means in compliance with this Circular, the law on anti-money laundering, e-transactions and relevant laws, ensuring client confidentiality and safety for commercial banks’ and foreign bank branches’ activities.

2. Commercial banks and foreign bank branches must fully archive information related to the trading and provision of interest rate derivative products by electronic means to serve the inspection, comparison and handling of tracing, complaints, disputes and provide information at request of the competent State agencies.”

5. To amend and supplement Point b Clause 2 and Point b Clause 3 Article 6 as follows:

a) To amend and supplement Point b Clause 2 as follows:

“b) Accrual interest rate swap means an interest rate swap, in which a commercial bank or foreign bank branch and client reach an agreement on interest receivables or payables that is calculated according to rates accompanied with conditions based on exchange rate fluctuations, rates, goods prices (except for prices of golds and goods banned from trading, import or export in accordance with law provisions) and is accumulated according to the payment period as agreed on the same value of the nominal capital.”

b) To amend and supplement Point b Clause 3 as follows:

“b) Accrual cross currency swap means a cross currency swap, in which a commercial bank or foreign bank branch and client reach an agreement on interest receivables or payables that is calculated according to rates accompanied with conditions based on exchange rate fluctuations, rates, goods prices (except for prices of golds and goods banned from trading, import or export in accordance with law provisions) and is accumulated according to the payment period as agreed on the same value of the nominal capital. The exchange or non-exchange of the value of the nominal capital shall be agreed by both parties, in case of exchanging the value of the initial or last nominal capital or part of the nominal value in each period, the fixed exchange rate shall be agreed in accordance with the State Bank of Vietnam’s regulations on exchange rate at the time both parties conclude the interest rate derivative contract.”

6. To amend and supplement Point b Clause 1; add Point dd to Clause 1; amend and supplement Points a and b Clause 2 Article 7 as follows:

a) To amend and supplement Point b Clause 1 as follows:

“b) Having principal transactions that remain valid in accordance with law provision. For foreign investors, principal transactions mean the transactions of investing Government bonds which are issued in Vietnam dong in the domestic market;”

b) To add Point dd to Clause 1 as follows:

“dd) In case where the client is entitled to receive foreign currencies from the interests arising from the interest rate derivative transaction, or receive foreign currencies from the exchange of nominal capitals, such foreign currencies shall be used to pay for obligations arising from the client's principal transactions, or the client must sell such foreign currencies for commercial banks, foreign bank branches trading and providing these interest rate derivative products.”

c) To amend and supplement Points a and b Clause 2 as follows:

“a) Interest rate derivative products are used for the purpose of preventing and minimizing interest rate risk for the principal transactions, or preventing and minimizing interest rate risk for items of the balance sheet (including the off-balance sheet items) of such credit institution or foreign bank branch;

b) Having principal transactions that remain valid in accordance with contents and operation as prescribed by the Law on Credit Institutions and relevant laws. For a credit institution other than a commercial bank or foreign bank branch, in case of preventing and minimizing interest rate risk for items of the balance sheet (including the off-balance sheet items), it must have a plan on prevention and limitation of interest rate risk approved by its competent authority;”

7. To amend and supplement Point a Clause 3 Article 8 as follows:

“a) In case where one or many reciprocal transactions are conducted for an interest rate derivative contract already provided to the client by the commercial bank or foreign bank branch, the performance duration of each reciprocal transaction and total remaining value (calculated by each currency) of principal swap amounts of reciprocal transactions after offsetting each other must not exceed the remaining term and the value of the nominal capital of interest rate derivative contracts;”

8. To amend and supplement Point b Clause 1 Article 9 as follows:

“b) Prevent and limit interest rate risk for items of the accounting balance sheet (including off-balance sheet items) of commercial banks, foreign bank branches.”

9. To amend and supplement Article 12 as follows:

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

1. Credit institutions, foreign bank branches that are entitled to trade, provide and use interest rate derivative products must comply with the State Bank of Vietnam's Circular No. 41/2016/TT-NHNN dated December 30, 2016, prescribing prudential ratios for operations of banks, foreign bank branches and its amending and supplementing documents.

2. Credit institutions, foreign bank branches trading, providing and using interest rate derivative products that have not yet applied the State Bank of Vietnam's Circular No. 41/2016/TT-NHNN dated December 30, 2016, prescribing prudential ratios for operations of banks, foreign bank branches and its amending and supplementing documents shall control the limit of net loss on trading, providing and using interest rate derivative products with an interest rate not exceeding 5% of the charter capital, allocated capital of such commercial banks, foreign bank branches. In case where the limit of net loss exceeds 5% of the charter capital, allocated capital, commercial banks and foreign bank branches shall suspend the conclusion of new interest rate derivative contracts, report the State Bank of Vietnam (the Banking Supervision Agency) causes of loss, measures and time for remediation.

When being in need of concluding new interest rate derivative contracts, commercial banks, foreign bank branches shall confirm the limit of net loss on trading, providing and using interest rate derivative products as a basis in accordance with this Circular. The limit of net loss on using interest rate derivative products shall be determined by total net interest and net loss of valid interest rate derivative contracts plus (+) total net interest and net loss of interest rate derivative contracts already settled in the financial year.

3. Credit institutions and foreign bank branches (excluding commercial banks and foreign bank branches specified in Clauses 1 and 2 of this Article) shall be entitled to use interest rate derivative products if satisfying one of the following conditions:

a) Having internal regulations on risk management, specifying the limit of interest rate risk, stop loss limit; total interest rate risk exposure limit for interest rate derivative products;

b) Controlling the net loss limit on using interest rate derivative products in accordance with Clause 2 of this Article.”

10. To amend and supplement title and Points b, d Clause 1 Article 14 as follows:

a) To amend and supplement title of Clause 1 as follows:

“1. Interest rate derivative contracts shall be made in writing (including electronic contracts), as agreed by both parties in accordance with this Circular and relevant law, containing at least the following contents:”

b) To amend and supplement Points b, d Clause 1 as follows:

“b) Principal transactions, value of the principal, interest rate applied in principal transactions, schedule for payment of principal and interest of principal transactions (applicable to clients being legal entities, foreign investors);”

“d) Effective date of an interest rate derivative contract, payment term, date of payment, method of payment of net interest/loss; agreement on net settlement of interest rate derivative contracts (if any);”

11. To amend and supplement Article 18 as follows:

“Article 18. Reporting

Credit institutions and foreign bank branches shall report interest rate derivative transactions in accordance with the reporting and statistical mechanism provided by the State Bank of Vietnam.”

12. To amend and supplement Clauses 4, 7; add Clause 9 to Article 19 as follows:

a) To amend and supplement Clause 4 as follows:

“4. Requesting clients being legal entities and foreign investors to provide information, documents proving the satisfaction of conditions for using interest rate derivative products in accordance with this Circular and internal regulations of commercial banks and foreign bank branches on trading and providing interest rate derivative products.”

b) To amend and supplement Clause 7 as follows:

“7. Making reports on trading and providing interest rate derivative products in accordance with regulations on reporting and statistical mechanism provided by the State Bank of Vietnam.”

c) To add Clause 9 as follows:

“9. Promulgating procedures for trading and provision of interest rate derivative products by electronic means, specifying measures for risk management and control (if any).”

13. To amend and supplement Point a Clause 2; amend and supplement Points a, b, c, dd Clause 3 Article 20 as follows:

a) To amend and supplement Point a, Clause 2 as follows:

“a) Providing commercial banks and foreign bank branches: True copies or extract copies of contracts of principal transactions; other information and documents prescribed by commercial banks and foreign bank branches providing interest rate derivative products to prove the satisfaction of conditions for using interest rate derivative products in accordance with this Circular. Taking responsibility before the law for the accuracy, honesty of information and documents provided to commercial banks and foreign bank branches;”

b) To amend and supplement Points a, b, c, dd Clause 3 as follows:

“a) Making commitments with commercial banks and foreign bank branches in the interest rate derivative contract or a separate document on the use of interest rate derivative products to prevent and minimize interest rate risk; providing true copies or extract copies of contracts of principal transactions or plans on preventing and minimizing interest rate risk for items of the accounting balance sheet (including off-balance sheet items) as requested by the State Bank of Vietnam and competent agencies;

b) Taking responsibility before the law for the accuracy, honesty of information and documents provided to commercial banks and foreign bank branches that provide interest rate derivative products;

c) Within the ambit of competence, formulating and approving plans on preventing and minimizing interest rate risk for items of the accounting balance sheet (including off-balance sheet items), analyzing interest rate risks;”

“dd) Discharging the responsibilities prescribed at Points b and c Clause 2 of this Article.”

Article 2. To replace and repeal some words, phrases, points, clauses and articles of the Circular No. 01/2015/TT-NHNN

1. To replace the phrase “arising from the accounting balance sheet” by the phrase “for items of the accounting balance sheet (including off-balance sheet items)” in Clause 5 Article 3 and Clause 2 Article 5.

2. To replace the phrase “legal entities” by the phrase “legal entities and foreign investors” in Clause 5 Article 4, Clause 1 Article 5, title and Point a Clause 1 Article 7, title of Clause 2 Article 20.

3. To replace the phrase “effective term” by the phrase “performance duration” at Clause 4 Article 6.

4. To remove the phrase “setting aside risk provisions” in the title of Section 5.

5. To repeal Article 16, Tables 01 and 02 attached to the Circular No. 01/2015/TT-NHNN.

Article 3. Responsibility for implementation organization

The Chief of Office, Director of the Monetary Policy Department, Heads of units affiliated to the State Bank of Vietnam; credit institutions and foreign bank branches shall be responsible for the implementation of this Circular.

Article 4. Implementation provisions

1. This Circular takes effect on February 14, 2022.

2. For interest rate derivative contracts concluded before the effective date of this Circular, commercial banks and foreign bank branches shall continue performing terms of interest rate derivative contracts concluded before the effective date of this Circular that are in compliance with the applicable law at the time of concluding such contracts, or agreements on amending and supplementing such interest rate derivative contracts in accordance with this Circular./.